TAXATION'I'PRE+MIDTERM'NOTES'

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June%15,%2010%Tuesday%
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What!do!you!understand!of!the!power!of!the!government!to!impose!taxes?!This!is!simply!Constitutional!law.!Russel!answers.!So!you’re!saying!that!
the!existence!of!the!Constitution!is!not!to!grant!the!power!of!taxation!because!it!is!already!inherent!in!every!sovereignty?!
!
What!is!taxation?!
!
- Taxation!is!the!inherent!power!of!every!sovereign!government!exercised!through!the!legislative!body!or!the!Congress!to!impose!or!exact!
burdens,!which!we!call!as!taxes,!upon!not!only!persons!but!upon!subjects!or!objects!of!taxation!for!the!purpose!of!raising!revenues!in!
order!to!address!the!legitimate!needs!of!the!government.!
- It!is!a!symbiotic!relationship!between!the!people!and!the!government.!The!government!cannot!exist!without!the!people!and!the!people!
cannot!exist!without!the!government!protecting!to!help!them.!
!
The!nature!of!the!power!of!taxation!is:!
!
1. It!is!legislative!in!character.!
!
- Who!can!actually!exercise!the!power!to!impose!tax?!!
o Only!Congress!
- How!about!the!President?!
o As!a!rule,!no.!
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2. It!is!inherent.!!
!
- Even!the!Constitution!does!not!grant!the!power!to!tax!because!the!power!to!tax!is!already!a!right!in!itself!by!the!sovereign.!
!
3. It!is!subject!to!inherent!and!constitutional!limitations.!
!
- So!whenever!you!see!the!word!tax!or!taxation!in!the!Constitution,!you!will!know!that!it!is!not!a!grant!of!power!but!simply!it!is!a!limitation!
to!the!unlimited,!plenary!and!supreme!power!of!the!government!to!impose!taxation.!
!
The!inherent!power!to!tax!simply!arose!because!there!is!a!need!of!the!government!to!raise!revenues!in!order!to!support!its!activities.!
!
M!If!you!are!reading!the!business!section!of!the!newspaper,!it!talks!about!budgets!for!the!government!to!meet.!The!budget!of!the!Commissioner!of!
the!BIR!to!raise.!
!
So! taxation! actually! plays! a! major! part! or! a! big! part! in! running! the! entire! government.! Its! basis! is! the! basis! of! necessity! –! the! need! of! the!
government!to!protect!the!people!and!the!need!of!the!government!to!serve!the!people.!And!it!is!actually!on!what!we!call!the!famous!doctrine!of!
taxation!–!the!lifeblood!doctrine.!
!
So,!what!is!the!lifeblood!doctrine?!Ryan!answers.!So!without!taxes,!the!government!cannot!exist?!
!
- 99%!of!the!countries!or!nations!impose!taxes!in!order!to!survive.!Government!cannot!exist!without!taxes.!But!I!think!there!is!one!state!
which! does! not! –! it! mainly! subsists! in! gambling! activities.! So! that! is! an! exception! to! the! rule! but! most! of! us! especially! the! Philippines!
would!survive!on!the!generation!of!taxes!in!order!to!raise!revenues!and!meet!the!needs!of!the!government!and!its!people.!
- So!whenever!you!have!doubts,!if!there!is!a!bar!question!asking!if!whether!or!not!an!object!or!a!person!or!an!activity!is!taxable,!you!think!
of!the!lifeblood!doctrine!–!it!should!be!taxable!because!the!government!needs!taxes.!But!the!lifeblood!doctrine!is!only!the!last!recourse.!
You!should!not!reach!such!point!because!you!should!know!the!answer!beforehand.!Otherwise,!you!would!just!bet!tackling!legal!ethics!
wherein!you’re!last!recourse!answer!would!be!good!moral!character.!The!lifeblood!doctrine!answer!is!only!to!support!your!first!answer,!
which!should!be!the!legal!provision!of!the!law.!
!
Taxation! as! a! theory,! which! we! call! as! the! symbiotic! relationship! between! the! government! and! its! people.! It! is! also! called! the! benefitsMreceived!
theory!or!the!compensation!theory.!These!three!theories!are!actually!almost!the!same.!
!
What!do!you!know!of!the!symbiotic!relationship!theory!between!the!government!and!its!people?!What!is!the!need!of!the!government!and!what!is!
the!need!of!the!people!in!so!far!as!taxation!is!concerned?!
!
- When!you!say!symbiotic!relationship!–!the!one!needs!the!other.!In!so!far!as!taxation!is!concerned,!what!the!government!can!offer!to!the!
people!is!protection!and!general!welfare!while!what!the!people!can!offer!to!the!government!is!the!funds!to!operate!the!government.!So!
taxes!by!the!people!to!the!government!in!exchange!for!the!government’s!protection!and!regulation!of!the!entire!nation.!So!it!is!symbiotic!
in! the! sense! that! one! needs! the! other.! It! is! a! benefitsMreceived! theory! because! it! is! for! the! benefit! of! both! and! compensation! for! the!
activity!(compensation!theory).!
 - !There!are!three!theories!actually.!It!is!a!compensation!theory!for!the!people.!It!is!a!compensation!to!the!government!for!the!support!to!
the!people.!
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What!is!the!main!or!primary!objective!of!taxation?!!!
!
- The!primary!purpose!of!the!power!of!taxation!is!to!raise!revenues.!Whenever!there!is!a!law!for!which!the!purpose!is!raising!revenue,!then!
you!have!no!doubt!that!it!is!in!the!exercise!of!the!power!of!taxation.!
!
But!there!are!secondary!purposes.!What!do!you!think!are!the!secondary!purposes!of!the!power!of!taxation?!
!
- To!regulate!businesses!
o Speaking!of!gambling,!are!winnings!from!gambling!taxable?!Winnings!from!lotto!(PCSO)!are!exempt.!Let!us!say!illegal!gambling!
or!games!from!cockfighting?!Even!illegal!winnings!or!gains!from!illegal!gambling!are!as!a!rule!taxable!because!subject!to!income!
tax! because! the! definition! of! income! tax! is! a! tax! on! any! income! from! whatever! source.! Because! of! the! phrase! “whatever!
source”,!it!includes!both!legal!and!illegal!games.!But!then!again!since!it!is!illegal,!I!don’t!expect!you!to!declare!it.!If!you!don’t!
declare!it,!you!become!not!subject!to!tax!by!virtue!of!your!own!decision.!
o Are!cigarettes!subject!to!tax?!Yes.!
! What!kind!of!tax?!Sin!taxes!or!excise!taxes.!Excise!taxes!are!those!taxes!which!are!imposed!on!items!which!are!not!
essential.!Cigarettes!are!not!essential,!in!fact,!dominant!is!the!phrase,!cigarette!smoking!is!dangerous!to!your!health.!
It! is! taxable! not! only! to! income! tax! but! as! well! as! to! excise! tax.! If! you! notice! in! a! pack! of! cigarettes,! there! is! a!
documentary!stamp!but!it!is!actually!a!proof!that!it!has!been!paid!of!excise!taxes.!It!is!the!same!as!liquors.!
! Whenever! you! withdraw! nonMessential! items! or! goods! from! the! warehouse,! it! is! expected! that! at! that! point,! it! will!
have!to!be!paid!of!excise!taxes!or!sin!taxes.!So!that!is!proof!that!it!has!been!paid.!
! If!it!is!imported!from!abroad!then!that!is!another!kind!of!tax!and!what!tax!is!that?!Customs!tariffs!and!duties.!
! !If! there! is! a! business! which! is! rendering! nonMessential! services,! such! as! movie! theaters! –! whenever! you! watch! a!
movie,!you!expect!that!30%!of!what!you!pay!goes!to!amusement!taxes!payable!to!the!local!government.!So!these!are!
types!of!activities!that!are!not!really!necessary!therefore,!in!order!to!regulate!and!at!the!same!time!raise!revenues,!
the!government!imposes!larger!taxes.!
! So!when!you!say!that!the!power!to!tax!is!also!used!as!the!power!to!regulate,!there!comes!in!the!famous!words!–!“that!
the!power!to!tax!also!involves!the!power!to!destroy”!
! What!do!you!mean!by!“the!power!to!tax!involves!the!power!to!destroy”?!Is!it!not!that!this!phrase!is!in!conflict!with!
the!provisions!on!the!Constitution!regarding!due!process!of!law!and!no!taking!of!life,!liberty!and!property?!
• The! power! to! tax! involves! the! power! to! destroy! is! not! necessarily! an! invalid! premise.! Therefore,! it! is! not!
invalid! to! say! that.! The! power! to! tax! involves! the! power! to! destroy! if! the! purpose! of! taxation! is! the!
secondary!purpose!which!is!the!purpose!for!regulation!–!such!as!trying!to!regulate!an!illegal!activity,!it!has!
to!impose!taxes!but!not!really!for!the!purpose!of!raising!revenue!but!for!the!purpose!of!regulating!even!to!
the!extent!of!closing!the!business!if!it!is!illegal.!But!it!(the!closing!or!destruction!of!the!business!or!taking!of!
the! property! through! the! imposition! of! taxes)! becomes! only! valid! if! there! is! compliance! with! substantive!
and! procedural! requirements! as! required! by! the! Constitution.! That! is! why! we! said! earlier! that! one! of! the!
nature!of!taxation!is!that!it!must!always!follow!the!Constitutional!and!inherent!limitations!–!constitutional!
limitations!as!provided!by!the!Constitution!and!inherent!limitations!as!provided!by!your!conscience!because!
the!power!to!tax!is!inherent.!
!
What!are!the!other!secondary!purposes?!
!
- To!promote!the!general!welfare,!public!health,!public!safety,!public!morals,!and!order!in!the!community.!
o This!power!of!taxation!is!exercised!handMinMhand!with!the!police!power!of!the!state.!
- Another!secondary!purpose!is!to!reduce!social!inequality.!Reduction!of!social!inequality!means!that!we!impose!taxes!with!escalating!rates!
to! those! who! are! earning! income! more! than! the! others.! You! notice! a! provision! in! the! Constitution! that! Congress! shall! evolve! a!
progressive!system!of!taxation.!This!simply!means!that!we,!as!much!as!possible,!should!try!to!enact!a!law!which!exacts!taxes!on!those!
who!have!the!ability!to!pay.!
o Example:! If! you! earn! P5,! you’ll! be! taxed! of! 5%! income! tax.! If! you! earn! 1M,! you! belong! to! that! category! of! income! earners!
subject!to!an!income!tax!of!32%.!So!it!is!based!on!your!ability!to!pay.!
o If!you!purchase!an!egg,!raw!meat!that!has!not!been!processed,!mango!(not!the!dried!mango)!from!the!grocery!store,!it!is!not!
subject! to! VAT.! You! notice! the! receipt! you! received! from! the! grocery! store,! at! the! bottom,! there! is! a! breakdown! of! what! is!
vatable!and!what!is!not!vatable.!!
o But!if!you’re!“sosyal”!and!you!buy!egg!from!the!restaurant,!even!if!it!is!just!hardMboiled!egg,!it!is!imposed!a!VAT.!So!it!is!based!
on!the!ability!to!pay!principle.!Why?!Because!if!you!can’t!afford,!then!why!would!you!buy!egg!from!the!restaurant.!
o But!we!cannot!achieve!a!perfect!system!of!taxation.!Even!the!Constitution!does!not!require!but!only!encourages!progressive!
system!of!taxation.!
- Finally,!another!secondary!purpose!is!to!encourage!economic!growth!by!imposing!tax!or!granting!fiscal!incentives!or!exceptions.!Notice!
that!to!encourage!investors!from!abroad,!we!give!them!income!tax!holiday!or!exemption!for!the!first!four!or!six!years!of!operation.!Now,!
are! we! really! giving! an! exemption! in! order! to! raise! revenue?! No,! because! we! are! actually! giving! up! our! right! to! collect! taxes! but! it!
encourages!economic!growth!in!the!long!run.!!
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The! scope! of! taxation! is! unlimited! in! scope.! Even! the! amount! and! rate! of! taxes! can! be! determined! alone! by! Congress.! But! Congress! is! voted! as!
representatives!of!the!people!so!it!actually!comes!from!the!people!indirectly.!!
!
Taxation!is!comprehensive,!plenary!and!supreme.!So!what!makes!it!comprehensive,!unlimited,!plenary!and!supreme?!It!is!because!when!the!power!
of!taxation!is!exercised!by!both!the!House!and!the!Senate,!they!can!determine!who!the!subjects!and!objects!of!taxation!are!so!long!as!these!objects!
and!subjects!are!within!its!jurisdiction.!!
!
So!are!you!class!subject!to!US!federal!taxes?!No!because!you!are!not!within!the!jurisdiction!of!the!US.!But!are!you!subject!to!Philippine!tax,!even!if!
you!are!not!yet!income!earners?!Yes!–!example!is!VAT!(such!as!when!you!purchase!gasoline).!!
!
So!you!will!notice!that!the!power!of!Congress!to!enact!tax!law!is!unlimited!because!whatever!they!can!think!of,!they!can!actually!enact!a!law!and!
impose!tax!on!it,!which!may!be!a!person,!a!property!or!an!activity.!
!
Taxes!are!imposed!not!only!in!persons!or!properties!but!also!activities.!So!more!or!less!everything!is!covered.!Congress!has!a!leeway!to!enact!the!
law!imposing!tax!on!such!activity!so!long!as!it!is!within!its!jurisdiction.!!
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Scope!of!the!Legislative!Taxing!Power:!
!
1. Determination!of!Purposes!
!
- Who!determines!the!purpose!of!taxation?!Is!it!Congress!or!the!President?!
o Congress!then!approved!by!the!President.!
o Every! tax! law! must! have! for! its! purpose! a! public! purpose.! The! absence! of! a! public! purpose! makes! the! law! invalid! and!
unconstitutional.!!
o Who!determines!whether!the!purpose!is!public!or!not?!
! It!belongs!to!Congress.!
o So!whenever,!a!law!is!approved!by!Congress!and!the!President!and!it!comes!out!as!a!valid!law!and!there!is!a!doubt!as!to!its!
constitutionality,!to!whom!do!you!go!to?!
! Judiciary!
o !So!remember!the!roles!of!the!three!branches!of!the!government.!
o Again,!the!scope!of!the!Congress’!taxing!power!is!to!determine!the!purpose.!Don’t!give!it!to!the!President.!It!is!not!even!for!the!
SC! to! give.! What! the! SC! does! is! actually! to! know! whether! the! law! is! constitutional! or! not! according! to! the! substantive! and!
procedural!requirements.!!
o Determination!of!the!public!purpose!is!the!wisdom!alone!of!Congress.!It!belongs!to!Congress.!!
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2. Determination!of!the!subject!and!objects!of!taxation!(within!its!jurisdiction)!
!
- This!is!the!determination!of!who!the!person!will!be,!what!property!and!what!activity.!It!still!belongs!to!Congress.!
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3. Determination!of!the!amount!and!rate!of!tax!to!be!collected!
!
- You!may!notice!that!in!the!tax!code!and!other!tax!laws,!some!of!the!taxes!imposed!are!given!in!rates,!of!course!in!digits,!some!in!figures!–!
fixed!amount.!In!more!cases!than!not,!we!usually!have!percentages!so!it!is!easier!to!memorize!than!the!fixed!rates.!
o Example:!You’re!income!tax!ranges!from!5M32%.!What!I!can!think!of!as!a!fixed!amount!of!tax!under!the!Tax!Code!is!for!common!
carrier’s!tax,!which!includes!shipping!vessels,!airplanes!and!jeepneys!and!taxis.!!
o So!if!you!look!at!the!Tax!Code,!jeepneys!have!different!common!carrier’s!tax.!It!is!fixed!in!amount!depending!on!the!capacity!of!
the! vehicle.! But! as! far! as! the! shipping! vessel! is! concerned! and! those! aircrafts,! it! is! not! subject! to! a! fixed! amount! of! tax,! but!
rather!it!is!subject!to!VAT,!which!is!equivalent!to!common!carrier’s!tax.!So!if!you!travel!by!boat!or!by!plane,!you!pay!12%!VAT.!
But!whenever!you!travel!by!land,!you!only!pay!nothing!in!tax.!You!don’t!pay!taxes!in!traveling!by!land,!but!it!is!the!operator!of!
those!vehicles!who!pay!for!common!carrier’s!tax.!
o Why!don’t!jeepney!drivers!impose!tax?!Because!it!is!difficult!to!monitor!or!regulate!jeepney!drivers!because!for!VAT!purposes,!
you!have!to!have!a!receipt.!So!on!their!part,!it!is!so!difficult!to!issue!a!receipt.!!
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4. Determination!of!the!kind!of!tax!to!be!collected!
!
- At!any!point!in!this!lifetime!that!you!have,!it!may!happen!that!Congress!will!always!either!increase!the!existing!tax!rate!or!enact!a!new!law!
imposing!a!new!tax.!
- Whenever!the!government!cannot!reach!its!budget!to!support!all!branches!and!departments!of!the!government,!their!next!recourse!if!
they!don’t!go!for!borrowings!and!subsidies,!they!increase!tax!rates.!!
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5. Determination!of!apportionment!of!the!tax!
!
- This!also!belong!to!Congress!
!
6. Determination!of!the!situs!of!taxation!
 !
- The!situs!of!taxation!also!belongs!to!Congress.!
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7. Determination!of!the!manner!and!mode!of!enforcement!and!collection!
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- The!other!scope!of!the!taxing!power!is!left!to!the!executive!branch!of!the!government,!which!is!the!enforcement!–!the!means,!manner!
and!method!of!how!to!collect!the!tax.!
!
There!are!two!aspects!of!taxation:!
!
1. Levy!(impose!the!tax)!
!
- So,!the!power!of!Congress!is!simply!to!enact!a!law!–!it!is!the!levying!or!the!imposition!of!the!tax!law.!But!it!stops!there.!They!cannot!go!
forward!to!the!point!of!collecting!the!tax!themselves!because!the!existence!of!Congress!is!simply!to!enact!a!law.!!
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2. Administration!of!the!tax!
!
- Taxation!would!not!be!successful!without!the!administration!aspect.!
- It!is!upon!the!executive!branch!on!how!to!collect!the!taxes.!
- The!role!of!the!SC!as!one!of!the!three!branches!of!the!government!is!to!know!whether!a!law!is!constitutional!or!not.!
- So!the!power!of!taxation!is!not!solely!in!the!exercise!of!Congress!but!other!2!branches!play!their!own!roles.!!
- To!which!department!of!the!government!does!the!BIR!belong!to?!
o Executive!branch!under!the!Department!of!Finance!!
o The!President!has!for!his!alterMegos!the!different!secretaries!of!the!departments.!
o Under!the!department!of!Finance!is!the!BIR!and!Bureau!of!Customs!(BOC)!
o Local!treasuries!belong!to!political!subdivision!units.!They’re!not!part!of!the!Department!of!Finance.!
- Who!has!more!authority?!Is!it!the!Secretary!of!Finance!or!the!Commissioner!of!the!BIR?!
o Secretary!of!Finance!is!the!boss!of!the!Commissioner!of!BIR.!
o Under!the!Sec.!of!Finance!is!the!Commissioners!of!both!BIR!and!BOC.!
!
How!do!we!develop!a!sound!tax!system?!
!
1. It!must!be!equitable!or!in!technical!terms,!there!must!be!theoretical!justice!or!equality.!
!
- What!it!simply!says!is!that!taxation!must!be!based!on!the!ability!of!the!people!to!pay!the!taxes!visMàMvis!their!income.!
- You!cannot!actually!impose!taxes!inequitably,!oppressively.!It!is!tantamount!to!confiscation!of!property.!
!
2. To!have!your!tax!laws!administratively!feasible.!(administrative!feasibility)!
!
- It! is! not! enough! to! enact! a! tax! law.! The! tax! law! must! provide! for! means! and! methods! which! makes! it! effective! and! efficient! for!
management.!Meaning,!the!collection!of!taxes!must!be!made!easier.!!
!
3. Fiscal!adequacy!
!
- Your!collection!of!taxes!must!be!reasonable!in!terms!of!how!much!you!will!spend!for!the!entire!nation.!
- Tax!collection!and!tax!imposition!must!be!so!flexible!as!to!expand!and!contract!according!to!the!needs!of!the!government.!
- Example:!!
o Can!we!say!that!our!tax!system!is!sound!if!the!budget!or!the!needed!expense!is!100B!but!the!collection!of!tax!is!60B,!short!of!
40B?!!
! No,!since!fiscal!adequacy!is!not!satisfied.!!
o How!about!if!the!needs!of!the!government!is!only!60B!and!the!tax!collected!is!100B?!
! No,!since!theoretical!justice!is!not!satisfied.!!
- More!or!less,!if!there!is!a!big!disparity!between!the!needs!of!the!government!and!the!services!that!it!is!giving!to!the!people,!meaning,!the!
expenses!that!it!has!incurred!to!provide!the!basic!needs!of!the!people.!Then,!we!do!not!have!a!sound!tax!system!because!in!that!case,!if!
the!collection!is!100B!and!the!services!delivered!is!only!60B,!then!the!government!is!underdelivering!the!basic!needs!to!the!people.!It!is!
not!a!sound!tax!system.!
!
!
- If!we!say!that!we!don’t!have!a!sound!tax!system!because!it!is!not!fiscally!adequate,!does!that!make!all!the!tax!laws!invalid?!
o No.!If!it!is!not!fiscally!adequate!because!both!the!budget!and!the!collection!do!not!meet,!although!we!can!say!that!it!is!not!a!
sound! tax! system,! but! it! doesn’t! make! the! existing! tax! laws! invalid.! Having! passed! both! the! substantive! and! procedural!
requirements,!it!is!still!a!valid!tax!law.!It!is!up!to!the!government!on!how!to!make!the!tax!system!sound.!All!that!the!government!
has!to!do!is!to!create!balance!between!the!collection!and!expenses.!!
!
 - If!there!is!difficulty!in!collecting!the!taxes,!the!tax!system!becomes!unsound!(violation!of!administrative!feasibility).!Does!that!make!the!
law!invalid?!
o No!because!tax!law!is!made!by!Congress!and!the!means!and!methods!of!collecting!taxes!is!formulated!by!the!executive.!So!if!
there!is!a!difficulty!in!the!collection!of!taxes,!it!is!not!the!fault!of!Congress.!If!you!notice!tax!laws,!at!the!end!of!the!law,!you!will!
find!there!rules!and!regulations!will!be!drafted!by!the!Secretary!of!Finance.!So!if!there!is!difficulty!in!collecting,!it!is!the!fault!of!
the!executive!branch!of!the!government.!It!does!not!make!the!tax!law!as!invalid.!All!it!has!to!do!is!to!loosenMup!and!formulate!
new! rules! and! regulations! or! you! can! eMpay! taxes! (eMfacility! –! paying! taxes! through! the! internet! or! online)! or! enhance! the!
collection!process!or!draft!another!manner,!means!and!methods!of!collecting!tax.!!
!
- If!the!abilityMtoMpay!principle!is!not!followed,!meaning!(violation!of!theoretical!justice!or!equality),!the!tax!system!is!not!progressive,!thus,!
not!developing!a!sound!tax!system,!does!that!make!the!tax!laws!existing!at!that!point!invalid?!
o If! the! progressive! system! of! taxation! is! reversed,! it! makes! the! tax! law! inequitable.! Thus,! it! result! to! invalidity! or!
unconstitutionality!of!the!law!because!it!would!result!to!confiscation!of!property!in!the!form!of!taxes!against!the!people.!
!
Distinguish!taxation!from!police!power!and!eminent!domain:!!
!
! Taxation' Eminent'Domain' Police'Power'
Authority' which' exercises' May! be! exercised! only! by! May!be:! May! be! exercised! only! by!
the'power' the! government! or! its! 1)Exercised! by! the! the! government! or! its!
political! subdivisions! government! or! its! political! political! subdivisions!
(LGUs)! subdivisions! (LGUs)!
!
2)Granted!to!public!service!
companies! or! public!
utilities!
Purpose' The! property! (generally! in! The!property!is!“taken”!for! The! use! of! the! property! is!
the! form! of! money)! is! public! use;! it! must! be! “regulated”! for! the!
taken! for! the! support! of! compensated! purpose! of! promoting! the!
the!government! general! welfare;! it! is! not!
compensable!
Persons'affected' Operates!upon!a:! Operates! on! an! individual! Operates!upon!a:!
! as! the! owner! of! a! !
1)Community;!or! particular!property! 1)Community;!or!
! !
2)Class!of!individuals! 2)Class!of!individuals!!
Effects' The! money! contributed! There! is! a! transfer! of! the! There!is!no!transfer!of!title!
becomes!part!of!the!public! right!to!property! !
funds! At! most,! there! is! restraint!
on! the! injurious! use! of!
property!
!
Benefits' received' or' It! is! assumed! that! the! He! receives! the! market! The! person! affected!
compensation' individual! receives! the! value! of! the! property! receives! indirect! benefits!
equivalent!of!the!tax!in!the! taken!from!him! as! may! arise! from! the!
form! of! protection! and! maintenance! of! a! healthy!
benefits! he! receives! from! economic! standard! of!
the!government! society!
Amount'of'imposition' Generally,!there!is!no!limit! No! amount! imposed! but! Amount! imposed! should!
on! the! amount! of! tax! that! rather! the! owner! is! paid! not! be! more! than!
may!be!imposed! the! market! value! of! sufficient!to!cover!the!cost!
property!taken! of! the! license! and!
necessary!expenses!
Relationship' to' Is! subject! to! certain! Is! subject! to! certain! Relatively! free! from!
Constitution' constitutional!and!inherent! constitutional! limitations! constitutional!limitations!
limitations! such!as!dueMprocess!clause! !
! and!just!compensation! Is! superior! to! the!
Including! the! prohibition! ! impairment! of! contract!
against! impairment! of! the! Inferior! to! the! impairment! provision!
obligation!of!contracts! prohibition;! government!
cannot! expropriate! private!
property,! which! under! a!
contract! it! had! previously!
bound! itself! to! purchase!
from!the!other!contracting!
party!
!
- Can!taxes!be!the!subject!of!compensation!or!setMoff!or!can!the!taxpayer!refuse!to!pay!taxes!because!it!has!an!existing!claim!against!the!
government?!
o No,! because! you! cannot! subject! the! government! to! uncertainty! in! the! collection! of! taxes.! Notwithstanding! that! you! have! an!
existing! claim! for! refunds! of! taxes! against! the! government,! you! cannot! offer! to! setMoff! or! exchange! your! payables! with! your!
receivables!from!the!government!because!the!lifeblood!of!the!government,!the!existence!of!the!government!and!its!survival!
rests!on!the!collection!of!taxes.!
!
- Note:!Sometimes,!the!power!of!taxation!is!used!as!the!power!to!destroy.!In!that!case,!you!can!close!up!a!business!so!long!as!your!purpose!
is!not!for!revenueMraising!but!only!for!regulation.!
- Note:!Even!if!we!take!out!the!Constitution,!does!that!make!the!power!of!taxation!limitless?!No!because!there!are!also!inherent!limitations!
which!attach!to!the!power!of!taxation.!These!inherent!limitations!always!follow!the!power!to!tax.!So!whether!or!not!the!Constitution!is!
there,!still!the!power!to!tax!is!limited!in!some!sense.!
!
- GR:!Taxes!are!payable!in!money.!!
o Reason:!Lifeblood!doctrine!–!Do!you!think!the!government!can!actually!work!and!provide!you!with!basic!services!if!it!accepts!
property! as! payment?! They! have! to! liquidate! it! and! sell! it! and! if! there! is! no! takers! or! buyers,! what! will! the! government! do?!
Thus,!their!operations!will!be!paralyzed!because!taxes!are!like!blood!which!runs!through!the!veins!of!the!government.!
!
- So!what!are!taxes?!
o Taxes!are!enforced!proportionate!contributions,!in!money,!levied!on!persons,!property!or!activities!of!the!persons!and!levied!by!
the!State!which!has!jurisdiction!over!the!subject!or!object!of!taxation!and!which!is!actually!exercised!by!the!lawmaking!body!of!
the!government!for!the!purpose!of!raising!revenues!to!meet!the!needs!of!the!government.!!
!
- If!you!dissect!the!definition!of!taxes,!you!will!arrive!at!the!characteristics!or!elements!or!attributes!of!taxes:!
o It!is!an!enforced!contribution!
! If!you!have!been!paying!taxes!and!you!seek!no!concrete!benefit!from!the!government!such!as!that!you!don’t!use!the!
roads,! you! have! been! living! in! the! mountains,! can! you! refuse! to! pay! taxes! considering! that! it! is! a! symbiotic!
relationship?!
• You! cannot! refuse! to! pay! taxes! simply! because! you! do! not! get! direct! benefit! from! the! government.!
Otherwise!stated,!you!cannot!solely!be!the!person!to!pay!taxes!simply!because!you!get!more!benefits!than!
the! rest.! Purpose! of! taxation! is! public! which! is! for! the! common! good! and! general! welfare.! So! long! as! it!
addresses!the!common!good!of!the!people!then!taxation!is!proper.!!
o It!is!proportionate!
! This!is!based!on!the!principle!of!abilityMtoMpay!principle,!which!is!actually!the!principle!in!equitable!payment!of!taxes!
following!the!progressive!system!of!taxation!–!the!higher!the!ability!to!pay!taxes,!the!more!is!expected!of!you!by!the!
government!
o Taxes!are!generally!payable!in!money!
! Reason:!It!is!only!money!that!is!the!standard!of!measure.!Everything!else!will!rise!and!fall!but!not!money.!
! Exception:!!
• When!taxpayer!becomes!delinquent!in!paying!taxes!(distraining!or!levying!properties).!A!lien!is!created!on!
every!property!of!a!taxpayer!once!he!fails!to!settle!his!tax!liability.!But!as!much!as!possible,!government!is!
not!interested!in!taking!properties!because!it’s!hard!to!dispose!of!them.!But!up!to!the!point!wherein!you!
cannot! settle! because! you! are! not! liquid,! meaning! no! cash,! it! is! when! the! government! will! sell! your!
properties!in!a!public!auction.!
• When!you!pay!through!tax!credit!certificates,!which!are!certificates!issued!by!the!government!itself.!These!
are!tax!certificates!issued!by!the!BIR.!
o Example:! If! you! overpaid! your! taxes,! you! ask! for! a! refund! from! the! government! but! the!
government!will!only!give!you!a!certificate!which!is!called!the!tax!credit!certificate!or!TCC!showing!
that!you!have!overpaid!taxes.!!
o Why!does!the!government!not!pay!you!in!cash?!Again,!lifeblood!doctrine.!
o So! instead! of! giving! back! the! money! to! you! if! the! government! realizes! that! indeed! you! have!
overpaid! the! taxes! then! the! government! will! simply! give! you! certificates! and! you! use! that! as! a!
taxpayer!to!pay!out!your!other!tax!liabilities!to!that!same!agency!of!the!government.!
o So!if!you!have!the!certificate,!next!year!you!can!use!that!certificate!to!pay!out!your!other!taxes.!
o So!it!is!only!this!instance!wherein!government!will!not!be!receiving!cash!as!tax!payment!!
o It!is!levied!on!persons,!properties!or!activities!(these!are!subjects!of!taxation)!
! Activities:!
• The!privilege!to!transmit!property!upon!death!is!subject!to!estate!tax!but!the!privilege!to!receive!property!
as!an!heir!is!no!longer!subject!to!inheritance!tax.!
• In!the!same!way!that!donors!are!subject!to!donor’s!tax!for!giving!something!but!donees!for!receiving!are!no!
longer!subject!to!donee’s!tax.!
! Property!
• Real!Property!tax!–!tax!imposed!against!the!property!itself!and!not!against!a!person!
! Person!
 • Income!tax!is!more!of!like!a!tax!against!an!activity!in!earning!or!generating!an!income!because!if!you!don’t!
engage!in!an!activity,!you!aren’t!subject!to!income!tax.!
• Community!tax!(cedula)!is!an!example!wherein!tax!is!directed!against!a!person!himself!with!or!without!an!
exercise!of!an!activity.!
o Levied!by!the!state!having!jurisdiction!over!the!subject!matter!or!object!of!taxation!
! It!simply!means!to!say!that!the!power!to!tax,!although!supreme!and!unlimited!in!nature!supposedly,!it!only!extends!
until!the!boundary!of!the!country.!Somewhat!physical!in!nature!that!when!you!go!abroad,!or!you!are!an!immigrant!
abroad!and!not!living!in!the!Philippines!physically,!then!your!income!abroad!is!not!subject!to!Philippine!income!tax.!
! So!nurses!abroad!earning!thousands!of!dollars!are!not!expected!to!remit!taxes!to!the!Philippine!government.!
! But!if!you!are!only!a!tourist!abroad!and!still!a!resident!in!the!Philippines,!then!you!are!subject!to!Philippine!income!
tax.!!
o It!is!exercised!by!the!Congress!or!lawmaking!body!of!the!state!
o Levied!for!a!public!purposes!
!
- Taxes!are!divided!into!4!categories:!
o Internal!revenue!taxes!–!are!those!taxes!imposed!by!the!NIRC!
! Example:! income! tax,! donor’s! tax,! estate! tax,! VAT,! percentage! taxes,! common! carrier’s! tax,! gross! receipts! tax,!
amusement!taxes,!documentary!stamp!tax,!excise!tax!!
! So!what!is!within!the!scope!of!the!BIR?!It!is!the!enforcement!of!the!taxes!under!the!NIRC.!In!short,!the!tax!code.!
o Local/Municipal!taxes!–!taxes!found!in!the!LGC,!which!comes!in!2!types:!
! Local!taxes!–!local!transfer!tax,!amusement!tax,!franchise!tax!
! Real!property!taxes!
o Tariffs!and!Customs!Duties!–!those!that!are!found!in!the!Tariffs!and!Customs!Code!
! Examples:!antiMdumping!duties,!retaliatory!duties!
o Taxes!and!tax!incentives!under!special!laws!–!taxed!found!in!different!special!laws,!such!as!special!laws!for!sugar!industry!and!
coconut!industry!
!
June!22,!2010!
• Recap!of!Last!Meetings!Discussion!starting!of!with!is!the!definition!of!Taxation:!It!is!an!enforced!contribution!to!the!government.!!
• We!said!that!1!of!the!nature!of!the!taxation!power!is!that!it!is!legislative!in!nature.!In!relation!to!fiscal!adequacy!as!one!of!the!basic!principles!
to!make!the!tax!system!sound,!just!in!case!the!basic!needs!and!expenses!is!not!met!by!the!tax!collector!under!the!present!taxing!system,!is!it!
allowed!that!a!tax!or!a!fee!will!be!collected!without!a!law!so!as!to!meet!the!needs!of!the!government?!
o Without!a!law!imposing!a!tax,!no!tax!can!be!collected.!Notwithstanding!that!there!is!a!deficit!in!the!budget!or!collection.!!
o When! taxation! or! the! power! of! taxation! is! inherent! in! every! sovereignty! it! simply! means! to! say! that! every! government! or! every!
sovereign!country!can!actually!tax!its!people!but!through!the!legislative!body.!That!there!is!no!need!for!the!Constitution!or!any!law!
to!grant!the!power!to!tax!because!it!can!tax!but!in!order!for!it!to!be!effective,!collecting!from!the!people!taxes,!there!must!be!a!law!
imposed!for!the!government!to!collect!taxes.!
o The! constitution! is! just! there! to! limit! the! power! of! taxation! which! is! otherwise! inherent.! At! any! point! in! time,! the! government!
through! the! legislative! body! can! enact! a! law! imposing! the! tax.! The! law! imposing! the! tax! will! be! enforced! or! executed! by! the!
executive! branch! of! the! government! collecting! the! tax! from! the! people.! If! we! make! a! short! cut,! for! the! government! collecting!
directly!from!the!people!without!the!law,!it!is!not!possible.!
o Cannot!use!the!life!blood!doctrine!cannot!be!used!because!this!situation!is!the!opposite.!
o It!will!result!in!chaos!and!oppression.!And!it!will!be!arbitrary!for!the!government,!exercised!through!government!officials!that!they!
collect!the!tax!without!any!guidelines!or!without!any!law.!!
o Collection! of! taxes! without! any! law! will! violate! the! basic! provision! of! the! ConstitutionM! _________.! That! when! the! nature! of! the!
power!of!taxation!is!legislative!in!character!it!simply!means!to!say!that!taxation!is!statutory!in!nature.!Without!a!statute!or!law,!no!
tax!can!be!imposed!or!collected.!Even!if!this!is!inherent,!the!power!to!tax,!no!collection!can!be!made!if!no!law!is!made!by!Congress.!!
• We!discussed!what!taxation!is!all!about,!it!is!inherent!in!every!society,!it!is!legislative!in!character!and!it!is!limited!by!2!types:!inherent!and!
constitutional!limitations.!
• We!also!discussed!what!is!the!basis!why!there!!is!an!inherent!power!to!tax!in!every!government!because!there!is!that!need!of!the!government!
to!protect!its!people!and!serve!its!people.!Having!these!needs!of!the!government,!this!can!only!be!addressed!by!the!people!supporting!the!
government! through! the! payment! of! taxes! which! is! a! symbiotic! relationship! between! the! government! and! its! people.! Taxes! will! be! in!
monetary!form!while!the!other!one!is!through!serving!and!protecting!its!people.!
• In!life!blood!doctrine,!we!say!the!government!has!a!need!for!it!to!survive!will!need!taxes!coming!from!its!people.!!
o And!we!illustrated!the!life!blood!doctrine!in!an!example,!there!can!be!no!set!off.!Taxes!can!never!be!the!subject!of!any!set!off.!No!tax!
payer!can!offer!to!set!off!his!claimable!against!the!government!against!his!liability!for!taxes.!For!one,!the!government!and!its!people!
are! not! creditors! and! debtors! of! each! other.! In! civil! law,! compensation! or! set! off! can! only! happen! if! there! is! that! creditorMdebtor!
relationship!but!taxes!are!not!debts!of!the!people!they!are!civil!obligations!that!are!actually!enforced!upon!the!people.!!
! If!the!tax!payer!will!have!a!liability!for!taxes,!the!tax!payer!will!have!to!settle!that!obligation!and!it!cannot!be!offMset!against!
any!right!of!the!taxpayer,!whether!it!be!a!right!to!be!refunded!of!any!tax,!etc.!
• Only! exception! to! the! rule! that! there! is! no! set! off! or! compensation! between! taxes! is! the! case! of! Domingo! v.!
Carlicos:!
o There!was!a!set!off!of!the!obligation!of!the!tax!payer!and!his!claimable!from!the!government.!But!this!
will!only!hold!true!if!the!receivable!from!the!government!is!already!LIQUIDATED!and!DEMANDABLE.!!
 o A!claim!for!refund!from!the!government!is!not!as!yet!liquidated,!then!it!is!not!demandable.!It!will!have!
to! be! settled! by! the! government! and! look! into! its! validity.! So! there! can! be! no! set! off! as! a! GENERAL!
RULE.!
o Another! illustration! of! the! life! blood! doctrine,! is! when! you! can’t! enjoin! the! collection! of! taxes! by! filing! a! case! in! court.! Say! for!
example!the!government!filed!a!civil!case!for!collection!of!your!unpaid!taxes!for!prior!years,!you!cannot!file!an!injunction!against!the!
government!or!BIR!against!the!case!filed.!!
! You!will!see!!in!last!part!of!the!Tax!Code!that!there!can!be!no!injunction!filed!against!a!collection!made!by!the!government!
for!taxes.!This!is!the!GENERAL!RULE.!
• Exception:!there!is!only!1!to!be!discussed!in!remedies.!
! Whenever! the! government! undertakes! a! move! to! collect! your! taxes! in! any! other! type! of! remedy! not! only! the! tax!
collection,! administrative! case,! etc.,! whatever! the! remedy! undertaken! by! the! government,! you! cannot! file! an! injunction!
case!as!a!general!rule.!
• We!also!discussed!last!meeting!the!purposes!of!taxation,!the!scope!of!the!power!of!the!legislative!department!in!which!starts!in!determining!
the!purpose!of!the!tax!law!down!to!the!kind,!amount,!nature!of!tax,!etc.!!
• We!also!discussed!the!2!aspects!of!taxation:!the!administration!aspect!and!preceded!by!the!levy!aspect!which!is!undertaken!by!the!legislative!
branch.!
• The!3!basic!principles!of!the!sound!tax!system!and!distinguished!taxation!from!police!power!and!eminent!domain,!the!2!other!powers!of!the!
government.!
• What!is!TAX?!What!are!taxes?!TAXES!are!enforced!proportional!contributions!generally!payable!in!money!impose!or!levied!against!persons,!
properties! or! objects! of! taxation! within! the! taxing! jurisdiction! levied! through! the! legislative! law! making! body! of! the! state! for! purposes! of!
raising!revenues!to!meet!the!legitimate!objectives!and!public!needs!of!the!government!and!the!people.!!
o It!is!an!enforced!contribution.!It!can!never!be!voluntary!as!nobody!will!voluntarily!pay!taxes.!!
o It! is! proportionate! in! contributions! because! it! proportions! the! burden! of! taxes! to! those! who! are! able! to! pay! the! taxes.! It! is! more!
based!on!the!ability!to!pay!principle.!
o It!is!generally!payable!in!money.!However,!TAX!CREDIT!CERTIFICATES!(TCT)!which!are!the!certificates!issued!either!by!the!Bureau!of!
Internal! Revenue,! Department! of! Finance! or! the! Bureau! of! Customs,! they! are! actually! indications! that! you! have! a! receivable! or!
overpaid! taxes! to! the! government! and! it! symbolizes! that! you! have! advance! payment! to! the! government! and! you! can! use! this!
certificate!to!pay!out!your!other!tax!liabilities.!Thus,!you!are!not!paying!in!cash!but!through!another!item.!
! If!TCC!is!issued!by!the!BIR,!it!can!only!be!used!to!pay!taxes!due!to!the!BIR.!So!if!it’s!a!TCT!for!income!tax!that!you!overpaid,!
you!can!use!that!certificate!to!pay!other!taxes!found!in!the!IRC!like!documentary!stamp!taxes,!donor’s!tax.!But!you!cannot!
use!this!TCC!to!pay!off!your!real!property!tax!before!the!LGU!or!to!pay!customs!duties!or!VAT!before!the!BOC.!It!must!only!
be!against!a!tax!of!the!issuing!authority.!!
o It!is!levied!against!persons,!properties!or!objects!of!taxation!so!long!as!it!is!within!the!taxing!jurisdiction.!!
o It!is!the!levied!by!the!law!making!body!of!the!state!for!public!purposes.!
• Generally,!for!tax!to!be!valid,!it!must!have!the!following!major!requirements:!
o 1.!The!tax!should!be!for!public!purpose.!
! In! the! Constitution,! any! tax! levied! by! the! government! should! not! be! appropriated! for! any! private! purpose! but! only! for!
public!purpose.!
o 2.!Taxation!should!be!uniform!in!nature.!When!we!say!uniform!in!nature,!then!it!must!be!applied!to!all!persons!within!the!same!class!
similarly!situated.!
! To!be!expounded!when!we!reach!equal!protection!clause!and!uniformity!and!equity!in!taxation.!
o 3.!It!must!be!within!the!jurisdiction!of!the!taxing!authority!to!be!expounded!when!we!reach!citus!of!taxation.!
o 4.!There!must!be!due!process!in!the!assessment!and!collection!of!taxes.!So!fair!and!reasonable!methods!of!collection.!
o 5.!With!porper!observance!of!both!inherent!and!constitutional!limitations!to!the!Power!of!Taxation!(POT).!
• How!are!taxes!classified?!What!are!the!classification!of!taxes?!
o The!subject!matter!or!object!against!which!it!is!taxed!is!directed!can!be!classified!into!3:!
! Personal!Tax:!tax!imposed!on!a!person!who!is!a!resident!of!a!particular!place!without!regard!to!his!citizenship.!Maybe!an!
alien!national!or!without!regard!to!the!type!of!business!or!profession!he!is!engaged!in.!He!may!be!a!minimum!wage!earner!
or!a!president!of!a!multiMnational!corporation,!it!does!not!matter.!Personal!tax!is!a!tax!directed!against!a!person!who!is!a!
resident!of!a!particular!place.!
• When!we!say!resident!in!a!particular!place,!it!means!residence!in!the!Philippines.!
• Why!can’t!we!impose!a!personal!tax!against!a!residence!of!the!US?!Because!he!is!outside!our!jurisdiction.!!
! Property!Tax:!it!is!assessed!on!properties!that!lie!within!the!jurisdiction!of!the!taxing!authority.!
• Example:!Real!property!tax.!Who!is!liable!to!pay!the!tax?!
• Example:! This! class! formed! a! corporation,! which! can! be! incorporated! by! a! minimum! of! 5! individuals.! The!
corporation!owns!various!real!properties.!!
o Since!corporations!have!different!personalities!or!distinct!from!the!persons!composing!the!corporation!
or!owning!the!corporation,!the!liability!of!the!real!property!tax!would!actually!call!on!the!corporation!
itself.!Stockholders!would!not!be!liable.!!
! That’s!the!reason!why!you!only!3!types!of!businesses!or!organizations.!It!can!be!corporation,!
partnership,!or!sole!proprietorship.!
! For!purposes!of!protection!of!individual!assets,!you!go!for!corporation!because!you!create!a!
separate!and!distinct!personality!and!it!cannot!go!after!your!personal!assets.!
• Now!if!the!corporation!has!real!properties,!it!is!the!corporation!who!pays!for!the!real!property!tax!(RPT).!
 • The! only! instance! wherein! the! stockholders! will! be! liable! to! pay! the! RPT! of! the! corporation! is! when! the!
corporation!dissolves!and!properties!are!distributed!to!the!tax!holders!without!the!tax!having!been!paid!because!
the!tax!follows!the!property!being!a!property!tax.!Property!tax!attaches!to!the!property!itself!whoever!the!owner!
is.!!
! Excise!Tax:!it!is!a!kind!of!tax!which!does!not!fall!within!the!meaning!of!personal!or!property!tax.!It!is!a!tax!based,!not!on!the!
person’s!residence!or!the!person’s!property,!but!on!the!performance!of!an!act!or!enjoyment!of!an!activity!or!privilege!and!
the! exercise! or! engaging! of! a! particular! profession.! All! others! which! do! not! fall! under! the! definition! of! a! personal! or!
property!tax!will!have!to!be!called!an!excise!tax.!
• Example:!!Income!tax!an!excise!tax?!Estate!tax!an!excise!tax?!!
o Second!classification,!under!who!is!burdened!by!the!tax:!Direct!and!Indirect!taxes.!
• What!do!you!call!a!person!who!is!liable!for!tax!as!provided!under!a!law?!STATUTORY!TAX!PAYER!(STP).!!
o Is! the! STP! always! burdened! by! the! tax! imposed! by! the! law?! Not! always.! So! we! discuss,! direct! and!
indirect!taxes.!
! Direct:! the! burden! falls! directly! on! the! tax! payer! who! is! mentioned! in! the! law.! We! call! every! taxpayer! or! every! person!
mentioned!in!the!law!as!the!one!liable!to!remit!the!tax!to!the!government!as!a!STP.!He!is!a!taxpayer!as!provided!by!the!
law.!He!is!the!one!required!to!remit.!!
• Is!remittance!to!the!government!requirement!equivalent!to!being!burdened!by!the!tax!itself?!Not!necessarily.!In!
some! cases! where! the! STP! is! required! to! remit! the! tax! that! he! himself! is! burdened! by! it,! by! which! he! can! no!
longer!pass!the!tax!to!anyone.!We!call!the!tax!as!the!direct!tax.!
o Example:! Income! tax! for! your! lawyer.! And! you! received! for! your! profession! as! a! lawyer,! you! will! be!
liable,!as!a!rule!by!income!tax.!!
! Can!you!shift!income!tax!to!your!clients?!No!because!income!tax!is!only!computed!at!the!end!
of!the!year!when!you!realize!your!income.!If!your!expenses!is!lower!than!your!receipts!from!
your!clients.!Since!you!can!no!longer!shift!the!burden!to!anyone!ellse,!you!are!liable!to!pay!
the!direct!tax.!Because!you!are!burdened!to!pay!the!tax!which!you!are!required!to!remit!to!
the!government.!
! Indirect:!the!STP!is!found!in!the!law!can!shift!on!or!pass!the!burden!to!another!person!may!he!be!a!direct!consumer!or!any!
other!entity!in!the!production!chain.!
• Example:!VAT.!Under!the!law!every!person!who!sells,!barters,!exchanges!goods,!services,!or!properties!are!liable!
12%!VAT!on!the!gross!selling!price!or!gross!receipts.!!
o If!you!are!a!seller!of!a!property,!you!will!be!liable!to!pay!the!12%!VAT.!You!are!a!STP!under!the!law.!But!
the! VAT! of! 12%! is! added! on! to! the! selling! price! of! the! property! which! the! consumer! pays.! So! the!
consumer!actually!pays!the!12%!vat!to!you!for!which!you!only!conduit!and!you!remit!the!12%!vat!to!
the!government.!!
o So!VAT!is!an!indirect!tax!because!the!burden!is!shifted!by!the!STP!down!to!the!next!person,!may!he!be!
an!individual!or!an!entity.!
o It!may!be!consumer!like!us!or!an!entity.!
o Example:!if!y!have!a!mango!and!you!sell!it!to!someone!who!will!convert!it!to!a!dried!mango!chip.!After!
which!it!is!sold!to!a!wholesaler,!to!a!retailer!sold!to!a!hotel.!Every!chain,!in!every!transfer!of!property!or!
goods,!there!will!be!a!12%!added!on.!Everyone!becomes!burdened!by!tax.!The!last!person,!someone!
ate! it! in! the! hotel.! That! hotel! also! becomes! a! STP! required! to! remit! it! to! the! government.! But! the!
burden!was!actually!shifted!to!the!one!who!ate!it.!
o That!is!why!it!is!called!VAT!because!it!is!a!tax!on!every!value!added!as!it!is!distributed!in!a!production!
chain!or!chain!of!distribution,!it’s!tax!is!added!up.!!
o Classification!as!how!the!amount!of!tax!is!determined:!
! Specific:!tax!imposed!by!the!head!or!number,!or!by!some!standard!of!weight!or!measurement.!!
• Excise! taxes! under! the! tax! code! imposed! on! non! essential! items,! not! totally! though,! that! they! are! more! of!
specific!taxes.!Ad!valorem!taxes!!
! Ad!Valorem:!are!imposed!on!the!value!of!the!item!or!goods.!!
• Example:!real!property!tax.!Estate!tax.!Donor’s!tax.!They!are!always!imposed!on!how!much!is!the!value!of!the!
property!that!is!transferred!or!so.!!
o As!to!purpose:!
! Revenue!raising,!which!is!the!general!purpose!of!taxation.!!
! Regulatory!purpose:!imposed!for!a!special!purpose.!
o As!to!the!scope!!
! National:!by!national!government!
! Local!or!Municipal:!by!municipal!corporations!or!local!governments.!
o As!to!graduation!or!rate!of!taxation:!
! Progressive:! taxes! which! escalate! or! increases! as! your! income! increase! based! on! ability! to! pay! principle.! The! tax! rate!
increase!as!the!income!increases.!
• This!is!more!reasonable!because!you!are!imposing!the!buden!of!tax!to!those!who!are!able!to!pay!them.!!
! Regressive:!the!tax!rate!decreases!as!the!income!increases.!!
• No!regressive!taxes!in!the!Philippines!because!these!are!discouraged.!Otherwise!it!will!be!unfair!to!those!whose!
income!is!not!so!much.!!
• What!is!only!argued!as!a!regressive!tax!is!the!VAT.!But!it!is!a!proportional!tax.!
 ! Proportional:! it! is! neither! regressive! nor! progressive.! In! between! regressive! and! progressive! taxes,! is! proportional! taxes!
which!is!a!fixed!percentage!of!tax!based!on!the!amount!of!the!property!subject!or!object!to!be!taxed.!What!is!fixed!is!the!
tax!rate.!What!is!increasing!or!decreasing!is!the!value!of!the!property,!object,!subject!or!income.!
• Progressive:!tax!goes!up,!income!goes!up.!Regressive:!tax!goes!up,!income!goes!down.!Proportional:!stays!as!a!
fixed!percentage!whether!the!income!is!going!up!or!income!is!going!down.!
• Example:!real!property!tax.!Because!RPT!in!cities!and!municipalities!within!the!Metro!Manila!area!is!imposed!at!
2%!of!the!assessed!value!of!the!property.!Whether!the!assessed!value!is!1M!or!1peso,!the!RPT!pays!fixed!at!2%!
o Corporate!Income!Tax:!stays!at!30%!flat!income!tax!even!if!the!income!of!the!corporation!is!at!1B!or!
1peso.!!
• When!you!have!progressive!income!taxation,!it!simply!means!that!the!tax!laws!of!the!country!or!system!of!taxation!is!placing!emphasis!on!
more!on!direct!taxes!because!equivalent!to!progressive!system!of!taxation!is!the!ability!to!pay!principle.!While!regressive!system!of!taxation!
focuses! more! on! the! presence! of! indirect! taxes! as! against! direct! taxes.! What! is! encouraged! by! the! Constitution! is! for! Congress! to! evolve! a!
progressive!system!of!taxation.!This!means,!Congress!would!like!to!have!as!many!direct!taxes!as!can!be.!!
o But!the!Constitution!does!not!prohibit!indirect!taxes.!It!only!encourages!a!progressive!system!of!taxation.!
o That!is!why!when!a!case!was!field!in!the!SC,!on!the!Constitutionality!of!the!EVAT!law!as!being!regressive!in!nature.!The!SC!upheld!its!
constitutionality.!The!constitution!does!not!prohibit!the!imposition!of!indirect!taxes.!Long!ago,!sales!taxes!were!there,!indirect!taxes!
were!already!present.!The!argument!that!VAT!being!regressive!is!that!if!you!compute!12%!as!a!fixed!amount!against!the!purchases!
of! a! high! income! earner! as! against! a! VAT! on! low! income! earner,! there! would! be! a! big! difference! of! the! take! home! pay! of! the!
individual.!
! Example:!Mr.!A!is!earning!100,000!per!month,!if!he!uses!30%!of!that!100%!for!purchases!imposed!with!VAT.!And!Mr.!B!
whose!income!is!!and!he!uses!30%!for!purchases!subject!to!VAT.!His!purchases!per!month!is!Php50,000!plus!VAT!of!12%!
which!is!equivalent!6000!as!against!the!income!component!of!Php!100,000.!He!actually!paid!VAT!of!6%!only.!
! If!Mr.!B!earning!only!10,000!in!a!month!and!spends!80%!of!his!income!to!purchase!in!order!to!subsist!in!his!living!expenses!
since!we!cannot!say!5000!is!enough.!He!will!have!to!pay!8000!purchases!plus!VAT.!VAT!is!Php!916.!So!he!actually!spent!for!
9.6%.!
! Although!both!of!them!are!subjected!to!a!proportional!tax!of!12%!because!VAT!belongs!to!the!proportional!tax!being!fixed!
in!amount!imposed!in!varying!degrees!of!the!property!bought!or!sold,!but!in!effect!the!burden!of!the!tax!is!different!as!to!
Mr.!A!and!Mr.!B.!There!was!a!difference!of!3.6%.!Thus,!argument!is!that!it!is!regressive!because!the!burden!decreases!as!
your!income!increases.!
! SC:!upheld!the!VAT!as!valid:!
• 1.!Indirect!taxes!is!not!prohibited!by!the!Constitution.!
• 2.!Indirect!taxes!or!sales!tax,!which!VAT!is!a!sales!tax,!has!been!there!for!a!long!time.!It!is!impossible!to!take!it!
out.!
• 3.!Because!low!income!earners!are!expected!to!purchase!items!which!are!not!vatable.!As!provided!for!in!Section!
109!of!your!tax!code,!it!lists!down!from!A!to!Z!items!which!are!now!exempt.!It!provides!there!that!items,!which!
are!original!in!stake!or!which!has!not!been!processed!as!yet!are!exempt!from!VAT.!The!SC!is!actually!saying!that!
this! group! of! income! earners! will! not! spend! on! VAT! because! they! will! only! purchasing! items! which! are! not!
vatable.!Therefore!VAT!is!still!a!valid!tax.!
• Distinguish! Taxes! from! License! or! Permit! Fees.! (If! to! distinguish,! the! best! answer! is! to! answer! as! to! every! distinction! you! can! think! of;!
Enumeration!as!to!bullet!points!or!numbers).!
o As!to!source!of!power:!Police!Power!for!license!and!power!of!taxation!for!taxes.!
o As!to!purpose:!License!for!regulation;!Taxes!for!revenue.!
o As!to!amount:!As!to!taxes,!it!is!unlimited.!It!is!for!Congress!to!determine!so!long!as!provided!under!the!law,!you!follow!the!law.!If!its!
50%!tax,!then!its!50%!tax.!But!for!licenses,!it!is!only!to!recover!the!cost!of!regulation.!But!sometimes!if!it!is!exercised!in!consonance!
with!the!power!of!taxation,!this!may!exceed!the!cost!of!regulation.!
o As!to!when!paid:!Because!every!business!before!it!starts!would!have!to!be!licensed!in!order!for!it!to!be!operative,!thus!it!is!paid!in!
the!beginning.!Taxes!are!only!imposed!if!an!income!is!earned!or!for!other!taxes,!such!as!community!tax,!if!there!is!capital,!etc.!!
o As!to!legal!effect:!NonMpayment!of!licenses!will!make!the!business!illegal!while!nonMpayment!of!taxes!makes!the!business!still!valid!
but!subject!to!civil!and!criminal!liability.!
• Toll!Fees!vs.!Taxes:!Toll!fees!are!payments!for!the!use!of!property.!It!is!not!exercised!in!the!power!of!taxation.!
o Toll!fees!are!imposed!for!the!use!of!the!property!for!purposes!of!recovering!the!construction!cost.!It!is!not!only!the!government!who!
has!the!right!to!collect!toll!fees!but!any!private!entity!as!well.!The!reason!there!being!is!that!in!some!cases!the!government!of!the!
Philippines! cannot! afford! to! have! these! kinds! of! structures.! It! will! have! another! foreign! company! to! do! the! Construction! and! the!
spending! and! allow! the! private! entity! or! corporation! to! recover! the! cost! of! construction! through! toll! fees.! In! some! cases,! the!
government! will! enter! into! a! BOT! Agreement,! BillMOperateMTransfer,! wherein! a! private! entity! will! build! something,! operate! it! and!
after!recovering!the!full!cost!will!transfer!the!entire!property!to!the!government.!
o Toll!fees!is!a!demand!fo!the!government!or!private!entity!for!purposes!other!than!governmental!purposes.!!
o As!to!demand:!Tolls!fees!are!a!demand!for!ownership!while!taxes!are!a!demand!of!the!sovereignty.!
• Special!Assessment!vs.!Taxes!
o Special!Assessment!is!a!levy!on!a!parcel!of!land!that!has!been!directly!benefited!by!the!public.!!
! Example:!If!a!flyover,!BTC!flyover,!can!the!government!actually!claim!a!levy!against!BTC?!Can!they!say!that!that!particular!
piece!of!land!was!benefited!by!the!public!improvement?!Not!all!public!improvements!will!entitle!the!government!to!levy!a!
special!assesedment!against!the!land!surrounding!the!improvement.!!
! SA!is!not!personal!in!nature.!It!is!directed!against!the!parcel!of!land,!directly!benefited!by!the!public!improvement.!It!is!
more!a!property!tax.!When!we!said!that!thtere!is!only!1!kind!of!property!tax,!which!is!real!property!tax.!You!will!notice!that!
 SA!is!a!real!property!tax!under!the!local!government!code.!It!is!a!property!tax!against!a!land!benefited!directly!by!the!public!
improvement! wherein! the! government! can! directly! collect! to! up! to! 60%! of! the! cost! of! the! improvement! from! all!
surrounding!properties.!If!no!benefit!is!given,!no!special!levy!can!be!collected.!!
o Tax!is!collected!on!a!regular!basis!while!SL!is!collected!only!after!an!ordinance!has!been!passed!by!the!LGU!imposing!such!levy.!And!
there! can! be! no! public! improvement! every! now! and! then! in! the! same! area.! For! purposes! of! observance! of! due! process,! public!
hearing!is!necessary!so!that!all!property!owners!is!given!the!chance!to!object!on!whether!or!not!they!will!be!benefited.!
• Compromise!Penalty!(1:13:10)!
o Compromise! Penalties! are! those! granted! by! the! government! in! lieu! of! a! prosecution! for! the! violation! of! the! tax! law.! It! is! still! in!
relation! to! taxes.! You! will! see! in! the! tax! code! that! for! every! violation! of! tax! law,! you! will! be! subjected! to! fines,! imprisonments,!
surcharges,!and!interests.!But!if!you!want!to!escape!criminal!prosecution,!if!the!government!will!offer!to!impose!and!collect!from!
you!the!compromise!penalty!in!lieu!of!a!criminal!prosecution!for!the!violation!of!the!tax!law.!It!is!allowed.!
! Example:!you!have!a!business!and!you!earn!1M!in!income!and!spend!1M!in!sales,!and!1M!in!expenses.!You!are!at!a!lost!of!
1M.! You! were! advised! by! your! advisor! that! there! is! no! need! to! file! an! income! tax! return! because! you! did! not! earn! any!
income!and!thus!not!liable!for!any!tax.!Is!this!correct?!NO.!!
• As!a!rule,!the!tax!code!provides!that!every!business!has!to!file!his!income!tax!return!whether!it!earned!income!or!
did!not!perform!well.!In!this!example,!if!you!did!not!file!an!income!tax!return!and!it’s!found!that!out,!you!will!be!
liable!for!the!nonMfiling!of!tax!return!which!is!criminal!prosecution,!violation!of!the!tax!code!but!in!lieu!of!this!the!
government!will!offer!you!a!compromise!penalty!of!Php!10,000!for!that!failure!to!file!the!tax!return.!But!you!will!
not!be!liable!for!interest!or!surcharge!because!you!did!not!earn!income.!Surcharge!is!only!based!on!the!tax!that!
has!not!been!paid,!you!are!losing.!You!will!not!be!liable!for!interest!because!you!did!not!earn!income!thus!you!
are!not!liable!for!tax,!no!interest!which!to!base!on.!!
o So,! the! compromise! penalty! is! monetary! in! nature.! The! government! is! not! really! interest! in! prosecuting! tax! payers! but! rather! as!
much!as!possible!into!entering!into!compromise!because!taxes!are!the!life!blood!of!the!state.!!
o Compromise!penalty!is!for!the!government!to!determine!and!offer.!There!is!another!type!of!compromise!which!is!not!a!penalty.!The!
tax!payer!of!the!government!wishes!into!compromise!meeting!and!middle!ground!in!the!assessment!and!in!the!capability!of!the!tax!
payer!to!settle!his!past!obligations.!This!is!a!compromise!which!must!be!decided!upon!by!both!parties.!But!this!compromise!penalty!
here!is!the!sole!prerogative!and!offer!of!the!government.!If!accepted,!then!taxpayer!has!only!to!pay.!But!the!government!cannot!
force! the! tax! payer! to! pay! the! compromise! penalty.! The! only! recourse! left! for! the! government! is! to! criminally! prosecute! the! tax!
payer.!
• Debt!vs.!Taxes!
o Debt!is!assignable!but!tax!is!not!generally!assignable.!Taxes!are!generally!not!assignable!tax.!If!you!are!the!statutory!tax!payer,!it!is!
only!against!you!with!whom!the!government!will!collect!from,!whether!its!direct!or!not.!Say!for!example,!in!VAT,!there!is!a!different!
statutory!tax!payer!and!the!tax!payer!burdened!by!the!tax.!If!the!purchaser!of!the!property!that!you!sold!did!not!pay!VAT.!You!are!
still! liable! to! pay! the! 12%! VAT! because! you! are! the! STP! whether! it’s! a! direct! tax! or! not.! The! liability! to! remit! the! tax! falls! on! the!
statutory!tax!payer.!!
! Only!in!very!few!exceptional!cases,!wherein!another!person!is!liable!for!the!tax!of!someone!else.!
• Example:!estate!tax.!If!a!person!Mr.!A!dies,!he!leaves!an!estate.!The!tax!payer!is!the!estate,!the!person!who!died!
has!no!more!personality.!The!estate!left!will!be!liable!to!pay!the!estate!tax.!If!the!peroperty!is!distributed!to!the!
heirs! before! settling! the! estate! tax,! the! government! can! actually! proceed! to! run! after! the! heirs! not! anymore!
against! the! estate! because! of! the! violation! of! the! law! that! distribution! can! only! be! made! after! payment! or!
settlement.!!
o Debts!can!be!paid!other!in!money.!While!tax!is!generally!paid!in!money.!
o In!debtedness,!as!provided!in!the!Civil!Code,!there!can!be!no!interest!collected!if!it!is!not!stipulated.!Unless!the!promissory!note!or!
written!agreement!or!loan!contract!provides!for!interest,!it!cannot!collect!interest.!But!in!taxation,!interest!would!only!come!in!after!
you!failed!to!your!tax!on!due!date.!In!every!regular!interval,!if!you!are!very!prompt!in!paying!taxes,!you!don’t!have!to!pay!interest.!
! !If!you!are!very!early!in!paying!your!taxes,!for!NIR!taxes,!no!incentive!because!of!the!life!blood!doctrine,!you!are!not!given!
any!discount.!But!for!LCG!and!real!property!taxes,!you!are!given!discount!of!10%!or!20%!for!real!property!tax!discount!but!
not!to!exceed!these!rates.!!
o Debts!can!be!compensated!or!offset!against!each!other!but!not!taxes!because!in!taxes,!the!relationship!of!the!government!and!the!
tax!payer!is!not!that!of!a!creditorMdebtor.!While!in!debts!it!can!be!compensated!or!offset.!!
! (Philex!Mining!Corp.!Case):!Philex!actually!offered!its!VAT!claims!for!refund!in!lieu!of!the!government’s!liability!on!excise!
taxes!on!mineral!extracted.!SC!said!no!there!can!be!no!offset!or!compensation!between!the!vat!refund!filed!and!the!excise!
tax!due.!Excise!tax!due!is!already!a!civil!obligation!of!Philex!mining!while!the!claims!for!VAT!refund!are!simply!inchoate!or!
yet!to!be!proven!and!is!not!yet!liquidated!and!thus!not!yet!demandable!by!the!corporation!so!there!can!be!no!offset.!
! (Another!Case)!There!was!allowed!an!offsetting.!Between!the!salary!of!a!government!employee!as!against!an!estate!tax!
liability.!!
• Subsidy!vs.!Taxes:!
o Subsidies!are!those!which!is!given!or!bounties!given!by!the!government!to!the!Philippines!while!taxes!are.!!
o Revenue!is!the!more!general!term.!Revenue!is!that!which!is!earned!by!the!government!through!the!tax!imposition,!subsidies!from!
other!nations!and!tariffs.!!
o Whiles!taxes!and!subsidies!are!part!of!the!revenue!of!every!government,!taxes!are!actually!imposed!against!its!constituents!while!
subsidies!are!voluntary!received!by!the!government.!
o Revenue,!that!which!enters!the!coffers!of!the!government.!It!is!more!encompassing!than!taxes!and!subsidies.!!
o Internal!revenues!are!the!revenues!of!taxes!imposed!by!the!BIR!which!is!part!under!the!NIRC!or!tax!code.!
 o Customs,! duties! and! tariffs! are! those! taxes! imposed! on! goods! coming! in! or! out! of! the! country.! But,! the! tariff! and! customs! code!
focuses!more!on!taxes!on!importation!because!these!are!the!types!of!activities!wherein!we!give!up!foreign!exchanges!or!currencies.!
Under!economics,!the!Bangko!Central!cannot!arbitrarily!issue!legal!tenders!of!the!Philippines!without!foreign!currencies.!Therefore,!
we!favor!exportations!rather!than!importations.!As!much!as!possible!we!utilize!local!products!than!importing!from!abroad.!
o Tariffs!is!a!table!of!rates!which!is!synonymously!used!with!customs!duties.!It’s!like!customs!duties!as!well.!!
• Limitations!to!the!power!of!taxation:!
o Inherent!Limitations!
o Constitutional!Limitations!
• INHERENT!LIMITATIONS:!
o First:!For!public!purpose!
! When! you! say! the! purpose! is! public,! it! means! that! it! affects! the! inhabitants! of! the! state! not! merely! the! individual.! It! is!
more!of!directed!to!the!common!good!of!the!people.!!
! But!there!can!be!indirect!benefits!to!particular!individuals.!!
! It! can! only! be! appropriated! for! public! purpose.! But! it! can! happen! that! incidentally! or! a! few! individuals! who! can! be!
benefited.!So!long!as!the!main!objective!is!for!the!common!good!of!the!people!it!is!still!for!a!purpose.!The!wisdom!of!the!
tax!law!is!for!Congress!to!decide.!The!motive!behind!every!law!is!also!for!Congress!to!determine.!!
! So!once!a!tax!law!is!levied!by!Congress!not!for!public!purpose!it!violates!not!only!the!Constitutional!limitation!that!it!must!
be!for!public!purpose!but!the!inherent!nature!as!well!of!taxation!that!always!it!must!be!made!for!a!public!purpose.!
! A!violation!would!actually!result!to!a!violation!of!the!due!process!clause!which!is!taking!of!property!from!the!individuals.!!
! Example:!Congress!enacted!a!law!which!provides!that!there!shall!be!levied!Php1!for!every!sack!of!fertilizer!produced!by!
every! fertilizer! producer.! Proceeds! of! which! is! to! rehabilitate! Company! B! an! ailing! fertilizer! company.! Let’s! say! it! is! a!
private!corporation.!Is!this!valid?!
• The!law!enacted!by!Congress,!according!to!a!SC!decision,!levying!tax!of!every!sack!of!fertilizer!produced!for!the!
purpose! of! funding! and! rehabilitating! an! ailing! company! which! is! a! private! company! is! invalid! because! the!
purpose!is!not!public.!The!tax!collected!or!the!tax!levied!is!directed!to!rehabilitate!a!private!corporation!which!is!
actually!a!direct!benefit!on!a!particular!entity!which!is!not!for!the!common!good.!
• It!made!the!law!void!and!unconstitutional!because!of!violating!the!inherent!limitation!that!every!tax!law!must!be!
for!a!public!purpose.!!
! But!it!is!not!so!general!as!to!say!that!a!law!cannot!be!enacted!to!impose!a!tax!in!order!to!fund!a!particular!industry!of!the!
country.!Example,!the!levying!of!fees!and!taxes!to!support!the!sugar!industry!is!valid!because!it!was!for!the!common!good!
of!the!entire!industry.!It!is!for!public!purpose!to!support!that!industry,!to!support!the!entire!government.!!
! But!if!it!is!only!for!1!entity!or!a!few!individuals!or!few!entities!and!so!it!is!not!for!public!purpose.!You!identify!someone!to!
be!directly!benefited!from!the!tax!it!is!invalid.!!
! To!test!whether!a!tax!law!is!for!public!purpose!or!not!determine!whether!the!proceeds!will!be!used!for!the!support!of!the!
government! or! any! of! the! government! activities! which! is! governmental! in! character! and! whether! or! not! its! proceeds! is!
used!to!promote!the!general!welfare!of!the!government.!Other!than!that,!if!the!main!purpose!is!not!any!of!those,!then!it!
becomes!for!private!purpose!and!an!invalid!tax!law.!
! If!you!are!a!tax!payer,!as!a!student!of!a!class,!if!you!realize!that!a!law!has!been!enacted!imposing!a!tax!but!the!proceeds!is!
used!by!the!public!official!or!the!government!to!fund!private!purposes,!your!recourse!is!through!a!taxpayer’s!suit.!
• To!be!able!to!file!a!tax!payer’s!suit,!the!requisites!are:!
o !
• A!taxpayer’s!suit!is!for!the!discretion!of!the!courts.!The!courts!may!not!at!all!times!grant!you!to!file!a!taxpayer’s!
suit.!But!the!basis!of!filing!that!case!is!generally!because!public!funds!are!illegally!disbursed!for!purposes!other!
than!for!public!purpose.!
! Public! purpose! should! be! determined! at(2:01:00)! We! said! that! the! scope! of! the! taxing! power! of! every! legislative!
department!of!a!country!is!that!they!have!this!exclusive!power!of!determining!the!wisdom!of!the!law,!the!motive,!and!the!
expediency!and!necessity!of!enacting!that!tax!law.!So!courts!in!that!point!have!no!power!to!inquire!into!the!law,!unless,!a!
tax!payer!comes!in!to!question!the!wisdom!or!purpose!of!the!law.!!
! In!determining!whether!a!law!is!valid!or!not!or!having!violated!the!inherent!limitation!that!a!tax!law!must!be!for!a!public!
purpose,!public!purpose!must!exist!at!the!time!that!the!law!is!enacted.!If!at!the!time!the!law!is!enacted,!it!will!be!there!in!
the!deliberations!in!Congress!and!it!is!for!public!purpose!then!the!law!is!valid!at!that!point.!!
• If!at!the!time!of!the!implementation!of!the!law,!we!don’t!have!any!control!over!that.!But!if!and!when!it!is!actually!
proven!that!the!proceeds!of!the!imposition!of!that!law!is!not!utilized!for!the!public!purpose!determined!at!the!
time!of!the!enactment!of!the!law,!that!is!when!the!taxpayer!comes!in.!You!question!the!illegal!disbursement.!
o Second:!NonMdelegation!by!the!taxing!authority:!As!a!general!rule,!the!power!of!taxation!cannot!be!delegated.!The!power!to!impose!a!tax!
law!remains!exclusive!to!the!legislative!branch!of!the!government!as!a!general!rule.!The!tax!law!cannot!be!delegated!by!Congress!
except!in!3!instances:!
! 1.! The! president! who! does! not! belong! to! the! legislative! branch! is! also! given! the! power! to! do! something! with! the! tarrif!
rates.! Like! increase,! decrease,! or! remove! protective! tariff! rates,! impose! bonds! on! imports! or! increase! the! customs! duty!
rates!by!not!more!than!10%,!which!are!exceptions!as!provided!for!in!the!Constitution.!
• When!it!allows!the!executive!branch!of!the!government!to!enforce!the!law!through!revenue!regulation!making.!It!
is! the! Secretary! of! Finance! who! makes! a! revenue! regulation! enforced! in! a! tax! law! with! the! recommending!
approval! of! the! Commissioner! of! Internal! Revenue.! Since! certain! regulations! as! we! said! forms! part! of! the! law!
therefore!it!is!as!if!Congress!is!delegating!that!power!to!the!executive!part!of!the!government.!But!very!limited!
 because! the! executive! branch! can! only! execute! rules! and! regulations! within! the! bounds! and! parameters!
provided!for!and!already!identified!by!Congress!in!the!law.!!
• Flexible!Tariff!Clause!in!the!Constitution!provides:!Wherein!the!president!can!actually,!under!this!tariff!clause,!in!
the! Constitution! it! provides! the! Congress! may! authorize! by! virtue! of! a! law! the! president! to! fix! the! tariff! rates!
whether! to! remove! existing! protective! tariff! duties,! to! increase! it,! to! reduce! it,! according! to! the! needs! of! the!
country!and!to!impose!import!or!export!quota!bands,!and!to!impose!additional!custom!duties!by!not!more!than!
10%.!The!constitution!itself!says!that!Congress!can!delegate!through!the!president,!the!law!making!power!not!
only!in!so!far!as!tariff!or!custom!duties!is!concerned.!!
! This!provision!is!not!selfMexecuting.!By!the!first!phrase!it!says,!Congress!may!authorize!by!law.!
As!provided,!Congress!can!authorize!but!it!has!to!make!a!law!first!before!the!President!can!
actually!exercise!the!right.!!
! Congress! already! enacted! a! law! with! the! Tariff! and! Customs! Code! and! its! part! of! the! Tariff!
and!Customs!Code.!!
! WHY:!The!president!is!delegated!with!such!power!because:!
• The!primary!reason!being,!the!president!is!actually!involved!in!everything,!not!only!
in!importation!and!exportation!but!also!with!the!budget,!the!annual!budgets!that!
we!have.!!
• Can!the!president!actually!say!that!VAT!should!be!100%!or!50%?!No.!Because!there!
is!no!law!providing!the!president!such!delegated!power.!The!!
• The! reason! why! this! was! delegated! is! for! EXPEDIENCY! purposes.! Importation! will!
cause! a! major! change! in! our! economy! vis! a! vis! wqorld! trade.! If! many! goods! will!
come! in! without! proper! regulation,! local! industries! will! be! affected.! If! we! do! not!
impose! import! bands! or! quotas! in! importation,! automatically! by! will! of! the!
president,!for!us!to!be!waiting!by!Congress!to!enact!a!law,!3!separate!readings,!etc,!
then!our!economy!will!be!greatly!affected!like!the!influx!of!China!made!items,!the!
influx!of!UkayMukay!which!is!not!actually!taxed!cannot!be!regulated!properly.!Its!for!
the! president,! and! only! 1! person! who! decides,! you! can! say! that! antiMdumping!
duties! or! retaliatory! duties! will! be! 100%! more! than! what! is! existing! in! order! to!
prevent!the!flow!of!that!particular!item!that!we!do!not!like!in!the!Philippines.!
! The!word!flexible!is!so!flexible!as!to!this!matter!so!long!as!the!president!will!follow!the!rule!
that! the! protective! rates! can! be! increased! or! reduced! by! not! more! than! 100%! additional!
duties! on! top! of! the! existing! may! be! increased! by! not! more! than! 10%.! These! are! the!
guidelines! Congress! has! provided! the! president! and! the! president! is! so! flexible! as! to! move!
within!these!limits!and!boundaries.!!
! The!reason!is!for!expediency,!necessity!and!flexibility.!But!this!can!only!be!done!with!NEDA!
recommendation!for!purposes!of!national!economy,!general!welfare!and!national!security.!
• Info:! We! have! custom! duties! which! we! impose! normally.! If! we! have! importations! that! we! do! not! like! coming!
from! a! country! which! discriminates! against! our! products! or! anything! about! the! Philippines,! we! can! impose! on!
top!of!the!regular!custom!duties,!a!discriminatory!tax!as!well.!This!is!where!the!president!can!move!about.!!
! 2.! LGU.! The! local! government! unit! has! been! given! by! the! Constitution! as! well! the! power! to! raise! its! own! sources! of!
revenue.!!
• Every!local!government!unit!has!the!power!to!raise!its!own!right!to!raise!its!own!source!of!revenue!by!imposing!
taxes,!fees!and!charges!against!its!constituents!as!provided!under!the!Constitution.!
• This!is!NOT!selfMexecutory.!Just!like!the!power!of!the!president!to!do!something!with!the!custom!duties!and!tariff!
rates!by!virtue!of!a!law!granted!by!Congress,!then!LGU!as!well,!needs!a!law!coming!from!Congress!so!it!can!fully!
execute!that!provision!in!the!Constitution.!
• Congress! has! made! a! law! granting! this! power! through! the! Local! Government! Code! of! 1991.! This! is! the! law!
enacted!by!Congress!granting!the!local!government!units!its!power!to!raise!all!sources!of!revenue.!!
• Municipal!corporations!are!mere!creatures!of!the!Congress!so!as!the!inherent!power!to!tax.!If!Congress!decides!
to! take! away! this! power! from! the! municipalities! or! cities! and! do! with! centralized! and! national! taxing! system,!
then!LGUs!will!be!left!without!recourse!but!to!simply!surrender!its!power!to!tax!and!let!the!BIR!do!the!collection!
of!taxes.!But!we!are!for!local!autonomy.!So!still,!we!have!the!LGUs!taxing.!
! 3.!Exemption!of!government!agencies.!If!the!government!will!tax!itself!for!the!purpose!of!of!using!it!to!fund!its!operations,!
it! is! superfluous! and! circuitry! wherein! you! simply! remove! money! from! 1! pocket! and! transfer! it! to! another.! It! will! also!
encourage! or! allow! an! opportunity! for! corruption! during! the! transfer.! Also,! immunity! from! tax! for! the! government! is!
necessary!so!as!not!to!impede!the!normal!operations!of!the!government.!!
• When!are!government!agencies!or!corporations!exempt?!!
o National!government!is!exempt!from!tax.!!
o Municipal!governments,!as!a!rule!are!exempt!from!tax,!because!they!are!political!subdivisions!which!
are!provinces,!cities,!municipalities!and!barangay.!They!are!taxable,!if!and!when!a!government!agency!
is!performing!proprietary!functions!it!removes!the!exemption!away!from!them.!
o GOCCs,!as!a!rule!are!taxable!just!like!any!other!corporation.!In!the!income!tax!chapter!in!the!tax!code,!
there!are!4!GOCCS!which!are!exempt!from!income!tax,!all!others!are!subject!to!income!tax:!
! The! 4! GOCCs! exempt! are:! SSS,! GSIS(Government! Service! Insurance! System);! PhilHealth! and!
PCSO.!
 ! Before!PAGCOR!is!exempt!but!this!has!been!removed!from!the!exemption.!
! Those! other! GOCCs! not! mentioned,! they! are! subject! to! income! tax! unless! their! charter!
provides!for!exemption.!!
o Fourth!inherent!limitation:!International!Comity.!
! The!grounds!for!exempting!foreign!government!from!taxes,!etc.!on!the!income!that!they!have!is!the!sovereign!equality!of!
the!states!which!is!actually!based!on!traditions,!customs,!and!duties!that!we!don’t!tax!a!state!which!we!recognize!as!coM
equal!to!us.!Besides,!every!state!is!immuned!from!suit.!In!case,!they!do!not!pay!if!we!require!them!to!pay,!our!suit!will!not!
prosper.! So! there! is! no! use.! We! do! not! tax! them! actually! because! of! the! sovereign! equality! of! states! and! the! immunity!
from!suit!included!customs,!duties!and!traditions.!
o Fifth,!territorial!jurisdiction:!
! If!you!go!abroad!tomorrow,!you!perform!an!activity!or!do!some!concerts!in!the!US!for!1!month!and!paid!1M!USD,!you!did!
that!outside!the!taxing!jurisdiction!of!the!state.!You!taxable?!Yes.!
! It!does!not!only!mean!to!say!that!you!will!only!be!taxable!if!you!are!within!the!territorial!boundaries.!When!you!say!within!
the!taxing!jurisdiction,!there!are!many!things!to!consider!including!of!course!the!situs!of!taxation!because!the!first!thing!
that!comes!to!mind!when!we!say!that!the!power!of!taxation!is!limited!by!the!territorial!jurisdiction!of!the!state!is!that!we!
only!tax!what!is!inside!the!Philippines.!This!only!holds!true!for!real!property!tax!or!taxes!on!property!because!we!follow!the!
rule!wherever!the!property!is!situated.!!
! But! for! people! who! can! move! about! freely! in! and! out! of! the! country,! we! not! only! determine! whether! they! are! in! the!
Philippines!or!abroad!but!also!where!they!earned!the!income,!etc.!As!of!now,!the!limitation!is!territorial!in!nature.!If!the!
income!is!earned!here,!the!property!is!here,!general!rule,!you!will!be!taxable.!
• 1.!If!your!parcel!of!land!is!in!the!Philippines,!it!is!subject!to!tax.!
• 2.!If!you!are!in!the!Philippines!working,!it!is!subject!to!tax.!
• 3.!If!you!are!a!foreigner!earning!income!in!the!Philippines,!it!is!subject!to!tax!because!you!are!enclosed!in!this!
territorial! jurisdiction.! If! you! are! a! foreigner! earning! income! abroad,! it! is! not! within! our! power! to! tax.! He! is!
beyond!us.!But!if!you!are!a!Filipino!earning!income!abroad,!the!answer!is!yes!and!no.!It!depends!on!how!long!you!
have!stayed!abroad.!
• 4.! Properties! abroad.! As! a! rule,! properties! are! taxable! where! they! are! located.! This! is! only! the! general! rule!
because!there!are!different!rules!for!different!types!of!tax.!!
• Constitutional! Limitations:! There! are! many! limitations! provided! in! the! Constitution,! it! may! be! directly! said! about! taxation! or! it! may! be!
indirectly!and!applicable!to!all!other!powers!of!the!government.!
o !First,!Concurrence!of!the!majority!of!Congress!is!needed!in!order!to!pass!a!avalid!law!granting!tax!exemption,!both!Senate!and!the!
House.!When!you!say!majority,!it!means!½!plus!1.!!
! When! a! tax! exemption! is! granted! by! Congress! there! must! be! the! concurrence! of! both! the! house! and! the! Senate! with!
atleast! majority! both! in! each.! They! have! to! vote! separately! otherwise! Senate! will! be! absorbed! by! the! number! of! the!
House.!
! Does!this!hold!true!as!well!with!passing!a!law!granting!tax!amnesty?!!
• Tax!amnesty!means!the!intentional!overlooking!of!the!state!of!its!right!to!collect!taxes!which!could!have!been!
due! to! it.! While! exemption! is! the! foregoing! the! collection! of! future! taxes.! While! amnesty! is! for! taxed! taxes.!
Because!in!amnesty!you!are!forgiving!past!violations.!In!exemption,!not!yet,!in!the!future,!you!are!supposed!to!
be!taxable!but!the!government!withheld!its!right!to!collect!the!tax.!!
• This!is!the!basic!difference!but!bottom!line,!the!government!is!not!getting!any!money!out!of!it.!Therefore,!being!
a!restriction!on!the!government’s!part!to!collect.!And!the!restriction!that!they!are!not!in!consonance!with!the!life!
blood!doctrine,!therefore!they!have!to!have!a!strict!majority!vote.!
• Since! tax! amnesty! is! the! same! effect! as! tax! exemption! because! bottom! line! is! both! is! that! the! government! is!
actually!forgoing!the!collection!of!amounts,!therefore,!coming!up!with!a!tax!amnesty!law!by!Congress!also!needs!
the!concurrence!of!majority!vote!of!both!Senate!and!the!house!for!it!to!be!a!valid!law.!For!all!others,!may!it!be!a!
law!granting!the!refund!of!taxes!for!a!particular!period!of!payment!or!any!other!amnesty,!majority!vote.!
o Second,! exemption! of! religious,! charitable! or! education! institutions! (RCE),! nonMprofit! cemeteries,! churches! and! parsonages! are!
exempt!from!property!tax.!!
! All!lands,!buildings!and!improvements,!as!real!properties,!of!all!RCE!institutions!are!exempt!from!property!tax?!It!should!be!
ACTUALLY,!DIRECTLY,!EXCLUSIVELY!(ADE)!used!for!the!purpose!of!RCE.!
! Example:!you!have!a!parcel!of!land!owned!by!you!is!this!subject!to!real!property!tax!(RPT)?!Yes.!You!have!it!leased!and!
used!by!USC,!a!nonMstock,!nonMprofit!educational!institution,!is!it!subject!to!real!property!tax?!NO.!because!it!is!ADE!used!
for!educational!purpose.!!
! If!this!is!leased!by!USC!and!a!chapel!is!built!but!not!a!school,!it!is!not!subject!to!RPT!because!the!chapel!is!incidental!to!the!
main!purpose!which!is!for!educational!purpose.!!
! If!USC!makes!a!school,!chapel!and!a!dormitory,!which!is!all!used!by!the!students,!is!the!entire!parcel!of!land!subject!to!RPT!
or!partially!subject!to!RPT?!Constitution!says!that!all!lands,!buildings!and!improvements!should!be!ADE!used!by!a!RCE,!etc!
are!exempt!from!real!property!taxes.!Therefore,!the!whole!land!is!exempted.!What!is!provided!in!the!Constitution!is!only!
exemption! from! real! property! taxes.! Whatever! other! income! that! will! come! out! with! the! use! of! the! property,! lands,!
buildings!and!improvements,!will!be!subject!to!other!kinds!of!taxes!such!as!income!from!the!rent!of!the!building,!donor’s!
tax!for!the!donations,!tax!for!the!transfer!of!the!property!in!case!it’s!sold.!!
• The!only!exemption!is!for!real!property!taxes!in!this!provision!of!the!law.!!
! The!exemption!is!not!absolute.!It!requires!that!the!use!and!not!the!ownership!that!matters!but!it’s!the!use.!So!long!as!its!
actually!ADE!for!RCE!purposes,!or!any!other!purposes!like!cemetery,!etc.!
 ! University!of!Cebu,!is!the!parcel!of!land!taxable!or!exempt!from!real!property!tax?!!
• Constitution! says,! ADE! for! RCE! purposes! does! not! require! that! the! school! must! be! a! nonMstock,! nonMprofit.! So!
long! as! the! purpose! is! education! in! nature,! whoever! that! school! is! will! be! exempt! from! RPT.! Whether! UC! is! a!
proprietary!school!or!whether!USC!a!nonMstock,!nonMprofit!school,!properties!used!for!education!purposes!will!be!
exempt!from!real!property!tax.!!
! Ex:!School!building.!This!is!the!parcel!of!land!rented!out!by!you!from!USC.!There!is!a!school!building,!dormitory,!a!canteen!
was!constructed!off!site.!Will!the!canteen!and!garden!be!tax!exempt?!
• Here!is!a!canteen!but!operated!by!you.!As!a!condition!to!USC!that!you!will!only!allow!to!sell!the!parcel!of!land!if!
you!will!be!operating!the!canteen!attached!to!this!building.!Is!the!parcel!of!land!exempt!from!RPT?!
o Example:!Styler!(canteen!in!the!main!building),!!
! General!rule,!if!the!parcel!of!land!is!used!for!educational!purposes!then!it!is!exempt!from!RPT!
so! long! as! it! is! ADE.! It! does! not! matter! whether! the! school! is! nonMstock! or! nonMprofit! or!
proprietary!or!for!profit.!The!religious!institution!is!does!not!have!to!be!Catholic.!So!long!as!it!
is!a!charitable!institution.!!
! But! for! this! incidental! activities,! like! canteens,! so! long! as! the! canteen! is! operated! by! the!
school!itself!and!within!the!campus,!then!it!will!be!exempt!from!RPT.!But!if!it!is!operated!by!
someone!else,!even!if!inside!the!school,!it!will!no!longer!be!exempt.!
! So!if!in!USC,!there!is!a!bar,!which!is!part!of!the!school!building.!Only!that!portion!of!the!land!
will!not!be!exempt.!All!others!will!be.!!
o Example,!dormitory,!which!is!open!for!the!public,!you!cannot!place!exemption!for!this!parcel!of!land.!!
o If!the!school!is!operated!by!the!school,!and!located!outside!the!school:!If!it!is!accessible!to!the!public,!
then!strictly!speaking,!it!is!taxable.!
o If!a!hotel!in!the!school!and!accessible!to!the!public,!for!HRM!students!in!USC,!the!income!from!outside!
guests,! being! merely! incidental,! are! subject! to! income! tax.! But! the! property! itself,! RPT! that! will! be!
exempt! because! having! a! hotel! is! part! of! the! activities! it! will! be! having! for! school! purposes.! For! the!
RPT,!they!can!ask!for!exemption.!
o Third,!all!assets!and!revenues!of!a!nonMstock,!nonMprofit!educational!institution!is!exempt!from!income!tax,!property!tax,!donor’s!tax!
and!custom!duties.!!
! Because! of! the! government’s! priority! for! education! in! the! Philippines,! it! elevated! the! role! of! nonMstock,! nonMprofit!
education!to!a!very!special!class!which!it!granted!exemption!to!the!4!kinds!of!taxes.!It!will!be!exempt!from!income!tax!from!
revenues! derived! from! educational! activities.! Donor’s! taxes! on! donations! of! properties! related! to! educational! purposes.!
Custom!duties!on!importations!on!equipments!and!items!used!for!educational!purposes!as!well.!Beyond!that,!NSNP!will!
not!be!exempt!if!it!is!not!for!educational!purpose.!It!must!also!be!ADE!used!for!educational!purposes.!
!
!
Taxation!M!june!29,2010!
CONSTITUTIONAL'LIMITATIONS'(cont.)'
• Revenue!bill!must!originate!exclusively!in!the!House!but!the!senate!may!propose!with!amendments!–!law!making!process!

In!drafting!of!tax!law,!it!must!originate!from!the!house!of!representatives.!Does!that!mean!the!senate!has!to!follow!what!the!
house!does?!No.!!
Just!like!the!general!ruling!in!making!a!law,!for!revenue!laws!or!tax!laws,!every!revenue!must!originate!from!the!house!but!it!
does!not!mean!that!everything!has!to!originate!from!the!house.!The!power!of!the!senate!is!to!amend!whatever!originated!from!the!
house! or! actually! have! in! advance! a! substitute! bill! already! made! in! anticipation! of! the! revenue! bill! which! is! to! be! passed! by! the!
house.!So!it!is!just!for!formality!purposes,!but!notwithstanding,!it!will!have!to!follow!the!3!readings!in!3!separate!days!wherein!a!
panel!form!of!such!enactment!is!to!be!given!3!days!before.!
• Exemption!of!religious,!charitable!and!educational!entities,!nonMprofit!cemeteries!and!churches!from!property!taxation!

Provision:! Charitable! institutions,! churches,! parsonages,! convents,! mosques,! nonprofit! cemeteries! and! any! improvements! actually,!
directly!and!exclusively!used!for!religious,!educational!and!charitable!purposes!shall!be!exempt!from!taxation.!
What!is!the!exemption!granted!to!religious!institutions?!It!only!covers!the!property!tax.!
When!you!say!property!tax,!what!do!you!mean!by!that?!If!a!religious!institution!has!various!properties,!both!real!and!personal!
prop,!would!all!these!prop!be!exempt!from!tax!under!the!constitution?!Piano!used!by!the!choir,!is!it!covered!by!exemption?!No.!
Piano!is!not!a!real!prop.!
The!coverage!of!exemption!under!this!constitutional!provision!is!only!REAL!prop!tax!exemption!on!real!prop.!Real!prop!refers!
only!to!lands,!buildings!and!improvements.!
Would!the!ownership!of!a!parcel!of!land!by!a!religious!institution!automatically!grant!it!real!property!tax!exemption?!No.!The!
test!of!exemption!is!not!ownership!by!the!charitable!institution,!not!the!ownership!by!the!religious!institution,!not!ownership!by!
educational!institution.!It!is!granted!real!prop!tax!exemption!if!it!is!actually,!directly!and!exclusively!used!by!such!institutions.!When!
you!say!ADE,!it!refers!to!the!use.!
Does! it! mean! to! say! that! incidental! use! of! the! property! will! strip! off! its! right! to! be! exempted! from! the! real! prop! tax?! No.!
Incidental!use!of!prop!as!long!as!it!is!M11.30MMM!main!purpose!is!still!covered!by!the!exemption.!!
i.e.!convents!used!by!priests!and!nuns!and!canteen!in!school.!When!you!say!exclusively!used,!it!does!not!mean!that!it!has!to!be!
used!only!for!that!religious!purpose.!It!does!not!mean!sole!use!but!it!must!be!used!primarily!for!religious!purpose.!
 i.e.!a!parcel!of!land!owned!by!a!private!individual,!leased!out!to!a!religious!institution.!50%!of!the!area!is!used!as!parking!space!
P10!per!hour!exclusively!used!for!parishioners.!MMMM!do!not!be!confused!with!the!exemption!in!so!far!as!real!prop!taxes!is!concerned!
as!against!the!income!tax!on!the!income!generated!by!the!use!of!that!prop.!In!that!case,!if!it!is!incidental,!when!the!use!of!the!free!
space!to!park!the!vehicles!of!those!attending!religious!activities,!the!portion!of!that!parcel!of!land!is!still!exempt!from!real!prop!tax!
because!the!use!is!incidental!to!the!primary!purpose!of!what!the!activity!is!all!about,!but!the!income!generated,!the!parking!fees,!is!
another!matter.!It!is!an!income!subject!to!income!tax.!The!provision!of!the!constitution!does!not!grant!exemption!from!income!tax!
to! income! generated! by! these! religious! institutions.! If! we! will! move! towards! income! taxation,! what! section! 30! of! the! tax! code!
provides! for! all! those! exempt! organizations,! nonprofit! cemeteries,! nonstock! nonprofit! educational! institution,! government! educ.!
Inst.!–!they!are!exempt!from!income!tax!but!any!use!of!their!prop!will!be!subject!to!income!tax!regardless!of!how!the!proceeds!will!
be!used.!In!that!case,!religious!institutions!earning!income!from!parking!fees,!can!they!say!that!they!will!be!exempt!from!income!
tax!because!the!fees!will!be!used!to!maintain!the!premises?!It!is!not!an!exemption!because!what!is!granted!by!the!constitution!is!
only!real!property!tax!exemption.!
Q:!if!parking!space!would!also!be!used!by!outsiders!and!not!merely!parishioners?!We!have!to!determine!what!the!numbers!are.!
If!majority!are!outsiders,!probably!it!is!not!already!incidental!to!the!existence!of!the!church!but!will!be!a!commercial!parking!space!
for!everyone!so!that!will!not!be!exempt!from!real!prop!tax.!
i.e.!San!Carlos!is!nonMstock!nonMprofit,!if!it!leases!out!a!portion!of!its!space!(10%)!for!use!to!Jollibee,!is!it!subject!to!tax?!We!are!
still!in!real!property!exemption,!it!says!charitable,!religious!and!educational!inst.!is!exempt!from!real!prop!tax!whether!they!own!
the!prop!or!not!so!long!as!the!prop!is!ADE!used!for!the!purpose.!In!this!case,!whether!this!parcel!of!land!is!leased!out!by!USC!or!
owned!by!it.!if!it!leases!out!or!subleases!out!a!portion!to!a!commercial!establishment,!this!is!taken!out!from!the!coverage!of!the!
exemption.!A!portion!of!this!entire!parcel!of!land!would!have!to!be!paid!of!real!prop!taxes.!Jollibee!space!is!to!be!paid!of!tax.!Who!
is! liable! for! this! real! prop! tax?! It! depends! on! the! agreement.! The! contract! of! lease! would! have! been! entered! into,! real! prop!tax!
follows!first!whoever!the!owner!is,!if!it!is!leased!out!to!somebody!else,!liability!may!be!shifted!to!someone!else.!
Would! it! differ! if! USC! will! be! changed! to! UC?! Would! your! answer! still! be! the! same?! If! we! change! this! to! UC,! a! proprietary!
private!educational!inst.!which!is!for!profit,!would!your!answer!still!be!the!same,!90%!exempt,!10%!taxable?!
!If!the!canteen!is!owned!and!operated!by!the!school!itself!and!it!is!located!within!the!campus,!it!will!be!exempt!from!real!prop!
tax.!Same!holds!true!with!operating!dormitories,!with!operating!bookstores,!computer!rent!outs,!so!long!as!it!can!be!justified!as!
related!for!the!promotion!of!educational!welfare!of!the!students!then!you!can!say!that!the!use!of!the!space!is!still!ADE!used.!
i.e.!USC!has!an!idle!parcel!of!land!that!it!plans!to!sell!to!UC,!is!this!parcel!of!land!held!by!USC!as!an!idle!parcel!of!land!be!exempt!
from!real!prop!tax!prior!to!its!sale!to!UC?!No.!Prop!held!for!future!use!or!for!speculation!purposes!are!not!covered!by!the!words!
ADE!use!for!charitable,!religious!and!education!purposes.!!
Let! us! say! this! parcel! of! land! is! fully! used! for! educational! purposes! and! is! sold! by! USC! to! UC.! It’s! exempt! from! real! prop! tax!
because! it! is! entirely! for! educational! purposes.! Will! the! sale! to! UC! be! subject! to! income! tax?! If! the! sale! is! not! for! educational!
purposes!it!is!not!covered!by!the!exemption.!
If!it!is!donated!to!UC,!will!it!be!subject!to!donor’s!tax?!No.!!
Advance! topic:! Income! taxation! and! donor’s! taxation! but! nonetheless! is! preliminary! to! the! discussion! of! the! exemptions!
granted!to!nonMstock!nonMprofit!educational!institution!which!we!will!expound!later.!!
Real! prop! tax! exemption! is! that! which! is! granted! to! the! 3! major! institutions! M! charitable,! religious! and! educational.! All!
educational!institutions!are!really!exempt!from!real!prop!taxes!so!long!as!their!assets,!buildings,!lands,!improvements!are!used!for!
educational! purposes.! We! do! not! distinguish.! But! the! exemption! stops! there.! Whatever! they! do! to! the! prop,! these! religious,!
charitable! and! educational! institutions! whether! they! transfer! that,! they! donate! that,! etc,! it! will! be! subject! normally! to! taxes!
applicable!to!other!institutions.!But!that!is!the!general!rule!because!we!have!not!studied!yet!the!next!exemption!granted!to!a!very!
special!institution!which!we!call!the!nonMstock!nonMprofit!educational!institution.!!
i.e.! If! a! religious! institution! has! a! parcel! of! land! which! it! wishes! to! donate! to! a! school,! to! a! private! entity,! to! a! charitable!
institution,!will!it!be!subject!to!donor’s!tax?!Yes,!because!religious!institutions!are!not!exempt!from!donor’s!tax!as!a!rule.!Will!it!be!
subject!to!local!transfer!tax!which!is!a!liability!to!the!local!government!units?!Yes.!Because!local!transfer!taxes!are!not!real!prop!
taxes!therefore!they!are!still!liable!for!that.!!
But! how! about! educational! institutions?! Will! they! be! taxable! as! charitable! and! religious! institutions! are! taxable?! Not!
necessarily.!NonMstock!nonMprofit!educational!institution!has!a!very!very!large!scope!of!exemption!granted!under!the!constitution.!
What!is!it!all!about?!The!constitution!provides!that!all!revenues!and!assets!of!nonMstock!nonMprofit!educational!institutions!used!
ADE!for!educational!purposes!shall!be!exempt!from!taxes!and!duties.!
• Exemption!of!nonstock,!nonprofit!educational!institutions!from!taxation!

i.e.!if!this!is!USC!leasing!out!to!Jollibee!earning!P100,000!monthly!rent!income,!will!the!P100k!be!subject!to!income!tax?!Yes!it!is!
taxable!since!income!derived!from!leasing!to!Jollibee!is!not!used!ADE!for!educational!purposes.!!
Notwithstanding!that!the!constitution!says!that!all!assets.!When!it!says!all!assets!and!revenues,!assets!refer!to!exemption!from!
donor’s! tax,! real! prop! taxes.! Revenues! refer! to! exemption! from! income! tax.! All! revenues! of! a! nonMstock! nonMprofit! educational!
institution!shall!be!exempt!from!taxes!which!is!income!tax!so!long!as!it!is!ADE!used!for!educational!purposes.!!
What! if! USC! raises! the! defense! that! P100k! monthly! income! proceeds! will! be! used! to! further! the! purposes! of! education,!
meaning!proceeds!will!be!used!for!educational!purposes,!will!they!still!be!subject!to!income!tax?!The!constitution!grants!income!tax!
exemption!to!revenues!of!the!school!so!long!as!it!is!ADE!used!for!educational!purposes.!It!is!somewhat!vain!in!saying!that!it!is!ADE!
use!if!we!apply!this!argument!that!P100k!income!rent!from!Jollibee!is!to!be!used!to!buy!books!for!school,!to!maintain!the!premises,!
etc.,! meaning! the! argument! that! this! will! actually! be! devoted! to! the! educational! purposes! of! USC,! can! they! actually! be! exempt!
using! this! agreement?! If! you! look! at! the! constitution,! it! would! seem! that! a! nonMstock! nonMprofit! educational! institution! can! get!
away!with!everything!by!saying!that!all!proceeds!will!be!used!for!educational!purposes.!Would!it!run!counter!to!the!provision!in!Sec!
30!last!paragraph!of!the!tax!code!which!says!all!entities!otherwise!exempt!from!income!tax!which!includes!nonMstock!nonMprofit!
 educational! institution! are! exempt! from! income! tax.! It! is! just! but! a! repetition! of! what! the! constitution! provides,! but! in! the! last!
paragraph,! it! further! went! on! to! clarify! that! all! income! derived! by! these! institutions! including! nonMstock! nonMprofit! educational!
institutions!will!be!subject!to!income!tax!if!it!is!an!income!derived!from!the!use!of!real!or!personal!prop.!Is!100K!an!income!derived!
from!the!use!of!real!prop!of!USC?!Yes.!Therefore!the!argument!that!these!proceeds!will!be!used!for!educational!purposes!will!not!
stand.!It!will!still!be!subject!to!income!tax.!!
What!it!really!means!when!it!said!that!revenues!are!exempt!from!income!tax!of!nonMstock!nonMprofit!educational!institution!is!
that! revenues! coming! from! its! educational! activities,! the! use! of! library! if! it! has! a! fee,! use! of! dormitories,! the! use! of! canteens!
operated!by!the!school,!use!of!parking!spaces!which!charges!parking!fees.!These!are!proceeds!incidental!to!activities!operated!by!
the!school!itself!in!order!to!enhance!the!services!to!the!students!but!Jollibee!is!entirely!and!distinctly!operated!by!another!entity!
which!is!for!profit!therefore,!it!is!as!if!USC!is!gaining!profit!out!of!the!rental!of!this!space.!Of!course,!if!you!were!USC,!all!you!have!to!
do!is!do!not!charge!rental!fees.!Therefore,!no!income,!ask!for!donation!from!Jollibee.!It!is!exempt!from!donor’s!tax!if!the!donation!
is!intended!for!educational!purposes.!Do!not!execute!a!contract!of!lease,!execute!a!deed!of!donation.!!
EXEMPTIONS:!
1. Income!tax!exemption!
2. Real!prop!tax!exemption!
3. Customs!duties!
4. Educational!institutions!are!exempt!from!donor’s!taxes.!!
!
Donor’s!tax!exemption:!On!what!kind!of!prop?!Would!all!donations!to!and!from!the!school!be!exempt!from!donor’s!tax?!It!has!to!
be!shown!that!it!is!ADE!used!for!educational!purposes.!!
i.e.! If! USC! would! import! other! equipments,! would! it! be! subject! to! customs! duties?! Customs! duties! are! taxes! you! pay! upon!
claiming!your!imported!items!from!the!bureau!of!customs.!No!release!of!goods!without!the!settlement!of!customs!duties.!If!the!
school!orders!and!imports!equipment!from!abroad,!will!they!be!liable!for!customs!duties!upon!claiming!the!items!from!the!Bureau!
of! customs?! Yes! if! primarily! for! educational! purposes?! If! importation! of! school! bus?! Yes.! So! long! as! it! is! for! ADE! educational!
purposes.!
Let’s!change!USC!to!UC,!importation!of!products,!exempt!from!customs!tax?!Does!UC!have!the!same!set!of!exemptions!granted!
to!USC?!Assuming!UC!is!proprietary?!Not!the!same!level!of!exemption!as!nonstock,!nonprofit.!!
If! you! talk! about! the! NIRC,! this! is! not! covering! customs! duties! and! exemptions! because! customs! duties! is! part! of! tariff! and!
customs! code.! The! exemptions! granted! to! proprietary! educational! institutions! or! educational! institutions! other! than! nonMstock!
nonMprofit!or!government!institutions,!the!constitution!is!not!so!direct!as!to!say!that!they!are!exempt.!What!it!actually!says!is!that!
congress! may! grant! exemptions! to! these! types! of! institutions! because! the! constitution! favors! and! supports! education! to! the!
constituents.!What!congress!did!when!it!enacted!the!national!internal!revenue!code,!it!provided!partial!exemption!granted!to!these!
proprietary!educational!institutions.!
What!do!you!mean!by!proprietary?!In!the!nature!business!which!has!the!end!of!obtaining!profit.!Sec!27B!of!tax!code!provides!
partial!exemption!granted!to!proprietary!institutions.!!
What!is!this!exemption?!It!is!an!exemption!of!income!tax.!!Ordinarily,!institutions!or!private!entities!are!subject!to!30%!corporate!
income!tax.!When!you!say!corporate!income!tax,!it!does!not!mean!tax!only!on!corporations.!It!is!a!tax!on!all!businesses!or!entities!
other!than!sole!proprietorships!or!other!than!those!ran!only!by!1!individual.!Whether!we!say!corporation,!strict!corporation,!entity,!
foundation,!institution!or!a!partnership!that!is!taxable,!it!is!subject!to!corporate!rate!of!30%.!Supposedly,!educational!institutions!
will! be! covered! by! this! because! it! is! not! a! sole! proprietorship,! it! is! an! entity.! But! by! virtue! of! constitution,! nonMstock,! nonMprofit!
educational! institutions! has! been! granted! full! exemption! from! 30%! income! tax! while! proprietary! educational! institutions! under!
section! 27B! of! tax! code! provides! for! a! partial! exemption! of! 20%.! It! means! to! say! that! proprietary! educational! institutions! are!
subject! only! to! a! tax! rate! of! 10%! because! the! 20%! is! an! exemption.! Although! it! did! not! say! 20%! but! we! presumed! that! the!
difference!between!30%!and!10%!is!20%.!Schools!will!be!subject!to!10%!income!tax.!!
An!easy!scheme!to!get!rich!–!(1)!organize!a!religious!cult,!(2)!schools.!Schools!whether!it!is!proprietary,!you!enjoy!privileges!of!
10%!income!tax.!It!is!very!much!lower!than!the!30%!when!you!make!a!business.!So!you!make!a!business!out!of!school.!!
!!!!It! is! not! in! the! tax! code! nor! the! constitution! as! well,! educational! institutions! have! went! further! in! claiming! their!
exemption,!nonMstock!nonMprofit!educational!institution!also!asks!for!exemption!from!withholding!taxes!on!their!deposits!
and! investments! with! financial! institutions.! If! you! have! a! deposit! in! a! bank,! the! bank! withholds! 20%! of! interest! income!
even!before!you!have!actually!received!the!interest.!!
!!!!!Schools!(nonMstock!nonMprofit)!because!they!have!been!granted!income!tax!exemption!also!sought!from!the!department!
of!finance!an!exemption!from!final!withholding!taxes!on!their!interest!from!bank!deposits.!!Because!in!some!cases!they!
have!extra!money!and!they!put!in!a!bank.!Their!argument!is!interest!earned!will!be!used!for!educational!purposes!etc…!
luckily!they!have!been!granted!exemption!on!many!conditions:!
1. They!must!submit!financial!statement!showing!the!interest!income!earned.!
2. They!must!show!proof!of!how!the!proceeds!of!that!income!was!spent!for!etc…!
!
!What!if!claiming!for!exemption!is!not!an!accredited!educational!institution?!Even!if!it!is!charitable,!even!if!it!is!nonMstock,!nonM
profit!foundation!if!its!nature!is!not!really!an!accredited!school!by!the!CHED!or!DECS!it!will!not!enjoy!the!exemption!granted!to!
nonMstock!nonMprofit!entities.!!
When!it!says!in!27b!that!it!is!exempt!from!taxable!income,!it!only!means!income!from!operation.!Customs!duties!is!a!tax!not!on!
income!but!on!the!landed!cost!or!value!of!the!products!coming!in.!so!it!is!based!on!the!total!value!of!the!product.!When!you!say!
subject!to!income!tax,!the!tax!is!directed!at!the!income!or!profit!after!deducting!your!costs!from!your!proceeds.!!
• Rule!of!uniformity!and!equity!in!taxation!!
 Are!these!2!the!same?!No.!uniformity!and!equity!in!taxation!do!not!mean!the!same.!!
Uniformity!–!There!is!uniformity!in!taxation!if!subject!matter!whether!persons,!properties!or!particular!activity!belonging!to!the!
same!class!is!taxed!at!the!same!rate.!You!may!take!the!que!from!uniformity!of!the!rate!of!those!belonging!within!the!same!class!
and!they!will!be!accorded!the!same!privileges!and!sameness!of!liabilities!imposed.!But!equity!in!taxation!does!mean!uniformity.!
Equity!–!Equity!is!the!apportionment!of!the!burden!of!taxes!is!distributed!heavily!on!those!who!are!better!able!to!pay!the!tax!
and!lesser!to!those!who!cannot!really!pay!the!tax.!So!it!is!based!more!on!ability!to!pay!principle!
Which! of! the! 2,! uniformity! as! against! equity,! follows! the! directive! or! progressive! system! of! taxation?! This! is! the! table! of!
individual! income! tax! rates! provided! under! section! 24! applicable! to! Filipino! citizens! ! and! resident! aliens! including! nonMresident!
aliens!engaged!in!trade!or!business:!
Not!over!P10,000!MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM!5%!
Over!P10,000!but!not!over!P30,000!MMMMMMMMMMMMMMMMMMM!P500!+!10%!of!the!excess!over!P10,000!
Over!P30,000!but!not!over!P70,000!MMMMMMMMMMMMMMMMMMM!P2,500!+15%!of!the!excess!over!P30,000!
Over!P70,000!but!not!over!P140,000!MMMMMMMMMMMMMMMMM!P8500!+!20%!of!the!excess!over!P70,000!
Over!P140,000!but!not!over!250,000!MMMMMMMMMMMMMMMMM!P22,500!+!25%!of!the!excess!over!p140,000!
Over!P250,000!but!not!over!P500,000!MMMMMMMMMMMMMMM!P50,000!+!30%!of!the!excess!over!P250,000!
Over!P500,00!MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM!P125,000!+32%!of!the!excess!over!P500,000!!
!
i.e.!If!you!belong!to!P1!until!P10,000!it!will!be!subject!to!5%.!Anything!in!excess!of!P10,000!up!to!P30000!is!subject!to!10%!and!
so!on…if!your!income!is!more!than!P500,000,!it!will!be!subject!to!32%.!Is!this!uniformity!in!taxation!or!equity!in!taxation?!How!can!
you!apply!the!words!uniformity!as!being!applied!to!taxing!the!same!class!with!the!same!rate!and!equity!based!on!the!ability!to!pay!
principle.!When!you!say!uniformity,!you!are!taxing!persons,!prop,!or!activities!belonging!to!the!same!class!with!the!same!uniform!
rate.!Congress!has!deemed!it!proper!to!classify!individuals!belonging!to!the!P1!income!earner!up!to!P10,000!income!earner!while!
those!P10001!to!P30000!earner!belongs!to!another!bracket.!They!are!uniform.!!All!those!within!the!same!bracket!are!taxed!at!a!
uniform!rate.!So!uniformity!would!apply!at!every!bracket.!As!to!the!wisdom!as!to!how!they!have!divided!the!income!bracket!is!up!
to!congress.!When!can!you!say!there!is!equity!in!taxation?!Equity!in!taxation!is!taxing!persons,!prop!and!activities!belonging!to!
different!classes!with!the!different!rates!according!to!their!ability!to!shoulder!the!burden!of!tax.!So!this!is!vertical!equity!or!equity!
in! taxation.! Where! is! progressive! system! of! taxation?! Did! congress! really! develop! a! progressive! system! of! taxation! in! this!
individual!income!tax!rates?!Progressive!M!Income!tax!rate!increases!as!your!income!increases.!
• Equal!protection!clause!–!(indirect!constitutional!limitation)!

Is!equal!protection!clause!related!somehow!in!this!equity?!Yes.!!
!Do!u!think!it!is!valid!for!congress!to!impose!varying!rates!on!individual!income!earners?!Yes.!!
Corporate!income!tax!rate!is!30%!.!Do!you!think!it!is!valid!for!congress!to!have!assigned!varying!and!increasing!rates!to!income!
of!individual!persons!as!against!the!flat!rate!of!30%!on!corporate!income?!Congress!can!make!valid!classifications!in!determination!
of!tax!rates,!application!of!tax!rates?!Yes.!!!
How!would!congress!make!classification!without!violating!equal!protection!clause?!i.e.!why!would!individuals!earning!P10,000!
be!taxed!only!as!such!while!individuals!earning!P500000!be!taxed!as!32%?!If!these!groups!of!taxpayers!would!question!the!rate!
they!want!to!be!applied!5%!how!would!you!defend!the!tax?!Why!did!congress!afford!to!tax!all!entities!regardless!of!income!at!the!
same!rate?!How!would!you!defend!the!classification!made!by!congress?!
!Equal!protection!clause!is!violated!when!distinction!is!made!by!congress!if!no!distinction!is!called!for,!on!the!other!hand,!if!no!
distinction!is!made!by!congress!when!distinction!is!necessary!in!the!application!of!tax!rates.!In!this!case,!there!is!no!violation!of!
the!equal!protection!clause!because!there!is!substantial!distinction!between!those!belonging!to!such!income!brackets.!There!is!as!
well!no!violation!of!the!equal!protection!clause!when!congress!decided!to!impose!varying!rates,!lower!rates!to!those!low!income!
earners!and!a!flat!rate!to!corporate!because!corporations!and!individuals!are!not!in!the!same!footing.!Corporations!are!taxed!at!a!
flat!rate!of!30%!despite!a!very!low!income!in!cases!of!low!income!earning!corporation!because!corporations!can!deduct!expenses!
related! to! the! business.! While! for! us! individuals! if! we! are! mere! employees,! can! we! deduct! our! personal! family! living! expenses!
before!these!tax!rates!can!be!applied?!No.!We!cannot!deduct!the!gasoline!that!we!spent!for,!the!food!that!we!bought,!etc.!So!long!
as!no!violation!of!equal!protection!clause!and!there!is:!!
1. Substantial!!distinction!
2. Distinction!is!germane!to!the!purpose!of!the!law,!ability!to!pay!principle.!
3. It!will!apply!not!only!to!present!conditions!but!as!well!to!future!conditions.!
4. Applies!equally!to!all!members!of!the!same!class!M!classification!must!apply!to!all!those!situated!within!the!same!circle.!
Wherever!that!particular!person!is!located,!the!same!rate!will!be!applied.!This!will!apply!even!to!an!individual!who!is!not!
present!in!the!Phils.!at!the!time!the!income!is!earned.!It!applies!to!those!who!are!situated!in!the!same!scope.!
!
• NonMimprisonment!or!nonMpayment!of!poll!tax!!

A!person!cannot!be!imprisoned!by!nonpayment!of!community!tax!unless!he!falsifies!such.!
What!is!your!penalty!to!nonMpayment?!Interest!will!be!imposed,!no!imprisonment!for!nonpayment!of!poll!tax.!
Poll!tax!–!a!tax!based!on!residence!regardless!of!citizenship,!nationality,!income!and!property.!
• NonMimpairment!of!the!jurisdiction!of!the!supreme!court!in!tax!cases:!

What! is! that! limitation! of! the! power! of! congress! to! impose! taxes?! The! SC! has! the! power! to! finally! adjudicate! tax! cases.! If!
congress!decides!to!amend!the!constitution,!can!it!withhold!form!the!SC!this!power!to!decide!the!finality!tax!cases.!No.!It!provided!in!
the!constitution.!!
 ! What!is!the!role!of!the!SC!in!so!far!as!the!power!of!congress!to!impose!taxes!is!concerned!?!The!SC!acts!as!the!final!arbiter!in!tax!
cases.!The!consti!provides!that!congress!is!so!powerful!as!to!withhold!and!take!away!the!various!powers!of!the!different!courts!that!
we!have.!But!it!withholds!from!congress!the!power!to!take!away!from!the!SC!its!role!as!the!final!arbiter!in!tax!cases,!the!power!to!
review,!revise,!modify,!affirm!any!issues!on!the!legality!of!taxes,!the!constitutionality!of!tax!laws!etc.!Power!of!congress!actually!stops!
in!the!enactment!of!the!law!but!the!final!determination!whether!it!is!constitutional!or!not!still!belongs!to!the!SC.!The!3!branches!of!
the!government!are!still!coMequal,!each!has!a!role!to!play.!!
• Other!provisions!in!the!constitution!which!are!directing!so!for!as!taxation!is!concerned!but!not!necessary!a!limitation!is!:!

o Flexible!tariff!clause!–!the!delegation!made!to!the!president!in!so!far!as!customs!duties!and!tariffs!are!concerned.!!

o Power!to!raise!its!own!sources!of!revenues!has!been!given!to!local!government!units.!

INDIRECT'CONSTITUTIONAL'LIMITATIONS'
! No!mention!of!specific!mention!of!taxes!but!they!might!be!applicable!to!taxation!as!well.!
1. Due!process!of!law!–!!

!!!!!!!!!!!!No!person!shall!not!be!deprived!of!life,!liberty!and!prop!without!due!process!of!law.!!
Does!it!mean!to!say!that!deprivation!of!prop!can!be!made?!Yes.!So!long!it!is!in!compliance!with!substantive!due!process!and!
procedural!due!process.!
Compliance!of!2!processes:!
Substantive!due!process!in!relation!to!taxationM!for!due!process!to!be!satisfied,!every!enactment!of!a!law!must!not!contradict!
the!provisions!of!the!consti!and!other!tax!laws.!
Procedural!due!process!M!!in!the!assessment!and!collection!stage!and!how!the!tax!law!must!be!enforced,!!everything!must!be!
fair! and! reasonable,! nothing! oppressive! and! arbitrary.! With! it! comes! the! requirement! that! in! the! enactment! of! a! tax! law! and!
application!of!the!proceeds!of!the!tax!law!it!must!be!for!public!purpose,!otherwise,!it!is!violative!of!due!process.!It!is!like!taking!away!
property!from!the!tax!payer.!
2. NonMimpairment!of!obligations!and!contracts!

When!can!say!that!a!tax!law!enacted!by!congress!is!violative!of!the!consti!provision!of!nonMimpairment.!!
Contract!must!be!between!the!government!and!a!private!person!or!entity.!Does!it!include!a!franchise!granted!exemption!by!the!
government?!No.!Congress!can!repeal,!modify,!revoke,!amend!franchise!contracts.!
What!do!you!mean!by!impairment?!Results!when!there!is!a!change!in!the!rights!of!the!taxpayers.!
!When!can!a!taxpayer!invoke!this?!Can!a!taxpayer!actually!say!that!there!has!been!a!violation!of!this!constitutional!provision!if!a!
new!tax!law!is!enacted!impairing!the!exemption!granted!to!them.!Yes!if!the!exemption!is!based!on!a!contract.!Contract!between!
the!government!and!private!entity/individual.!
Would! exemption! granted! under! a! law! allow! a! tax! payer! to! invoke! nonimpairment! clause?! No.! When! an! exemption! is! taken!
away!by!a!new!law,!can!taxpayer!raise!nonimpairment!clause?!!When!you!want!to!invoke!nonimpairment!clause,!do!not!base!your!
argument!on!the!exemption!granted!in!a!general!law!which!is!applicable!to!everyone.!You!can!raise!nonimpairment!clause!violation!
wherein!you!have!entered!into!a!contract!with!the!government!granting!you!an!exemption.!
!When! you! say! contract,! it! means! to! say! it! is! bilateral.! The! govt! is! as! well! receiving! some! benefits! out! of! granting! you! the!
exemption.!so!there!is!an!agreement,!there!is!a!contract.!Your!liability!under!a!tax!law!and!the!exemption!granted!under!general!
law! is! but! a! civil! obligation,! it! is! not! a! contract.! We! said! that! there! is! no! set! off! because! there! is! no! contract! between! the!
government!and!the!taxpayer.!If!your!exemption!is!fully!dependent!on!the!law,!then!congress!repealed!it,!you!cannot!say!that!you!
have! a! contract! that! has! been! repaired.! But! if! you! have! an! existing! contract,! the! government! cannot! impair! it! if! the! contract! is!
bilateral!and!it!is!an!onerous!contract.!!
Will! nonMimpairment! clause! apply! to! contracts! not! with! the! government! for! taxation?! NO.! NonMimpairment! clause! is! a! very!
general!provision.!That!is!why!it!is!under!indirect!limitation.!But!if!you!apply!it!to!taxation,!we!are!thinking!here!of!some!kind!of!
exemption!that!has!been!granted!to!you!as!a!taxpayer!by!the!government.!So!whenever!we!are!talking!about!a!contract!that!has!
been!impaired!in!relation!to!the!power!of!taxation,!there!is!some!kind!of!reprieve,!exemption,!amnesty!granted!by!the!government!
and!if!it!is!taken!out!unilaterally!by!the!government!impairing!your!rights!under!a!contract,!you!can!invoke!nonMimpairment!clause!
because!the!power!of!taxation!is!not!supreme!to!the!nonMimpairment!clause.!A!new!law!cannot!supersede!a!very!personal!contract!
between!the!government!and!a!taxpayer!wherein!the!taxpayer!is!granted!an!exemption!in!exchange!for!some!consideration!that!
the!government!is!receiving.!It!is!all!about!exemption!or!anything!which!decreases!collection!of!the!government.!
Franchises!do!not!fall!under!the!definition!contracts!in!so!far!as!this!consti!provision!is!concerned.!Why?!There!is!a!particular!
provision! which! says! that! franchises! are! withdrawable! and! revocable! at! any! time! without! impairing! the! rights! of! the! franchise!
grantee.!
3. NonMinfringement!of!religious!freedom!

!!!!!!!Taxes!shall!not!be!imposed!which!infringes!the!right!to!exercise!religion.!
i.e.!Ayala!and!SM!St.!Paul!store!selling!religious!articles,!is!it!free!from!taxes?!No.!Can!they!invoke!this!provision?!No.!!
When! the! consti! says! noninfringement! of! religious! freedom,! there! shall! be! freedom! to! exercise! your! religion! without! being!
subjected!to!taxation!otherwise!there!will!be!a!violation!of!the!due!process,!deprivation!of!liberty!to!exercise!your!religion.!What!it!
actually!prohibits!is!taxing!the!activity!itself!including!the!free!distribution!of!items!which!promotes!your!religious!activity!and!your!
religious! freedom.! But! when! you! engage! in! selling,! especially! if! it! is! for! profit,! you! will! be! subjected! to! sales! taxes,! value! added!
taxes,!even!on!your!religious!articles!except!bible!because!bible!is!literary.!Statues,!rosaries!etc.,!if!it!is!sold!by!an!outlet!in!ayala,!sm!
 it! presumes! an! entity! that! is! for! profit.! It! is! taxable! to! income! tax,! VAT,! it! is! even! required! to! be! licensed.! What! is! a! NoMNo! in!
religious!freedom!is!you!do!not!require!a!license!or!permit!fee!from!religious!activity!or!the!distribution!of!religious!articles!which!
are!not!really!intended!for!profit.!!
Religious!freedom!shall!not!infringe!by!the!rule!that!no!taxes!shall!be!imposed!for!any!religious!activity,!no!permit!in!relation!to!
taxes!necessary,!no!license!fees!to!distribute!items,!bibles!etc,!except!if!it!is!already!sales!and!for!profit.!!
4. No!public!money!shall!be!appropriated!for!religious!purposes!

The!congress!cannot!enact!a!law!to!give!public!funds!to!support!a!religious!organization.!Not!even!the!predominantly!catholic!
religion!can!demand!a!share!from!the!collection!for!the!public!funds!that!we!have.!There!is!an!entire!separation!of!the!church!and!
state.! No! appropriation! purposes! not! even! to! support! a! priest,! an! institution,! a! religious! activity.! But! the! consti! provides! for!
exemptions:!
1. Priests!in!govt!orphanages!
2. Penal!institution!
3. Leprosarium!
4. Armed!forces!in!the!phils.!
!
What! is! exempt! from! the! rule! that! no! public! funds! shall! be! appropriated! for! religious! purposes?! If! a! priest,! minister,! pastor!
works!in!a!leprosarium,!govt!orphanage,!penal!institution!(priest!is!there!to!give!final!blessing)or!the!Armed!Forces!etc.!so!this!is!
exempt! from! the! rule! that! no! public! funds! shall! be! appropriated! for! religious! purposes! because! what! is! actually! being! given! to!
these!priests,!ministers!and!pastors!are!in!the!form!of!compensation!or!salary!for!the!service!rendered!because!it!is!not!directly!a!
religious! activity! for! the! entire! country! or! parishioners! but! it! is! for! a! specific! purpose.! It! is! exempt! because! it! is! not! really! to!
promote!religion!but!address!the!needs!of!those!who!are!in!these!institutions.!
Is!the!compensation!or!salary!of!the!priest!working!in!a!leprosarium!exempt!from!income!tax?!No.!The!priest!has!to!pay!income!
tax.!
i.e.!!A!parish!priest!or!a!priest!assigned!in!a!chapel!farMoff.!He!is!receiving!a!monthly!amount.!He!is!working!in!religious!capacity.!
Will!that!monthly!amount!that!he!is!receiving!be!exempt!from!income!taxes?!No.!If!he!receives!the!income!while!rendering!services!
to!parish!he!is!subject!to!income!tax.!
Nuns! are! subject! to! income! tax! on! any! income! they! receive.! What! the! consti! provides! is! that! no! public! funds! shall! be!
appropriated!to!promote!a!particular!religion.!In!order!to!promote!any!particular!religion,!no!public!fund!shall!be!used!for!religious!
purposes.!Exception!is!when!these!priests,!ministers!and!pastors!are!hired!in!these!4!institutions.!What!they!are!actually!doing!is!
not!promoting!religion!but!addressing!the!needs!of!those!that!belong!of!the!same!region,!the!prisoners,!the!orphanage,!etc.!so!this!
is!not!appropriating!public!money!for!religious!purpose.!Going!to!the!issue!on!whether!what!the!priests!are!receiving!whether!in!
these!4!institutions!them!doing!the!service,!or!those!priests!detailed!in!different!parishes!both!are!subject!to!income!tax!in!their!
personal!capacity.!!
What!if!we!exempt!them!from!income!tax,!would!it!violate!any!constitutional!provision?!Separation!of!church!and!state,!equal!
protection!clause.!They!are!still!individuals!earning!income.!They!are!subject!to!the!same!tax!rates!that!we!are!subjected!to.!It!is!not!
a!lucrative!practice,!vow!of!poverty!as!well.!!
There!is!a!BIR!ruling!that!even!SC!justices!are!taxable!on!the!honorarium!that!they!are!receiving!for!preparing!bar!questions.!
Anything!which!is!an!income!to!anyone!is!taxable!unless!you!fall!under!the!exemption.!Whomever!you!are,!whatever!capacity!you!
are!doing,!your!service,!in!general!rule,!is!subject.!Anything!which!is!an!income!to!an!individual!or!entity!is!taxable!unless!it!falls!
under!the!exception.!
i.e.!When!Pope!John!Paul!came!to!the!Phils!and!billions!was!appropriated!for!that!visit.!Did!it!violate!the!rule!that!no!public!
funds!will!be!appropriated!for!public!purposes?!No!because!he!came!here!as!head!of!state!rather!than!as!a!religious!icon!or!as!a!
pope.!
5. Freedom!of!the!press!from!taxation!

No!license!fees,!no!permit!fees!can!be!collected!to!express!your!opinion!or!even!the!airing!of!news!etc,!but!what!is!taxable!is!
the!business!of!producing!magazines,!newpapers,!etc.!When!it!is!already!translated!into!printed!materials!that!is!when!it!becomes!
taxable!but!to!express!your!opinion!is!not!taxable.!!
6. Power!of!the!president!to!veto!any!particular!item!

!
SITUS'OF'TAXATION'
It! is! the! place! of! taxation! –! a! subject! matter,! object! or! person! becomes! taxable! if! it! is! within! the! taxing! jurisdiction! of! the! state! in!
question.!Different!subject!matters!of!taxation!which!is!person,!property,!exercise,!business,!transaction,!activity,!would!have!different!situs.!!
Which!of!the!5!inherent!limitations!closest!to!situs!of!taxation?!Territorial!jurisdiction.!!
What! are! the! factors! that! have! to! be! considered! whether! a! particular! state! has! juris! over! that! subject! matter?! the! different! subject!
matters! M! person,! property! (real,! personal,! personal! tangible,! personal! intangible),! excise! –! occupation,! transaction,! privilege,! activity,!
business.!!
To!determine!whether!subj!matter!is!within!the!juris!of!the!taxing!state,!how!will!we!know?!What!factors!do!we!have!to!use?!
1. Source!of!income!–!if!it!is!an!excise!tax!(occupation,!activity,!business,!profession,!privilege)!where!is!the!source!of!income?!You!
have!to!answer!that.!If!it!is!in!the!phils,!then!phils!has!the!juris!to!tax.!

2. If!it!is!a!person!–!is!he!a!citizen!of!the!phils?!is!he!a!resident!of!the!phils?!
3. Property!tax!–!subclassify!if!real,!personal,!tangible,!intangible,!where!is!the!property!located,!etc.!!

!!!!!it! is! the! type! of! subj! matter,! what! kind! of! tax! has! ! to! be! imposed,! what! is! the! citizenship! or! nationality,! where! is! the!
residence,!where!is!it!located!etc.!where!is!the!source.!We!follow!a!very!comprehensive!situs!of!taxation.!One!question!will!not!be!
answered!by!one!factor!in!determining!whether!the!situs!is!here!in!the!Phils!or!not.!!
!!!!!i.e.!If!real!prop,!the!situs!is!where!it!is!located.!Real!prop!are!immovable!prop.!If!prop!is!located!in!the!Phils!even!if!the!owner!
is!abroad,!the!Phils!has!juris!to!subject!it!to!tax.!What!kind!of!tax?!Real!prop!tax.!!
If!excise!tax,!ask!what!is!the!use!of!the!tax,!is!it!for!business,!etc.!since!the!source!is!in!the!phils,!it!is!subject!to!phil!tax.!
Real!prop!situs!–!where!prop!is!located!
Personal!tangible!prop!–!where!prop!located!
Personal!intangible!prop!–!GR:!follows!the!owner/domicile!of!owner!
!
In! some! cases,! there! is! multiplicity! of! situs.! One! state! claims! that! it! is! taxable! and! another! state! claims! its! taxability! as! well.!
When!does!this!happen?!i.e.!shares!of!stock!–!if!that!share!of!stock!is!issued!by!a!domestic!corporation!but!the!owner!of!the!stock!is!
a!nonMresident!alien!individual!an!investor!who!is!residing!abroad,!will!the!dividends!coming!from!the!shares!of!stocks!be!subject!to!
phil!income!tax!if!the!owner!is!abroad,!the!citizenship!is!nonfilipino!and!residence!is!not!here?!Subject!to!income!tax?!Yes.!Even!if!
domicile!of!owner!is!not!here?!Why?!What!is!the!right!of!Phils!to!subject!it!to!phil!income!tax?!The!privity!of!relationship,!the!benefit!
received!by!that!corporation.!The!domestic!corp!is!located!in!the!phils.!and!the!shares!of!stocks!issued!by!the!corp!remains!domestic!
wherever!and!whoever!the!owner!is.!The!Phils!is!granting!protection!and!benefits!to!that!corp!resulting!to!it!operating.!If!there!is!
income! coming! out! from! the! shares! of! stocks! whoever! the! recipient! is! whether! he! is! here! or! not! will! be! subject! to! income! tax!
because!of!the!privity!of!relation!between!the!govt!and!corporation!and!the!benefit!received!theory.!
GR:!For!intangible!personal!prop!–!you!just!determine!who!the!owner!is!and!where!he!is!domiciled.!!
E:!2!exceptions!when!domiciliary!theory!is!not!applicable!–!1.!when!the!law!provides!that!it!will!have!situs!in!another!place!and!
2.!if!there!is!another!basis!that!the!benefit!received!theory!etc!on!which!to!base!and!we!have!to!follow!the!exception!to!the!
rule.!
i.e.!example!of!intangible!personal!prop!something!which!you!cannot!see,!receivables!and!payables.!If!you!have!a!payable!to!a!
nonMresident!bank,!the!asset!of!the!bank!in!the!Phils!is!actually!receivable!of!interest,!interest!is!intangible,!is!the!interest!you!are!
paying!from!foreign!bank!is!tangible!in!the!phils?!GR:!All!intangibles,!personal!prop!follow!the!domiciliary!theory!as!a!rule!therefore!
in!interest!it!is!the!general!rule.!Wherever!the!domicile!of!the!borrower!is,!it!is!the!state!which!has!the!taxing!jurisdiction.!If!he!is!
the! borrower,! despite! that! the! income! earner! of! the! interest! is! staying! abroad,! it! will! be! subject! to! Phil.! income! tax.! Basis:!
protection! and! benefits! that! the! government! is! giving! to! that! borrower! allowing! him! and! enabling! him! to! perform! his! duty! in!
complying! his! obligation! abroad.! The! foreign! bank! abroad! would! be! expecting! that! whatever! income! he! is! earning! in! the! Phils.!
would!be!subjected!to!tax.!!
A! share! of! stock! in! a! foreign! corp.! (intangible),! usually! a! foreign! corp! does! not! have! a! domicile! here! but! if! that! corp! has!
operation!of!more!than!85%!or!more!in!the!phils,!then!it!acquires!domicile!in!the!phils.,!any!share!of!stock!will!be!subjected!to!tax!
in!the!phils!whoever!the!holder!of!the!stock!is.!That!is!why!whenever!a!foreign!individual!who!has!a!share!holding!in!the!phils!corp!
or!foreign!corp!operating!85%!in!the!phils,!wherever!he!dies,!whatever!his!nationality!is!are!always!subject!to!estate!tax!in!the!phils!
because!of!the!benefits!and!protection!received!by!the!corp!issuing!the!stock.!!
Another! reason! for! multiplicity! of! situs! –! different! taxing! authorities.! Why! would! both! have! the! same! interest! on! the! same!
income?!The!primary!reason!why!there!could!be!multiplicity!of!situs!in!1!same!subject!matter!is!that!different!states!have!different!
concepts!of!what!domicile!is.!They!have!different!process!of!taxation!for!the!type!of!use!of!the!prop!or!subj!matter!and!there!is!
multiple! distinct! relationships! with! respect! to! intangibles.! In! order! to! address! the! multiplicity! of! situs,! because! it! can! be!
burdensome…going!back!to!interest:!
i.e.!if!mr.!leal!obtains!a!loan!from!a!foreign!bank,!who!is!the!income!earner?!The!foreign!bank.!Because!mr.!leal!would!have!to!
be! obligated! to! pay! not! only! the! principal! but! also! the! interest.! The! foreign! bank! is! earning! income! out! on! the! loan! that! it! had!
extended.!!
! The!Phils!is!interested!in!taxing!the!interest!that!he!has!to!pay!abroad!because!we!follow!the!domiciliary!theory!that!
wherever!the!borrower!is!domiciled,!we!tax!the!intangible.!We!tax!the!interest!that!he!remits!abroad.!Of!course!that!
foreign! bank! is! a! resident! of! that! foreign! state! registered! to! their! tax! authority.! Whatever! income! he! has! earned!
including!the!interest!that!he!has!earned!here!would!have!to!be!declared!and!taxed!by!that!foreign!state.!Two!taxing!
states!on!one!same!interest.!!

How!do!tax!laws!address!multiplicity!of!situs!of!taxation?!Whenever!one!subject!matter!and!there!are!two!or!more!states!taxing!
the!interest!there!are!remedies:!
1. by!granting!tax!exemptions!

2. by!allowing!tax!deductions!are!allowed!for!foreign!tax!payments!–!i.e.!if!the!tax!that!has!been!paid!and!remitted!by!mr.!leal!on!
the!interest!here!in!the!Phils.,!if!that!is!a!Japanese!corp/Japanese!bank,!they!may!allow!the!taxes!paid!in!the!Phils!as!a!deduction!
from!their!income!before!tax!is!computed!or!the!other!way!around.!(sec!34!of!tax!code)!!

3. allowing! foreign! tax! credit! –! this! is! different! from! allowing! tax! deduction.! Tax! deduction! is! claimed! as! an! expense.! Allowing!
foreign!tax!credit!is!deducting!the!tax!that!you!have!paid!directly!against!the!tax!liability.!Which!is!more!favorable?!Foreign!tax!
 credit!because!you!are!offsetting!the!tax!paid!directly!against!your!liability.!Tax!deduction!is!different!–!you!are!claiming!as!an!
expense!only!an!item!which!you!have!paid.!!

4. Entering!into!bilateral!tax!treaties!between!2!states!–!we!have!51!tax!treaties!entered!into.!i.e.!whenever!an!income!is!earned!
by!a!Japanese!corporation!here!for!1!day!service!may!be!exempt!from!income!tax!in!the!Phils.!it!can!only!be!taxed!in!Japan.!!

DOUBLE'TAXATION''
' 2!types!of!double!taxation!
1. Direct!double!taxation/!double!taxation!in!its!strict!sense!!
2. Indirect!double!taxation!in!its!broad!sense!!
!
Does!the!constitution!prohibit!double!taxation?!Does!not!outrightly!prohibit!double!taxation!but!it!indirectly!prohibits!direct!double!
taxation!because!it!violates!due!process!clause!and!equal!protection!of!laws.!Although!there!is!no!word!double!in!the!constitution,!once!
a!person!invokes!that!there!is!double!taxation!in!the!strict!sense,!it!means!to!say!that!he!is!invoking!the!violation!of!equal!protection!
clause!and!the!deprivation!of!his!due!process.!
Double! taxation! in! its! strict! sense! (direct)! –! prohibited.! Taxed! twice! by! same! taxing! authority,! same! taxing! period,! same! subject!
matter!and!for!the!same!purpose,!within!the!same!taxing!year.!This!is!violative!of!the!constitution!provision!of!due!process!and!equal!
protection!clause.!
Indirect!double!taxation!–!lacking!any!1!of!those!items!in!direct!double!taxation.!Can!be!same!subject!matter,!same!purpose,!same!
kind! of! tax! but! different! taxing! authority.! i.e.! if! it! is! taxed! by! the! national! government! and! taxed! by! the! local! govt.! It! is! not! indirect!
double!taxation!that!is!prohibited.!!
i.e.!if!a!certain!prop!is!subject!to!real!prop!tax,!subject!to!local!transfer!tax!when!sold!and!subject!to!capital!gains!tax!when!sold,!is!
there!double!taxation?!!
1.!real!prop!tax!is!imposed!by!LGU!on!existence!of!prop!itself.!
2.!local!transfer!tax!is!imposed!by!the!LGU!on!the!sale,!barter!or!exchange!of!the!prop.!
3.!capital!gains!tax!which!is!taxed!together!with!local!transfer!tax!is!taxed!by!the!National!government!on!the!sale,!barter!or!
exchange!of!the!prop.!
!
Is!there!double!taxation!particularly!between!these!local!transfer!tax!and!capital!gains!tax!which!is!a!tax!on!the!same!subject!matter,!
for!the!same!purpose!within!same!taxing!year?!No!double!taxation.!
Parcel! of! land,! you! have! it! sold,! you! pay! capital! gains! tax! 6%! to! BIR! based! on! the! selling! price! or! fair! market! value! whichever! is!
higher.!You!have!to!pay!documentary!stamp!tax!of!1.5%!to!the!BIR!but!basis!is!the!contract!that!you!have!entered!into.!You!have!to!pay!
local! transfer! tax! of! ½! of! 1%! sometimes! ¾! of! 1%! ! (it! depends)! to! the! LGU! all! referring! to! the! same! prop,! same! year,! same! purpose!
because!you!sold!it.!Is!there!direct!double!taxation?!Why!is!it!not!direct!double!taxation?!Why!is!it!allowed?!Why!valid?!It!is!not!direct!
double!taxation!because!BIR,!National!government,!LGU!are!different!taxing!authorities.!One!element!is!lacking.!
DIFFERENT'FORMS'OF'ESCAPING'TAXES:'
1.!SHIFTING!!
When!the!burden!of!tax!is!shifted!by!a!person!who!is!required!by!the!statute!to!pay!a!tax.!Shifting!is!made!to!another!person.!The!impact!
of!taxation,!the!shifting!is!the!process!of!transferring!the!burden!and!the!incidence.!!
Impact!of!taxation!is!the!point!at!which!the!tax!is!imposed!as!provided!under!law.!It!is!shifted!by!that!person!required!by!the!law!to!pay!to!
another!person!who!is!burdened!by!it,!and!incidence!of!taxation!is!when!the!burden!finally!falls!or!rest!to!the!consumer!or!the!person!willing!
to!shoulder!the!tax.!
i.e.!VAT!–!because!shifting!can!only!happen!in!indirect!taxes.!There!can!be!no!shifting!in!direct!taxes!because!the!person!on!whom!the!law!
expects!to!pay!is!the!person!who!is!burdened!by!a!direct!tax,!but!in!indirect!tax!there!can!be!passing!on!or!shifting!of!the!burden.!!
Forward! shifting! –! when! the! tax! burden! is! shifted! from! the! factors! of! production! down! to! the! factors! of! distribution! up! to! the!
consumer.!Every!shift!is!forward.!
Backward!shifting!–!if!it!is!from!the!consumer!to!the!production.!
Onward!shifting!–!if!it!is!more!than!1!shift.!
i.e.!If!a!fisherman!(producer)!fishing!fish!puhunan!is!P0.00,!it!will!be!put!in!a!can!and!the!manufacturer!purchased!it!at!P100,!section!105!
of! tax! code! says! that! every! seller! is! subject! to! 12%! VAT! in! value! of! goods! sold.! How! much! will! he! actually! sell! it?! P200! +12%! VAT.! So! the!
wholesaler!purchased!it!at!P224!which!is!the!selling!price!+!VAT!(!which!goes!to!the!govt.).!It!has!been!shifted!forward!to!the!wholesaler.!The!
wholesaler!will!sell!it!to!the!retailer!at!P300!+!12%!VAT!selling!price,!again!tax!goes!to!the!government!but!it!is!shifted!on!to!the!retailer!at!
P336! which! is! the! purchase! price! of! the! retailer.! If! the! retailer! of! the! hotel! serves! it! to! the! consumer! at! P400+12%! VAT,! 12%! goes! to! the!
government,!it!is!paid!for!by!the!consumer!for!P448.!From!P0,!consumer!actually!shouldered!the!entire!burden!of!taxes!as!it!is!passed!on!
from!every!chain!of!distribution.!
2.!CAPITALIZATION!
Form! of! escape! of! taxation.! Someone! else! is! passing! on! the! burden! of! tax! to! another! person.! There! is! no! actual! payment! of! tax.! The!
reduction! of! the! price! of! the! subject! matter,! the! reduction! being! equivalent! to! the! future! taxes! the! buyer! is! expecting! to! pay.! It! is! like!
backward!shifting!where!consumer!passing!on!the!burden!to!the!source!or!producer.!Whenever!a!buyer!of!a!certain!property!expects!that!
the!property!will!have!to!pay!will!generate!future!taxes!that!he!intends!to!recover!from!the!selling!price.!So!he!will!offer!a!lower!purchase!
price.!The!reduction!in!the!offer!between!the!seller!and!the!acceptance!supposedly!by!the!buyer!is!that!which!is!equivalent!more!or!less!the!
future! taxes! that! he! needs! to! pay! on! the! property! that! he! is! purchasing.! It! is! a! form! of! shifting! but! in! the! end,! just! like! shifting,! the!
government!does!not!lose!anything.!It!is!just!that!there!is!some!escape!of!taxation!by!one!person!but!someone!else!has!to!bear!it.!In!shifting,!
it!is!very!obvious,!it!is!the!next!person!on!whom!the!tax!has!been!shifted!who!will!be!burdened!and!shoulder.!In!capitalization,!the!seller!is!
 receiving! a! lower! selling! price! but! it! is! still! the! buyer! who! has! to! shoulder! the! taxes.! But! then! again! he! has! recovered! by! offering! a! lower!
purchase!a!lower!purchase!price.!!
3.!TRANSFORMATION!
! A!form!of!escape!of!taxation!wherein!a!person!afraid!that!he!will!lose!his!market!if!he!passes!on!the!12%!VAT!or!any!other!tax!on!the!
selling!price,!he!instead!shoulders!paying!the!tax!by!giving!out!a!lower!price!intending!to!recover!himself!in!turning!out!more!units!produced!
at!a!lower!cost.!
• i.e.!!If!he!purchased!the!P100!fish!and!he!intends!to!sell!it!at!P200!+!VAT!but!he!is!afraid!that!there!is!another!supplier!who!can!actually!
sell!at!P210!not!P224.!What!he!does!is!simply!shoulder!the!tax!as!a!component!of!P200!but!on!the!hope!that!he!can!recover!the!tax!that!
he!is!shouldering!by!selling!more!because!he!can!produce!more!at!a!lower!cost.!!

• i.e.!When!you!order!a!particular!product!like!keychain,!it!has!to!have!a!hole.!If!you!order!1!piece,!you!have!to!shoulder!the!cost!of!the!
hole.!If!you!order!100!pcs,!the!value!of!each!piece!would!have!to!be!way!way!lower!than!one!piece!that!you!ordered.!More!sale!for!less!
cost.!

4.!TAX!EVASION!
! Illegal.!You!evade!the!payment!of!tax.!Tax!evaders!(people!who!evades!taxes).!Tax!dodging!another!word!for!tax!evasion.!!
RATE!–!program!of!government!to!Run!After!Tax!Evaders.!
!!!!!!!Evasion! is! the! employment! of! illegal! and! fraudulent! means! to! defeat,! lessen! or! do! away! with! the! payment! of! taxes.! It! is! illegal! and!
fraudulent.!It!is!a!heavy!charge!to!say!that!you!are!fraudulently!evading!the!payment!of!tax.!It!is!also!a!heavy!charge!to!say!that!you!are!a!tax!
evader.!When!can!you!say!that!evasion!took!place?!!
There!are!3!factors!of!tax!evasion.!Evasion!can!only!happen!if!all!these!factors!take!place:!
1. End!to!be!achieved!!M!pay!less!tax!than!what!is!legally!due.!State!of!mind.!You!are!thinking!of!lessening!the!payment!of!your!
true!tax!or!not!paying!the!tax!at!all.!But!it!is!still!conceived!in!your!mind.!
2. The!accompanying!state!of!mind!which!is!evil!or!in!bad!faith,!deliberate.!!Even!if!you!have!arrived!at!the!first!factor!of!the!
end!to!be!achieved,!it!is!not!total!evasion!but!because!you!can!still!think!that!I!want!to!lessen!the!payment!of!taxes!but!
second!factor!is!not!present!if!you!would!employ!tax!avoidance!because!tax!avoidance!is!legal.!If!your!end!to!be!achieved!is!
not!to!pay!tax!or!lessen!the!payment!of!tax!and!the!accompanying!state!of!mind!is!evil,!deliberate,!intent!refusal!to!pay!the!
rd
tax,!evasion!will!be!perfected!once!you!reach!the!3 !stage.!
3. Course!of!action!or!failure!of!doing!an!action!which!is!unlawful!–!when!it!is!translated!into!a!deed!i.e.!that!you!have!not!
filed!your!tax!return!or!you!have!filed!but!did!not!pay!the!correct!tax.!!
!
i.e.!an!indication!that!you!have!evaded!taxes!–!the!failure!of!declaring!your!income!tax!in!ITR.!Would!one!instance!be!equivalent!to!
evasion?! It! would! point! out! to! tax! evasion! when! the! failure! is! for! 2! consecutive! years.! Since! this! is! attended! by! fraudulent! intent!
which! is! all! in! the! mind! and! you! cannot! prove! at! all! times! that! there! is! actual! fraud! sometimes! you! to! have! to! consider! the!
circumstances!surrounding!whether!there!is!constructive!fraud.!If!there!is!already!a!failure!of!2!consecutive!years!that!you!have!not!
truly!reflected!the!income!that!you!have!earned!or!have!overclaimed!the!deductions!or!expenses!than!the!true!expense,!then!the!
circumstances!would!point!out!to!fraud!and!evasion.!!
5.!TAX!AVOIDANCE!!
Not! the! full! amount! goes! to! the! government.! Avoidance! which! is! tax! minimization! is! employment! of! legal! and! permissible! means! of!
avoiding!the!payment!of!tax.!In!avoiding!you!have!to!avoid.!There!is!a!legal!means!to!avoid.!You!use!another!route,!use!another!activity!in!
order! to! avoid! the! payment! of! taxes.! It! is! not! evading! the! payment! of! taxes! so! this! is! legal! permissible! tax! rates! methods! and! means! of!
computing!your!income!taxes!or!doing!your!activities.!
Tax!avoidance!and!tax!evasion!does!not!at!all!tantamount!to!zero!collection!by!the!BIR.!You!can!avoid!in!part,!you!can!evade!in!part,!you!
can!also!evade!the!tax!totally!or!not.!
i.e.!if!there!are!2!bridges,!one!is!free,!one!has!toll!fee!for!passing!through,!you!pass!on!to!the!free!bridge!not!charging!for!a!fee.!The!same!
instance,!if!you!have!excess!money!and!you!want!to!invest!it!in!a!bank,!avoidance!can!be!to!an!extent!wherein!you!deposit!your!money!not!in!
the!regular!peso!account!but!in!a!dollar!account.!Why?!Your!interest!in!peso!account!is!subject!to!20%!tax.!It!is!withheld.!If!you!deposit!in!a!
foreign!currency!unit!system!dollar,!it!is!only!subject!to!7.5%!income!tax.!So!you!are!actually!avoiding!paying!the!12.5%!tax.!Another!instance!
is!when!you!actually!deposit!your!money!on!a!longMterm!basis!with!maturity!of!5!years,!totally!exempt!from!tax.!To!avoid!tax!is!legal!because!
it!is!provided!by!the!law.!It!may!not!be!the!intent!of!congress!to!allow!you!to!escape!taxes!but!since!it!will!not!defeat!the!literal!provision!of!
the!law!then!it!is!simply!called!tax!avoidance.! !
i.e.!if!this!is!company!A!owned!by!company!B!in!US.!Co.!A!is!located!in!Cebu!and!the!other!is!located!in!Lapu2.!Both!are!branches!of!the!
head!office!in!US.!You!follow!the!single!entity!concept!rule!.!if!it!is!located!in!Cebu!city!whatever!remittances!after!earning!income!here!you!
have!to!remit!to!your!head!office!but!provided!by!your!tax!code,!it!says!that!whenever!a!branch!locates!within!an!economic!zone,!it!is!exempt!
from!the!15%.!So!you!transfer!your!branch!inside!an!ecozone.!Whatever!you!give!abroad!is!0!tax.!This!is!simply!tax!avoidance.!
6.!TAX!EXEMPTION!
! A!grant!of!immunity!either!express!or!implied!to!particular!persons!or!corporations!from!the!obligation!to!pay!taxes!which!generally!they!
should!have!been!liable!to.!An!immunity!granted!for!future!taxes.!
! TAX!AMNESTY!–!intentional!overlooking!of!your!tax!violations!wherein!the!government!actually!foregoes!the!collection!of!any.!
If!you!simply!read!the!definition!of!amnesty!in!the!book,!it!will!come!to!mind!that!amnesty!is!totally!not!paying!any!tax!or!any!money!
because!you!have!been!pardoned.!It!is!not!the!case.!
! In! a! recent! amnesty! law! enacted! by! congress! sometime! 2005,! amnesty! law! is! to! the! point! where! you! are! actually! pardoned!
from! paying! penalties! of! your! previous! violations! but! you! pay! the! basic! tax.! Amnesty! can! be! in! varied! forms! although! it! will! not! be!
impossible!in!the!future!to!have!amnesty!law!actually!pardoning!everyone!of!us!from!paying!past!taxes.!The!reason!why!amnesty!law!is!
 not!so!popular!is!because!it!will!only!encourage!violators.!Why!would!you!strictly!follow!the!provisions!in!the!law!when!you!know!in!the!
future!an!amnesty!law!will!be!enacted.!
What!is!the!nature!of!tax!exemption?!It!is!personal.!Generally!revocable!by!the!person!granting!it.!Waiver!on!the!part!of!the!government.!
Whenever!an!exemption!is!granted,!only!the!one!who!actually!falls!under!that!exemption!is!personally!free!from!paying!the!tax.!It!cannot!be!
shifted!off.!!
i.e.!if!a!corporation!is!granted!tax!exemption.!The!stockholders!owning!the!corporation!will!not!be!free!from!taxes!on!the!dividends!that!
they!will!earn!from!their!investment.!It!is!personal!to!the!corp.!!
Why!do!you!think!the!government!would!grant!exemptions!when!it!needs!taxes!to!run!the!government?!The!rationale!or!basis!for!granting!
exemption!is!public!policy.!So!long!as!it!will!subserve!public!interest!for!the!good!of!all.!So!notwithstanding!that!it!becomes!in!part!a!waiver!of!
collecting!taxes!by!the!government,!it!expects!to!receive!taxes!in!some!other!forms.!i.e.!if!this!is!a!corp!which!has!been!granted!income!tax!
holiday!for!6!years.!It!means!to!say!that!for!6!years!the!government!will!not!be!receiving!income!tax.!The!government!is!actually!expecting!
other!taxes!in!some!other!forms.!
1.!incentive!fiscal!is!the!influx!of!industry.!2.!Employment!of!Filipinos.!3.!Taxes!from!the!salaries!of!employees.!4.!VAT!!!
5.!Other!forms!of!taxes!like!withholding!of!taxes.!
!
Every!corporation!in!the!first!minimum!3!years!is!actually!operating!at!a!loss,!it!has!to!recover!the!investment!first.!
!
TAXATION!JULY!6!
FORMS!OF!ESCAPE!OF!TAXATION!(continued)!
1. EXEMPTION!MMM!is!the!immunity!granted!to!persons/!classes!of!persons!or!corporations!who!would!otherwise!been!subject!to!tax!as!other!
people!belonging!to!the!same!situation!!

• Does!congress!have!the!power!to!inherently!grant!tax!exemption?!Yes,!it!arises!from!Congress!inherent!power!to!tax!(the!power!
comes!with!it)!

• But! if! Congress! grants! tax! exemption,! what! is! the! constitutional! limitation?! In! an! enactment! of! a! law! granting! exemption,!
congress!must!vote!by:!Majority!vote!of!both!houses,!voting!separately!

• Insofar!as!the!LGU!is!concerned!do!they!have!the!inherent!power!to!tax?!No,!it!is!not!inherent!

• But!can!they!grant!tax!exemption?!Yes,!if!the!LGU!is!delegated!power!to!impose!tax!(bring!its!own!sources!of!revenue)!it!carries!
with!it!the!power!to!grant!exemption!but!not!inherent!

• Example:!in!the!LG!Code,!LGU!can!grant!real!property!tax!exemption,!local!business!tax!exemption,!or!exemption!in!
cases!of!natural!calamity,!disasters,!etc.!(Like!what!happened!during!Ondoy!MMM!cities!of!Marikina!and!Rizal!could!enact!
an!ordinance!granting!exemption!from!real!property!taxes!for!those!properties!destroyed!by!the!typhoon)!

• It!is!an!immunity!of!payment!from!future!burden!of!taxation!

• If!an!exemption!is!granted,!what!is!the!nature!of!the!exemption!granted?!!

• Note:!when!you!want!to!avail!of!exemption,!burden!lies!on!you!to!prove!you!are!exempt.!It!is!not!enough!that!there!is!
a!law!granting!you!exemption!

• The!second!requirement!is!that!you!must!be!able!to!fall!under!the!conditions!for!the!exemptions!to!apply.!So!General!
exemption!is!not!enough,!you!must!prove!that!you!satisfy!all!the!privileges!required!

st
• 1 !nature:!Is!its!personal!privilege!granted!to!person/!class/!corporations!

• Does!it!mean!to!say!exemption!granted!is!not!transferrable?!General!rule!it!is!a!personal!privilege!and!not!
transferrable! MMMM! unless! law! expressly! provides! for! its! transferability! because! exemptions! are! against! the!
lifeblood!doctrine!

nd
• 2 !nature:!if!it!is!founded!on!contract!it!cannot!impair!the!nonMimpairment!clause!

• General! rule:! all! exemptions! are! generally! revocable! and! withdrawable! ! by! the! government! like! when! it!
needs!funds.!This!includes!franchises!because!constitution!itself!provides!it!is!revocable.!

• Exception:!when!the!exception!is!granted!based!on!the!contract!the!government!entered!into!with!a!private!
corporation!or!person!MMM!it!cannot!be!withdrawn!because!it!will!violate!nonMimpairment!clause.!!
 • The!only!instance!the!exemption!can!be!withdrawn!even!if!it!will!violate!the!nonMimpairment!clause!is!when!
the!government!will!exercise!the!police!power!of!the!state!

rd
• 3 !nature:!it!is!a!waiver!on!the!part!of!the!government!

• Moment!congress!passes!a!law!it!knows!it!is!waiver!

th
• 4 :!it!is!not!necessarily!discriminatory!from!other!persons!

• Because!it!is!presumed!there!is!substantial!distinction!of!else!it!will!violate!the!equal!protection!clause!

• What!do!you!mean!by!equality!in!taxation,!is!that!the!same!as!equity!in!taxation?!No.!Equality!in!taxation!is!
simply! the! equal! protection! clause! or! uniformity! clause! (similarly! situated! taxed! alike)! while! Equity! in!
taxation!is!taxation!that!apportions!to!those!who!are!better!able!to!pay!the!taxes!

• What!is!the!reason/!rationale!by!tax!exemption!is!granted!despite!the!waiver/!absence!of!taxes?!

• Reason!why!tax!exemption!is!granted!is!to!subserve!public!interest!and!public!benefit!MMM!which!is!sufficient!to!offset!
the!monetary!loss!

• Public!benefit!derived!is!NonMmonetary!in!a!sense!

• Grounds!for!tax!exemption:!

• Contract!MMM!law!between!parties!

• Public!policy!

• Reciprocity!MMM!created!by!treaties;!to!lessen!burden!of!international!taxation!when!2!taxing!jurisdictions!are!interested!
in!1!and!the!same!subject!matter!of!taxation;!this!can!be!provided!in!a!treaty!or!in!a!municipal!law!of!the!Philippines!
or!another!country!

• Equity!MMM!is!not!a!ground!for!tax!exemption!because!!

• What!is!equity?!!

• Typhoon!Ondoy!resulted!in!many!business!at!a!loss,!can!they!demand!equity!as!an!exemption!and!demand!
release!from!income!taxes?!!

• Taxation!and!exemption!is!statutory!in!nature!MMM!without!a!tax!law!there!can!be!no!tax.!No!exemption!can!
be!availed!without!another!law!granting!exemption!

• For!the!3!grounds,!there!must!be!a!law!supporting!the!ground!of!tax!exemption.!Equity!cannot!be!a!ground!
for!exemption!because!it!has!no!ground!to!stand!on/!support!it!

• Can! the! government! arbitrarily! enter! into! contracts! granting! tax! exemption?! There! must! be! a! basis! for! such! exemption.!
Government!should!receive!full!equivalent!for!the!exemption!

• It!must!not!be!unilateral!in!a!sense!that!only!the!tax!payer!is!benefited!by!the!terms!of!the!contract.!The!government!
should!receive!full!equivalent!in!other!aspects!or!benefits!!

• Public!policy!as!a!ground!for!tax!exemption!MMM!to!help!necessary!industries,!help!newly!created!business,!put!investments,!when!
it!wants!to!foster!charitable!institutions!and!nonMstock!nonMprofit!institutions!noble!intentions!

• Public!policy!requires!still!a!general!or!special!law!supporting!it!

• example:! foundations! tax! exemption! are! not! granted! In! constitution! itself.! But! Sec.! 30! of! tax! code,! congress! also!
granted!exemption!to!these!nonMprofit!institutions.!So!there!is!a!general!law,!tax!code!is!a!general!law!

• Example:! new! investment! in! Philippines! are! exempted! from! first! 4! years! of! income! tax! RA! 7916! promote! ecoMzone!
enterprises!(a!special!law)!
 • So!must!always!pinpoint!to!a!law!and!show!that!all!conditions!necessary!are!satisfied!

• Exemption!may!be!either!

• Express!MMM!clearly!granted/!provided!under!the!law!!

• Is!there!exemption!by!implication?!No!there!is!no!exemption!by!implication!(this!is!different!by!exempt!from!
omission)!

• Taxation!is!statutory!in!nature!MMM!if!activity!or!person!is!not!enumerated!under!the!law!then!you!are!exempt!
by!omission!

• Exemption!by!omission!MMM!those!not!enumerated!under!the!law!!(because!without!a!law,!still!cannot!be!exempt;!so!
use!this!term!to!be!technically!correct)!

• Total!MMM!exempt!from!all!types!of!taxes!

• Does!it!include!exemption!from!indirect!taxes!(like!VAT)?!General!rule:!exemption!from!all!taxes!covers!only!
those!which!the!taxpayer!is!generally!liable!for!and!does!not!include!VAT.!!

• Indirect!tax!are!not!easily!granted!as!exemption,!because!these!are!taxes!the!burden!of!which!are!shifted!to!
another!person!

• Take!the!case!of!San!Carlos,!exempt!from!income!tax,!real!property!tax,!Sec.!109!of!tax!code!(tuition!fees!
exempt!from!vat)!MMM!but!it!is!liable!to!pay!VAT!on!its!purchases!

• Is!San!Carlos!exempted!from!paying!withholding!tax!from!salaries!of!its!employees?!San!Carlos!cannot!claim!
exemption,!because!the!tax!is!actually!somebody!else’s.!San!Carlos!is!actually!a!conduit!of!the!employee!and!
the!government.!San!Carlos!is!both!the!withholding!agent!of!the!employee!and!the!collecting!agent!of!the!
government!

• Partial!MMM!exempt!from!certain!types!of!tax!

• Granted!exemption!partially!

• Example:!corporations!situated!in!economic!zone!are!granted!5%!preferential!tax!rates,!and!not!be!liable!for!
VAT!or!income!tax!

• Personal!!MMM!granted!to!certain!persons!

• Impersonal!MMM!granted!to!certain!classes!

• Examples!of!exemption!MMM!give!example!of!statutory,!constitutional!and!special!law!exemption!(see!book)!

CONSTRUCTION!OF!TAX!EXEMPTIONS!
• How! tax! exemption! laws! are! construed?! Strictly! against! the! tax! payer! MMM! because! taxation! is! the! rule,! exemption! is! the!
exception.! All! persons! property! and! transaction,! should! bear! a! burden! a! share! in! the! cost! and! expenses! in! running! the!
government!

• 4!exceptions!to!the!general!rule:!

! Law!expressly!provides!liberal!construction!in!favor!of!Tax!payer!

! Exemption!granted!to!particular!class!of!persons!

! When!it!concerns!public!property!

• Real!property!owned!by!the!government,!notwithstanding!use!in!proprietary!or!governmental!functions!!MMMM!
because!only!real!property!tax!exemption!(is!different!from!income!tax!exemption)!
 • That! real! property! tax! exemption! is! given! in! relation! to! use! MMM! applies! only! to! religious,! charitable! and!
educational!institutions!

• But!when!it!comes!to!property!owned!by!government!MMM!use!is!immaterial,!ownership!is!sufficient!!to!grant!
exemption!from!real!property!taxes!

• There!are!2!kinds!on!exemption!from!Real!property!tax:!

o Exemption!based!on!use!

o Exemption!based!on!ownership!MMM!example!the!government!

rd
! Exception! to! exception:! if! the! government! allows! 3 ! persons! to! use! the! property,! it!
takes!away!exemption!based!on!ownership!

! Exemption!in!favor!of!government!and!instrumentalities!(specifically!income!taxes!

! Provision!in!constitution!granting!exemption!to!religious,!charitable!institutions!

2. TAX!AMNESTY!MMM!are!waiver!on!the!part!of!the!state!of!the!penalties!or!delinquent!taxes!due!

• How!construed?!Strictly!against!tax!payer!MMM!because!it!is!the!same!nature!as!tax!exemption!in!the!sense!that!it!is!a!waiver!on!
the!part!of!the!government!to!connect!penalties!from!violators!

• Tax!remissions,!conditions,!refunds!MMM!how!construed?!Strictly!against!tax!payer!

! Tax!remissions!

! Tax!condonation!

! Tax!refunds!

• If!tax!code!provides!imprisonment!for!tax!violators!does!it!make!tax!laws!penal!in!character?!No,!because!it!tax!penalties!are!
only!to!encourage!prompt!payment!of!taxes;!it!is!only!to!compel!the!timely!payment!and!compliance!of!taxpayers!and!only!to!
punish!tax!evasion!

! Tax!laws!are!civil!in!nature!MMM!are!laws!of!the!territory!and!not!of!the!occupying!enemy.!Tax!laws!will!not!change!with!
the!change!in!government!

! Tax!laws!are!not!penal!in!nature!MMM!ex!post!facto!laws!do!not!apply!

! Tax!laws!are!not!political!in!character!

!
CONSTRUCTION!OF!TAX!LAWS!!
• Taxation!is!statutory!In!nature.!Without!tax!law,!no!taxes!imposed!

• If!there!is!a!tax!law!that!is!clear!(in!imposing!tax)!then!it!must!be!carried!out.!IT!will!be!strictly!construed!against!the!tax!payer!because!he!
is!clearly!liable!under!the!law.!

• But!once!the!provision!is!doubtful,!it!is!only!when!it!will!be!construed!strictly!against!government!MMM!only!when!there!is!doubt!!Because!
tax!laws!is!purely!statutory!in!nature,!without!a!clear!tax!law,!there!can!be!no!tax!

NATURE!OF!TAX!LAW!
• Do!tax!laws!have!prescriptive!period?!Some!are!prescriptible!some!are!not.!Or!else!we!will!be!at!the!mercy!of!the!government!

o Tax! code! and! tariff! and! custom! code! provide! for! prescriptive! periods.! But! there! are! also! provision! that! provide! for!
imprescriptibility!
 o When!it!is!all!about!tax!evasion,!a!criminal!case!can!be!filed!by!the!government!within!5!years!from!the!commission!of!the!crime!
OR!if!the!commission!is!not!known,!from!the!discovery!and!institution!of!judicial!proceeding!

! It!can!be!made!imprescriptible!MMMM!because!it!can!be!filed!5!years!from!the!time!government!has!knowledge.!So!if!I!
were!the!government!I!would!say!I!had!no!knowledge!

! Even!if!you!discovered!it!now,!if!the!government!does!not!institute!criminal!proceedings,!it!does!not!prescribe,!so!it!is!
lifetime!

o Another! example! of! imprescriptibility:! Fraudulent! returns! MMM! prescribes! 10! years! from! the! date! of! discovery.! So! long! as! the!
government!says!that!is!did!not!discover!your!fraudulent!returns,!it!does!not!prescribe.!

o But!general!rule:!right!to!assess!you!prescribes!to!give!you!peace!of!mind.!In!the!absence!of!fraud!MMM!the!government!can!assess!
you!only!within!3!years!from!the!filing!of!the!return.!Under!the!local!government!code!the!LGU!can!only!assess!you!within!5!
years!from!the!payment!

o Under!the!Tarriff!and!customs!code!MMM!once!you!have!settled!the!final!liquidation!of!customs!duties!and!3!years!have!lapsed,!
the!government!cannot!question!your!payment.!!

o These!are!the!prescriptive!periods!in!the!absence!of!fraud.!But!fraudulent!activities!would!result!to!imprescriptibility!

HOW!ARE!TAX!LAWS!APPLIED!
• General!rule:!prospective!application!of!tax!laws!(but!not!an!absolute!rule)!

o Why!not!retroactive?!!Because!It!will!be!applying!taxes!to!back!taxes!or!past!transactions!on!which!it!had!no!knowledge!of!the!
taxes!so!it!will!be!absence!of!due!process!especially!it!is!more!burdensome!to!the!taxpayer!

• Exception!

o Law!expressly!provides!for!retroactive!application!MMM!but!notwithstanding!express!provisions!of!retroactivity!still!it!there!will!not!
be!retroactive!application!in!all!cases!MMM!if!it!results!to!oppressive!taxes!and!equates!to!lack!of!due!process,!it!will!still!be!applied!
prospectively!

o Example:!RA!9204!took!effect!Jul.!6,!2008,!it!exempted!from!tax!the!minimum!wage!earners.!With!it!there!was!also!increase!in!
personal!exemptions.!!

! All!income!within!the!calendar!year,!will!be!totaled!and!exemptions!are!deducted!to!cover!your!living!exemptions!

! Before:!for!every!single,!head!of!family!is!20K!!or!married!is!there!is!exemption!AND!additional!exemption!of!8K!for!
every!dependent!child!

! Now:! 50K! each! regardless! of! status! and! each! child! is! 20K! each.! This! compensates! the! transportation! and! grocery!
expenses!you!use.!

! At!the!end!of!2008,!what!did!the!BIR!(Who!is!the!exec.!Branch!of!government)!enforce!these!2!laws?!What!exemption!
was!applied?!

! if!you!use!50K!for!the!whole!year,!you!would!be!using!retroactive!application!for!half!(Jan!–!Jun)!but!the!law!did!not!
provide!for!retroactive!application!MMM!so!what!happened,!for!2008,!for!the!2st!half!of!the!year,!apply!half!of!the!old!
20K!exemption!and!half!of!the!new!50K!exemption!so!you!have!35K!as!exemption!

! because!the!law!did!not!provide!for!retroactive!application.!So!on!july!6,!was!the!only!time!the!new!law!took!effect!

! had!the!law!provide!for!retroactive!application!to!Jan!1!2008,!we!could!fully!apply!the!new!50K!exemption!

! This!is!lifeblood!doctrine!as!well,!exemption!is!strictly!construed!!

MANDATORY!AND!DIRECTORY!PROVISION!
• Mandatory!provisionMMM!are!those!which!we!find!in!tax!law!or!regulations!implementing!it!
 • Directory! Provision! MMM! provisions! contained! in! circulars,! orders! issued! by! the! head! of! office! to! its! subordinates! for! the! proper!
implementation!of!the!law!

!
REVENUE!REGUALTIONS!
o What!are!revenue!regulations?!(see!below,!when!differentiated!with!rules!and!regulations)!

o purpose!of!revenue!of!regulations?!Enforcement!and!execution!of!the!law!

o who!issues!revenue!regulations?!Secretary!of!Finance!

o What!is!the!role!of!the!commissioner!of!internal!revenue!(his!signature!is!still!on!the!revenue!regulation?!Only!recommending!
approval!by!the!commissioner!

! Is!one!of!the!powers!not!delegable!by!the!commissioner!

! General!rule:!all!of!powers!of!the!commissioner!of!international!revenue!are!delegable!

! Exception:!4!powers!not!delegable—we!will!learn!later!

o For!every!revenue!regulation,!you!will!see!2!signatures:!the!one!who!issues!and!the!one!who!recommends!

o Enforcement!actually!falls!with!BIR!for!national!revenue!taxes!that!is!why!it!is!a!recommendation!coming!from!the!BIR!itself!

What!differentiates!Revenue!Reg!from!Rulings/!Opinions!of!commissioner?!
• Main!difference:!Revenue!regulations!(implementing!rules!and!regulationsM!MMM!are!the!more!general!interpretation!of!the!law,!to!explain!
and!carry!effect!the!general!provisions!of!the!tax!law!for!the!purpose!of!properly!implementing!and!executing!it.!It!is!a!clarification!but!on!
a!general!level!

o When!revenue!regulations!are!issued!it!does!not!pinpoint!to!a!particular!tax!payer,!it!does!not!provide!for!a!specific!scenario!
that!is!actually!experienced!by!the!tax!payer!

• Rulings/!opinions!of!commissioner!

o Are!issued!by!the!commissioner!of!the!BIR!MMM!because!these!are!the!less!general!interpretations!of!the!law,!catering!to!a!specific!
situation!presented!by!the!taxpayer!

o A!taxpayer!when!In!doubt!of!interpretation!of!the!law,!can!seek!a!ruling!or!opinion!of!the!commissioner!but!he!has!to!present!
the!actual!facts!(no!hypothetical!questions!is!allowed!to!be!basis!of!the!ruling!to!be!issued)!

o Is!the!ruling!of!the!BIR!Comm.!subject!to!review!of!Sec.!of!Fin.?!Yes!

! Commissioner!of!Internal!revenue!has!the!power!to!issue!rulings/!opinions!but!it!is!not!a!final.!It!can!be!reviewed!by!
the!secretary!of!finance.!

nd rd
! Other!powers!of!commissioner!not!delegable!(2 !and!3 )!

• Power!to!issue!rulings!of!first!impression!MMM!those!rulings!that!have!no!precedent!as!yet!

• Power!to!revoke,!revise,!modify!existing!rulings!

o All! other! existing! rulings! and! opinions! (meaning! those! with! precedent)! can! be! issued! by! the!
Deputy!Commissioner!or!Asst.!Commissioner!

• How!do!you!make!revenue!reg.!valid!and!effective?!Requires!publication!MMM!this!applies!only!to!revenue!regulations!

o Not!hold!true!for!rulings!and!opinions!

• Do!revenue!regulations!have!the!force!and!effect!of!tax!law?!It!forms!part!of!the!law!of!the!land!

• Can!the!current!Sec.!Fin!or!Comm.!BIR!revoke!existing!rulings!issued!by!his!predecessor?!Yes!
 o Does!it!make!rulings!and!opinions!volatile?!What!happens!is!already!in!effect!is!reversed!by!the!commissioner?!!

! Example:! Mr.! X! commissioner! of! ’07M’09.! He! granted! exemption! to! a! particular! entity.! In! 2005! a! new! law! enacted!
where!the!exemption!was!no!longer!covered.!When!Mr.!Y!became!commissioner,!it!came!upon!ruling!of!Mr.!X!so!he!
reversed!the!tax!payer.!Will!the!taxpayer!be!liable!for!taxes!upon!issuance!and!reversal?!!

! Answer:!as!a!rule,!rulings!are!not!applied!retroactively!.!if!there!is!a!subsequent!ruling!reversing!the!previous!ruling!it!
is! applied! prospectively.! But! there! are! exemptions! to! the! rule:! (in! these! instances! reversal! of! the! ruling! applies!
retroactively)!

• When!the!taxpayer!seeking!exemption!applied!it!in!bad!faith!and!thus!able!to!get!the!exemption!

• When!the!taxpayer!seeking!exemption!deliberately!omitted/!misstated!material!facts!leading!to!the!grant!of!
exemption!

• !When!the!subsequent!findings!of!the!BIR!are!different!from!the!facts!present!when!the!ruling!was!made!

• *in!all!cases,!it!is!about!the!data!presented!by!the!taxpayer!!

! Towards!the!end!of!every!ruling!issued,!there!is!a!provision!that!this!ruling!was!issued!based!on!the!facts!given,!that!
any! deviation! would! lead! to! a! change! of! opinion! would! nullify! the! ruling! issued.! This! gives! BIR! area! of! aveue! to!
reverse/!withdraw!opinion!given!

SOURCES!OF!TAX!LAWS!
o Constitution!

o National!law!

o Local!ordinances!

o Executive!orders!

o Presidential!decrees!

o Treaties!

o Judicial!decisions!

o Revenue!regulations!

o Rulings!and!decisions!of!the!executive!branch!

!
BACKGROUND!ON!INCOME!TAX!
• What!is!income?!All!income/!wealth!that!flows!into!the!hands!of!the!taxpayer!(including!those!from!illegal!activities)!other!than!he!return!
of!capital!(example:!finding!yamashita)!

o Capital!MMM!is!that!which!provides!the!income!

o But!in!some!cases!you!derive!income!without!capital!(if!is!given!to!you!in!silver!plate;!example:!see!money!on!the!floor,!finding!
treasure!in!backyard)!

o Example!of!capital:!that!which!you!invest,!that!you!allow!to!produce!an!income!

o Capital!is!the!tree!while!fruit!is!the!income.!!

o Example:!deposit!money!(your!capital),!it!earns!interest!(your!income)!

• Income!taxation!is!something!else.!It!is!taxing!an!income.!And!not!all!income!are!taxable.!You!have!to!satisfy!the!requisites!of!when!an!
income!becomes!taxable!

• 3!requisites!before!income!is!taxable!(to!income!tax)!
 o There!must!be!a!gain!or!profit!

! What!is!gain!or!profit?!it’s!the!result!from!reducing!the!proceeds!from!the!cost!

! The!tax!is!only!a!tax!on!the!profit!or!income!(not!capital/!puhunan)!

! The!only!exception!where!there!is!a!tax!on!the!capital!is!Sec.!24(d)!or!Sec.!27(d)!MMM!capital!gains!tax!on!sale,!barter,!
exchange!of!real!property!located!in!the!Philippines!and!classified!as!a!capital!asset!

! Example:! parcel! of! land! bought! at! 1! million! sell! at! 2! million! MMM! tax! here! is! on! the! capital! because! basis! of! capital!
against!tax!is!the!gross!selling!price.!So!regardless!if!you!sold!it!at!a!profit,!or!sold!it!at!a!loss,!you!will!be!taxed!on!your!
selling!price.!*this!is!the!only!exemption!if!you!read!through!the!income!tax!where!there!is!tax!on!capital!and!not!the!
income!

! Had!this!not!been!a!parcel!of!land!(capital!asset)!bought!at!1!million,!sell!at!2!million!MMM!income!tax!is!applied!only!to!
the!1!million!profit!

! Is!income!merely!a!tax!on!the!difference!at!of!the!price!and!cost?!(that!tax!only!profit/!income)!but!what!we!study!in!
income!tax!is!to!study!all!the!revenue,!the!cost!and!the!income.!Once!you!get!gross!income,!this!is!where!you!apply!
the!tax!rates.!

! Prizes! winning! from! sports! competitions! MMM! are! winnings! taxable! unless! sanctioned! by! the! PSA! (Philippine! sports!
association)!and!approval!Phil.!Olympic!committee!

• So! Manny! Pacquio! is! practicing! it! as! a! profession,! his! fights! are! not! sanctions! so! his! income! is! subject! to!
general!rule!that!all!income!are!subject!to!income!tax!

!
!
nd
July!13,!2010!(2 !Part)!
A. Definition'of'Terms''
What!is!income?!!
♣ In!its!broad!sense—all!wealth!which!flows!into!the!hands!of!the!taxpayers!other!than!as!a!
mere!return!on!capital.!!
" Why?!Everything!which!comes!to!the!taxpayer!as!an!addition!to!his!asset!except!for!those!
which!are!merely!returns,!because!it!is!his!capital,!are!considered!income!already.!It!is!the!broad!definition!because!it!includes!
everything!which!comes!to!the!hands!of!the!taxpayer.!!
!
♣ In!its!strict/!more!specific!meaning!sense—it!is!an!amount!of!money!coming!to!the!taxpayer!
for!the!service!performed,!for!an!activity!which!he!engaged!in,!or!for!an!investment!he!has!made!but!it!is!not!all!inclusive!because!as!we!
have! said,! anything! that! is! seen! without! anybody! owning! that! income! or! wealth! can! be! considered! as! income! insofar! as! the! finder! is!
concerned.!!
!
♣ So,! if! you! file! for! illegal! dismissal,! aside! from! back! wages! because! that! is! compensation!
income,!and!you!are!awarded!damages!(exemplary!and!moral!damages),!is!this!subject!to!income!tax?!Is!it!an!income?!!
" Yes,! it! is! income! because! it! increases! your! patrimony! or! your! asset.! All! damages! that! you!
receive!are!considered!income!except!actual!damages.!!
" As!to!moral,!exemplary!damages,!arising!from!various!reasons!such!as!breach!of!promise!to!
marry,!accidents,!physical!injury,!illegal!termination,!illegal!dismissal!is!considered!income.!WON!it!is!taxable,!it!is!a!different!
story.!It!has!to!satisfy!all!the!other!requirements!in!order!to!be!taxable.!!!
!
!
♣ How! about! actual! damages,! is! that! an! income?! You’re! driving! your! car! and! you! met! an!
accident,!and!you!were!awarded!damages?!The!actual!damages!was!paid!as!a!breach!of!a!promise!to!marry,!is!that!an!income?!
" No,! it! is! not! considered! income! because! it! is! an! actual! loss! awarded! to! the! person! who!
suffered!actual!damages.!So!long!as!the!actual!damages!is!equivalent!to!the!actual!loss!suffered!by!the!recipient,!then,!that!is!
not!an!income.!It!does!not!increase!your!asset!or!wealth.!It!simply!to!recover!the!value!of!the!property!that!was!lost.!So,!it!is!not!
income.!But!once!the!actual!damages!has!been!miscomputed!and!it!is!more!than!the!actual!damages!that!you!have!suffered,!
then!it!is!considered!as!part!of!your!income.!!
!
♣ If!you!find!treasure!in!your!backyard,!is!it!considered!income?!
" Yes,!it!is!income.!!
!
 ♣ Are!all!kinds!of!dividend!considered!income?!!!
" (this!was!answered!in!the!later!part!of!the!lecture)!!
!
♣ How!about!illegal!gains,!is!that!an!income?!!
" Yes,!it!is!income.!!
What!is!capital?!!
♣ It!is!a!fund!or!property!existing!at!one!point!of!time.!!
What!is!income!tax?!!
♣ Tax!on!income!!
♣ Simply,! a! tax! on! income! or! on! amount! which! increases! the! net! worth! or! net! value! of! the!
taxpayer!
" This! definition! is! included! because! it! is! not! in! all! cases! where! the! BIR! can! determine! the!
income!tax!of!a!person!based!on!his!income!alone.!In!some!cases,!taxpayers!do!not!reflect!their!true!sales!or!income,!and!they!
overstate!or!over!claim!their!expenses!in!order!to!arrive!at!a!lower!taxable!base!or!taxable!income!as!against!which!the!income!
tax!rates!are!to!be!computed.!So,!what!the!BIR!does!in!order!to!assess!taxpayers!of!their!true!income!and!collect!the!true!tax,!is!
to!simply!determine!the!net!worth!of!a!taxpayer.!!
" What! is! net! worth?! Simply! stated,! it! is! your! value.! Assets! less! liabilities,! this! is! your! net!
value.!!What!the!BIR!does!when!it!does!not!have!books!on!which!to!audit!or!no!reliable!books.!Some!taxpayers!have!at!least!
two!sets!of!books.!They!maintain!two!books!of!account.!(refer!to!the!illustration!below)!So,!what!they!do!is!determine!the!net!
worth!of!the!taxpayer!from!one!point!in!time!to!another!point!in!time,!any!increase,!so!if!this!is!2007!to!2009,!no!taxes!are!paid!
in!between,!would!the!BIR!simply!agree!on!no!tax!payment?!What!they!will!do!is!compare!the!value.!If!this!is!1!million!and!this!
is!10!million,!there!is!an!increase!in!the!net!worth!of!the!taxpayer!which!is!9!million.!9!million!is!an!income!although!not!fully!
declared!as!an!income.!!
!
Net!Worth!2007:!1!Million!
!
9
No!Taxes!Paid! MILLION
!
Net!Worth!2009:!10!Million!
!
!
♣ So,!income!tax!is!a!tax!on!declared!income!and!those!which!is!reflected!from!an!increase!in!the!net!worth!or!net!value!of!the!taxpayer!
because!it!will!reflect!the!sources!of!the!income!by!the!taxpayer!which!is!actually!undeclared.!!!!!!!!!!!
!
♣ Tax!on!all!yearly!profits!arising!from!property,!profession,!trade!or!business,!or!as!a!tax!on!a!person’s!income,!emoluments,!profits!and!
the!like.!It!is!generally!regarded!as!an!excise!tax.!It!is!not!levied!upon!persons,!property,!funds!or!profits!but!upon!the!right!of!a!person!to!
receive!income!or!profits!
What!is!gross!income?!
♣ Means!all!income!derived!from!whatever!source,!including!but!not!limited!to!the!following,!see!Sec.!32!(A).!It!is!defined!in!various!ways,!
depending!on!what!context!presented.!!
♣ This!is!the!entire!formula!(refer!to!the!illustration!below).!Your!first!revenue!is!your!sales.!Assume!that!you!are!selling!siopao,!how!much!
did!you!buy!the!siopao!for?!Any!difference!is!your!gross!income!but!you!deduct!the!salary!of!your!salespersons!and!transportation!(to!and!
fro!your!source;!then!to!your!buyers).!You!get!the!taxable!income.!The!tax!rate!is!not!multiplied!against!the!revenue!nor!directly!against!
the!gross!income.!You!are!allowed!certain!deductions.!
Revenues!
Less:!Cost!
_________________!
Gross!Income!
Less:!Deductions!
_________________!
Taxable!Income!
X!!!!!!!!!!Tax!Rate!
_________________!
Tax!Due!
!
♣ Gross!income!is!all!income!derived!from!whatever!source,!whether!it!is!from!illegal!sources!or!from!found!treasure.!It!all!forms!part!of!
your!gross!income,!if!you!truly!declare!all!wealth!which!flows!into!your!hands.!
!!
B. Purposes'of'Income'Taxation''
!
♣ All! taxes! are! for! the! purpose! of! raising! revenue! save! for! the! case! of! secondary! purposes! such! as! to! offset! the! effects! of! sales! and!
consumption! taxes! which! are! seen! as! regressive! taxes! by! some! proponents! and! in! order! to! mitigate! the! effects! of! the! inequitable!
distribution!of!wealth!between!different!income!earners.!Of!course,!this!is!made!together!with!the!imposition!of!estate!taxes!because!we!
are!taking!about!wealth!and!income!distribution.!
 !
C. Systems'of'Income'Taxation'
What!are!the!systems!of!income!taxation!in!the!Philippines?!!
♣ Schedular!system—follows!a!schedule!of!rates.!The!Tax!Code!or!Congress!treats!differently!
every!category!of!income!earners.!!
♣ Global!system—a!uniform!rate!or!proportional!rate!for!all!types!of!income!so!long!as!it!is!
classified!within!the!same!class.!If!it!is!corporate!taxpayer,!all!the!income!of!the!corporations!regardless!of!value!is!taxed!at!a!flat!rate!of!
30%!
D. The'Philippine'law'is'following'what'kind'of'income'taxation'system?''
♣ The! Philippine! law! is! following! the! semiMglobal! and! semiMschedular! system! of! taxation!
because!this!is!what!is!provided!in!the!Tax!Code.!!
" Why!is!it!semiMschedular?!Give!me!an!example!of!a!scheduler!tax!rate.!!
MMMMMBecause! the! income! is! treated! differently! according! to! a! taxpayer’s! ability! to! pay.! ! An! example! is! Income! tax! on!
individuals.!
" A!global!income!tax!system!views!indifferently!the!tax!base!and!treats!all!the!categories!of!
income!the!same!which!is!a!uniform!tax!rate!applied!to!the!income!of!corporate!taxpayers.!!!
What'are'the'income'tax'methods'followed'by'the'Philippine'tax'laws?'What'are'the'methods'of'taxing'the'income'of'an'individual?''
♣ If!you!go!into!business,!all!that!flows!into!you!is!revenue.!But!that!is!not!taxable!because!a!
portion!of!that!is!simply!a!return!of!capital.!If!you!buy!siomai!at!5!peso!each!and!sell!it!at!10!peso!each.!You!have!revenue!of!10!pesos.!But!
you!have!a!capital!of!5,!so!what!is!taxable!is!the!difference!of!5!plus!all!your!other!expenses.!!
!
♣ There! are! 2! kinds! of! tax! methods! followed! in! the! Philippines! but! in! different! occasions—
gross!income!taxation!and!net!income!taxation.!!
!
" The!basic!difference!is!the!deductions!(expenses!that!you!are!allowed!to!claim).!!
!
" Gross! income! taxation—income! is! taxed! at! gross! without! the! benefit! of! deductions! and!
expenses!found!under!Sec.!34!of!the!Tax!Code.!Sometimes,!it!could!even!mean!that!it!is!taxed!at!a!revenue.!!!
!
" Net!income!taxation—as!the!word!net!implied,!is!taxation!based!on!net!income!after!you!
are!allowed!to!deduct!some!items.!!
!
What'are'the'advantages'and'disadvantages'of'gross'income'taxation?'
♣ If!we!follow!gross!income!taxation!and!your!income!is!sourced!from!service,!service!income!
(i.e.!working!in!Junquera),!what!is!your!concrete!source!that!you!can!deduct?!If!we!follow!the!gross!income!of!taxation,!you!will!be!taxed!
directly!with!the!amount!paid!by!your!customers.!No!deductions!allowed.!!
♣ Advantageous!to!the!government:!!
" More!revenue!going!to!the!coffers!of!the!government!!
" Simplified! method! of! taxation.! There! is! nothing! to! determine! whether! the! expenses! is!
allowable!or!not.!!
♣ Disadvantages!
" Inequitable! to! the! taxpayer.! It! is! unjust.! Why! are! they! not! allowed! to! deduct! the! costs!
incurred!in!order!to!get!that!income!of!revenue?!!
" It!will!not!encourage!taxpayers!to!earn!more!because!everything!goes!to!the!government.!
And!would!lead!mainly!to!tax!evasion!because!taxpayers!would!not!declare!their!true!income!due!to!high!tax!rate.!WON!the!tax!
rate!is!high,!it!is!still!high!because!it!is!directly!computed!against!your!gross!income!without!the!benefit!of!gross!deductions.!!
What'are'the'advantages'and'disadvantages'of'net'income'taxation?'
♣ Advantageous! more! on! the! taxpayer! because! he! is! given! the! chance! to! deduct! all! the!
expenses!and!deductions!there!is!so!long!as!it!is!applicable!in!the!business!for!which!he!is!engaged!in!or!the!profession!he!is!practicing.!!
♣ Disadvantageous!on!the!part!of!the!government!because!of!the!allowance!for!deduction,!it!
will! be! more! tedious! for! the! government! to! determine! whether! the! expenses! or! deductions! claimed! are! valid! or! not;! legal! or! not.! It!
rd
becomes!an!avenue!for!over!claiming!expenses!especially!in!family!owned!corporations.!There!is!no!3 !person!investor!who!is!interested!
whether!the!income!you!are!declaring!is!the!true!net!income.!In!one!actual!case,!for!example,!part!of!a!cost!of!a!service!company!was!the!
cost!of!the!motor!vehicle,!which!is!personal,!owned!by!one!of!the!owner’s!children.!Can!the!BIR!plug!that!loophole?!Of!course!it!is!very!
difficult!unless!we!demand!for!the!gross!income!taxation.!But!then!again,!applying!gross!income!taxation!is!not!equitable!in!all!cases.!!!!!!!!
E. Features'of'Our'Present'Income'of'Taxation'
!
What'are'the'features'of'individual'income'taxation?''
♣ Schedular!system!of!taxation!
" As! your! income! increases,! your! tax! rate! also! increases.! 5%! to! 32%! tax! rate! for! individual!
taxpayers.!!
" Would!the!sole!proprietorship!business!be!covered!by!the!scheduler!system!of!taxation!or!
the! global! system! of! taxation?! Sole! proprietorship! is! owned! by! one! owner.! Hence,! it! is! covered! by! the! scheduler! system! of!
taxation.!In!fact,!when!you!sue!a!sole!proprietorship,!you!have!to!include!the!owner!of!the!sole!proprietorship.!It!is!like!taxing!
an!individual.!It!follows!still!the!rate!of!5%!to!32%.!It!does!not!follow!the!30%!flat!rate!because!it!is!not!a!corporation.!!!
 !
♣ Tax!rates!are!progressive!in!character!
" As!income!increases,!your!tax!rate!also!increases.!!
!
♣ Modified!gross!income!as!regards!pure!compensation!earner!!
" If!you!are!a!pure!compensation!income!earner!in!the!Philippines,!meaning!all!your!income!is!
derived!from!pure!employment,!then,!you!will!be!subjected!to!gross!income!taxation!although!modified.!Modified!in!the!sense!
that!you!will!be!allowed!to!deduct!personal!and!additional!exemptions,!remember,!the!15k!exemption!and!the!25k!exemption.!
For!every!child,!25k!exemption.!That’s!what!makes!it!modified!but!it!is!still!gross.!It!is!still!gross!because!you!are!not!allowed!to!
deduct! expenses! like! transportation! expenses! to! and! fro! your! office,! or! your! food! during! office! hours.! No! deductions,! like!
depreciation!to!your!car!etc.!!
" So,!it!is!gross!but!modified.!There!are!a!few,!one!or!two,!deductions!that!you!can!make.!!
!
♣ But! as! regards! those! individual! taxpayers! that! derive! business,! trade! or! professional!
income,!we!adopt!the!net!income!system!!
" For!example,!you!are!the!president!of!a!multiMnational!company!but!at!night!you!perform!
services.!You!have!two!incomes,!two!types—compensation!income!from!employment!and!compensation!income!that!you!have!
at!night!but!not!thru!employment!(from!your!profession).!By!the!time!that!you!pay!your!income!tax,!you!have!to!consolidate!
everything!at!the!end!of!the!year.!Will!you!be!subjected!to!gross!income!taxation!or!net!income!taxation?!Are!you!allowed!to!
make!deductions(net!income!taxation)?!!
MMYou! are! subjected! to! net! income! taxation.! By! the! process! of! elimination,! your! modified! gross! income! taxation! will! only! be!
applicable! if! you! are! a! pure! compensation! income! earner.! Once! you! cross! that! boundary,! meaning! you! are! a! pure! business!
income!earner,!pure!profession!income!earner!or!modified!(both!income!and!employment),!you!will!now!be!allowed!to!claim!
deductions.! You! will! be! covered! by! net! income! taxation.! But! in! all! cases,! the! schedular! rates! will! have! to! be! applied! for!
individuals.!!
! !!!!Let!us!go!to!rates.!This!is!a!backgrounder!for!individual!income!taxation.!
1. Always,!always!the!rates!will!be!schedular.!!!
2. WON!an!individual!is!allowed!deductions.!The!rules!would!be:!!
# If!you!are!a!pure!compensation!income!earner,!your!deductions!would!only!be!personal!additional!exemptions!
which!will!subject!you!to!modified!gross!income!taxation.!
# If!you!earn!compensation!PLUS!business!or!profession!or!trade,!you!are!now!shifted!to!the!other!type!of!taxing!
your! income! which! is! net! income! taxation.! You! will! be! allowed! deductions.! Logic! behind! this! is! once! you! earn!
income!other!than!from!employment,!you!will!be!expected!to!have!incurred!expenses!for!your!business,!trade!or!
profession.!!
!
♣ “Pay!as!you!file”!system!
" Whenever!you!file!for!your!return,!you!are!expected!to!pay!within!the!same!day.!!
♣ Under! certain! cases,! “pay! as! you! earn”! system,! as! applicable! to! “income! subject! to!
withholding!tax”!!
" Individuals!are!also!subjected!to!the!rule!that!they!pay!the!taxes!as!they!earn.!It!is!covered!
by! the! withholding! tax! system! because! you! are! expected! to! be! withheld! of! your! taxes! the! moment! you! earn! it.! When! you!
receive!your!salary,!it!is!already!net!of!withholding!taxes.!The!moment!you!receive!interest!from!bank!deposits,!it!is!already!net!
of!taxes.!Pay!as!you!earn.!!
What'are'the'features'of'corporate'income'taxation?''
♣ Global!concept!of!taxation!!
" Because!you!are!taxed!at!the!same!rate.!Example!is!that!of!corporations.!It!is!taxed!at!the!
same!rate!regardless!of!what!type!of!corporation!it!is!(whether!domestic,!foreign!resident,!or!nonMresident!foreign!corporation)!
and!regardless!of!the!amount!of!income!that!it!has!earned.!So,!it!is!global.!!!
!!
♣ Corporate!taxpayer,!particularly!domestic!corporations!are!entitled!to!deductions!insofar!as!
domestic!corporations!and!resident!foreign!corporations!are!concerned,!we!adopt!the!net!income!tax!system.!!
" Corporations,!as!a!rule,!are!following!net!income!taxation!(Ex.!SM!deducting!from!its!gross!
income!the!salary!of!its!employees)!because!they!are!allowed!to!deduct!business!expenses.!But!this!is!not!absolute.!A!resident!
foreign!corporation!is!subject!to!gross!income!taxation.!!
" NonMresident! foreign! corporations! are! not! allowed! to! deduct! business! expenses! because!
they! are! not! doing! business! here! in! the! Philippines.! For! every! income! that! they! earn! they! are! subjected! to! gross! income!
taxation.!The!concept!of!a!corporation!is!to!do!business!and!earn!profit!or!income.!Therefore,!only!domestic!corporations!which!
are! engaged! in! business! are! subject! to! net! income! taxation.! Resident! foreign! corporations! which! registered! itself! in! the!
Philippines!is!registered!outside!as!well.!The!registration!starts!outside.!!
!
" Difference!between!domestic!and!resident!foreign!corporation!
 !
!
COMPANY A COMPANY B
! 99% owned by Filipinos 99% owned by Germans
! Registered in British Virgin Islands Registered in the Philippines
! (resident foreign corporation) (domestic corporation)
!
!
!
!!!
# Company!B!is!a!domestic!corporation!because!it!is!registered!in!the!Philippines.!Company!A!
is!foreign.!It!becomes!resident!when!it!also!registers!in!the!Philippines.!If!it!is!not!registered,!it!remains!a!nonMresident!
foreign!corporation.!!
# Only!those!corporations!doing!business!in!the!Philippines!are!allowed!to!claim!exemptions.!
When!you!do!business!in!the!Philippines,!you!incur!expenses!which!are!deductible.!!
!!
♣ Pay!as!you!file!system!(except!insofar!as!the!electronic!filing!system!is!applied)!!
" If!you!file!the!return,!you!are!expected!to!pay!unless!they!avail!of!electronic!filing!system!
which!gives!them!5!days!thereafter!to!pay!the!taxes.!!
What'are'the'criteria'used'in'our'present'income'taxation?'''
" This!is!only!for!income.!Do!not!consider!real!property.!!
!
♣ Residency!!
" As!a!criteria,!you!have!to!know!whether!the!he!is!a!resident!or!not.!!
♣ Nationality!or!Citizenship!
" You!have!to!know!whether!the!resident!is!a!citizen!or!not.!!
♣ Source/!Place!
" Whether!the!income!has!been!earned!in!the!Philippines!or!abroad.!!
" Sometimes!the!execution!of!the!document,!the!finality!of!the!transaction!etc.!doesn’t!even!
matter,!it!is!where!the!source!of!income!is.!(we’ll!learn!this!in!letter!J,!situs!of!taxation)!!
F. Sources'of'Income'
What'are'the'4'sources'of'income?''
" Is! the! source! of! income! a! place?! it! is! not! a! place.! it! is! a! property,! activity! or! service! that! produces! the! income.! To! be!
considered!as!an!income!coming!from!the!Philippines,!it!is!enough!that!the!income!is!derived!from!within.!You!would!know!
that!there!is!a!source!within!and!without!the!Philippines!(letter!J,!situs!of!taxation).!
♣ Capital!!
" Fund!or!property!existing!at!one!point!of!time.!It!can!be!an!investment!or!capital!in!order!
for!it!to!grow.!!
♣ Labor!!
" Without!any!tangible!capital,!you!can!derive!income!out!from!labor!performed.!!
♣ Both!capital!and!labor!!
" Like!constructions!!
♣ Sale!of!property!!
" Dealings!in!real!property!(sale,!barter!etc.)!!
G. Criteria!to!Determine!if!Income!is!Taxable!
In'summary:'
1. There!is!Gain!or!Profit!
In!determining!the!profit!from!the!sale!of!property,!the!formula!is!
AMOUNT!RECEIVED!/!REALIZED!LESS!COST!OF!PROPERTY!=!PROFIT!
2. The!gain!or!profit!is!realized!or!received!(either!actually!or!constructively!received)!
3. Such!gain!or!profit!is!not!exempt!under!any!law!or!treaty.!
! ! !
When'can'we'say'that'the'income'which'flows'into'our'hands'are'taxable?''
♣ There!is!a!gain!or!profit!!
♣ The!gain!or!profit!is!realized!or!received!(either!actually!or!constructively!received)!during!
the!taxable!year!!
♣ Such!gain!or!profit!is!not!exempt!under!any!law!or!treaty!!
%
Illustration:!You!purchased!a!parcel!of!land!in!1961!for!1!million.!Today,!its!value!is!100!million.!Do!you!have!an!income?!Do!you!have!a!99!million!
income!that!is!taxable?!!
A.!Parcel!of!Land!
!
! Purchased in 1961 Php 1,000,000.00
!
Today Php 100,000,000.00
!
!
!
• Do!you!consider!Php!99!Million!as!taxable!income!based!on!the!criteria!that!you!have!just!mentioned?!So!it’s!not!taxable!because!it!has!not!
yet!been!sold?!What!if!nobody!buys!the!property?!Will!you!pay!the!tax!on!the!Php99M!if!no!one!is!buying!the!property?!Therefore,!it!is!not!
taxable.!Because!it!failed!to!follow!number!2!criteria.!It’s!not!an!income!that!you!have!realized!or!you!have!received.!
• What!the!difference!from!realizing!and!income!or!receiving?!!
o So!you!own!this!one!and!has!the!power!to!dispose!it,!is!it!not!realizing!an!income?!Not!all!economic!gains!constitute!taxable!income.!
Mere!increase!in!the!value!of!the!property!without!such!value!having!been!actually!realized!does!not!constitute!an!income!but!is!
merely!an!unrealized!income!or!unrealized!gain.!In!this!case,!until!and!unless!you!dispose!of!this!property!and!actually!sell!it!for!the!
value!that!you!expect.!It!is!not!a!realized!income!and!not!being!realized,!with!more!reason!it!is!not!a!received!income.!
o There! is! a! big! difference! between! receiving! an! income! and! realizing! it.! Which! comes! first?! What’s! the! difference! between!
constructive!receipt!of!an!income!and!realizing!it?!You!must!know!what!comprises!of!profit.!The!formula!as!provided!in!your!outline!
is!simple:!
! Proceeds!or!the!revenues!less!the!cost!is!equals!your!gain!or!profit.!So!if!you!were!able!to!sell!it!at!Php!100M!for!a!cost!of!
Php1M,!your!profit!is!Php!99M.!Is!it!taxable!or!not?!Depends!whether!the!income!is!received!or!realized.!
! When!you!say!its!received,!there!are!2!connotations!there:!
• Actual!Receipt!of!Income!
o Example!is!there!is!a!general!professional!partnership!which!you!created,!48!lawyers.!You!decided!that!
at!the!end!of!every!month,!each!of!you!will!get!Php!100,000.00.!That!is!actual!receipt!of!income!when!
you!get!it.!
• Second,!it!could!be!constructive!receipt.!
o It!is!constructive!if!after!distributing!the!Php!100,000!each,!there!still!remains!at!the!end!of!the!year,!
Php! 1B! in! income! of! the! general! professional! partnership.! Even! if! the! share! is! undistributed,! it! is!
considered! constructive! receipt! of! income! in! so! far! as! the! partners! are! concerned! because! it! will! be!
now!taxable!on!the!individual!partners.!It!is!upon!your!free!disposal!to!get!hold!of!your!share!of!the!
Php!1B.!It’s!constructive!receipt.!You!can!get!it!anytime.!It’s!just!that!it!is!not!with!you!yet.!
!
! REALIZED
!
!
! ACTUAL CONSTRUCTIVE
!
!
!
! How!about!realized?!You!say!that!income!is!realized!when!your!right!to!have!it!has!already!ripened!in!simple!words.!!
• Example:!You!have!an!apartment.!You!entered!into!a!contract!of!lease!for!1!year.!All!rents!payable!at!the!end!of!
the! 1! year! contract.! Say! for! example,! you! started! out! the! rent! or! leasing! out! of! your! apartment! July! 1,! 2010.!
Ending!June!30,!2011,!midway!for!the!calendar!year.!At!the!end!of!the!calendar!year,!December!31,!2010.!Are!
you!expected!to!declare!a!taxable!income!from!leasing!your!apartment!as!owner?!YES.!!
• The!mere!fact!that!you!are!able!to!lease!out!6!months!over!12!months,!the!activity!has!been!finished!from!July!1!
to!December!31,!2010,!your!right!to!collect!has!already!ripened.!It!is!already!due.!So!you!should!at!the!end!of!the!
year!declare!it!as!a!realized!income.!!
• So!if!it!taxable!or!not,!should!you!end!there?!If!you!have!answered!whether!it!is!realized!or!received.!Can!you!at!that!point!say!whether!it!is!
taxable! or! not?! Can! you! say! that! after! determining! that! the! income! has! been! realized! or! received,! that! is! already! automatically! subject! to!
income!tax?!Not!yet.!!
o You!may!say!that!it!is!a!realized!income!but!it!is!not!taxable!because!there!is!a!law!exempting!it.!!
! Given! an! example.! Look! into! Section! 32B! on! compensation! for! injuries.! A! bank! for! example,! if! you! have! been! awarded!
moral!and!exemplary!damages!for!physical!injuries!inflicted!upon!you,!will!the!damages!awarded!be!subject!to!income!tax?!
If! you! have! received! Php1M! in! cash?! You! have! been! awarded! moral! and! exemplary! damages! plus! actual! damages.!
Awarded!Php!6M,!received!Php!1M!as!actual!and!Php5M!for!mental!damages.!You!received!it!and!it!was!wired!to!your!
account.! That’s! actual! receipt! because! your! account.! Can! we! now! say! that! this! income! actually! received! is! subject! to!
income!tax?!
!
1 Million ACTUAL
!
Awarded Php 6M
!
5 Million Mental (Moral, Exemplary, etc)
!
!
!
! ANSWER:!In!outline!no.!2,!letter!K!number!4.!It!is!compensation!for!injuries!or!sickness.!This!will!be!exempt!to!income!tax.!
If!you!are!awarded!damages!as!compensation!for!physical!injuries!or!sickness,!the!damages,!whether!it’s!actual!or!moral,!
exemplary,!nominal,!temperate,!liquidated!damages,!are!all!exclusions!from!gross!income.!It!is!not!subject!to!income!tax.!
Despite!the!fact!that!you!have!actually!received!it.!It’s!a!wealth!which!is!given!to!your!hands.!!
• So!you!cannot!exclusively!pick!1!or!2!of!these!criteria.!
o 1.!Determine!whether!there!is!income!or!profit.!Meaning!your!revenues!less!the!cost!to!get!those!revenues,!do!you!have!anet!gain!
or!profit?!
 o 2.!Have!you!realized!the!income?!Or!have!you!received!actually!or!constructively!the!income.!If!yes,!proceed!down!to!the!next.!
o 3.! Is! there! a! law! or! a! tax! treaty! granting! exemption?! If! none,! which! we! always! actually! construe! strictly! against! the! tax! payer! in!
exemption,!if!there!is!none,!proceed!on!to!compute!for!the!income!tax.!
!
H. Kinds!of!Taxable!Income!or!Gain!
1. Capital'gains:'gains'or'income'from'the'sale'or'exchange'of'capital'assets'including:'
a. Income!from!dealings!in!shares!of!stock!of!domestic!corporation!whether!or!not!through!the!stock!exchange!
b. Income!from!dealings!in!real!property!located!in!the!Philippines!and!
c. Income!from!dealings!in!other!capital!assets!other!than!(a)!and!(b).!
2. Ordinary'gains:'gains'or'income'from'the'sale'or'exchange'of'property'which'are'not'capital'assets:'
a. Business!Income!
b. Compensation!Income!
c. Passive!Income!
d. Other!income!from!whatever!source!
• Last!meeting!as!mentioned,!Is!income!tax!always!a!tax!on!income!alone?!No!capital!can!even!be!subjected!to!tax?!Capital!gains.!
Proceeds!–!Cost!=!Income!/!Profit!
!
! Proceeds - Cost = Income/Profit
FT 100Million - 0 = 100Million Taxable
! Parcel of Land 1Million - 5Million = (4Million) Not Taxable
! Siomai Business 1Million - 500K = 500K Taxable
!
!
o If!you!found!Php100M!in!treasures!at!zero!cost,!everything!is!taxable.!
o If!you!have!a!real!property!sold!for!1M,!put!purchased!it!for!Php5M,!you!lost!Php4M,!is!this!transaction!taxable?!
o If!you!have!siomai!business,!at!a!cost!of!Php500k,!taxable.!!
o There!is!an!exemption!to!the!rule!that!income!tax!is!a!tax!on!income!not!tariff.!All!taxes!that!you!!will!see!in!the!chapter!of!income!
tax,!is!income!tax.!Differently!named,!differently!collected.!Meaning!the!mode!of!collection!is!different,!the!manner!of!how!it!is!paid!
is!different.!But!everything!you!see!in!the!chapter!is!an!income!tax.!!
o So!capital!gain!stocks!is!an!income!tax.!It!is!the!exemption!to!the!rule!that!income!tax!is!only!a!tax!on!income!because!in!cases!of!sale!
of!real!properties!classified!as!capital!assets!located!in!the!Philippines,!you!may!be!taxed!on!that!capital.!Capital!is!actually!the!cost.!
You!may!be!taxed!because!it!is!not!dependent!on!the!rule!proceeds!less!cost!equals!profit.!It!is!based!on!the!gross!selling!price!or!fair!
market!value!whichever!is!higher.!!
o If!the!gross!selling!price!is!1M!but!the!fair!market!value!is!Php10M,!then!you!are!taxed!at!Php10M,!a!portion!of!that!Php10M!is!the!
cost!of!Php5M!in!buying!that!property!before!hand.!It!is!the!exemption!to!the!rule!that!income!tax!is!a!tax!on!income.!!
! What!about!capital!asset.!We!said!that!it!must!be!a!capital!asset.!Because!if!this!is!not!a!capital!asset,!it!does!not!become!
subject!to!capital!gain!stock.!!
! We!move!on!to!the!kinds!of!taxable!income!for!gain.!2!kinds:!
• Capital'Gains'
• Ordinary'Gains'
o In! a! car! rental! business,! is! the! car! a! capital! asset! or! an! ordinary! asset?! Because! only! capital! asset!
produces!capital!gains!and!only!ordinary!asset!produces!ordinary!gains.!Why!is!it!an!ordinary!asset?!In!
capital!gains,!be!careful!with!letter!C,!it!is!a!catchMallMprovision,!that!which!is!not!in!A!or!B,!means!all!
rd
others.!So!is!it!in!letter!C?!It!is!under!the!3 !classification!of!an!ordinary!asset,!which!is!used!in!business!
and!subject!to!depreciation.!
!
• (A!short!recap!after!!break)!We!all!know!the!possible!sources!of!income!is.!But!not!all!income!would!be!a!source!of!tax!by!the!government.!
Upon!knowing!that!there!is!a!flow!of!wealth,!following!the!lifeMblood!theory,!it!has!come!upon!you.!Your!next!step!is!to!determine!whether!
you!have!received!the!income!or!realized!it!which!means!the!REALIZATION!TEST,!if!it!is!realized!income!then!it!may!be!taxable.!Then!move!on!
to!the!next,!if!there!is!a!law!exempting!it.!If!none,!proceed!to!subject!it!to!tax.!
o If!there!is!no!income,!no!realized!income,!such!as!the!example!of!Php1M!parcel!of!land!valued!at!Php100M!now,!as!long!as!it!is!not!
sold,!there!is!no!realized!income.!No!tax.!You!can!only!subject!it!to!tax!once!there!is!a!close!and!completed!transaction!of!selling!it,!
bartering!it,!with!something!else.!!
o Now,! it! is! not! enough,! if! you! want! to! move! through! the! formula! above,! it! is! not! enough! to! know! whether! there! is! an! income,!
whether!it!has!been!realized,!whether!there!is!a!law!exempting!it,!we!also!have!to!distinguish!whether!the!income!is!an!ordinary!
income! or! a! capital! income.! Why?! There! are! different! rules! for! taxing! ordinary! income! or! ordinary! gains.! And! there! are! different!
rules!for!capital!gains!or!capital!income.!But!both!for!income!taxation,!even!for!the!bar!is!more!on!ordinary!income.!
! Even!part,!on!corporate!taxation!part!4!of!our!outline,!is!more!on!ordinary!income.!Say!for!letter!A!and!B!in!capital!gains.!
We!will!discuss!capital!gains!after!we!are!done!with!the!3!outlines!for!income!taxation.!
! When!we!start!discussing!individual!and!corporate!taxation,!we!will!be!discussing!together!with!that!capital!gains!A!and!B.!
!
• To!know!what!are!ordinary!gains!and!capital!gains,!we!have!to!know!what!are!those!assets!which!produces!capital!gains!and!what!are!those!
assets!which!produces!ordinary!gains.!!
o What! is! a! capital! asset?! What! is! an! ordinary! asset?! In! Section! 39! of! your! tax! code,! you! will! see! the! negative! definition! of! what! a!
capital!asset!is.!There!is!no!definition!of!what!an!ordinary!asset!is!but!it!is!enumerated!in!Section!39.!It!says!a!capital!asset!is!an!asset!
that!is!not!among!the!following.!So!it!simply!means!that!what!is!enumerating!is!an!ordinary!asset.!If!it!does!not!fall!in!the!ordinary!
 assets,!the!four!categories!of!ordinary!assets,!then!all!else!will!have!to!considered!capital!asset.!What!are!the!four!ordinary!assets,!
we!will!know!what!is!not!covered!by!an!ordinary!asset!is!a!capital!asset:!
o Taxation! for! ordinary! assets! and! ordinary! income! is! much! more! simple! than! capital! assets! and! capital! gains.! But! what! are! the!
ordinary!assets!and!capital!assets?!So!you!will!know!if!the!ordinary!rates!will!apply!or!the!special!rates.!
o Ordinary'assets'are'those'assets'enumerated'in'Section'39,'which'comprises'the'negative'definition'of'what'capital'asset'is.''
! Stock! in! trade! of! the! taxpayer! or! other! property! of! a! kind! which! would! properly! be! included! in! the! inventory! of! the!
taxpayer!if!on!hand!at!the!close!of!the!taxable!year.!Stock!in!trade!or!those!assets!that!remain!as!inventory!at!the!end!of!
the!year!of!the!tax!payer.!So!goods,!merchandise,!inventories.!!
• T:!Inventory!commonly!known!as!the!stocks!if!you!will!look!at!SM!at!the!end!of!the!year,!December!31.!Anything!
remaining!is!the!stock!in!trade!or!inventory!which!is!considered!as!an!ordinary!asset!of!SM.!
! Second,!assets!which!are!primarily!held!for!sale.!
• Example! if! you! are! a! real! estate! company,! house! and! lot! are! considered! assets! primarily! held! for! sale.! It! is!
somewhat!an!inventory!but!bigger!in!a!sense.!
! Third,!are!those!assets!which!are!subjected!to!depreciation!and!use!in!business.!!
• Example,!is!the!example!given!above!on!the!car!rental!business.!The!motor!vehicles!are!assets!used!in!business!
subjected!to!depreciation.!It!depreciates!in!value!as!time!goes!by.!
! Finally,!even!real!property!can!be!considered!as!ordinary!asset!if!used!as!business.!
• A!parcel!of!land!can!be!considered!as!ordinary!asset!if!it!is!used!in!trade!or!business.!Example!if!it!is!where!your!
condominium!unit!is!for!selling!condominium!units!or!condominium!building,!then!that!is!an!ordinary!asset.!If!it!
is!sold,!then!it!calls!for!a!taxation!of!ordinary!gains.!
• Is!a!manufacturing!building!a!capital!asset!or!an!ordinary!asset?!And!if!sold,!will!it!be!subject!to!tax!on!capital!
gains!or!ordinary!gains?!Parcel!of!land!which!the!building!stands,!capital!asset!or!ordinary!asset?!!
o Obnimaga!answers:!Ordinary!asset!for!both.!
o For!all!others,!it!falls!under!capital!assets.!!
! Example,!as!a!student,!if!you!have!a!motor!vehicle,!that!is!a!capital!asset.!Unless!you!use!it!as!a!taxi!cab.!Or!your!house,!as!
long!as!you!are!not!renting!it!out.!Your!rings,!your!jewelries,!etc,!so!long!as!you!are!not!into!jewelry!business.!
! But!majorly,!there!are!3!classes!or!capital!assets!for!taxation!purposes.!
• No.!1!category!is!stocks.!If!you!buy!stocks.!If!you!are!in!stock!trading,!the!stocks!that!you!are!buying!and!selling!
are!capital!assets!unless!you!are!a!broker.!
• No.!2,!real!properties!located!in!the!Philippines!which!are!not!used!for!trade!or!business.!
• No.! 3,! all! others.! It! can! be! as! many! as! 3000,! all! other! assets! not! related! to! business! is! capital! and! we! have! a!
special!taxation!for!that.!!
I. Gross'Income'
1. Inclusions!–!Section!32A!
The!enumeration!is!NOT!EXCLUSIVE.!
Treatment!of!some!special!items:!
a. Forgiveness!of!Indebtedness!
b. Recovery!of!amounts!previously!written!off.!
2. Exclusions!–!Section!32B!
• Gross!Income,!in!Section!32A,!is!all!income!derived!from!whatever!source.!By!the!phrase!whatever!source,!it!means!legal!or!illegal,!whatever!
type!of!income!that!is.!Including!but!not!limited!to!the!following!to!those!enumerated!in!Section!32!(A).!
o Those!list!in!Section!32!in!not!an!all!in!exclusive!list.!There!can!be!as!many!sources!of!income!except!those!enumerated.!What!is!
enumerated!in!Section!32A!is!simply!a!list!of!the!major!items!we!classify!as!income.!
o So!the!simplest!way!is!to!memorize!Section!32B!which!is!exclusions!from!gross!income.!Exclusions!are!a!quick!list!of!what!are!those!!
not! considered! as! income.! We! cannot! consider! Section! 32! as! exclusions! from! gross! income! as! including! but! not! limited! to! the!
following!because!we!cannot!arbitrarily!declare!an!income!as!an!exclusion.!What!is!the!list!as!exclusion!is!an!exclusive!list!according!
to!the!tax!code.!!
o If!you!meet!encounter!a!problem!you!run!through!the!list!of!Section!32B.!If!it!is!not!among!Section!32B!as!an!exclusion,!probably!
that!is!an!inclusion.!But!you!still!have!to!answer!all!those!other!criteria!enumerated!above.!
o Give!an!example!of!income,!part!of!a!business!that!is!taxable!but!not!enumerated!in!Section!32A:!
! 1.'In'outline,'forgiveness'of'an'indebtedness.'
!
! COMPANY A COMPANY B
1 Million
! Creditor Debtor
!
!
• Let’s! illustrate.! 1! million! loan,! Company! A! forgives! the! debt! and! Company! B,! as! debtor! earns! income.! If! the!
reason!for!the!forgiveness!or!condonation!of!debt!is!for!services!that!have!been!performed!or!will!be!performed,!
it!will!be!considered!as!income!subject!to!income!tax!because!it!is!tax!for!compensation!for!service.!!
• But!if!the!reason!for!the!forgiveness!or!condonation!of!debt!is!gratuitous!or!liberal,!it!is!not!subject!to!income!tax!
but!it!is!subject!to!donor’s!tax.!
! 2.'Second'item,'is'recovery'of'amounts'previously'written'off.!(Has!always!come!out!of!the!bar!and!in!review!notes!in!
Manila)!To!be!discussed!in!later!outines.!
! Take!note,!donation!is!an!exclusion!because!it!is!already!to!donor’s!tax.!!
!
J.'Situs'of'Income'
• Exclusions!are!those!types!of!income!that!are!considered!as!income,!profit,!realized,!received!but!because!of!a!provision!of!the!law,!Section!
32b,! they! are! not! considered! as! not! part! to! the! taxable! income.! It! is! not! subject! to! income! tax,! which! is! to! be! discussed! thoroughly! after!
discussing!situs!of!income.!
o Again,!situs!of!income!under!general!principles,!it!is!the!place!of!taxation!where!the!state!has!a!right!to!subject!it!for!taxes!or!it!is!
fully!within!its!taxing!jurisdiction.!
o When!we!proceed!and!have!answered!the!following!criteria:!
! 1.!Is!there!an!income!or!profit?!
! 2.!Is!it!realized!or!received?!
! 3.!Is!there!a!law!exempting!it?!
• If!the!answer!here!is!there!is!no!law!exempting!it,!therefore,!it!is!taxable.!But!it!is!not!complete!at!this!point,!we!
have!to!answer!situs!of!taxation.!
• Where!is!the!situs!is!it!in!the!Philippines?!
• Example,! when! we! are! talking! about! the! nonMresident! foreign! corporation! doing! business! abroad! and! earning!
income!abroad,!are!we!interested!in!the!income?!!
• The!situs!of!income!is!discussed!in!your!outline!according!to!how!it!is!presented!in!Section!32.!Section!32A!is!the!enumeration,!although!not!an!
exclusive!list,!of!what!may!comprise!gross!income.!For!every!income,!let!us!know!whether!it!has!situs!in!the!Philippines!or!not.!!
1. First,'compensation'income,!!
• The!situs!is!the!place!where!the!services!are!rendered.!
! Example,! if! you! are! a! resident! alien! and! you! perform.! If! you! are! Usher! and! perform! a! 1! night! concert! here.! Subject! to!
income!tax?!The!service!is!rendered!in!the!Philippines!or!was!conducted!in!the!Philippine,!therefore!there!is!Situs!in!the!
Philippines.!So!Philippines!has!the!right!to!tax!that!income.!!
! For!compensation!or!any!service!that!you!performed,!always!it!is!where!always!the!service!is!performed.!!
! Same!holds!true!for!example!if!a!Filipino!celebrity!performs!a!concert!abroad,!the!question!of!whether!it!is!taxable!or!not!is!
not!fully!captured!in!this!situs.!The!service!performed!abroad,!will!we!automatically!say!it!is!subject!to!tax!only!abroad?!No!
because!he!is!still!a!national!or!a!resident!of!the!Philippines.!But!for!compensation!per!se!lang,!it!is!where!the!service!is!
rendered.!
2. Gross'Income'from'business.''
• Situs!is!the!place!where!the!business!is!undertaken.!
! Merchandising,!mining,!farming!or!agricultural!business,!the!situs!is!more!stable.!It!has!definite!place,!thus!the!situs!is!
where!the!business!is!undertaken.!Therefore,!it!is!taxable!in!the!Philippines.!We!cannot!bring!the!actual!mining!from!
abroad!here.!It!can!only!be!an!extension!office!which!is!not!the!actual!mining.!!
! Manufacturing!business,!takes!into!consideration!where!the!products!are!manufactured!and!where!the!products!are!
sold.! If! the! products! are! manufactured! here,! sold! here,! entirely! we! have! jurisdiction! over! it.! Everything! is! 100%!
taxable.!!
• If!it!is!manufactured!abroad,!sold!abroad,!we!don’t!tax!it,!it!is!beyond!our!jurisdiction.!
• But! if! it! is! manufactured! abroad,! and! sold! in! the! Philippines,! we! have! the! right! to! tax! it.! The! business! of!
selling!is!here.!!
• If!manufactured!here,!sold!abroad,!we!have!the!right!to!tax!it.!The!situs!is!partly!within!and!partly!without.!
Partly! within! because! the! manufacturing! here! and! if! the! contract! of! sale,! before! it! is! shipped! abroad! is!
perfected!here,!then!we!have!situs!here.!
' 3.'Income'from'Sale'or'Exchange'of'Property.'Distinguish!from!real!or!personal!property'
!
! ! (1)!If!it!involves!personal!property!–!the!place%of%sale!
(2)!In!the!case!of!sale!of!transport!documents!–!the!place%where%the%transport%document%is%sold.%
(3)!If!it!involves!real!property!–!the!place%or%location%of%the%real%property!
!
M For!real!property!in!so!far!as!income!taxation!is!concerned.!It’s!easy.!It!is!immobilized!by!nature!therefore!wherever!the!real!property!is!
situated,! it! is! the! state! exercising! jurisdiction! over! it! which! has! the! power! to! tax.! So! if! it’s! in! the! Philippines! then! it! is! taxable! to! Phil.!
income!tax.!!
M How!about!personal!property?!The!goods!that!cross!boarders?!Will!the!Phil.!have!jurisdiction!over!a!personal!property!that!is!sold!like!
motor!vehicle,!equipments,!machineries?!It’s!not!easy!to!answer!because!it!is!the!place!of!sale.!Where!could!be!the!place!of!sale?!
o For! example:! Company! A! would! like! to! purchase! machineries! and! equipments! from! Japan.! It’s! a! personal! property! that! is!
movable,!where!is!the!place!of!sale?!Is!it!in!Japan!or!in!the!Philippines?!
! It! depends! with! the! arrangement.! If! the! contract! is! perfected! abroad! and! ownership! is! actually! relinquished! at! the!
point!of!delivering!it!to!the!carrier!abroad,!then!the!sale!has!been!consummated!abroad.!But!if!ownership!is!retained!
by! the! seller! until! it! reaches! Philippine! ports! and! if! it’s! consummated! here,! then! the! sale! is! undertaken! in! the!
Philippines,!then!it!will!be!subject!to!Phil.!income!tax.!!
!
! 4.'Interest'Income'
!
! Tax!Situs:!residence%of%the%debtor!!
!
M Interest!Income!is!something!that!cannot!really!be!seen!except!payment!of!money.!!
 o So!if!a!domestic!corporation,!needing!capital!for!its!operations,!obtains!a!loan!from!a!nonMresident!foreign!bank!in!Japan.!Of!
course,!domestic!has!to!pay!the!principal!and!interest.!The!payment!of!principal!or!the!loan!amount!is!mere!return!of!capital!
while!the!payment!of!interest!is!the!income.!There!is!here!a!territorial!boarder.!So!who!has!the!right!to!tax!the!interest,!the!Phil.!
or!Japan?!
! Territorial Border
!
! Bank B
COMPANY A
! Domestic
In Japan (Income Earner)
!
!
! Obtained a loan
!
! Note: INTEREST is the INCOME
! PRINCIPAL is the CAPITAL

!
!
!
! Note:! There! is! a! difference! between! a! domestic! corporation! and! a! Filipino! corporation.! Domestic! is! that! which! is!
incorporated!in!the!Phil.!Filipino!is!at!least!owned!60%!by!Filipinos.!!
! !Phil.!because!the!domestic!corporation,!who!is!the!debtor,!resides!in!the!Phil.!BenefitsMreceived!theory!–!for!the!Phil.!
government!who!have!protected!domestic!corporation!and!allowing!it!to!raise!money!in!order!for!it!to!pay!interest!to!
bank!Japan!abroad,!it!will!have!jurisdiction.!The!situs!is!where!the!debtor!is!residing.!So!no!matter!who!the!creditor!is,!
always,!the!Philippines!has!taxing!jurisdiction!over!such!interest!income.!Remember!that!the!incomeMinterest!earner!
here!is!bank!Japan,!thus,!technically,!it!should!be!Japan!who!will!be!taxing!the!interest!income!because!such!bank!is!
residing!in!Japan!but!because!we!have!our!own!situs!rule!here!in!the!Phil.!which!says!that!any!interest!income!where!
the!debtor!is!a!resident!of!the!Phil.!will!be!covered!by!the!Phil.!taxing!jurisdiction.!Therefore,!the!Phil.!will!also!have!to!
tax!it.!!
! How!will!the!Phil.!government!get!the!tax!of!such!interest!income?!Will!it!require!bank!Japan!to!declare!the!income,!
remit!the!tax!or!some!other!arrangement?!
• For! payments! to! a! nonMresident! foreign! corporation! who! is! not! registered! in! the! Phil.,! it! will! have! to! be!
withheld!by!the!paying!company.!
o So!payments!to!Usher!concert,!will!have!to!be!withheld!by!the!production!team,!before!it!is!given!
to!the!nonMresident!foreign!corporation!as!net.!!
o Such! nonMresident! foreign! corporation! or! individual,! is! not! within! the! hold! of! the! Phil.! tax!
authorities.!They!cannot!be!required!to!actually!pay!because!they!are!not!registered!tax!payers!in!
the!Phil.!!
!
! 5.'Rent'Income'
! Tax!Situs:!place%where%the%property%subject%of%the%contract%of%lease%is%located%
!
! 6.'Royalties'
! Tax!Situs:!place%where%the%intangible%property%is%used%
%
M Royalties!are!fees!you!pay!for!the!use!of!intangible!property!such!as!intellectual!property!rights.!
o Example:! McDonalds! is! originally! a! nonMresident! foreign! corporation! –! the! actual! source.! If! we! obtain! a! franchise! from!
McDonalds,! the! monthly! payment! for! the! franchise! is! called! a! royalty! fee.! So! does! the! Phil.! have! taxing! jurisdiction! over! the!
royalty!income!that!is!remitted!by!a!franchisee!to!the!franchisor!abroad?!
! Yes!since!McDonalds,!the!intangible!property,!is!used!in!the!Phil.!then!it!is!the!Phil.!who!has!taxing!jurisdiction!over!
such!royalty!income.!
o Another! example:! In! manufacturing! companies! wherein! they! have! to! get! technical! knowledge! and! technical! knowMhow! in!
creating! microchips,! etc….! They! have! to! pay! royalty! fees,! let’s! say,! 3%! for! the! annual! revenues! here! in! the! Phil.! so! that! any!
payment!to!the!nonMresident!foreign!corporation!abroad!would!have!to!be!withheld!of!the!tax!because!the!situs!of!the!royalty!
income!is!in!the!Phil.!The!technical!knowMhow!is!exercised!and!being!used!in!the!Phil.!So!although!it!is!intangible,!you!will!see!
the!effects!of!where!it!is!actually!used!and!who!is!benefiting.!!
!
' 7.'Dividend'
! a.!received!from!domestic!corporation!–!income%purely%within%
b.! received! from! foreign! corporation! –! consider! the! income! of! the! foreign! corporation! in! the! Philippines! during! the! last! preceding! 3!
taxable!years:!
(1)!The!income%is%purely%within!if!the!income!derived!from!the!Philippine!sources!is!more!than!85%!
(2)!It!is!purely%without!if!the!proportion!of!its!Phil.!income!to!the!total!income!is!less!than!50%!
(3)!There%should%be%an%allocation!if!it!is!more!than!50%!but!not!exceeding!85%!(partly!within!and!partly!without)!
!
M Dividends!are!company!profits!paid!pro!rata!to!stockholders.!It!is!a!fruit!out!of!the!stockholders’!investment!in!a!corporation.!Dividends!
come!in!many!forms.!
 M Kinds!of!Dividends:!
o Cash!Dividends!–!you!receive!cash!out!of!the!profits!of!the!business!
! Example:!If!you’re!a!10%!owner!of!PLDT,!you!get!10%!out!of!the!entire!dividends!that!will!be!declared!to!the!owner!so!
if!it’s!1B!dividends!then!you!will!get!100M!share!because!you’re!a!10%!owner.!
o !Sometimes! what! the! corporation! gives! if! it’s! not! so! liquid,! meaning! no! cash,! is! property! dividends! –! if! it’s! a! subdivision!
company,!you!may!be!given!a!house!and!lot.!It’s!property!dividend;!it’s!property;!it’s!income!because!it!is!a!wealth!–!it!is!an!
increase!in!your!assets.!
o Sometimes!it!can!be!stock!dividends!
M The!dividend!referred!to!here!is!cash!&/or!property!dividend!because!both!of!them!are!considered!income!while!stock!dividend!is!not!
included!since!stock!dividend!is!not!considered!income!as!a!rule!because!it!is!not!yet!a!realized!income,!it!is!inchoate.!
!
! 10 Years After
! Assets 47Million 100Million
Liabilities 0Million 10Million
!
Net Worth 47Million 90Million = Increased to 43Million
!
!
!
o Illustration:!Tiu!makes!a!corporation.!You!all!contribute!1M!each!so!you!get!47M!since!the!class!consists!of!47!students!and!no!
loans!so!net!worth!is!47M.!But!after!10!years!of!operation,!you’re!assets!became!100M!and!liabilities!10M!so!you!will!have!a!net!
worth!of!90M.!Did!the!net!worth!increase?!Yes!the!net!worth!increase!to!43M.!This!43M!is!your!earnings!from!the!startMup!of!
your!business!and!your!cutMoff!point,!which!is!10!years!of!operation.!You!would!actually!would!want!to!distribute!the!43M!as!
dividends!if!you!have!cash.!Say!for!example,!the!43M!is!in!real!estate!property!(you!invested!it!in!real!estate!valued!at!100M)!so!
you!don’t!have!cash.!What!you!will!do!is!that!you!will!simply!say!that!you’re!ownership!becomes!1.5M!already,!thus,!Tiu!will!
increase!your!investment!from!1M!to!1.5M!to!each!of!you!but!it!is!not!given!in!cash,!it!will!simply!increase!your!investment!in!
the!corporation.!That!is!stock!dividend!–!your!ownership!is!increased!but!nothing!is!given!to!you,!it’s!inchoate.!Until!and!unless!
it! will! be! given! to! you! and! you! have! free! disposal! of! that,! it! remains! a! nonMtaxable! stock! dividend! because! it’s! unrealized!
income.!Who!knows!by!next!year!the!corporation!will!be!losing!so!that!there!is!negative!net!worth.!!
M The!reason!why!dividend!is!taxable!in!the!Phil.!if!it!is!issued!by!a!domestic!corporation!or!paid!by!a!domestic!corporation!without!regard!
to!where!and!who!the!owner!of!the!dividend!is!it’s!because!the!domestic!corporation!receives!protection!from!the!government!such!that!
being! an! intangible! property,! it! does! not! follow! the! general! rule! where! the! domicile! of! the! owner! is! since! it’s! receiving! benefits! and!
protection! from! the! government,! the! Phil.! government! has! the! right! to! fully! tax! a! dividend! that! is! given! by! a! domestic! corporation!
wherever!and!whoever!the!recipient!of!the!dividend!is!(100%).!!
M If!it’s!a!foreign!corporation!abroad!such!as!for!example,!Ms.!Dumagad!owns!a!share!in!a!mining!corporation!in!Africa!and!she!gets!millions!
out!of!it!annually,!the!situs!of!the!dividend!for!Africa!is!where!the!corporation!is!issuing!the!dividend!but!that’s!a!separate!issue!as!to!
being! her! a! resident! citizen.! But! the! point! is,! it! follows! where! the! issuing! corporation! is! except! that! if! a! foreign! corporation! performs!
business!85%!or!more.!Why?!If!its!operation!amounts!to!85%!or!more!located!in!the!Philippines,!it!is!as!if!it!acquired!situs!already!in!the!
Phil.!It!is!receiving,!at!most,!the!benefits!and!protection!from!the!Phil.!government,!therefore,!it!will!have!full!situs!here!in!the!Phil.!But!if!
it’s!less!than!50%!operation!in!the!Phil.,!it!will!have!situs!abroad!where!the!domicile!of!that!foreign!corporation!is.!If!it’s!in!between!50%!
and!85%,!it!is!partly!within!and!partly!without!according!to!the!percentage!of!the!operation!in!the!Phil.!!
!
8.'Annuities'
! Tax!Situs:!place%where%the%contract%was%made% !!
!
! 9.'Prizes'and'Winnings'
! M!given!on!account!of!services!rendered!–!place%where%the%services%were%rendered%
! M!not!given!on!account!of!services!rendered!–!place%where%the%same%was%given%
%
M Winnings!are!those!not!given!on!account!of!services!rendered!while!Prizes!maybe!given!on!account!of!services!rendered!or!not!given!on!
account!of!services!rendered.!
M Every!time!you!receive!something!and!it!is!attached!to!a!service!that!you!have!rendered,!it’s!like!a!compensation!for!services!you!have!
rendered!so!you!back!to!the!first!rule,!a!compensation!given!is!taxable!where!the!service!has!been!rendered.!So!prizes!given!for!services!
rendered!is!taxable!on!the!place!where!such!services!were!rendered!while!prizes!and!winnings!not!for!services!rendered!is!taxable!on!the!
place!where!the!same!was!given.!
o Example:!Let’s!say!Mr.!Pelinio!went!to!the!U.S!on!March!31!and!he!has!his!bet!and!he!won!$100M!lotto!there.!Where!is!the!
situs?!
! The!situs!is!in!the!U.S.!because!Mr.!Pelinio!did!not!render!any!service!so!situs!is!in!the!place!where!the!winnings!was!
given,!which!is!in!this!case,!it!is!in!the!U.S.!
! But! is! it! taxable! in! the! Phil.?! Knowing! where! the! situs! is! does! not! totally! equate! whether! it’s! taxable! or! not.! Is! it!
taxable!in!the!Phil.?!
• Yes,!because!Mr.!Pelinio!is!a!resident!citizen!and!he!is!taxable!for!all!his!income!within!and!without!the!Phil.!!
• So!what!should!Mr.!Pelinio!do!so!that!his!$100M!winnings!will!not!be!subject!to!tax?!
o Mr.!Pelinio!will!not!come!back!for!a!certain!period.!Sec.!22E!of!the!Tax!Code!provides!that!if!you’re!
a!citizen!who!will!qualify!as!nonMresident!because!you!have!stayed!for!the!most!part!of!the!year!
abroad,! meaning! more! than! 183! days! abroad! or! more,! then! all! your! income! abroad! will! not! be!
subject!to!Phil.!income!tax.!So!if!Mr.!Pelinio!will!just!stay!after!winning!plus!183!days!or!more!then!
 you!come!back!after!that,!then!the!winnings!will!not!be!subject!to!Phil.!tax.!So!Mr.!Pelinio!earn!it!
abroad,!for!the!year!he!is!considered!nonMresident!citizen.!!
!
10.'Pension'
Tax!Situs:!place%where%this%may%be%given%on%account%of%services%rendered!
!
M Since!pension!is!something!that!is!more!related!to!a!service!such!as!that!you!have!rendered!in!the!past!and!you’re!given!retirement!or!
pension!pay!then!the!situs!is!the!place!to!where!the!services!were!rendered.!
!
11.'Professional'income'of'professional'partners'
Tax!Situs:!place%where%the%exercise%of%profession%is%undertaken!
!
M Since!it!is!more!on!the!exercise!of!a!profession,!it’s!an!activitiy,!so!it’s!where!the!activity!or!the!profession!is!undertaken.!It!follows!the!
place!where!such!profession!is!exercised.!
!
K.'Exclusions'from'gross'income'
!
M For! all! the! enumerations! in! gross! income! Sec.! 32A,! all! income! from! whatever! including! but! not! limited! to! the! following,! from!
compensation!income!down!to!partner’s!distributive!share,!you!now!know!where!the!situs!is.!But!is!situs!enough!for!you!to!be!able!to!
answer!whether!it’s!taxable!to!Phil.!income!tax?!Not!yet!because!we!have!yet!to!discuss!individual!income!taxation!and!corporate!income!
taxation.!But!at!least!we!now!know!whether!it!has!Phil.!situs!or!not.!
M !But!in!order!to!complete!the!formula,!we!startMoff!with!revenues!or!income!but!there!are!items!which!we!do!not!need!to!include!in!the!
formula!for!income.!We!call!them!exclusions!to!gross!income.!It!is!not!included!in!the!formula!instead!it!is!excluded!from!the!listings!of!
gross!income.!!
!
1.'Proceeds'of'Life'Insurance'Policy'
Subject%to%tax%if:%
a)!Insurer!and!insured!agreed!that!the!amount!of!the!proceeds!shall!be!withheld!by!the!insurer!with!the!obligation!to!pay!interest!in!the!same,!
the!interest!is!the!one!subject!to!tax.!
b)!there!is!transfer!of!the!insurance!policy!
!
M What!is!referred!to!here!is!the!proceeds!of!life!insurance!given!to!the!beneficiary!once!the!insured!dies.!
M Reason:!since!it!is!a!contract!of!indemnity;!not!a!profit!or!gain!
M Proceed!of!life!insurance!policy!is!receivable!by!the!beneficiary,!not!the!insured!one!who!already!died.!Will!it!be!taxable!in!the!hands!of!
the!beneficiary?!
o No,! because! it! is! paid! by! reason! of! death! and! is! considered! an! indemnity! rather! than! a! gain! or! profit! on! those! who! are!
aggrieved.!
!
MR. B
!
President
!
COMPANY A For the life of
!
Domestic
! (Insurer)
! Premium: Insurance Details:
! Worth Beneficiary INCOME TAX ESTATE TAX
! 1. 400,000 1. 1 Million: Beneficiary Company A ! !
2. 400,000 2. 1 Million: Beneficiary Heirs of B ! "
!
!
!
!
!
!
!
!
!
!
!
!
! Example:!Company!A!took!out!a!life!insurance!policy!on!the!life!of!its!President,!Mr.!B,!in!order!to!protect!itself!from!
the!sudden!loss!of!its!chief!operating!officer.!Say!for!example,!there!are!2!life!insurance!policies!taken!by!company!A!
with! different! insurance! companies.! The! insurance! was! for! 1M! each.! The! beneficiary! of! the! first! insurance! policy! is!
Company!A.!The!beneficiary!of!the!second!insurance!policy!is!the!heirs!of!Mr.!B.!Mr.!B!died.!2M!was!released,!one!by!
one! insurance! company! and! the! other! one! by! the! second! insurance! company.! Will! the! 1M! proceeds! received! by!
company!A!be!subject!to!income!tax!or!an!exclusion!to!income!tax?!Will!the!1M!received!by!the!heirs!of!B!subject!to!
income!tax!or!an!exclusion!to!income!tax?!Will!they!be!subject!to!estate!tax?!
 • !For!income!tax,!the!1M!each!received!by!company!A!and!the!heirs!of!B!are!exempted!because!the!provision!
in!Sec.!32B!(1)!does!not!distinguish!the!kind!of!beneficiaries!who!will!receive!the!proceeds!of!a!life!insurance!
policy,! therefore,! proceeds! of! life! insurance! policy,! regardless! of! who! the! beneficiary! is! (whether! it! be! a!
juridical!or!natural!person),!as!a!rule,!are!exempted!from!income!tax!or!excluded!from!gross!income.!!
• !Let’s!say,!company!A!has!to!pay!a!total!of!400,000!premiums!for!each!policy.!Will!the!premiums!be!part!of!
the!compensation!or!salary!on!the!part!of!Mr.!B!who!is!actually!indirectly!benefited!(his!life!is!insured)!and!
thus!subject!to!income!tax?!
o For! the! 400,000! premiums! paid! by! company! A! in! order! to! secure! the! second! insurance! policy!
wherein!the!beneficiary!is!the!heirs!of!Mr.!B,!such!premiums!are!subject!to!income!tax!for!they!
form!part!of!Mr.!B’s!salary!as!an!indirect!benefit!on!Mr.!B’s!part.!So!the!400,000!premiums!for!the!
second! insurance! policy! is! subject! to! the! tax! on! Mr.! B’s! salary.! However,! for! the! 400,000!
premiums!paid!by!company!A!in!order!to!secure!the!first!insurance!policy!wherein!the!beneficiary!
is!company!A!itself,!such!premiums!is!not!subject!to!tax!because!it!is!merely!a!return!on!capital!of!
company!A.!Therefore,!it’s!not!subject!to!tax!on!the!part!of!Mr.!B’s!salary.!!
• The! 1M! received! by! company! A! will! never! form! part! of! the! estate! of! Mr.! B! and! a! juridical! person! has! no!
estate,!thus!it!is!not!subject!to!estate!tax.!However,!the!1M!received!by!the!heirs!of!B!will!form!part!of!the!
estate!of!B,!and!thus,!it!may!be!subject!to!estate!tax.!But!can!estate!tax!and!income!tax!coMexist!in!one!and!
the!same!1M?!
o No,!because!in!exclusions!from!gross!income,!once!an!income!is!subject!to!estate!tax,!it!will!never!
be!subject!to!income!tax.!
• But! if! there! is! a! third! person,! let’s! say,! in! the! life! insurance! policy,! C,! a! very! close! friend! of! Mr.! B,! was!
designated!as!a!beneficiary.!Will!the!proceeds!received!by!C!upon!B’s!death!form!part!of!the!estate!of!B?!
o If! the! designation! is! revocable,! which! is! the! default,! it! goes! to! the! estate! of! B,! thus! it! will! be!
subject!to!estate!tax.!If!the!designation!is!irrevocable,!it!will!never!form!part!of!the!estate!of!B,!
thus!it!will!not!be!subject!to!estate!tax.!
!
!
July!20,!2010!
!
Transcription!from!room!403!for!July!24,!2010!class!
We’re!now!with!exclusions!from!gross!income.!
The!enumeration!sec32b!are!substantive!exclusion!from!gross!income.!So!it!is!by!law!an!exclusion!regardless!of!the!point!of!realization.!!
!
There!is!what!we!call!a!temporary!exclusion!from!gross!income.!
The!word!temporary!means!that!in!some!point!in!time,!the!income!is!excluded!from!the!gross!income!because!either!it!has!not!been!realized!or!it!
has!not!yet!been!perfected.!
Ex.!although!there!is!a!gain!or!profit,!so!long!as!it!has!not!yet!been!realized,!it!is!not!a!taxable!income!as!yet.!It!is!excluded.!!
! But!once!it!is!realized,!it!ripens!into!an!income!that!is!taxable.!
Those!are!the!types!of!income!that!is!listed!in!32b.!
!
Those!that!are!listed!in!32b!whether!it!is!received,!realized,!unrealized,!etc,!these!are!already!exclusions!from!gross!income.!
And!we!started!off!discussing!number!1!last!meeting.!
!
PROCEEDS!FROM!LIFE!INSURANCE!
What!is!the!reason!why!proceeds!from!life!insurance!are!excluded?!
! It!is!to!indemnify!the!beneficiary!of!the!death!of!the!person.!
!
So!there!must!be!somebody!who!will!die?!
! Yes.!
!
There! are! insurance! policies! which! are! life! insurance! policies! but! are! the! other! type.! At! the! point! of! maturity! of! that! insurance! policy,! even! life!
insurance!policy,!the!insured!has!the!option!of!receiving!the!proceeds!from!the!insurance!company.!Is!that!the!same!type!that!is!not!taxable?!
To!be!totally!free!from!income!tax,!the!proceeds!of!the!life!insurance!policy!must!result!to!the!death!of!the!insured?!
True!or!False.!The!proceeds!from!life!insurance!policy!regardless!of!the!designated!beneficiary!is!not!subject!to!income!tax.!
! False.!
! As!an!exception!to!the!rule,!if!and!when!the!insurance!proceeds!are!withheld!by!the!insurance!company!on!the!condition!that!interest!will!be!paid!
upon! release,! the! interest! or! any! income! derived! from! the! withholding,! meaning! the! point! of! not! yet! releasing! the! insurance! proceeds! will! be!
subject!to!income!tax.!It!is!already!an!income!of!insurance!proceeds.!
!
But!the!life!insurance!proceeds,!the!reason!why!it’s!not!subject!to!income!tax!or!is!an!exclusion!from!gross!income!is!because!it’s!simply!a!payment!
or!an!indemnity!for!a!loss!or!a!death!of!a!person.!
We!are!looking!here!at!somebody!who!died.!The!person!who!is!insured!will!never!get!the!chance!to!receive!the!insurance!proceeds.!
Otherwise,!if!he!does!so!receive!it,!it!will!only!be!covered!by!exclusion!number!2.!
!
We!have!another!exception!to!the!rule!why!it!is!false.!
Since!we!are!talking!about!exception!to!the!rule,!this!means!to!say!that!there!will!be!tax!implication!or!some!form!of!taxes!that!needs!to!be!paid.!
!
Just! like! number! 1,! we! said! any! interest! derived! from! withholding! the! release! of! the! life! insurance! proceeds! is! already! an! inclusion! from! gross!
income!which!is!taxable.!
!
Second'exception'is'when'there'is'a'transfer'to'life'insurance'policy.''
What!do!you!mean!by!that!one?!
If!an!insurance!policy!is!subsequently!sold!or!transferred!to!another!person,!what!will!happen!is!that!any!difference!between!the!amount!paid!to!
get!the!insurance!policy!versus!the!proceeds!will!already!be!subject!to!income!tax.!!
!
Ex.!if!the!face!value!of!the!insurance!policy!is!10m!and!you!are!required!to!pay!5m!in!premiums!over!a!period!of!5!years,!that!means!to!say!over!five!
years!you!have!to!pay!1m!per!year.!
! And!it!will!produce!face!value!or!face!amount!of!10m.!So!half!diba?!
!
! If!along!the!way,!second!year!of!the!insurance!policy,!you!have!already!paid!2m,!and!you!sell!it!to!your!friend!for!3m,!how!much!is!your!friend!
going!to!pay!to!the!insurance!company!to!finish!off!the!policy?!
! 3m!pa!diba.!!
!
! Because!the!seller!sold!it!at!a!point!after!the!point!of!paying!the!premium!which!is!2m.!
!
! Although!the!seller!paid!2m!in!premiums!but!sold!it!for!3m,!transfree!paid!3m!to!seller!and!3m!remaining!premiums!since!the!insurance!company!
is!expected!to!receive!total!of!5m.!
!
! How!much!did!the!buyer!paid!for!the!contract?!
! 6m!
!
! If!he!receives!the!insurance!policy!face!value!of!10m,!is!the!10m!exclusion!from!gross!income?!
! Not!anymore!because!it!is!an!exception!to!the!rule.!!
!
! Therefore,!is!10m!taxable?!
!
! The!insurance!policy!has!a!face!value!of!10m.!How!much!do!you!expect!to!receive!upon!maturity!or!upon!death?!
! 10m!
!
! But!you!don’t!pay!10m!premiums!just!to!get!the!face!value!of!10m.!Otherwise!there’s!no!sense!of!getting!the!insurance!policy.!
!!
! So!if!the!insurance!policy!says!5m!of!premiums!in!5!years,!that!means!to!say!1m!per!year.!
!!
! If!the!first!insured!sells!it!for!3m!after!paying!2m,!the!buyer!actually!has!a!capital!of!3m.!If!he!decides!to!finish!by!paying!off!the!remaining!3m!
which!is!unpaid,!he!actually!paid!for!6m.!
! So!if!the!beneficiary!receives!the!10m!in!proceeds,!this!is!not!anymore!covered!in!the!exclusion!number!1!because!there!is!already!a!subsequent!
transfer!of!the!policy.!
!
! But!the!entire!10m!is!not!taxable!because!we!also!have!to!apply!the!exclusion!number!two!which!says!that!if!the!part!of!the!proceeds!is!a!return!
on!premium!payments!or!cost,!then!it!has!to!be!exclusion!from!gross!income!or!nontaxable.!
!
! How!much!of!the!10m!is!premium!and!cost?!
! The!3m!and!3m=6m!
!
! So!only!4m!is!taxable!in!the!hands!of!the!recipient.!
!
So!again,!true!or!false.!All!proceeds!from!the!life!insurance!policy!regardless!of!the!designated!beneficiary!is!not!subject!to!income!tax.!
! FALSE.!
! Because!not!all!proceeds!will!have!to!be,!except!if!it!falls!under!the!exception!1!and!2.!
!
The!statement!‘regardless!of!the!beneficiary’,!is!that!correct?!
! Yes.!!
!
So!would!the!designation!of!the!beneficiary!matter!insofar!as!considering!the!income!as!exclusion?!
! No.!Whoever!is!the!beneficiary!of!the!life!insurance!proceeds!would!enjoy!the!exemption!from!income!tax!because!the!law!does!not!distinguish.!
!
But!it!does!not!mean!to!say!that!if!the!proceeds!or!life!insurance!proceeds!is!an!exclusion!from!life!insurance!program,!totally!there!would!be!no!
other!tax!applicable.!
!
What!are!the!applicable!tax,!just!in!case?!Let’s!talk!about!the!beneficiary.!
!
Life!insurance!proceeds;!if!the!beneficiary!is!any!of!the!relations!of!the!insured:!heirs,!estate,!administrator!executive,!is!it!subject!to!income!tax?!
! Is!it!an!inclusion!to!gross!income?!
! Yes.!Therefore!it!is!not!subject!to!tax.!
!
!
If! the! beneficiary! is! a! third! person! other! than! those! related! to! the! estate! of! the! decedent! or! the! insured;! ex.! the! company! who! took! the! life!
insurance!policy!of!the!insured!or!any!other!friend,!would!it!be!an!exclusion!from!gross!income!of!the!beneficiary?!
! Is!the!recipient!beneficiary!be!subject!to!income!tax!or!would!that!life!insurance!proceeds!be!part!of!his!gross!income?!
! It!is!one!of!the!exclusions!because!it’s!regardless!of!who!the!beneficiary!is.!
!
It’s!no!longer!taxable!insofar!as!the!beneficiary!whether!he!is!beneficiary!class!number!and!number!2;!he!is!not!required!to!pay!income!tax!on!the!
proceeds.!
!
But!would!the!estate!of!the!decedent!be!liable!for!estate!tax!by!the!mere!transfer?!Or!would!it!be!liable!for!estate!tax!because!it!is!part!of!his!estate!
upon!death?!
! Yes.!Because!if!the!beneficiary!is!the!estate!itself,!then!it!goes!to!the!estate.!If!the!heirs,!it!goes!still!to!the!estate.!If!the!executor!or!administrator,!
it!goes!still!to!the!estate.!
! Therefore!it!just!goes!to!show!that!it’s!part!of!the!property!of!the!decedent!upon!death.!
!
! Remember!estate!taxation!is!taxing!the!decedent!on!all!properties!existing!at!the!point!of!death.!
!
How!about!life!insurance!proceeds,!when!does!it!accrue?!
! Upon!death!of!the!insured.!
!
Beneficiaries!would!not!have!to!pay!the!income!tax!but!the!estate!itself!is!liable!for!estate!tax.!
!
! Remember!an!estate!if!the!decedent!is!a!separate!entity.!It’s!an!individual!for!tax!purposes.!
!
!
If!the!beneficiary!is!a!third!person;!the!company!who!took!the!insurance!policy,!a!friend,!a!relative!who!is!not!near!the!heirs,!is!the!estate!liable?!
! At!the!point!of!computing!the!estate!tax,!will!the!BIR!include!the!proceeds!as!part!of!the!estate!and!be!liable!for!estate!tax?!
Mr.!A,!the!insured!is!the!president!of!company!B!who!took!out!the!insurance!company!in!favor!of!the!prior.!
There!are!two!scenarios.!!
One,!beneficiary!is!in!relation!of!Mr.!A!which!can!be!the!estate!of!Mr.!A!itself,!heir,!administrator!or!executor.!
Second!scenario!is!the!company!made!itself!the!beneficiary.!
Insofar!as!recipient!beneficiary!is!concerned,!we!don’t!have!any!problem.!It’s!never!subject!to!income!tax.!
But!how!about!estate!tax?!
Will!it!be!subject!to!estate!tax!if!the!beneficiary!of!the!policy!is!the!third!person,!the!company!itself?!
! NO.!
! Because!ownership!of!the!proceeds!belongs!to!the!company!who!is!not!part!of!the!estate!of!the!decedent.!
! Therefore!it!is!not!subject!to!the!estate!tax.!
! Estate!tax!refers!only!to!the!estate!of!the!dead!person.!
!
! And!if!it’s!now!the!ownership!of!the!company!who!has!designated!itself!as!the!beneficiary,!of!course!you!do!not!coMmingle!the!company!with!the!
estate.!
!
! So!there!is!the!irrevocable!designation!of!the!company!as!the!beneficiary,!no!way!is!it!subject!to!income!tax.!
!
! But!if!in!default,!the!company!is!the!designated!beneficiary,!then!it!is.!
! And!what!is!default!of!insurance!policy?!!
! The!designation!is!revocable.!
!
! Only!if!the!designated!beneficiary!is!irrevocably!designated!that!it!not!belong!to!the!estate!of!the!decedent.!
!
! So!as!a!general!rule,!you!will!see!that!majority,!it!will!always!form!part!of!the!estate!of!the!decedent,!relations!or!third!party!revocably!designated.!
!
! It!will!only!be!excluded!from!the!estate!of!the!decedent!if!it!is!irrevocably!designated.!And!irrevocable!designation!must!be!clear!from!the!policy!
itself.!Otherwise,!default!is!revocable.!
!
!
th
Mr.A!took!out!a!life!insurance!policy!wherein!the!terms!of!the!contract!is!10!years!payment!of!premium!and!on!the!20 ,!it!will!mature.!
! If!he!outlives!the!policy!he!gets!the!insurance!proceeds.!!
! If!he!dies!before!the!20!year!period,!his!beneficiaries!or!heirs!will!get!the!life!insurance!proceeds.!
! What!is!the!tax!if!he!outlives!the!policy!and!if!he!has!not?!
! If! he! outlives! the! policy,! meaning! he! himself! outlives! the! policy,! it! will! be! taxable! except! for! the! portion! which! represents! the! return! of! the!
premium!payments!that!he!has!made.!
!
th
! If!he!gets!100m!after!outliving!the!policy!after!it!has!matured!on!the!20 !year,!and!by!computation!he!was!only!able!to!pay!5m!in!premiums,!then!
the!95m!difference!will!have!to!be!declared!as!part!of!his!gross!income!taxable!to!32%.!
!!
! If!he!dies!before!maturity!of!the!policy,!then!we!will!follow!exclusion!number!1.!
!
!
!
!
!
!
Let’s!go!to!exclusion!number!3.!
ITEMS!ALREADY!COVERED!BY!DONOR’S!TAXATION!AND!ESTATE!TAXATION!
!
Why!is!it!excluded!from!gross!income?!
If! X! gives! a! gift! to! D,! who! is! subject! to! tax?! What! tax?!
X,!for!donor’s!tax.!
!
Will!D!be!liable!for!tax!on!the!amount!received?!
! No.!
!
The!taxability!of!income!tax!would!have!to!be!on!the!part!of!recipient.!
The!taxability!of!donor’s!tax!would!have!to!be!on!the!part!of!the!donor.!
!
So!there!are!2!exceptions!to!the!rule!that!gifts!are!not!subject!to!income!tax!because!they!are!exclusions!from!gross!income:!
1.!any!income!or!fruit!derived!from!the!gift!is!not!covered!by!the!exclusion.!It’s!subject!to!income!tax.!
! Naturally.! It’s! like! exclusion! number! 1,! if! life! insurance! proceeds! is! withheld! and! it! bears! interest,! the! interest! as! a! fruit! will! have! to! be!
subjected!to!income!tax.!
2.!if!you!require!the!done!to!perform!some!services!in!exchange!for!the!gift.!
! ! Who!here!will!be!taxable?!
!!
! Whichever!way,!the!amount!given!is!always!subject!to!tax.!
! It!might!be!on!his!part,!if!it’s!purely!gratuitous,!the!entire!donation!will!be!subject!to!donor’s!tax.!
! If!it’s!for!compensation!as!a!whole!because!services!are!to!be!performed,!he!will!be!free!from!taxes!but!the!done!will!be!taxed!for!income.!
! If!it’s!halfMhalf!or!partly,!the!donor!will!pay!the!donor’s!tax!and!the!done!will!pay!the!income!tax.!
!
!
Next!exclusion!is.!
COMPENSATION!FOR!INJURIES!AND!SICKNESS.!
What!injury!are!we!talking!about?!
Would!all!types!of!injury!be!covered!in!the!exclusion?!
What!type!of!compensation!do!you!get!out!of!a!physical!injury!case?!
What!are!the!sources!wherein!you!derive!compensation!for!physical!injury?!
Compensation!for!injuries,!do!you!agree!that!it!refers!only!to!physical!injuries?!
!
! As!discussed!by!some!of!the!authors,!when!you!say!compensation!for!sickness!and!injuries,!it!would!have!to!refer!to!physical!injuries!and!sickness.!
!
!
! And!when!you!say!compensation!for!physical!injuries,!it’s!related!to!sickness.!You!have!to!take!it!with!the!other.!
!
! The!law!itself!says!that,!for!compensation!maybe!by!virtue!of!a!suit!or!a!case!or!paid!by!virtue!of!a!health!insurance,!personal!heath!insurance,!
accident!insurance,!and!workman’s!compensation!act.!
! It!simply!boils!down!with!there!being!something!wrong!with!the!physical!body!or!physical!disability.!
!
!
Would!the!damages!received!as!part!of!the!compensation!for!injuries!and!sickness!be!subject!to!income!tax?!
! No.!It’s!not!subject!to!income!tax!because!it!is!derived!not!from!labor,!capital,!labor!or!capital!and!properties.!
!
And!again,!its!exclusion!is!not!stemmed!from!the!other!laws!but!because!of!this!32b!which!actually!says!that!any!compensation!received!including!
damages!on!account!of!such!injury!or!sickness!is!not!part!of!the!gross!income!subject!to!income!tax.!
!
The!only!gray!area!there!is!the!compensation!for!loss!for!future!earnings.!
! If!you!have!studied!torts,!somewhere!along!the!way!you!will!come!across!SC!granting!compensation!for!the!loss!of!the!future!earnings!which!could!
have!been!derived!by!the!person!who!met!the!accident.!
!
So!whatever!is!derived!from!that;!EX.!if!the!dead!or!injured!is!expected!to!receive!50k!a!month!times!the!number!of!years!of!his!life!expectancy.!
That!will!be!awarded!by!SC.!
!
As!to!whether!it!is!taxable!or!not,!there!are!conflicting!views.!
! Some!of!the!authors!would!say!that!it!is!subject!to!income!tax!because!it!is!compensation!for!future!services!which!could!have!been!rendered.!
!
! But!some!of!the!authors!would!also!say!that!it!is!not!subject!to!income!tax!because!it!is!part!of!the!compensation!for!the!injury!or!sickness.!
!
! We!can!say!that!it!is!not!taxable.!
! We!use!the!word!compensation.!And!it!means!all!types!of!awards!given!by!either!the!SC!or!insurance!companies.!
!
!
!
INCOME!EXEPMT!UNDER!TREATY!
Since!the!doctrine!of!incorporation,!any!agreement!we!have!entered!into!with!the!other!countries!that!there!are!exemption!to!be!granted!to!the!
taxpayers!earning!income!here,!the!principle!of!reciprocity!will!be!respected.!
! We!consider!those!as!exclusions!from!gross!income.!
!
But!mind!you,!this!is!not!even!self!executing.!Whatever!the!provisions!of!the!tax!treaties!are,!we!have!to!seek!confirmation!from!the!national!office!
of!the!bureau!of!internal!revenue!in!Quezon!City.!
! Otherwise,!if!we!don’t!seek!for!a!confirmation!ruling,!even!if!you’re!situation!falls!squarely!with!what!the!treaty!provides,!you!will!not!be!allowed!
to!avail!of!the!exemption!or!the!preferential!treatment!of!the!treaty.!
!
So!again,!it’s!like!lifeblood!doctrine!that!in!construing!exemptions,!it!has!to!be!strictly!construed!against!the!tax!payer.!
!
!
RETIREMENT!BENEFITS!
What!retirement!benefits!are!subject!to!tax?!
! 1.!If!it!falls!under!RA!7641!which!actually!is!part!of!the!labor!code,!art!287!on!retirement!benefits.!
! 2.!If!it!is!part!of!the!private!retirement!fund.!
!
So,!what!are!the!conditions!for!excluding!from!income!the!benefits!received!under!retirement!benefits!plan?!
1.!recipient!must!be!at!least!50!years!old!
2.!at!least!10!years!of!services!
3.!retirement!plan!is!reasonable!
4.!in!nature!of!pension,!stock!option!or!profit!sharing!
5.!availed!once!
6.!approved!by!BIR!
7.!employer!must!contribute!and!for!the!common!benefit!!
!
!
How!many!situations!are!the!in!6a,!how!many!retirement!benefits!are!we!referring?!
!
If!you!are!48!years!old!and!you!have!rendered!48!years!with!the!company,!can!you!retire!with!the!retirement!pay!tax!free?!
If!you!retire!at!the!age!of!51!and!have!rendered!8!years!of!service,!can!you!retire!tax!free?!
Should!both!(age,!years!of!service)!requirements!co!exist!in!all!cases?!
This!matters.!Because!most!of!the!companies!I!know,!most!of!the!employees!will!wait!until!the!point!that!they!can!get!the!retirement!benefit!free!
of!tax.!Otherwise!they!will!have!to!pay!30%.!
When!can!you!say!that!60!year!old!rule!will!apply!rather!than!the!50!year!old!rule?!Can!both!requirement!co!exist?!
! Can!we!expect!the!two!types!of!benefits!under!the!7641!and!the!reasonable!retirement!benefit!plan!to!be!applied!in!one!and!the!same!company?!
! So!that!some!can!retire!at!60!tax!free!while!others!can!retire!at!50?!
After!break.!
!
Would!the!two!situations!mentioned!before!co!exist!in!one!company?!
!
This!rule!is!under!the!tax!code!–!reasonable!private!benefit!plan.!!
! If!the!company!sets!up!a!reasonable!retirement!benefit!plan,!retirements!for!it!to!be!exempt!from!tax!must!be!by!a!person!at!least!50!years!old,!
having!rendered!service!for!at!least!10!years!and!it!is!his!first!availment!of!retirement.!
!
When!will!the!60!year!old,!5!years!of!service!apply?!
! In!the!absence!of!a!reasonable!private!benefit!plan!established!by!the!company,!
! In!the!absence!of!collective!bargaining!agreement,!
! In!the!absence!of!the!employment!contract!designating!when!the!retirement!is.!
!
! So!it!is!a!catch!all!rule.!
!
! If!there!is!no!reasonable!private!benefit!plan,!there!is!no!collective!bargaining!agreement,!no!employment!contract,!no!other!agreement!entered!
into!by!the!employee!and!employer,!then!use!this.!
! He!gets!to!retire!tax!free!at!the!age!of!60,!having!rendered!five!years!of!service.!
!
! But! in! more! cases! than! not,! companies,! since! they! are! encouraged! to! establish! a! reasonable! retirement! benefit! plan,! then! the! default! is! the!
retiree!should!at!least!be!50!years!old!with!at!least!10!years!of!service.!
!
!
So!if!there!is!a!reasonable!private!benefit!plan,!to!be!tax!free,!it!should!be:!
! 1.!duly!approved!by!the!BIR!
! 2.!gratuity!plan!
! 3.!employer!established!the!fund,!contributing!to!the!fund!itself!
! 4.!fund!will!be!for!the!sole!benefit!of!employees!
!
What!are!the!requirement!of!private!benefit!plan’s!proceeds!to!be!tax!free?!!
! 1.!employee!is!at!least!50!years!old!
! 2.!has!rendered!at!least!!
! 3.!first!availment!of!retirement!!
!
For!you!to!be!exempt,!not!only!must!you!be!at!least!50!years!old!and!had!at!least!10!years!of!service.!It!must!be!the!first!time!that!you!have!availed!
of!a!tax!free!retirement,!exclusive!of!the!government!retirement.!
!
! Of!course!if!it’s!a!government!retirement,!it’s!totally!tax!free.!
!
So!in!this!case,!for!example,!you!have!reached!50!years!old!and!have!rendered!5!years!of!service!with!company!A.!This!is!the!first!time!you!have!
availed!of!the!retirement.!
! Are!you!tax!free?!
! Yes.!
!
Then!you!got!yourself!hired!with!the!government!at!age!51.!You!rendered!10!years!of!service!with!the!government!and!retired!at!the!age!of!60.!Is!
the!retirement!pay!that!you!will!receive!from!the!government!exempt!from!tax?!
! No.!
!
The!rule!is!to!exclude!retirements!from!government.!
So!if!the!second!retirement!is!from!the!government!institution,!it!will!have!to!be!exempt!from!tax.!
!
But!if!your!second!retirement!after!you!first!private!institution!retirement,!is!still!with!another!private!institution,!regardless!of!how!old!you!are,!it!
is!already!taxable.!
!
! Even!if!you!rely!on!the!law!itself,!it!says!there!–!retirement!benefit!plan!of!a!private!institution!or!private!corporation!
! So!if!it’s!not!a!private!institution,!it’s!government,!it’s!not!availing!twice!with!the!private.!
!
! So!if!it’s!privateMgovernment,!both!are!exempt.!
! If!it’s!privateMprivate,!that!is!taxable.!
!
!
This!will!apply!if!there!is!a!reasonable!private!benefit!plan.!
Let!us!say!there!is!no!private!benefit!plan.!A!collective!bargaining!agreement!is!in!effect.!And!it!says!that!an!employee!can!retire!at!the!age!of!60!or!
after!rendering!20!years!of!service.!
! A,!40!years!old,!wants!to!retire!after!rendering!21!years!of!service.!
! Taxable!or!not?!
! Not!taxable.!
!
Another!case,!no!collective!bargaining!agreement,!no!employment!policy,!no!reasonable!private!benefit!plan.!!!
! A,!60!years!old,!wants!to!retire!after!rendering!4!years!of!service!in!the!company.!
! Taxable!or!not?!
! Taxable.!
!
There’s!an!existing!retirement!benefit!plan,!50!years!old,!ten!years!of!service.!!
! Taxable!or!not?!
! Not!taxable!
!
You!always!consider!if!there!is!an!existing!retirement!benefit!plan!with!the!company.!Because!the!law!says;!retirement!benefits!derived!are!exempt!
if!it’s!derived!from!RA!7641!or!a!reasonable!private!benefit!plan!RPBP.!
! But!the!law!also!says!that!for!the!benefits!derived!in!RPBP!would!only!be!exempt!if!it!satisfies!the!requirements:!50!years!!old,!!10!years!of!service,!
and!first!availment!of!in!a!private!institution.!Well!of!course!the!RPBP!would!also!be!duly!approved!with!all!the!requirements.!
!
But!would!that!10!yearsM!50!years!old!apply!to!7641?!
! No.!because!this!is!a!different!law.!This!is!the!tax!code!itself.!
!
If!there!is!no!retirement!benefit!plan,!you!have!to!apply!the!retirement!benefits!derived!from!7641.!!
!
But!7641!is!not!exclusive!to!60!years!old!or!5!years.!
It!says!that!it!will!only!be!applicable!if!there!is!no!CBA,!employer!policy,!etc..!
!
Now!if!there!is!a!CBA,!do!not!use!this!as!yet.!
!
If!the!CBA!says!you!can!retire!at!the!age!of!60!plus!20!years!of!service,!then!it!must!be!PLUS.!Both!conditions!must!exist.!
!
If!the!CBA!says!60!years!old!or!more!than!20!years!of!service,!if!you!can!satisfy!just!1,!then!it!is!exempt.!!
!
So!long!as!the!CBA!is!not!more!burdensome!than!the!60M5!year!rule.!
! It!says!in!641,!any!CBA!or!policy!that!is!not!more!burdensome!than!the!60M5!year!rule!can!be!acceptable.!
!
The!60M5!year!rule!will!be!applied!if!there!are!no!agreements!existing.!
!
So!in!the!case!of!60!years!old!or!at!least!20!years!of!service,!and!the!employee!has!been!working!for!21!years,!this!is!exempt.!Because!the!CBA!says!
OR.!So!even!if!you!are!still!young!at!the!age!of!40,!you!can!still!retire!if!you!have!rendered!at!least!20!.!
!
!
**If!there!is!a!CBA!and!RPBP!at!the!same!time,!it!has!to!be!well!defined!in!the!CBA!to!whom!and!to!what!extent!it!will!be!applied.!
! I!don’t!really!know!if!it!can!coMexist!!
!
But!in!this!ruling!in!BIR,!an!employee!retired!at!less!than!50,!and!rendered!21!years!of!service.!His!retirement!benefits!are!granted!with!exempt!by!
BIR.!Why?!!
! Because!the!CBA!itself!which!is!duly!approved,!says!than!employee!may!be!retired!at!the!option!of!the!company!upon!reaching!the!age!of!60!years!
or!upon!having!completed!more!than!20!years!of!service.!
!
So!it!can!even!be!more!than!10!years!of!service.!At!the!age!of!30!he!can!retire.!And!that!is!exempt.!
But!then!again,!if!you!get!yourself!rehired!in!a!private!institution,!and!you!get!again!your!retirement,!that!is!taxable!na.!
!
!
You!retired!and!got!the!retirement!pay!of!10m.!Because!of!your!excellent!service,!you!receive!a!gratuity!pay!of!4m.!Plus!15!days!of!work,!50k.!Your!
vacation!leave!!and!sick!leave!credits!that!have!not!been!used!are!500k!and!500k!respectively.!You!are!50!years!old!with!10!years!of!service.!
! In!total,!you!receive!15,050k.!
! Which!of!the!items!are!subject!to!tax!if!the!you!are!under!the!RPBP?!
If!the!company!has!a!retirement!fund,!and!you!retire,!your!retirement!pay!will!not!be!taken!out!of!the!retirement!funds.!It!will!be!taken!out!from!a!
plan,!which!plan!is!a!separate!entity!itself.!It!is!usually!handled!by!insurance!companies!or!banks.!
If!you!did!your!job!well,!you!can!be!given!gratuity!pay!which!is!outside!of!the!fund.!It!is!bonus!
! Is!the!gratuity!pay!subject!to!tax?!
! No.!
!
Is!the!50k!taxable?!
! Yes!because!it!is!compensation!for!the!service!rendered.!
!
How!about!the!leave!credits?!
! If!you!work!and!you!are!given!vacation!leave!and!you!don’t!utilize!them,!in!some!companies!it!can!be!converted!to!cash!and!can!be!accumulated!
for!as!long!as!you!want.!
! Are!they!subject!to!tax?!
! No.!
!
If!you!have!plans!of!retiring,!do!not!compute!or!convert!your!leave!credits!before!retiring.!Because!usually!if!you!convert!your!leave!credits!on!a!
regular!basis!without!being!connected!to!any!retirement,!they!are!taxable!in!excess!of!ten!days.!
!
But!if!you!retire!and!it’s!the!only!time!that!you!convert!all!leave!credits,!it!becomes!a!terminal!leave!pay,!everything!is!taxable.!
!
Everything!given!during!retirement!if!your!retirement!is!qualified,!tax!free,!is!exempt.!
! So!even!the!gratuity!pay!is!not!taxable.!
! Only!the!15!day!salary!is!taxable.!
! But!all!the!rest,!retirement!pay,!bonuses,!gratuity!pay,!leave!credits,!whatever!it!is!named,!basta!lang!the!basic!is!exempt,!everything!that!follows!
will!also!be!exempt.!
!
!
SEPARATION!PAY!
Separation!pay.!Is!it!subject!to!tax?!What!are!the!rules!for!it!to!be!exempt!from!tax?! !
Is!separation!pay!taxable!if!it!is!given!out!of!pity?!
!
You!were!hired!by!the!government!as!one!of!the!midnight!appointees!of!GMA.!When!Aquino!came!in!you!will!be!separated!from!work.!
! You!got!100k!separation!pay.!Is!that!taxable?!
!
!
Quizer!question:!if!you!are!given!separation!pay!at!the!age!of!48!years!old!after!rendering!9!years!of!service!due!to!occupying!a!redundant!position,!
is!it!an!inclusion!to!gross!income?!
!
For!separation!pay,!there!is!no!age!requirement,!no!years!of!service!rendered!requirement!for!the!payment!to!be!tax!free.!
!
All!that!it!requires!is!that!your!separation!from!the!company!must!be!due!to!death,!sickness,!physical!disability!or!indury!and!those!other!causes!
beyond!your!control.!
! For!example,!redundant!position,!or!those!that!you!find!in!you!LC,!labor!saving!device,!retrenchment,!occupying!a!co!terminus!position.!
!
How!about!social!security!benefits?!Is!that!an!exclusion!from!gross!income?!
! Social! security! benefits! for! us! Filipinos! receiving! from! our! Philippine! social! security! system! is! not! taxable.! Even! from! the!GSIS! as! well! as! social!
security!benefits!from!abroad.!
!
! Ex.!you!have!been!a!citizen!or!a!resident!in!the!US!and!you!retired!here,!you!will!get!your!pension!and!social!security!benefits,!it’s!also!tax!free.!!
! Probably!that’s!the!reason!why!there!are!so!many!retirees!here.!
!
!
US!VETERANS!BENEFITS!!
That’s!self!explanatory!
!
!
MISCELLANEOUS!ITEMS!
Quizer!Question:!Mr.!A!received!a!100k!cash!prize!after!his!cell!number!was!automatically!included!in!the!electronic!draw!effected!by!the!service!
provider.!He!did!not!perform!any!act!to!enter!the!contest!nor!is!he!ever!required!to!render!future!services!as!a!condition!to!getting!the!prize.!
! Is!the!100k!part!of!the!exclusion?!
! Yes?!
! How!about!joining!the!raffle!in!SM.!If!the!prize!is!motor!vehicle.!Is!it!subject!to!tax?!
! Yes.!
! There!is!an!on!going!restoration!project!of!the!church.!In!order!to!encourage!people!to!donate,!they!sell!raffle!tickets!and!if!they!win!it’s!tax!free?!
! What!are!the!requirements?!
! What!about!buying!the!ticket!itself,!is!that!not!active!part!of!joining!the!contest?!
! It’s!taxable.!Even!if!the!purpose!is!religious.!!
!
So!long!as!you!do!some!or!there’s!an!action!on!your!part!in!order!to!join!the!contest!and!win!it,!it!is!taxable.!
!
If!you’re!a!taxicab!driver!and!you!are!given!money!for!returning!the!money!left!in!your!cab!as!an!award….!
!
Educational!naman,!you!join!‘who’s!smarter!than!a!fifth!grader’,!that’s!taxable!because!there!is!active!participation.!
!
So!both!requirements!should!be!satisfied.!
1.!without!any!action!on!the!part!of!the!recipient!to!enter!the!contest!
2.!not!required!to!render!substantial!future!services!
!
Prize!given!to!Pacqiao!by!the!government!is!not!because!he!was!not!expecting!that.!It!was!given!for!giving!honor!to!the!country.!
!
PRIZES!AND!AWARD!IN!SPORTS!COMPETITION!
Is!Pacqiao’s!last!tournament!winning!taxable?!
! Yes.!
!
In!sports!competitions,!for!your!awards!to!be!tax!free!or!excluded!in!gross!income,!the!competition!must!have!been!duly!approved!by!the!national!
sports! associaltion! and! approved! as! well! by! the! Philippine! Olympic! committee,! whether! it! may! be! an! international! competition! or! neld! in! the!
Philippines!or!not.!
!
What!it!means!to!say!is!that!the!exclusion!from!gross!income!would!never!include!a!professional!fight.!
!
Many!is!a!professional!boxer.!He!is!not!representing!any!sports!in!the!Olympics.!Everything!that!he!earns!is!taxable.!
!
In!one!of!the!BIR!rulings,!there!is!this!one!boxer!who!sought!for!exemption.!He!was!granted!an!exemption!on!the!ground!of!bringing!glory!to!the!
Philippines.!
!
But!if!it!granted!to!that!boxer,!no!other!boxer!can!avail!or!use!that!ruling!for!an!exemption.!
Why!do!you!think!other!boxers!cannot!avail!of!the!exemption!if!the!exemption!is!granted!by!BIR!to!one!of!them?!
! Exemptions!are!personal.!
! So!whenever!rulings!or!SC!says!that!this!person!is!exempt,!then!no!other!person!can!use!that!provision!unless!the!law!is!general.!
In!any!case,!if!and!when!prizes!and!award!granted!in!sports!competition!or!if!any!literary,!religious,!charitable!!educational!achievements!that!you!
get,!if!it!does!not!satisfy!the!condition,!therefore!it!is!taxed;!it!will!now!be!with!held!of!tax.!Because!the!nature!of!prizes!and!awards!is!that!it!will!
be!given!to!the!recipient!net!of!taxes.!
!
Now!if!you!happen!to!win!in!SM!1m,!do!not!expect!to!get!1m.!it’s!only!800k!because!the!tax!withheld!is!20%.!
!
If!in!the!posters!it!is!said!to!be!tax!free,!will!you!receive!1m?!
! Yes.!But!do!not!be!misled.!There!is!tax!but!the!burden!of!tax!is!shifted!to!the!one!giving!the!price.!SM!will!pay!1250k.!the!1m!you!received!is!as!if!it!
is!the!80%!of!the!price.!
!
If!it!is!not!tax!free,!the!price!(motor!vehicle)!will!not!be!given!unless!the!winner!pays!the!tax.!
!
!
!
INCOME!DERIVED!BY!GOVERNMENT!OR!POLITICAL!SUBDIVISIONS!
In!this!exclusion,!whose!income!is!exempt?!
What’s!a!government!entity?!Does!it!include!government!agencies?!
! No.!!
! You!have!to!strictly!construe!it.!
! In!this!case,!this!is!exclusions!are!only!the!income!of!the!government!of!the!Philippines!or!the!income!of!political!subdivisions.!
!
! And!you!know!political!subdivisions!as!composing!of!the!provinces,!cities,!municipalities!and!barangays.!
!!
! It!does!not!include!government!instrumentalities!nor!entities!nor!GOCCs.!!
!
If!you!have!seen!from!your!readings!that!here!is!exemption!granted!to!agencies,!instrumentalities!or!GOCCs,!that!basis!is!not!32b!but!some!other!
provision!of!the!law.!
!
What!we’re!talking!about!here!is!the!income!from!the!exercise!of!the!essential!governmental!function!of!the!government!of!the!Philippines!and!its!
political!subdivisions!as!well.!
!
The!basis!here!is!that!we!cannot!tax!the!government!who!is!taxing!us.!
!
How!about!income!derived!by!foreign!government?!Is!that!subject!to!income!tax?!
If!there!is!income!received!by!a!non!resident!foreign!bank!fully!owned!by!the!Japanese!government,!is!that!taxable?!
So!when!we!say!income!derived!from!investment!in!the!Philippines,!would!it!include!extending!a!loan!to!the!corporations!in!the!Philippines!or!the!
Philippine!government!itself?!
! If!a!domestic!corporation!of!the!Philippines!is!obtaining!a!loan!from!a!bank!in!Japan!fully!owned!by!the!Japanese!government,!is!that!taxable?!
! You! get! 1b! loan! and! will! have! interest! of! 100k! monthly.! Is! this! covered! by! the! exclusion! that! investments! made! by! a! foreign! government! or! a!
financial!institution!fully!owned!by!the!government!are!exempt!from!tax?!
!
! If!the!1b!is!claimed!in!the!Philippines,!it!is!a!domestic!corporation,!the!operation!is!expectedly!in!the!Philippines.!
!
! The!SC!has!already!included!granting!of!loans!by!foreign!banks!to!domestic!corporations,!investment!not!only!in!stock,!bonds!and!also!extending!
loans.!
! So!any!income!derived!from!money!extended!to!the!Philippines!by!a!foreign!government!or!even!if!it!is!a!financial!institution!so!long!as!it’s!fully!
owned!by!the!foreign!government!is!already!exempt!from!tax.!
!
So!in!the!Philippines,!it!also!works!the!other!way!around.!There!is!already!a!tax!treaty.!
! If!we!extend!a!loan!as!well!to!foreign!government,!the!income!derived!from!that!loan!is!also!exempt.!
!!
But!not!all!banks!are!considered!as!covered!in!this!exclusion.!In!Japan!there!are!only!two!banks.!In!the!Philippines!are!Land!bank!of!the!Philippines!
and!Development!bank!in!the!Philippines.!
!
When!it!says!income!from!investment,!it!does!not!mean!to!say!lang!investment!in!the!business.!It!includes!and!it!has!expanded!the!meaning!to!
those!extending!a!loan!to!domestic!corporation.!
!
But!if!the!extension!of!the!loan!is!to!a!foreign!corporation!or!not!a!domestic!corporation,!then!it’s!not!income!having!situs!here.!That’s!another!
issue.!
!
GAINS!DERIVED!FROM!REDEMPTION!OF!SHARES!OF!STOCK!BY!THE!MUTUAL!FUND!COMPANY!
It!should!be!the!mutual!fund!company.!If!not,!no!exclsions,!no!exemptions.!
!
CONTRIBUTIONS!TO!SSS,!GSIS,!PAGIBIG!AND!UNION!DUES!
You!will!notice!that!your!salary!is!already!deducted!with!these!contributions.!It’s!your!share.!Because!the!share!of!you!employer!is!not!reflected!in!
the!pay!slips.!
In!the!computation!of!you!tax,!those!items!are!deducted!from!your!income!because!of!the!provision!of!the!law.!
! After!the!law!made!in!1997,!they!were!already!made!as!deductions.!
!
!
If!your!have!monthly!salary,!you!will!give!PAGIBIG!100.!Your!employer!will!also!give!100.!Your!PAGIBIG!account!will!be!added!200.!
!
But!if!you!have!a!housing!loan!and!you!want!to!contribute!to!PAGIBIG!1100!and!your!taxable!income!if!8900,!this!will!actually!benefit!you.!This!will!
reduce!your!taxable!income.!!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!1"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
July%27,%2010%Tuesday%
L."Allowable"Deductions"
!
All!Income!
!
Less:!Exclusions!from!Gross!Income!/!Exemption!
! _________________________________________!
! Gross!Income!
Less:!Deductions!
!
_________________________________________!
! Taxable!Income
!
• Distinguish!deduction!from!exemption!and!deduction!from!exclusion.!Or!are!they!the!same?!
o First!off,!we!have!to!know!that!all!wealth!which!flows!to!our!hands!to!know!whether!it’s!an!income!or!a!capital.!If!it’s!an!income,!you!
list!down!all!your!income!but!you!exclude!those!which!are!listed!as!exclusions!from!gross!income!or!any!item!which!the!law!exempts!
from!taxation!to!arrive!at!gross!income!because!this!is!income.!In!order!to!arrive!at!a!taxable!income!in!which!the!income!tax!rate!
will!be!computed,!we!have!to!know!the!deductions!allowed.!
o She! said! that! the! difference! between! an! exemption! and! deductions! is! that! deductions" are" those" items" allowed" by" law" to"
reduce" the" gross" income" in" order" to" arrive" at" a" taxable" income." Exclusions" are" these" items" are" already," off>hand,"
already"identified"by"law"as"an"exempt"income"whether"it"be"included"in"the"list"of"exclusions"of"gross"income"under"
Section"32b"or"in"separate"special"laws.! Diba! what! did! we! say! about! exemptions,! these! are! immunities! from! future! taxes! to!
which!you!could!have!been!liable!had!there!been!no!law!granting!its!exclusion.!
o Now,!if!you!identified!all!income,!you!exclude!all!the!exclusions,!this!is!the!one!which!we!were!asked!to!memorize,!the!exclusions!
from!gross!income!are!those!exemptions!granted!so!that!you!will!know!which!are!covered!by!gross!income.!But!not!all!gross!income!
are!subject!because!there!are!deductions!allowed.!!

o Is!deduction!an!income!that!is!not!taxable?! The"distinction"there"really"is"when"you"say"exemption,"it’s"an"income"that"is"
not"taxable."There"is"an"inflow"towards"you,"but"there"is"a"law"saying"that"that"income"which"flew"into"your"hands"is"
not"taxable."But"deduction,"although"it"reduces"the"income,"in"order"to"arrive"at"a"taxable"income,"is"not"an"income."
Deduction"is"an"expense."It’s"an"outflow"of"your"wealth."That’s!why!you!are!allowed!to!deduct!expenses.!!
! When!you!engage!in!a!business,!you!have!income,!you!have!proceeds!but!you!are!not!entirely!taxable!on!the!proceeds,!
you!are!allowed!to!deduct!expenses!which!you!have!incurred.!!
• In!the!same!way,!that!deduction!is!not!the!same!as!exclusion.!Exclusions!are!just!like!exemptions,!they!are!income!or!inflows!to!the!tax!payer.!
But!because!of!the!provision!of!the!tax!code,!it!is!not!subject!to!income!tax!see.!Now,!you!will!see!that!in!order!to!arrive!at!a!taxable!income,!
you!always!deduct!exclusions!and!exemptions.!It!is!the!act!of!deduction!but!it!is!not!an!expense,!it’s!an!income.!!
• Now!there!are!principles!that!you!need!to!know!to!guide!you!whether!you!can!deduct!a!certain!item!from!your!gross!income.!What!are!these?!
o The!basic!principles!that!would!guide!you!in!determining!whether!an!item!is!allowed!to!be!deducted!is:!
! 1.!The!taxpayer!or!you!seeking!for!deduction!must!be!able!to!pin!point!some!specific!provision!of!the!law!authorizing!you!
to!deduct!and!
! 2.!Prove!that!you!are!entitled!to!the!deduction!authorized!because!you!satisfy!all!the!conditions!required.!
rd
! 3.!All!deductions!are!always!strictly!construed!against!the!tax!payer.!That!is!the!3 !principle.!!
! 4.!An!additional!requirement!for!the!deductibility!of!an!expense!is!not!when!a!tax!is!required!to!be!withheld!by!you,!as!the!
payer!of!the!expense,!you!should!have!withheld!the!tax,!otherwise,!you!cannot!deduct!the!expense.!
• Let! me! put! it! in! simple! terms.! If! you! have! a! business! and! you! rent! a! place,! a! boutique! perhaps! in! ayala! at!
Php100k!per!month,!per!space.!The!law!requires!you!to!withhold!5%!oif!your!rental!payments!and!remit!it!to!the!
government.!So!you!will!only!pay!or!give!ayala!Php!100k!less!5%!or!less!Php!5000.!Where!does!the!Php5000!go?!
To! the! government.! Ayala! will! only! receive! 95%.! If! you! failed! to! deduct! even! if! you! have! given! Ayala! the! full!
Php100k,! you! forgot! to! deduct! the! 5%,! you! will! not! be! allowed! to! deduct! entirely! the! Php100k! rent! expense.!
That’s!what!will!happen!if!you!won’t!satisfy!the!requirement!of!the!deductibility!of!taxes!on!expenses.!
• What!are!the!deductions!that!may!be!allowed!or!what!are!the!different!kinds!of!deductions!that!may!be!allowed!on!the!different!kinds!of!tax!
payers?!
o a."Personal"and"Additional"Deductions/Exemptions"–"Section%35%
o b."Itemized"Deductions"–"Section%34A%–%K%and%34M%
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o c.!Optional"Standard"Deduction"of"40%"of"the"Gross"income"–!is!the!deduction!which!an!individual!other!than!a!non`resident!alien,!
or!a!corporation,!subject!to!income!tax,!may!elect!in!an!amount!not!exceeding!40%!of!his!gross!sales!or!gross!receipts,!as!the!case!
may!be,!on!a!corporation,!in!an!amount!not!exceeding!40%!of!its!gross!income,!in!lieu!of!taking!itemized!deductions.!
• Itemized!deductions,!these!are!expenses!incurred!in!line!with!your!business!or!profession.!Optional!standard!deductions,!which!is!in!view!of!
itemized!deductions!and!number!3,!that!you!can!deduct!in!order!to!arrive!at!your!taxable!income!is!the!personal!and!additional!deductions.!
• I!am!not!saying!that!for!you!as!a!taxpayer,!everything!will!be!applicable.!But!these!are!(she’s!saying!about!number!4,!then!does!not!continue!
here.)!
!

SM
!

25,000 /child
2. 50,000
!
! All!Income!
Less:!Exclusions!from!Gross!Income!/!Exemption!/!Personal!and!Additional!Exemptio!
!
_________________________________________!
! Gross!Income!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1.!expense!!!!!!!!!!!!!!!!!!!!!!!!!!!!in!lieu!!!!!!2.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4.!!
!
Less:!Deductions!(itemized!deductions!/!Optional!Standard!Deduction!/!Premiums!on!HIH!Insurance!
! _________________________________________!
! Taxable!Income

!
• Any!of!the!deductions!claimed!by!a!tax!payer!will!fall!under!any!of!these!categories.!It!may!be!an!itemized!deduction!or!expenses!or!in!lieu!of!
that!an!optional!standard!deduction!at!a!fixed!rate!of!40%!of!your!gross!income.!Or!you!can!claim,!if!you!are!an!individual!tax!payer,!you!can!
also!claim!the!personal!and!additional!exemptions!in!lieu!of!family!and!living!expenses.!!
o What!are!the!personal!and!additional!exemptions!as!mentioned!before?!Php!50,000!for!Single,!head!of!the!family!or!married,!the!
personal! exemption.! Php! 25,000! additional! exemption! for! every! dependent! child! that! you! have,! legitimate,! illegitimate,!
acknowledged!or!legally!adopted.!So!if!you!compute!your!income!tax!due,!you!may!be!able!to!claim!anyone!of!these,!but!not!all!of!
these.!Because!optional!standard!deduction!is!only!in!lieu!of!itemized.!
o We!will!discuss!this!fully!in!outline!number!3!and!4.!After!we!have!the!deductible!expenses,!you!can!now!have!your!taxable!income!
multiplied!by!your!tax!rate.!!
L."Non>deductible"Items"
• Would!all!your!expenses!incurred!be!deductible?!If!you!engage!in!business!and!you!had!incurred!expenses!of!Php1M!but!your!sales!proceeds!is!
only!Php500,000.!Are!you!guaranteed!that!you!can!claim!your!Php1M!expenses?!There!are!non`deductible!items!identified!by!the!Tax!Code.!!
!
Sale! ! Php!500,000.00!
! Expenses!! (Php!1,000,000.00)!
! !
!
• !What!are!the!non`deductible!items?!Not!all!expenses!that!you!paid!for!or!have!incurred!may!be!allowed!as!deduction!in!the!computation!of!
your!taxable!income.!Let!us!identify!what!are!the!items!that!you!have!spent!for!but!are!totally!non`deductible!items.!
1.!Personal!living!or!family!expenses!
2.!Amount!paid!for!new!buildings!or!permanent!improvements,!or!betterment!to!increase!the!value!of!any!property!or!estate;!
3.!Any!amount!expended!in!restoring!property!or!in!making!good!the!exhaustion!thereof!for!which!an!allowance!is!or!has!been!made;!
4.!Premiums!paid!on!any!life!insurance!policy!covering!the!life!of!any!officer!or!employee,!or!of!any!person!financially!interested!in!any!
trade!or!business!carried!on!by!the!taxpayer,!individual!or!corporate,!when!the!taxpayer!is!directly!or!indirectly!a!beneficiary!under!such!
policy!
5.!Losses!from!sales!or!exchanges!of!property!directly!or!indirectly!–!!
a)!Between!members!of!a!family!(brother,!sister!of!half!or!full!blood,!spouse,!ascendant,!lineal!descendants)!
b)! Except! in! case! of! distributions! in! liquidation,! between! an! individual! and! a! corporation! –! more! than! 50%! in! value! of! the!
outstanding!stock!of!which!is!owned!directly,!by!or!for!such!an!individual!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
c)!Except!in!case!of!distributions!in!liquidation,!between!2!corporations!–!more!than!50%!in!value!of!the!outstanding!stock!of!
each!of!which!is!owned!directly!or!indirectly,!by!or!for!same!individual,!if!either!one!of!such!corporation!is!a!personal!holding!
company!or!a!foreign!personal!holding!company!
d)!Between!the!grantor!and!a!fiduciary!of!any!trust!
e)!Between!fiduciary!of!a!trust!and!the!fiduciary!of!another!trust,!if!the!same!person!is!a!grantor!with!respect!to!each!trust!
f)!Between!a!fiduciary!of!trust!and!a!beneficiary!of!such!trust!
• (1)!Personal!living!or!family!expenses!
o Why!non`deductible?!!
! 1.!Its!not!related!to!the!business.!It!is!personal!and!for!the!family.!
! 2.! The! personal! exemption! of! Php! 50,000! for! single! and! married! individual! and! additional! exemption! for! every! child!
already!child!already!approximates!your!personal!and!family!living!expenses!for!the!entire!year.!That!is!why!personal!and!
family!living!expenses!are!non`deductible!items.!!
• (2)!Amount!paid!for!new!buildings!or!permanent!improvements,!or!betterment!to!increase!the!value!of!any!property!or!estate;!
o This!simply!means!to!say!that!when!you!spend!for!something!as!a!property!or!estate!for!the!business,!it!is!not!deductible!in!the!year!
that!you!have!spent!for!it!or!paid!for!it.!!
o Give!me!an!example.!Amount!paid!for!new!building!or!permanent!improvements!are!non`deductible!items!period.!!
! Example,!if!you!open!up!a!business!and!you!purchased!a!new!building!used!to!house!your!operations,!is!that!expense!not!
deductible!from!your!income?!It!is!not!deductible!in!the!year!you!spent!for!it.!
o If!you!spent!Php100M!in!purchasing!a!building,!you!are!not!allowed!to!deduct!the!full!Php100M!in!the!year!of!purchase,!or!in!the!
year!of!construction!but!it!will!deductible!as!an!allowance!over!the!years!of!its!estimated!time.!So!if!a!building!is!constructed!costing!
PHp100M!and!it!is!expected!to!have!a!life,!useful!for!another!100!years!from!the!time!that!it!is!finished!from!construction,!then!it!is!
just! but! proper! and! reasonable! to! spread! out! the! value! of! Php100M! over! the! useful! years! of! 100.! So! it! is! deductible! based! on!
depreciating!effect!or!the!value!of!depreciation!for!years.!So!it!will!diminish!its!value,!Php1M!every!year.!Because!after!every!year,!its!
estimated!life!reduces!by!1!year!so!the!effect!is!to!deduct"it""not"1"time"but"over"the"estimated"life"of"that"property"or"asset"or"even"
if"its"not"a"new"building,"so"long"as"it’s"a"major"improvement,"a"betterment,"which"increases"the"life"of"an"existing"asset,"it"will"not"
be"deductible"outright"but"only"deductible"over"its"life.""
o It!is!reasonable!because!if!you!deduct!in!the!first!year!that!you!bought!it,!you!deduct!Php100M.!And!your!sales!is!only!PHp2M,!you!
lose! Php98M.! Whereas,! if! you! spread! out! the! expense! over! 100! years,! you! will! benefit! each! and! every! Php1M! every! year! as! an!
expense.!
o If!we!will!come!across!an!exemption!wherein!non`stock,!non`profit!education!institutions!like!San!Carlos!can!actually!deduct!in!the!
st
1 !year!of!purchasing!building!the!entire!Php1M.!Why!does!the!BIR!allow!this?!Because!schools!are!not!taxable.!Even!if!we!deduct!
the!entire!Php100M!of!purchasing!it,!nothing!will!ever!change.!Even!if!we!deduct!it!the!next!year.!Schools!are!not,!non`stock,!non`
profit!educational!institutions,!are!not!taxable.!So!the!effect!is!different.!IN!normal!businesses!and!abnormal!businesses.!
• (3)!Any!amount!expended!in!restoring!property!or!in!making!good!the!exhaustion!thereof!for!which!an!allowance!is!or!has!been!made!
o No.!3!is!it!the!same!as!No.!2?!If!you!have!a!motor!vehicle!or!delivery!van!in!your!business!to!deliver!your!items!and!you!change!the!
headlight!or!you!change!the!mirror,!can!you!deduct!the!expense!outright!or!should!you!spread!out!the!value!of!the!repair?!You!can!
deduct!outright.!
o No.! 3! are! major! repairs! which! extends! the! life! of! an! existing! asset! which! requires! an! apportionment! of! the! expenses! over! the!
number!of!years!that!the!asset’s!life!has!been!extended!or!the!property’s!life!has!been!extended.!
• (4)!Premiums!paid!on!any!life!insurance!policy!covering!the!life!of!any!officer!or!employee,!or!of!any!person!financially!interested!in!any!trade!
or!business!carried!on!by!the!taxpayer,!individual!or!corporate,!when!the!taxpayer!is!directly!or!indirectly!a!beneficiary!under!such!policy!
o The!company!took!out!a!life!insurance!policy!over!your!life!as!its!most!important!employee.!Every!year!the!company!pays!premiums!
amounting! to! PHp100,000! over! the! life! insurance! policy.! Is! the! Php100,000! premium! a! deductible! business! expense?! You! are! the!
president!of!the!company.!!
! Let’s! have! an! illustration:! Company! A! gets! a! life! insurance! policy! over! your! life,! Php100,000! premiums! over! a! year.! The!
Php100,000!premium!is!used!to!satisfy!the!requirement!of!the!life!insurance!taken!by!the!company!over!your!life!and!it!is!
paid!to!an!insurance!company,!Company!B.!This!is!an!expense!of!the!company.!The!assets!of!the!company!is!decreased!by!
Php100,000!every!year!just!to!pay!the!premiums!of!your!life!insurance!policy.!Can!we!claim!this!as!an!expense!deductible!
from!income!of!Company!A!who!spent!for!it?!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
Premium" Beneficiary" Deductible?"
Php!100,000! Company!A! X"
Php!100,000! Estate!of!U!as!employee! !!

!
• If!a!company!takes!out!an!insurance!policy!over!the!life!of!its!employees,!take!note!of!who!the!beneficiary!is.!It’s!
only!here!that!the!one!spending!for!the!premium!is!the!company!itself,!so!it’s!losing!money!because!it’s!paying!
for!something.!!
• Can! this! be! a! deductible! expense?" So" it" can" be" a" tax" benefit" in" the" payment" of" taxes," so" the" tax" liability" of"
Company"A"will"be"reduced,"you"have"to"know"who"the"beneficiary"is."Now"if"the"company"made"itself"as"the"
beneficiary,"it"is"not"deductible"because"the"law"says"it"is"not"deductible"if"the"taxpayer"is"directly"or"indirectly"
the"beneficiary"under"the"policy."
o Who!is!the!taxpayer!referred!to!in!this!section?!Company!A.!The!tax!payer!who!took!the!life!insurance!
policy!is!the!beneficiary!itself,!not!deductible.!
• The! principle! behind! that! because! it! is! merely! transferring! money! from! Company! A! to! the! insurance! company!
and!go!back!to!Company!A!when!the!employee!dies.!It!is!merely!transfer!of!money!but!will!revert!back!to!the!
company!upon!the!happening!of!the!event!insured.!!
• But!if!the!beneficiary!is!another!person!other!than!the!tax!payer!himself,!it!is!deductible,!because!the!proceeds!
will!not!revert!to!the!coffers!of!the!company.!!
! But!take!note,!the!designation!of!the!company!may!be!direct!designation!or!indirect.!If!its!traceable!then!it!is!a!indirect!
designation!in!favor!of!the!company,!still!it!is!not!taxable.!
!
• 5.!Losses!from!sales!or!exchanges!of!property!directly!or!indirectly!–!!
! First,!we!have!to!know!whether!losses!are!deductible!expenses?!Yes.!!
! Example,!if!you!engage!in!the!buy!and!sell!of!motor!vehicles.!If!you!have!sold!10!motor!vehicles!in!a!year,!7!were!sold!at!a!
profit,!3!were!sold!at!a!loss,!the!losses!incurred!by!the!3!transactions!can!be!offsetted!against!the!gains!out!from!the!7!
transactions.!So!generally!losses!are!deductible!items.!!
• If! the! 7! motor! vehicles! were! sold! for! Php7M,! your! capital! was! only! Php4M,! Php3M! is! taxable! income.! If! the! 3!
other!vehicles!were!sold!for!were!sold!for!Php1M,!and!puhunan!is!Php3M,!you!lost!Php2M,!since!you!own!this!1!
business,!you!will!only!be!liable!for!tax!for!Php!1M,!losses"are"deductible"expenses"so"long"as"it"is"incurred"in"
relation"to"your"business.""
! Example,! if! you! are! in! the! manufacture! of! milk! or! production! of! milk,! along! the! way! some! will! evaporate,! losses! are!
incurred.!From!the!cow’s!milk,!if!it!directly!spills.!But"losses"are"deductible"except"for"losses"found"in"Section"36,"and"it"
says"losses"from"sales"or"exchanges"of"property"between"members"of"a"family.!
o a)!Between!members!of!a!family!(brother,!sister!of!half!or!full!blood,!spouse,!ascendant,!lineal!descendants),!!
! Example:!This!motor!vehicle,!you!sold!it!to!your!sister.!Puhunan!is!Php3M,!but!the!7!you!sold!it!to!your!classmates,!if!you!
sold!this!to!your!sister,!is!the!Php2M,!deductible!as!an!expense?!No.!!
! Why!are!losses!or!exchanges!of!sales!between!you!and!your!sister!not!deductible!losses?!Because!transactions!between!
rd
family!members!are!for!the!most!part!not!entered!into!an!honest!transaction!unlike!entering!into!a!transaction!with!a!3 !
rd
person! or! 3 ! party,! you! may! sell! this! one! for! Php10! to! someone! else! but! you! can! actually! dispose! it! to! your! sister! for!
Php1M.!!
! So!losses!are!not!real!in!cases!between!family!members.!And"even"if"it"is"real"losses"but"because"you"entered"it"with"a"
family"member,"it"is"not"deductible."
o b)!Except!in!case!of!distributions!in!liquidation,!between!an!individual!and!a!corporation!–!more!than!50%!in!value!of!the!outstanding!
stock!of!which!is!owned!directly,!by!or!for!such!an!individual!
!
! Company A U
!
Loss: Php 2M
!
Deductible
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
! Company!A!sold!a!parcel!of!land!to!you,!selling!price!is!Php1M,!cost!to!the!company!is!Php!3M,!the!company!lost!Php2M!
from!the!transaction!entered!with!you.!Is!the!transaction!PHp2M!deductible!from!the!income!of!Company!A?!Yes.!Because!
in!this!case!there!is!no!mention!if!you!are!a!stockholder!of!the!company!and!for!what!share.!
!
! 60% 10%
U V 10%
! W
10%
!
X
!
10%
! Y
Company A U
!
!
Loss: Php 2M
!
Not Deductible
!
! Company! A! is! owned! by! a! 5! stockholders! (Corporation! must! be! atleast! 5! stockholders).! You! are! the! owner! of! 60%! of!
Company! A.! ! V,! W,! X,! Y! are! owners! of! 10%! of! the! shares.! If! you! are! an! owner! of! Company! A! by! 60%,! can! the! company!
deduct!the!Php2M!from!its!income?!No.!!!
! Why?! Because! if! a! company! wishes! to! avoid! paying! taxes,! it! can! actually! enter! into! simulated! losses! or! transactions! by!
selling!properties!to!any!of!its!controlling!stockholders.!But!in"order"for"it"to"be"a"non>deductible"sale"class,"the"individual"
with" whom" the" company" entered" into" with" a" transaction" must" be" a" controlling" stock" holder," meaning" he" owns" more"
than"half"or"more"than"50%"of"the"business"itself."!
! If!Company!A!sold!the!land!for!Php1M!costing!PHp3M!to!any!of!V,!W,!X!and!Y,!it!is!still!deductible!loss.!Why?!Because!these!
stockholders!are!not!controlling!stockholders.!!
! When! the! transaction! that! we! are! looking! into! is! between! a! company! and! an! individual,! the! requirement! is! that! the!
individual!must!be!a!direct!stockholder.!!
!
o c)!Except!in!case!of!distributions!in!liquidation,!between!2!corporations!–!more!than!50%!in!value!of!the!outstanding!stock!of!each!of!
which!is!owned!directly!or!indirectly,!by!or!for!same!individual,!if!either!one!of!such!corporation!is!a!personal!holding!company!or!a!
foreign!personal!holding!company!
! How!about!corporation!to!corporation?!!
! Give!me!an!illustration!for!number!3.!!
! What!does!no.!3!prohibit?!Transactions!between!corporations.!
!
Company A Company B
!
!
Loss: Php 2M
! Deductible

! Corporation!A!sold!a!land!for!Php1M!costing!Php3M,!suffering!a!loss!of!Php2M.!To!whom!was!it!sold?!Corporation!B.!Is!the!
loss!of! Php2M! deductible?! ! As! a! rule,! if! you! have! no! other! fact,! these! are! the! only! facts! given! the! general! rule! is! losses!
incurred!are!deductible!losses.!!
!
!
! But!if!we!dig!into!the!ownership,!say!for!example:!
! 60% 10% 60% 10%
U V 10% U V 10%
! W W
! 10% 10%
X X
!
10% 10%
! Y Y
Company A Company B

Land GSP Php 1,000,000

Cost 3,000,000
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!6"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!
!
!
! U,!V,!W,!X!and!Y,!and!Company!B!is!also!owned!by!U,!V,!W,!X!and!Y,!and!the!shares!are!given!as!shown,!still!deductible?!No.!
Because! the! ownership! is! more! than! 50%.! The! law! provides! that! if! for! example! that! this! transaction! is! entered! into!
between!2!corporations!whereby!ownership!is!held!directly!or!indirectly!by!more!than!50%!for!the!same!individual!is!not!
deductible!loss.!!
! So! Company! A! is! owned! by! more! than! 50%! ! by! U,! Company! B! is! owned! more! than! 60%! by! the! same! individual,! so! the!
controlling!interest!in!both!corporations!is!U,!the!same!individual,!therefore,!it!is!covered!by!non`deductible!lsoses.!
! Let!me!change!the!facts:!
! 60% 10% 10% 10%
U V 10% U V 10%
! W W

! 10% 10%
X X
!
10% 60%
! Y Y

! Company A Company B
!
Land GSP Php 1,000,000
! Cost 3,000,000
! Loss Php 2,000,000

! ***DEDUCTIBLE

! Deductible!or!not?!U!owns!60%,!Y!owns!60%!on!the!other!company.!Is!the!loss!deductible?!Yes.!In!this!case,!it"is"not"the"
same"individual"who"is"owning"both"corporations"or"controlling"both"corporations,"the"loss"is"deductible."
! Let!me!change!again!the!facts:!
! 60% 10% 10% 10%
U V 10% U V 10%
! W W
! 10% 10%
X X
!
10% 10%
! Y Y
! Company A Company B 50%
! Company Z
99.99% owned by U
! Land GSP Php 1,000,000
Cost 3,000,000
! Loss Php 2,000,000

! ***NON-DEDUCTIBLE
!
th
! In!this!case,!if!I!put!in!there!are!5!owners,!individual!owners!and!the!6 !owner!is!Z!Corporation,!but!Z!Corporation!is!owned!
100%! by! U,! deductible! or! not?! Okay,! let’s! go! to! your! first! corporation,! we! retained! ownership! 60%! controlled! by! U,!
Company! B,! the! buyer! of! the! land! is! owned! by! 10%! by! U,! V,! W,! X,! Y.! The! remaining! 50%! is! owned! by! a! corporation,!
Corporation! Z.! If! a! corporation! owns! a! corporation,! there! is! ultimately! an! individual! owning! it.! You! have! to! key! in! the!
ownership!of!all!levels!of!the!corporation.!It!so!happened!that!Z!corporation!is!99.99%!owned!by!U.!!
• Is!the!loss!deductible!or!not?!Is!this!covered!by!transactions!which!are!not!arms!length?!Arms!length!because!the!
law!says!owned!by!individual!directly!or!indirectly.!This!is!a!case!of!2!corporations!entering!into!a!sale!transaction!
of! a! real! property! but! both! corporations! are! owned! by! the! same! individual! although! indirectly.! The! other! one!
indirectly.!!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!7"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
• !More!than!50%!is!held!by!the!same!individual!directly!or!indirectly.!You!say!U!owns!this!majority;!it’s!more!than!
50%.!Is!U!owning!or!controlling!this!corporation?!Yes,!indirectly.!How!indirectly?!U!owns!10%.!U!owns!the!entire!
50%! through! another! corporation,! therefore,! U’s! ownership! is:! 10%! +! 50%! =! 60%.! More! than! 50%! of! both!
corporations!is!owned!by!the!same!individual.!Therefore,!we!can!say!that!the!transaction!is!not!entered!into!an!
arms!length.!
! Let!me!change!the!facts!again:!
!
60% 10% 10% 10%
! U V 10% U V 10%
W W
! 10% 10%
! X X

! 10% 10%
Y Y
!
Company A Company B 50%
! Company Z
60% owned by U
! Land GSP Php 1,000,000 40% owned by A
Cost 3,000,000
! Loss Php 2,000,000 Therefore,!U’s!share!is:!
! !
***DEDUCTIBLE 60%!of!the!50%!share=!!!!!!30%!
! Plus:!share!in!Co.!B!=!!!!!!!!!!10%!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!40%!
!
!
! Z!Corporation!owns!50%!of!Company!is!owned!by!U!and!A.!60%!for!U,!40%!for!A.!IS!the!loss!deductible?!Does!U!control!
corporation!B?!No.!But!then!U!has!more!than!60%!of!Company!Z?!!Diba!this!is!a!corporation!owned!by!a!corporation.!But!
you!know!that!this!corporation!is!owned!by!other!stockholders.!So!how!much!of!the!share!does!U!own?!60%!of!50%!is!30%!
plus!10%,!U!owns!only!40%.!
• The!ownership!of!U!here!is!more!than!50%!direct!control!over!Z!Corporation.!But!in!Company!B,!U!only!directly!
control!Company!B!by!10%.!U!owns!10%!directly!and!indirectly!by!30%!of!Company!B!through!owning!B!by!60%.!
60%!of!50%!if!30%.!So!the!30%!of!Company!B!is!owned!by!U!through!this!corporation!and!another!10%!that!is!a!
total!of!40%!
• Does!it!satisfy!the!requirement!for!non`deductibility?!NO,!therefore!the!loss!is!deductible.!!
• This!is!what!you!call!a!grandfather!rule!in!determining!ownership!of!the!corporation.!It!is!grandfather!in!a!sense!
because!you!with!start!with!Company!A!here!and!its!owned!by!another!Company!C,!owned!by!another!Company!
C,!to!the!extent!that!you!determine!the!ownership,!the!vast!ownership!of!the!individual,!that!is!the!grandfather!
rule!in!Corporation!Code.!
! If!it’s!family`owned,!there!are!still!distribution!of!interest!and!control.!You!still!use!the!number!of!ownership!that!he!has!in!
his!corporation.!That!is!based!on!SEC!because!there!is!an!annual!report!that!needs!to!be!submitted!to!the!SEC,!stating!who!
the!owners!are!and!what!percentages!of!the!stocks!they!are!holding.!
o d)!Between!the!grantor!and!a!fiduciary!of!any!trust!
o e)!Between!fiduciary!of!a!trust!and!the!fiduciary!of!another!trust,!if!the!same!person!is!a!grantor!with!respect!to!each!trust!
o f)!Between!a!fiduciary!of!trust!and!a!beneficiary!of!such!trust!
! The!other!non`deductible!losses!from!sales!or!exchanges!of!property,!the!reason!why!it!is!non`deductible!because!it!refers!
to! one! and! the! same,! it! simply! a! temporary! transfer.! The! grantor! of! the! trust! and! the! fiduciary! of! the! trust,! these! are!
second!transfers!so!it!refers!to!one!and!the!same.!!
N."General"Principles"of"Income"Taxation"in"the"Philippines"–"Section"23."
• This!is!a!very!important!provision!for!income!tax.!!
• What!are!the!general!principles!of!income!taxation?!!
1.!A!resident!citizen!is!taxable!on!all!income!derived!from!sources!within!and!without!the!Philippines.!
2.!A!non`resident!citizen!is!taxable!only!on!income!derived!from!sources!within!the!Philippines.!
Sec.*22(E)*enumerates*who*are*non4resident*citizens*
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!8"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
3.!An!overseas!contract!worker!is!taxable!only!on!income!from!sources!within!the!Philippines;!a!seaman!who!is!a!citizen!of!the!Philippines!
and! who! receives! compensation! for! services! rendered! abroad! as! a! member! of! the! complement! of! a! vessel! engaged! exclusively! in! the!
international!trade!shall!be!treated!as!an!overseas!contract!worker.!
4.!An!alien!individual,!whether!a!resident!or!not!of!the!Philippines,!is!taxable!only!on!income!derived!from!sources!within!the!Philippines.!
5.!A!domestic!corporation!is!taxable!on!all!income!derived!from!sources!within!and!without!the!Philippines!
6.!A!foreign!corporation,!whether!engaged!or!not!in!trade!or!business!in!the!Philippines,!is!taxable!only!on!income!derived!from!sources!
within!the!Philippines.!
• Individuals! are! classified! into! resident! citizens,! taxable! for! income! within! and! without.! Second! classification,! is! non`resident! citizen! taxable!
only! for! income! within.! Third! classification,! they! are! taxable! only! for! income! derived! within.! For! non`resident! aliens! engaged! in! trade! or!
business,!are!taxable!only!for!income!within!the!Philippines.!
• How!about!overseas!contract!workers?!Taxable!for!income!derived!within!the!Philippines.!!
o Why!are!they!not!taxable!within!and!without?!
" When!they!are!non`residents!for!the!year,!they!are!only!taxable!within.!!
• All!of!those!taxpayers!are!taxable!only!from!income!within!EXCEPT!for!2!types!which!are!taxable!on!their!worldwide!income.!What!are!the!
2!taxpayers!which!are!taxable!from!income!within!and!income!without?!!
" Only! resident! citizens! and! domestic! corporations! are! taxable! on! income! within! and! income! without,! while! all! the! rest! are!
taxable!only!if!they!earn!income!having!situs!within!the!Philippines.!!
" So!bottom!line!is!determining!the!situs!of!the!income!important!for!all!types!of!taxpayers?!What!is!the!purpose!why!do!we!have!
to!determine!the!situs!of!the!income?!
o Purpose:!so!that!we!will!know!if!we!have!taxing!jurisdiction!over!that!income.!Determining!the!situs!of!income!is!
important!because!we!would!want!to!know!if!the!income!of!those!taxpayers!that!we!have!just!mentioned!are!
income!within,!and!definitely,!taxable!in!the!Philippines.!!
o But!not!all!taxpayers!would!the!situs!of!income!really!matter.!What!type!of!taxpayer!is!situs!irrelevant?!!Resident!
citizen!and!domestic!corporation!because!they!are!taxable!on!income!within!and!without.!So,!situs!of!income!is!
not!important!in!so!far!as!domestic!corporations!and!resident!citizens!are!concerned,!they!are!taxable!wherever!
their! income! has! situs.! Therefore,! ! if! you! have! a! question! before! you! that! says,! “the! individual! taxpayer! is! a!
resident! citizen! or! a! domestic! corporation! it! is! actually! taxable! on! income! within! and! without.! So,! situs! is!
irrelevant!unless!we!make!it!more!complicated!in!applying!exemptions!in!tax!treaties.!!
o But!as!a!rule,!situs!is!only!important!in!so!far!as!determining!whether!the!income!of!non`resident!citizens,!aliens!
and! foreign! corporations! are! concerned! because! these! types! of! taxpayers! are! taxable! on! income! within! the!
Philippines.!!
• Is!an!immigrant!a!resident!citizen?!What!is!his!classification!as!a!taxpayer,!resident!citizen!or!non`resident!citizen?!(not!answered!by!Atty.!
Tiu)!!
• What!are!the!general!principles!of!income!taxation!in!the!Philippines?!!
" A!resident!citizen!is!taxable!on!all!income!derived!from!sources!within!and!without!the!Philippines!!
" A!non`resident!citizen!is!taxable!only!on!income!derived!from!sources!within!the!Philippines.!!
" An!overseas!contract!worker!is!taxable!only!on!income!from!sources!within!the!Philippines;!a!seaman!who!is!a!citizen!of!the!
Philippines!and!who!receives!compensation!for!services!rendered!abroad!as!a!member!of!the!complement!of!a!vessel!engaged!
exclusively!in!the!international!trade!shall!be!treated!as!an!overseas!contract!worker.!!
" An! alien! individual! whether! a! resident! or! not! of! the! Philippines! is! taxable! only! on! income! derived! from! sources! within! the!
Philippines!!
" A!domestic!corporation!is!taxable!on!all!income!derived!from!sources!within!and!without!the!Philippines!!
" A!foreign!corporation!whether!engaged!or!not!in!trade!or!business!in!the!Philippines!is!taxable!only!on!income!derived!from!
sources!within!the!Philippines.!!
Individual"Income"Taxation"
Taxable*Individuals**
A. Resident*Citizen*
• Who!is!a!resident!citizen?!What!is!the!taxability!of!a!resident!citizen?!!
" Resident!citizens!are!citizens!of!the!Philippines!residing!therein.!!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!9"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
" They!are!subject!to!the!schedular!rates!of!5%`32%!tax!on!income!derived!from!sources!within!and!without!the!Philippines.!!
" Prime!example:!all!of!us!are!citizens!here!unless!you!claim!otherwise.!!
B. Non4resident*Citizen*
• Who! is! a! non`resident! citizen?! Assuming! you! are! working! and! your! company! sent! you! off! abroad! under! an! assignment! contract! for! 2!
years.!He!left!today,!will!he!be!considered!a!non`resident!citizen!for!tax!purposes?!He!is!still!a!citizen,!yes.!His!employer!is!a!domestic!
corporation.! He! was! sent! to! Korea! for! 2! years,! he! left! this! morning.! Is! he! a! resident! citizen! or! non`resident! citizen?! When! is! a! citizen!
considered!a!non`resident!citizen?!(Ms.!Tiu!said!she!wants!the!enumeration!found!in!Sec.!22!of!the!Tax!Code,!she!said!that!we!have!to!
memorize!this!Sec.!re!who!are!non`resident!citizen)!
" Sec.!22(E),!the!term!“nonresident!citizen”!means:!!
o (1)! A! citizen! of! the! Phils.! who! establishes! to! the! satisfaction! of! the! Commissioner! the! fact! of! is! physical! presence!
abroad!with!a!definite!intention!to!reside!therein!
o (2)! A! citizen! of! the! Philippines! who! leaves! the! Philippines! during! the! taxable! year! to! reside! abroad,! either! as! an!
immigrant!or!for!employment!on!a!permanent!basis.!
o (3)!A!citizen!of!the!Philippines!who!works!and!derives!income!from!abroad!and!whose!employment!thereat!requires!
him!to!be!physically!present!abroad!most!of!the!time!during!the!taxable!year.!
o (4)!A!citizen!who!has!been!previously!considered!as!nonresident!citizen!and!who!arrives!in!the!Philippines!at!any!time!
during!the!taxable!year!to!reside!permanently!in!the!Philippines!shall!likewise!be!treated!as!a!nonresident!citizen!for!
the!taxable!year!in!which!he!arrives!in!the!Philippines!with!respect!to!his!income!derived!from!sources!abroad!until!
the!date!of!his!arrival!in!the!Philippines.!
o (5)! The! taxpayer! shall! submit! proof! to! the! Commissioner! to! show! his! intention! of! leaving! the! Philippines! to! reside!
permanently!abroad!or!to!return!to!and!reside!in!the!Philippines!as!the!case!may!be!for!purpose!of!this!Section.!
st
o Illustration!(1 !scenario):!
! 5!months!and!4!days!
Less!than!183!days! ABROAD! ! !
! WITHIN!SITUS! WITHOUT!SITUS! WITHOUT!SITUS! WITHOUT!SITUS! WITHIN!SITUS!
!
!
January!1,!2010! July!27,!2010! December!31,!2010! December!31,!2011! July!26,!2012! December!2012!
!
! HOMECOMING!
! 2010!RESIDENT!CITIZEN! NON`RESIDENT!
TAXABLE"FOR"BOTH" EXEMPT"
! CONSIDERED"NON>RESIDENT"

!
!
! He!does!not!qualify!under!No.!1!and!No.!2.!!
! Let! us! go! to! No.! 3.! A! citizen! of! the! Phils.! who! works! and! derives! income! from! abroad! and! whose!
employment!requires!him!to!be!physically!present!abroad!most!of!the!time!during!the!taxable!year.!!
“Most!of!the!time”!is!interpreted!to!mean!183!days!abroad!or!more!physically!present.!!
Did!he!go!abroad!for!employment?!Yes!but!not!on!a!permanent!basis!because!his!contract!is!fixed!
for! 2! years,! January! 1,! 2010.! He! left! this! morning,! July! 27,! 2010.! By! December! 31,! 2010,! he!
spent!5!months!and!4!days,!which!is!definitely!less!than!183!days.!He!is!not!abroad!most!of!the!
time,!so!for!2010,!he!is!considered!a!resident!citizen.!!
For!December!31,!2011,!he!is!abroad.!He!is!a!non`resident!citizen.!!
Now,!this!is!established!that!he!is!a!resident!citizen!for!the!entire!2010.!Why?!He!was!not!abroad!
most!of!the!time!during!year.!So,!his!salary!from!January!to!July!has!situs!within.!His!salary!from!
July! to! December! has! situs! without! because! he! is! abroad.! Is! this! taxable! for! 2010?! Yes,! both!
income!is!taxable.!As!a!resident!citizen,!regardless!where!your!income!is!earned!whether!it!has!
situs!within!or!without,!definitely,!it!is!taxable!in!the!Philippines.!!
Now!for!2011,!he!is!a!non`resident!citizen!because!his!employment!requires!him!to!be!physically!
present! most! of! the! time! during! the! year.! Is! this! an! income! within! or! without?! It! is! income!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!10"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
without,!hence,!not!taxable!in!the!Philippines.!A!non`resident!citizen!is!only!taxable!for!income!
within,!so,!in!this!case,!this!is!not!taxable.!!
How! about! 2012?! He! came! back! and! continued! employment! with! his! local! company,! December!
31,!2012.!Is!this!income!within!or!without?!Is!this!taxable?!He!is!considered!non`resident,!under!
category!no.!4.!!
nd
o 2 !scenario:!!
!
5!months!and!4!days!
! Less!than!183!days! ABROAD! ! !
WITHIN!SITUS! WITHOUT!SITUS! WITHOUT!SITUS! WITHOUT!SITUS! WITHIN!SITUS!
!
!
!January!1,!2010! July!27,!2010! December!31,!2010! December!31,!2011! June!26,!2012! December!2012!
! LESS!THAN!183!days!!
here! HOMECOMING!
! 2010!RESIDENT!CITIZEN! NON`RESIDENT! " "

! TAXABLE"FOR"BOTH" EXEMPT"

! CONSIDERED"NON>RESIDENT"STILL"

! He! is! still! considered! non`resident! citizen! (from! Dec.! 31,! 2011! to! June! 26,! 2012).! As! a! returning! non`resident!
citizen,!from!the!start!of!the!year!to!the!date!of!arrival,!any!income!earned!without!or!outside!the!Philippines!is!
not!taxable.!Because!for!this!period,!he!is!considered!as!a!non`resident!citizen.!This!is!where!he!is!a!considered!as!
a!hybrid!non`resident!citizen,!half!and!half.!You!cannot!consider!him!as!entirely!as!non`resident!nor!as!resident!
citizen! for! the! entire! year! but! the! requirement! there! to! apply! the! rules! of! hybrid! personality,! he! must! have!
returned!as!a!non`resident!the!year!before.!If!he!is!a!resident!citizen!the!year!before.!So,!lets!cut!this!short,!wala!
ni!nga!year,!what!is!the!year!immediately!before!this!one,!the!rule!will!not!apply!because!he!must!be!a!returning!
non`resident!citizen.!!!
! Diba!the!first!type!of!non`resident!is!easy—must!be!able!to!establish!the!fact!of!his!physical!presence!abroad!to!
the!Commissioner!of!Internal!Revenue!and!he!has!a!definite!intention!to!reside!therein.!!
! No.!2!is!also!easy—he!must!be!an!immigrant!or!permanently!employed!abroad.!!
! No.!3!is!much!more!complicated!because!his!employment!abroad!requires!him!to!be!physically!present!most!of!
the!time!during!the!year!which!requires!183!days!or!more.!!
th st
! The!4 !only!applies!to!a!citizen!who!was!previously,!the!year!before,!is!considered!as!non`resident!whether!1 ,!
nd rd st
2 ,! or! 3 ! category.! Any! of! those! 1 ! 3! categories! non`resident! citizen! comes! back! to! the! Philippines! to! reside!
permanently!here,!then,!he!will!have!a!portion!of!the!year!as!non`resident!citizen!and,!after!the!date!of!arrival,!
resident!citizen.!Any!income!during!that!time!from!without!is!already!taxable.!!
! Remember! the! rules,! this! is! important! that! he! be! considered! non`resident! here! because! all! his! income! from!
abroad!during!this!time!will!always!be!considered!as!non`taxable!in!the!Philippines!because!his!classification!is!a!
returning!non`resident.!But,!from!the!day!of!arrival!until!Dec.!31,!he!is!already!classified!as!resident!citizen,!and!if!
he!has!income!in!any!day!or!any!month!during!this!period,!he!goes!abroad!to!perform,!to!sing,!or!whatever,!even!
if! it! is! income! without! but! he! is! already! classified! as! resident! citizen,! it! means! to! say! that! everything! here! is!
taxable.!But!on!the!other!hand,!only!those!income!within!is!taxable.!!!
! As!a!returning!non`resident!the!year!before,!even!if!he!returns!January!3!here,!not!most!of!the!time!during!the!
year,!his!income!from!January!1!to!January!3!abroad!is!non`resident!citizen,!income!without,!therefore!exempt.!!
! (Atty!Tiu!was!asked!what!“returning”!is?)!His!coming!back,!definitely,!to!reside!in!the!Philippines.!But!for!him!to!
th
avail!for!the!4 !category!of!non`resident!citizen!tax`free,!he!must!have!been!a!non`resident!the!previous!year!or!
years.!!
! Say,!if!you!have!a!relative!who!stayed!abroad!for!many!years,!comes!back!to!the!Philippines!as!balikbayan!and!
stayed!here!for!6!months,!went!back!to!the!US!for!1!month!then!came!back!again!for!the!rest!year.!If!you!take!
the!entire!year!he!stayed!here!for!more!than!183!days,!is!he!resident!citizen!because!he!stayed!here!most!of!the!
time?!NO!because!he!is!not!returning!back!to!reside!here,!only!on!a!vacation.!So,!it!does!not!take!his!status!as!a!
non`resident!for!staying!here!most!of!the!time.!An!immigrant!is!an!immigrant,!unless!he!decides!to!come!back,!
he!will!not!be!considered!as!a!resident!citizen.!
! (Q:!asked!what!if!the!employee!is!asked!to!go!abroad!near!the!end!of!the!taxable!year)!If!you!are!required!to!go!
abroad! on! a! 2! year! contract,! make! sure! that! you! leave! the! Philippines! before! June! 30,! so! that! you! will! be!
considered!as!non`resident!citizen!so!that!you!income!abroad!will!not!be!taxable.!!!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
! (Q:! what! is! our! measure! of! most! of! the! time?)! 183! days! or! more! in! a! given! year! whether! continuous,! in!
succession,!or!in!the!aggregate.!You!add!out!the!days.!Basta,!!you!have!a!definite!purpose!of!going!there!but!not!
for!permanent!stay.!!
st
! (Q:!in!the!1 !category,!when!is!the!reckoning!point?)!for!category!1!and!2,!the!day!that!you!left.!!!
! How!about!a!seaman!who!is!working!in!a!vessel?!Would!all!of!them!be!considered!as!non`resident!citizen?!!
A!seaman!is!not!categorized!as!non`resident!(1)!although!he!is!physically!present!abroad,!he!does!not!
intend!to!reside!in!the!vessel!for!his!entire!life;!(2)!he!is!not!an!immigrant!and!his!employment!is!not!
permanent,!its!per!contract!basis.!So,!he!is!under!category!no.!3.!!
In! order! that! they! be! classified! non`resident! citizen! under! category! no.! 3,! 2! requirements! must! be!
complied!with,!(1)!they!must!stay!abroad!most!of!the!time!abroad!during!the!year,!meaning!183!days!
or!more;!and!(2)!the!vessel!within!which!they!are!working!must!be!engaged!exclusively!in!international!
trade.! Otherwise,! they! do! not! qualify! as! non`resident! citizen! and! their! income,! even! if! they! earn! it!
working! in! the! vessel,! it! will! be! considered! as! taxable! within! and! without! as! resident! citizens.! Why!
again?! They! don’t! qualify! as! immigrants! or! permanent! employees! abroad.! All! overseas! contract!
workers!including!seaman,!its!contractual.!Its!not!a!permanent!employment.!!!
C. Resident*Alien**
• Who!is!a!resident!alien?!!
" A!resident!alien!is!an!individual!whose!residence!is!here!in!the!Philippines!but!is!not!a!citizen!of!the!Philippines.!!
• When!can!you!be!considered!a!resident?!If!you!marry!a!Filipina?!!
" You! will! be! considered! a! resident! if! you! are! not! considered! as! a! mere! transient! or! if! he! lives! in! the! Philippines! and! has! no!
definite!intention!of!his!stay!here.!!
" There! is! no! number! of! days! as! a! benchmark,! or! number! of! months,! number! of! years! to! say! whether! an! alien! here! in! the!
Philippines!is!definitely!considered!as!resident!or!not.!Unlike!in!non`resident!citizen,!there’s!a!number!of!days.!Resident(?mao!ni!
iyang!giingon!pero!murag!non`resident!alien!iyang!pasabot.!Check!lang!#)!alien!engaged!in!trade!or!not!engaged!in!trade,!you!
have! 183! day! rule! but! for! an! alien! to! be! considered! as! resident,! there! is! no! exact! measure! or! length! of! stay! that! he! has! to!
establish!in!the!Philippines.!!
" So!long!as!he!is!not!a!mere!visitor,!transient,!or!sojourner!in!the!Philippines!and!so!long!as!he!has!definite!intention!to!reside!
here!or!his!visit!requires!an!extended!stay!in!order!to!establish!or!satisfy!a!purpose!for!which!he!is!coming!to!the!Philippines,!
making!the!Philippines!as!a!temporary!home!country,!he!will!be!considered!as!a!resident!alien.!In!some!part!of!the!discussions!
in! the! book,! you! will! see! there! one! year! but! that! one! year! has! not! been! established! by! any! law.! It! is! just! a! discussion! of! an!
opinion!or!ruling!by!a!SC!decision!but!in!more!cases!than!not,!the!SC!does!not!really!give!a!number!of!years!for!length!of!stay.!It!
just! says,! so! long! as! he! has! a! definite! purpose! of! staying! in! the! Philippines,! and! making! the! Philippines! as! his! home! country,!
then,!he!can!be!considered!a!resident!alien.!In!one!case,!it!says!that!the!length!of!stay!is!indicative!of!the!intention!of!an!alien.!If!
he!had!stayed!here!in!the!Phils.!for!more!than!a!year,!he!may!already!be!considered!as!a!resident!alien.!!
D. Non4resident*alien*
• What! about! a! non`resident! alien?! Definitely! not! a! citizen,! not! even! a! resident! alien.! But! for! some! purpose! he! happens! to! be! in! the!
Philippines!earning!some!form!of!money!or!income.!Who!is!a!non`resident!alien?!!
" There!are!two!classifications!of!non`resident!alien:!!
o (1)!one!that!is!engaged!in!trade!or!business!
o (2)!one!that!is!not!engaged!in!trade!of!business!
• If!there!is!an!alien!or!foreigner,!say,!you!went!to!Boracay!alone!and!you’ve!met!a!foreigner.!During!your!conversation,!you!learn!that!he!
has!been!in!Boracay!for!half!of!the!year.!He!came!to!Boracay,!January!1!and!you!met!him!yesterday!(July!26;!stayed!around!204!days!
already!in!the!Philippines,!almost!7!months),!can!you!consider!him!a!non`resident!alien!not!engaged!in!trade!or!business.!So,!his!stay!is!
st nd
more!than!half!of!the!year.!He!did!nothing!in!Boracay!except!surf!and!dive.!Is!he!of!the!1 !type!or!the!2 !type?!During!almost!those!7!
months,!he!earned!a!minimum!amount!in!teaching!how!to!scuba!dive.!!
" Those!non`resident!aliens!who!stayed!in!the!Philippines!continuously!or!in!the!aggregate!for!more!than!180!days!regardless!of!
what!they!are!doing!in!the!Philippines,!they!are!considered!as!non`resident!aliens!engaged!in!trade!or!business.!The!number!of!
days! is! used! to! classify! whether! the! non`resident! alien! is! engaged! in! trade! or! business! or! not.! The! reason! why! we! have! to!
qualify!or!distinguish!them,!although!both!of!them!have!really!no!definite!purpose!in!staying!in!the!Philippines!if!you!have!a!
definite!purpose!of!staying,!you!may!already!be!categorized!as!resident!alien,!for!those!having!no!definite!intention!or!purpose!
of!staying!here,!you!use!the!180!day!rule.!!
" And!using!the!180!day!rule!is!for!purposes!of!what?!Why!do!we!have!to!distinguish!not!engage!or!engage!when!both!of!them!
have!are!non`resident!aliens!with!no!intention!for!staying!here?!Why!is!there!a!need?!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o Both!of!them!are!taxable!only!on!income!within.!Insofar!as!their!income!are!earning,!there!is!no!difference.!If!Mr.!A!
who!stayed!here!180!days!and!Mr.!B!who!stayed!here!179!days,!they!both!earn!the!same!income,!they!are!both!
taxable!on!income!earned!within!the!Philippines.!Why!do!we!have!distinguish!them?!!
! They!are!subject!to!different!tax!rates.!!
! A!resident!citizen!and!a!non`resident!citizen,!a!resident!alien!and!a!non`resident!alien!engaged!in!trade!or!
business,!otherwise!those!staying!more!than!180!days!in!a!given!year,!aggregate!or!continuous,!would!be!
taxed! at! the! same! rate! of! 5%`32%.! Only! non`resident! aliens! who! have! stayed! 180! days! or! less! will! be!
taxed! at! a! different! rate! of! 25%! and! without! the! benefit! of! deductions! because! they! are! taxed! on! all!
incomes.!!
! So!in!our!example!before!whenever!a!performing!artist!does!a!concert!here!in!the!Philippines!for!1!night,!
the!entire!income!that!they!earn!is!taxed!at!a!fixed!rate!of!25%!without!the!benefit!of!any!deductions!not!
even!his!plane!ticket!cost,!but!it!is!shouldered!by!the!producer.!!
E. Special*Employees**
• Who!are!special!employees?!!
" Special!employees!are!those!employees!employed!in!special!corporations!and!special!corporations!are!the!following:!!
o (1)!Regional!Area!Headquarters!(RAHQ)!of!multinational!corporations,!defined!in!Sec.!22!!
o (2)!Regional!Operating!Headquarters!(ROHQ)!of!Multinational!Corporations,!defined!in!Sec.!22!
o (3)!Offshore!banking!units!!
o (4)!Petroleum!service!contractors!
" What!is!the!difference!between!the!two,!(1)!and!(2)?!!
o RAHQ!is!established!for!the!purpose!of!overseeing.!They!do!not!earn!income.!They!do!not!operate!to!earn!income!
while!ROHQ!may!be!performing!services!and!activities!in!favor!of!the!other!corporations!related!to!the!multinational!
companies!located!within!the!Asia`Pacific!region.!!
o For!example,!Chevron!is!related!to!Caltex.!Chevron!established!a!ROHQ!wherein!employees!of!that!headquarters!will!
perform!services!(accounting,!auditing,!financing,!administration!services)!for!and!in!behalf!of!all!other!Caltex!located!
within! the! Asia`Pacific! region.! Its! operational! and! it! is! earning! income! but! would! all! employees! of! Chevron! be!
considered!as!special!employees?!!What!makes!them!special?!Why!are!they!called!special!employees?!!
! No,! not! all! would! be! considered! special! employees.! They! are! special! because! they! are! subject! to! a!
preferential! tax! rate! of! 15%! on! their! salaries,! honorarium,! wages,! emolument,! remunerations! and! other!
similar!income.!!
o Can!a!Filipino!be!a!special!employee?!
! The! general! rule! is! only! alien! employees! occupying! managerial,! supervisory,! technical! positions! can! be!
special! employees.! Only! in! cases! where! no! alien! individual! can! fill! up! that! requirement! would! a! Filipino!
individual!be!allowed!to!become!a!special!employee!subject!to!the!preferential,!special!tax!rate!of!only!15%.!!
! That! is! so! special! because,! normally,! Filipino! individuals! or! alien! individuals! employed! in! corporations! not!
among! those! special! corporations! will! be! taxed! at! a! rate! of! 5%`32%,! and! you! know! that! managerial!
positions! already! demand! a! higher! salary! where! you! would! be! covered! a! bracket! of! 32%.! Indeed,! 15%! is!
special.!!
! We! have! RAHQ,! ROHQ! of! multinational! corporations,! offshore! banking! units! in! the! Philippines! and!
petroleum!service!contractors.!These!are!the!only!corporations!who!can!employ!special!employees.!!
• If!you!are!a!special!employee,!you!are!a!Filipino,!and!you!have!and!income!on!the!side,!will!all!your!income!from!employment!and!other!
income,!say!for!example,!from!business!be!subject!to!the!preferential!rate!of!15%?!!
" No.! If! you! are! a! Filipino! individual,! the! rule! is! special! employees! would! only! be! allowed! preferential! treatment! of! salaries,!
honorarium,!wages,!emolument,!remunerations,!those!entirely!related!to!the!employment!of!the!special!corporation.!If!he!has!
earned!income!as!an!employee!of!a!special!corporation!occupying!managerial!and!technical!position,!then,!any!income!which!
he!earned!from!selling!sandwiches,!coffee!etc.!during!break!time!will!not!be!covered!by!the!15%,!it!will!be!taxed!5%`32%.!!
" But!what!is!the!special!rule!for!Filipinos!occupying!technical/!managerial!positions!in!these!special!corporations?!Do!they!have!
the!option!to!be!taxed!at!5%`32%!instead!of!15%?!
o A!circular!(Revenue!Memorandum!41`2009)!has!been!issued!by!the!BIR,!if!in!case!we!talk!about!of!Filipinos!employed!
in! these! special! corporations! availing! of! the! special! rate! of! 15%,! their! positions! must! be! managerial! and! highly!
technical!position,!not!OR,!in!order!for!them!to!be!entitle!to!15%!or!at!a!regular!rates!of!5%`32%.!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o While!normally!we!employ!expatriate!employees,!these!are!alien!individuals!employed!in!managerial!confidential!or!
highly!technical!positions.!!!
F. Estates*and*Trusts**
• Is!an!estate!an!individual?!Why!is!it!included!in!taxable!individuals?!When!a!natural!person!dies,!how!many!taxable!persons!do!we!have?!
Diba,!persons,!it!can!be!juridical!or!natural?!At!the!point!of!death,!if!you!are!the!BIR,!how!many!taxable!persons!do!you!see?!!
" There! are! two—the! dead! person! or! his! income! during! his! lifetime,! during! the! calendar! year.! If! a! person! dies! today,! he! is!
supposed! to! have! income! January! 1! until! yesterday.! From! today,! he! will! have! estate! as! a! taxable! individual.! You! have! two!
separate!taxable!persons!at!the!time!of!death.!!!
!
August"3,"2010"
!
1. Alien!individuals!employed!in!multinational!corporations!are!subject!to!the!preferential!rate!of!15%!on!compensation!income!so!long!as!they!
are!occupying!managerial!and!technical!positions.!True!or!False?!
False.! Multinational! Corporation! is! generic.! Multinational! Corporation! is! simply! a! foreign! corporation! or! entity! engaged! in!
international! trade.! When! you! say! regional! operating! headquarters,! regional! area! headquarters! of! a! multinational! corporation,! that’s! what!
makes!an!employee!a!special!employee!given!a!preferential!rate!of!15%.!!
We! said! that! there! are! only! four! corporations! who! can! hire! special! employees! subject! to! the! special! rate! of! 15%! and! they! are!
regional!operating!headquarters!of!multinational!corporations,!regional!area!headquarters!of!multinational!corporations,!petroleum!service!
contractors! and! subcontractors! and! lastly,! the! offshore! banking! units.! If! we! simply! say! alien! individuals! employed! in! a! multinational!
corporation,! it’s! as! if! they! are! simply! employed! in! a! resident! foreign! corporation! engaged! in! international! trade! or! as! simple! as! that.! To!
become!a!regional!area!headquarter!or!regional!operating!headquarter,!it!requires!a!special!registration.!!
!
2. How!about!estates,!trusts,!are!they!considered!as!individual!tax!payers!for!tax!purposes?!Yes.!!
!
3. If!you’re!saying!that!they!shall!be!treated!the!same!as!individuals,!so!what!are!the!tax!rates!applicable!to!these!estates!and!trusts?!How!about!
the!estate!itself?!Is!it!subject!to!income!tax?!!
This!is!not!the!cemetery!class.!Mr.!X!died,!he!left!an!estate,!a!set!of!property.!While!the!property!is!under!judicial!settlement,!it!will!
bear!income!or!fruits.!To!which!amount,!is!it!the!estate!or!the!fruits!that!the!estate!is!subject!to!income!tax?!It!is!the!fruits!that!are!subject!to!
income!tax.!Okay,!only!the!outer!layer!is!subject!to!estate!income!tax.!!
What!about!the!estate!itself!left!by!the!decedent,!is!it!subject!to!income!tax?!No.!Why?!Because!it’s!not!an!income,!it!is!a!capital!and!
subject!to!estate!tax.!There!is!a!difference!between!the!estate!tax!of!5`20%!and!estate!income!tax!of!5`32%.!Income!tax!as!we!have!learned!is!
always! subject! to! an! income.! Only! one! instance! is! income! tax! subject! to! capital! and! what! is! that! again?! On! the! capital! gains! or! rather! the!
presumed!gains!on!a!sale!of!a!capital!asset!which!is!a!real!property!located!in!the!Philippines.!So!do!not!tax!the!estate!left!by!the!decedent,!
simply!tax!the!income!generated!by!the!estate!during!settlement.!Whenever!a!person!dies,!there!are!two!persons!subjected!to!tax:!(1)!the!
decedent!himself!his!income!from!January!up!to!his!income!is!subject!to!income!tax.!Upon!death!and!until!the!settlement!is!finished,!it!will!be!
the!income!generated!unless!distributed!is!subject!to!estate!income!tax.!!
!
4. Is!the!estate!allowed!personal!exemption?!Say!for!example!this!is!2010,!Mr.!X!died!August!3,!today,!can!the!income!tax!return!of!Mr.!X!claim!
the!personal!exemption?!How!about!the!estate?!Can!the!estate!claim!during!the!same!year!personal!exemption?!!
The! individual! person! can! claim! the! personal! exemption! on! his! income! from! January! until! the! point! of! death.! The! estate! under!
settlement! from! the! point! of! death! until! the! end! of! the! same! year! is! another! personality,! distinct! from! the! person! himself! who! died.!
Therefore,!personal!exemption!is!as!well!allowed!to!the!estate.!But!of!course,!the!following!year,!if!the!estate!is!not!yet!settled,!still!under!
judicial!settlement,!the!following!year,!you!don’t!speak!of!Mr.!X!anymore.!His!personality!has!ceased!at!the!time!of!death.!He!could!no!longer!
earn!income,!only!the!estate!will!be!considered!as!a!tax!payer,!the!year!after!death!and!years!after!that.!
!
Illustration:!
!
!
! DIED!ON:!
! August!3,!2010!
X! X! X!
! X! X!
! X!
MR.!X! X! Estate!of!Mr.!X.! ESTATE!PER!SE:!
!
Subject!to!Estate!Tax!
! X! X! X!
X! X!
! JANUARY!–!DEATH!
! Subject!to!Income!Tax!
! as!an!individual! FRUITS:!
! Subject!to!Income!Tax!
! CAN!CLAIM!PERSONAL!EXEMPTIONS?!Yes,!for!both.!
! !
!!!!!!PHP!50,000!during!time!alive!!!!!!!!!!!!!!!!!!!Php!20,000!as!an!estate!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!
!
5. Personal!exemption!is!how!much?!!
P50,000!
!
6. Can!the!estate!claim!additional!exemption!for!a!dependent!amounting!to!P25,000!–!the!additional!exemption?!!
The!P25,000!is!only!in!reference!to!a!dependent!child!or!children.!Exemption!is!P50,000!basic!class,!I!think!I!placed!there!last!page!of!
this!outline,!estates!and!trusts!number!3,!exemption!allowed!to!estate!and!trust!fifty!(P50,000)!right?!But!the!problem!is!that!when!I!looked!
into! the! tax! code,! that! section! 62! using! RA! 8424,! it’s! only! P20,000! because! in! 1998! when! 8424! took! effect,! personal! exemption! was! only!
P20,000.!When!was!it!raised!again!to!P50,000?!Only!in!2008,!RA!9504,!remember!the!illustration!I!gave!you!in!retroactive!application?!It’s!just!
that,!that!same!law,!RA!9504!did!not!amend!section!62!which!is!the!personal!exemption!allowed!to!estates!and!trusts.!So,!I!think!since!this!is!
an!exemption!and!strictly!construed!against!the!estate!tax!payer,!we!still!retain!the!P20,000!exemption!although!it!is!not!reconcilable.!Still,!we!
maintain! the! P20,000! not! the! P50,000! which! replaces! this.! Again,! for! the! reason! that! Section! 62! of! the! tax! code! has! not! been! specifically!
amended!by!RA!9504!which!increase!the!personal!exemption!from!P20,000!to!P50,000.!
!
Let’s!go!to!different!types!or!categories!of!income!that!individual!taxpayer!may!earn.!
!
7. What!is!compensation!income?!
(Can’t!hear!Ms.!Tan’s!voice)!Based!on!Dimaampao’s!book,!it!is!defined!as!all!remuneration!for!services!rendered!by!an!employee!for!
his!employer!unless!specifically!excluded!under!the!Tax!Code.!
!
8. When!is!there!employee`employer!relationship?!
Apply!the!four`fold!test!
!
9. For!tax!purposes,!can!a!compensation!in!kind!be!subject!to!income!tax?!Or!is!it!always!compensation!in!cash?!Or!does!the!labor!code!allow!
compensation!to!be!given!in!kind?!!
Under!the!labor!code!it’s!not!allowed!but!for!tax!purposes!class,!compensation!may!be!given!in!cash!or!in!kind.!Lifeblood!doctrine,!
the! government! does! not! only! look! at! cash! compensation! to! be! taxed! but! in! any! form! that! the! person! employee! is! benefited! from! his!
employment!or!services!that!he!has!rendered.!Everything!will!be!taxable!as!a!rule.!
!
10. Give!me!an!example!of!a!compensation!in!kind.!
Promissory!notes.!
!
How!can!an!employee!have!a!promissory!note!as!an!income?!!
Even!if!it’s!not!in!cash!yet,!it!can!be!considered!as!realized!on!the!part!of!the!employee!as!he!has!already!rendered!services,!then!it!
will!be!subject!to!tax.!!
!
!
What!else?!
Stocks.!!
!
What!about!stocks?!What!is!a!Stock!option?!!
Instead!of!giving!salary,!they!are!given!with!stocks,!shares!of!stocks.!
!
What!do!you!think!why!the!company!would!give!an!employee!a!share!of!stock?!What!would!that!make!the!employee!if!he!gets!hold!of!stocks!
of!the!company?!!
In!some!cases,!companies!in!order!to!build!loyalty!and!in!order!to!retain!the!employees!in!its!employ!would!be!offering!stock!options!
to!its!employees.!Now,!if!the!offer!of!the!stock!option!is!not!more!favorable!than!that!offered!to!third!persons!not!employees!to!the!company,!
so!if!it’s!offered!at!100!and!sold!to!outsiders!at!100!as!well,!there’s!no!income!to!speak!of.!The!only!time!that!the!employee!will!be!subjected!
rd
to!income!tax!is!when!the!stock!option!is!more!favorable!than!3 !person.!Say!for!example,!the!fair!market!value!per!share!of!the!company!is!
1000! and! it! is! sold! to! the! employee! at! 100.! The! 900! difference! is! simply! an! income! which! can! be! connected! to! the! services! that! has! been!
rendered!by!the!employee!to!the!employer.!!
!
What!other!compensation!in!kind!do!we!have?!
Cancellation!of!indebtedness!–!we’ve!discussed!that!already!before.!
!
What!else?!
Tax!liability!of!the!employee!paid!by!the!employer.!
!
Can!you!illustrate?!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
Let’s!say!for!example,!you!were!hired!P10,000!a!month.!Do!you!expect!to!get!P10,000!a!month?!No.!because!this!P10,000!is!entirely!
subject!to!income!tax!because!it’s!her!income.!
In!the!example!that!she!has!given,!tax!liability!of!the!employee!being!shouldered!or!payed!by!the!employer!is!when!the!example!is!
when!the!employer!promised!to!give!her!clean!P10,000!without!any!tax!deduction.!It!may!so!happens!that!she!may!get!P10,000!without!any!
deduction,!the!employer!is!actually!shouldering!the!tax!of!the!entire!income.!So,!the!tax!of!the!entire!income!is!somewhere,!let’!say,!P2,500!to!
the!BIR,!P10,000!to!the!pocket!of!the!employee.!The!employee!does!not!concern!himself!with!how!much!the!employer!will!be!paying!so!long!
as! he! gets! free! of! tax.! You! will! learn! later! how! to! gross! this! tax,! how! to! compute! the! tax.! Anyway,! so! long! as! the! employer! promises! the!
employee!of!a!salary!that!is!already!free!of!tax,!the!employer!is!actually!shouldering!the!tax,!it’s!as!if!the!portion!shouldered!by!the!employer!is!
still!net!income!of!the!employee.!In!fact,!in!this!case,!how!much!is!really!the!compensation!of!the!employee?!Is!it!P10,000!or!P12,500?!It’s!
P12,500.!It’s!just!that!P2,500!went!directly!to!the!tax!authority.!And!I!think!we!have!also!in!our!outline,!premiums!paid!by!the!employer!to!life!
insurance!policy!of!the!employee!–!we’ve!discussed!this,!right?!(Class:!yes)!!
!
Illustration:!
!
!
!
! TAX! SALARY:!
! ! PHP!10,000.00!
! PHP!2,500.00!
!
!
! ACTUAL!COMPENSATION:!Php!12,500.00!
!
!
!
11. If!a!property!is!given!to!the!employee,!what!is!the!taxable!base?!!
!
If!you!are!given!a!parcel!of!land!by!your!employer!class,!the!basis!for!taxation!is!the!fair!market!value!of!the!property!given.!!
!
12. Now,!what!is!the!doctrine!of!cash!equivalent?!How!is!this!related!to!what!we!have!discussed!a!while!ago?!!
For!tax!purposes!class,!we’re!looking!at!the!fixed!amount!on!which!the!tax!will!be!imposed.!If!the!income!goes!to!the!tax!payer!or!
employee!in!the!form!of!property!or!any!other!kind!other!than!the!standard!of!measure!of!value!which!is!cash,!then!there!must!be!equivalent!
to! every! property! that! is! given.! For! every! value! received! by! the! tax! payer! or! employee! as! a! benefit! for! being! hired! or! as! compensation! for!
service!rendered,!there!will!be!an!equivalent!tax!on!that!income,!even!if!it!is!received!in!kind.!So,!the!equivalent!value!of!the!property!of!the!
property!or!benefit!received!will!be!taxable!as!a!rule.!That’s!as!a!rule!because!we!will!encounter!some!exceptions!to!the!rule.!
!
13. Now! if! you’re! an! employee! Ms.! Gingoyon! and! you! are! allowed! to! stay! in! the! condominium! units,! for! which! you! actually! don’t! get! housing!
allowance!in!cash.!You!only!have!free!stay!in!that!condominium!unit.!Is!that!an!income?!!
Yes.! If! you! will! be! allowed! to! stay! free! of! charge! in! a! particular,! like! residential! place,! apartment,! etc.! Regardless! whether! you!
received!something!in!cash!or!not!for!that!stay,!it!will!be!taxable!because!you!are!benefited.!In!your!own!person,!you!don’t!need!to!shell!out!
money! in! order! to! stay! in! that! place.! Therefore,! how! will! it! be! taxed! if! your! stay! in! the! condominium! unit! which! is! a! value! of! P50,000! the!
leasing!rate!which!is!per!month,!then!the!P50,000!value!will!be!subject!to!tax,!regardless!of!your!status!in!the!company!–!whether!you!are!the!
janitor!or!president!of!the!company,!it!will!be!subject!to!tax.!But,!who!pays!is!something!else.!!
!
You!mentioned!of!fringe!benefit,!what!is!it?!
Fringe!benefit!is!any!good!or!services!or!benefits!given!by!the!employer!to!the!employee,!except!for!rank!and!file!employees.!!
!
So,!bottom!line,!who!gets!fringe!benefits?!Say!for!example,!this!is!ABC!Corporation,!everyone!of!us!here!are!employees!of!ABC!Corporation,!
rank`and`file! and! not! rank`and`file.! Everyone! is! given! a! chance! to! stay! in! the! condominium! unit,! 1! unit! each.! Is! everybody! earning! income!
here?!!
Yes.!It!is!settled!class!that!everyone!is!actually!earning!income!in!some!form.!Although!it!is!not!in!cash,!it!is!the!free!stay!valued!at!
P50,000/month!had!they!stayed!in!another!area.!!
!
My!question!is!since!it!is!settled!that!everyone!is!earning!income!in!some!form,!would!we,!all!of!us,!be!subject!to!tax!on!the!income!that!we!
have!earned!in!kind?!!
Yes!
!
Non!rank`and!file!that!side!and!rank`and!file,!P50,000/month!in!kind!`!free!stay,!P15,000/month!in!kind.!If!you!want!to!ask!how!much!is!the!
cash!compensation,!P10,000!lang!in!cash!because!you’re!rank!and!file.!P100,000!in!cash!because!you’re!not!rank`and`file.!Now!this!is!taxable,!
taxable.!Is!this!taxable?!!
This!will!be!given,!the!cash!from!the!cash!compensation!will!be!given!through!you!ATM!account!or!in!cash,!net!of!your!taxes.!But!
how!will!this!be!regulated?!So,!you’re!saying!this!is!taxable!for!the!rank`and`files!here,!if!the!tax!of!this!amount!is!P10,000,!you!will!receive!
nothing!na,!because!the!P10,000!will!be!collected!from!you,!agree?!!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
This!level,!the!cash!that!is!received!both!rank`and`file!and!not!rank`file!is!considered!as!salary.!This!level!naman!beyond!your!salary,!
we!call!that!benefit!in!kind.!Some!benefits!are!in!cash!if!you’re!given!Christmas!bonuses.!But!benefits!in!kind!are!treated!differently!if!received!
by!a!rank`and`file!and!benefit!by!a!not!rank`and`file,!this!is!specifically!called!fringe!benefit.!!
These!are!ordinary!benefits.!Both!are!income,!differently!termed,!these!are!benefits!received!by!the!rank`and`file!employee.!These!
are! specifically! called! fringed! benefits! received! by! non! rank`and`file! employees.! Now,! usually! you! couldn’t! imagine! rank`and`file,! getting! of!
these,!di!ba?!But!for!illustration!purpose,!let’s!say!they!are!also!given!that!kind!of!benefit.!Now,!will!this!be!subject!to!tax?!!
Doctrine!of!cash!equivalent,!will!it!be!subject!to!tax?!Yes.!This!salary!will!be!subject!to!tax!of!which!we!call!as!withholding!tax!on!
wages,!salary!or!compensation.!It’s!the!ordinary!tax!on!the!salary.!This!one!will!be!subject!to!the!ordinary!tax!on!salary!as!well!but!how!about!
this?!Is!this!subject!to!ordinary!tax!on!the!salary?!No.!Subject!to!what?!Fringe!benfits!tax.!And!fringe!benefits!tax!is!what?!Final!tax.!What!is!the!
effect!if!it’s!a!final!tax?!Ms.!Cuevas!answers.!!
Fringe! benefits! tax! works! this! way.! I’ll! show! how! this! is! really! unfair! to! this! line.! Fringe! benefits! are! perks! given! to! those! given!
occupying!managerial!and!supervisory!positions.!And!for!that!whatever!benefit!is!given!to!them!which!is!usually!not!available!to!rank`and`file,!
it! is! subject! to! final! tax! which! we! call! as! the! tax! on! fringe! benefit.! Being! subject! to! final! tax,! the! word! final! means! that!the! benefit! itself! is!
already!taxed!with!finality.!And!if!it!is!taxed!with!finality,!it!is!no!longer!considered!in!the!income!of!the!non!rank`and`file!to!be!subjected!to!
the!ordinary!withholding!tax!on!salaries.!So,!this!is!separately!taxed.!But!because!it’s!a!perk!or!benefit!to!those!occupying!higher!positions,!it!is!
the!employer!who!shoulders!the!tax.!Whatever!benefit!is!given!to!the!employee,!a!corresponding!is!paid!by!the!employer!to!the!government.!!
!
How!about!those!given!to!rank`and`file?!Sige!it’s!an!apartment!lang!at!P5,000!not!a!condominium!unit,!is!this!a!fringe!benefit?!!
No.! there! will! never! be! a! fringe! benefit! if! the! recipient! is! a! rank`and`file! employee.! They! don’t! receive! perks.! Not! being! a! fringe!
benefit,!it!is!not!subject!to!the!final!tax!which!we!call!as!fringe!benefits!tax.!Not!being!subject!to!tax!with!finality,!it!simply!means!that!the!
compensation!in!kind!given!to!rank`and`file!will!be!considered!in!his!salary!–!it!will!be!considered!as!a!part!of!the!salary!of!the!rank`of`file!
subject! to! the! ordinary! withholding! tax! on! wage.! So,! in! this! case! class,! P15,000! will! be! subject! to! withholding! tax! instead! of! the! P10,000!
because!the!employees!as!well!receiving!P5,000!in!kind.!
In! this! case! naman,! the! basic! only! is! subject! to! tax! by! the…! will! be! shouldered! by! the! employee! while! the! P50,000! perk! will! be!
covered!by!the!employer.!The!tax!at!P15,000!is!higher!than!the!taxed!at!P10,000.!The!non!rank`and`file!is!actually!enjoying!this!kind!of!benefit!
free!from!tax.!It!is!really!best!to!be!a!non!rank`and`file!employee.!You!can!receive!different!kinds!of!fringe!benefit.!
!
Illustration:!
!
!
! RANK"AND"FILE"EMPLOYEE" NON>RANK"AND"FILE"EMPLOYEE!
! TAXABLE?! Amount" Amount" TAXABLE?!
SALARY! !Subject!to!WTW/C/S! Cash!Php!10,000! Cash!Php!100,000! !Subject!to!WTW/C/S!
BENEFIT! !Subject!to!WTW/C/S! Kind!Php!50,000! Kind!Php!50,000! !Subject!to!FBT!
!
!
! ORDINARY!BENEFIT! FRINGE!BENEFIT!
!
14. What!are!the!different!kinds!of!fringe!benefits?!!
Housing,! expense! account,! vehicle! of! any! kind,! household! personnel,! interest! on! loan! at! less! than! market! rate,! membership! fees,!
dues!and!other!expenses!borne!by!the!employer!in!social!and!athletic!clubs!or!other!similar!organizations,!expenses!for!foreign!travel,!holiday!
and!vacation!expenses,!educational!assistance!to!the!employee!or!his!dependents,!and!life!or!health!insurance!and!other!non`life!insurance!
premiums!or!similar!accounts!in!excess!of!the!law!allows.!
!
15. If!you!are!an!employee,!non!rank`and`file!and!you!are!allowed!to!stay!at!a!staff!house!within!the!company!premises.!Example!in!Ormoc,!is!it!
Ormoc! wherein! there’s! Californian! Energy! Plant! –! the! powerplant.! There’s! an! administration! building,! dispensed! in! territory! there! are! staff!
house.!If!you!are!allowed!to!stay!in!of!the!staff!houses,!is!it!considered!as!fringe!benefits!subject!to!fringe!benefits!tax?!!
Housing!benefits!as!a!rule!is!subject!to!fringe!benefits!tax!if!the!recipient!is!a!non!rank`and`file!employee!but!there!are!exceptions:!
1. If!the!housing!allowance!or!benefit!is!for!the!convenience!of!the!employer.!Example,!if!you’re!a!doctor!and!your!work!is!24hrs.!call!of!
duty.!You!hired!a!driver!which!you!housed,!you!don’t!want!him!to!stay!inside!your!house.!You!simply!rented!out!the!place!beside!your!
house.!Is!that!for!the!convenience!of!the!employer?!Yes.!But!the!driver!is!not!a!rank`and`file!but!it!is!just!for!illustration.!
2. When! your! place! rented! out! is! within! 50meters! from! company! premises.! Now,! if! your! place! of! stay! is! within! 50meters! from! company!
premises,!then!it!is!exempt!from!fringe!benefits!tax.!So,!if!ever!you!get!to!be!an!employer!years!from!now!and!you!want!to!give!housing!
allowances!or!housing!benefits!of!your!staff!or!manager,!make!sure!that!you!get!something!that!is!near.!!
If!it’s!50meters!whether!it!is!for!convenience!or!not.!For!the!convenience,!no!meters!required!or!no!standards.!But!the!50meter!
whether!or!not!for!the!convenience!but!bottom!line!it’s!usually!for!the!convenience!why!he!is!required!to!stay!near!the!premises.!
But! there! is! an! exemption! to! that! by! virtue! of! the! BIR! Ruling! the! taxpayer! requested! an! exemption! from! fringe! benefits! tax!
despite!the!distance!longer!than!50meters!is!when!the!place!is!hazardous!to!health!of!the!employees,!so!it!can!be!100meters.!
3. You’re!on!travel!and!you!are!allowed!or!given!housing!benefit!for!3!months!or!less!in!the!area!wherein!you!are!assigned.!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
16. Now,! the! listings! here! Ms.! Cuevas,! is! it! exclusive! or! are! there! other! benefits! that! can! be! subject! to! fringe! benefits! tax! not! listed! in! this!
enumeration?!
Yes.! Primarily! because! it! says! “but! not! limited! to! the! following.”! Although! there! are! two! views! class,! there! are! some! discussions!
which!says!these!are!their!only!benefits!subject!to!fringe!benefits!tax!but!there!has!already!been!a!BIR!Ruling!saying!that!the!stock!options!
given!by!Globe!Telecom!to!its!officers!are!subject!to!fringe!benefits!tax!to!the!extent!of!the!difference!between!the!fair!market!value!of!the!
stocks!and!the!offer!price!to!its!officers.!
!
17. Give!me!an!example!wherein!you!will!be!subject!to!fringe!benefits!tax!on!a!vehicle!assistance!or!motor!vehicle!–!in!relation!to!motor!vehicle!
benefits.!!
For!example!if!the!manager!lives!away!from!the!workplace,!for!example!Lapu`Lapu!and!then!the!place!of!work!is!in!Minglanilla.!So,!
the! employer! has! given! the! employee! or! issued! the! employee! a! vehicle! for! the! benefit! of! the! employee! so! that! it! would! be! easy! for! the!
employee!to!travel.!!
!
18. In!that!case,!is!that!subject!to!fringe!benefits!tax?!!
Yes.!In!that!case,!it!will!be!subject!to!fringe!benefit!tax.!
!
!
19. Is!it!necessary!that!the!ownership!of!the!vehicle!be!given!to!the!employee!so!that!there!will!be!fringe!benefits!tax!due!on!the!assistance!given.!!
I!think!it!is!not!necessary!that!the!ownership!is!given!to!his!employee!as!long!as!the!employee!is!having!or!is!enjoying!the!benefit!of!
that!vehicle!which!can!be!subject!o!fringe!benefits!tax.!Okay.!There!are!many!types!of!benefits!in!so!far!as!vehicle!is!concerned.!The!company!
may!give!the!employee!directly!a!motor!vehicle!–!is!entirely!fringe!benefits.!Sometimes,!the!company!may!subsidize!50%!of!the!purchase!price!
of!the!vehicle!and!50%!is!the!fringe!benefit.!In!some!case,!the!company!allows!only!not!transfer!of!ownership,!only!allows!the!employee!to!use!
the!vehicle!exclusively!–!still!it!is!subject!to!fringe!benefits!tax.!How!will!it!be!computed?!Of!course!the!monthly!amortization!or!the!monthly!
depreciation!value!of!the!vehicles!or!in!case!where!there!may!be!fringe!benefits!in!the!vehicle!assistance!where!the!employer!leases!or!rents!
out!the!motor!vehicle!for!the!use!of!the!employee!himself,!for!his!own.!Exception!to!that!rule!even!if!he!is!using!the!motor!vehicle!of!your!
employer,!it!is!not!subject!to!fringe!benefits!tax,!if!you!use!it!for!car!pooling!or!you!allow!others!to!use!it!as!well.!So!what!you!have!to!do!class,!
if!ever!you!will!be!assigned!a!motor!vehicle,!as!if!lang!others!may!use!it.!!
If!it!is!for!the!use!as!if!for!everyone,!it’s!for!the!convenience!for!the!employer!necessary!for!the!business.!Ang!shifting!lang!for!this!
one!to!this!one!is!the!status!of!the!employee.!
!
How!do!they!declare!such..!that!it’s!for!own!use!lang!or!department’s!use?!!
Through!the!policy!of!the!company,!so!long!as!you!have!documentation!of!the!company!that!this!is!for!the!everyone,!that!would!
suffice.!The!BIR!will!not!be!following!your!car!around!if!it’s!park!outside!your!house!at!night,!etc.!
!
How!about!the!gasoline?!!
It!is!still!subject!to!fringe!benefits!tax!under!the!expense!account.!If!you’re!given!transportation!allowance!as!a!president,!gasoline!
allowance,! cellular! phone! allowances,! etc.! it! will! fall! under! expense! account! unless! class,! you! are! required! to! liquidate! that! by! submitting!
receipts! at! the! end! of! the! year.! A! cellular! would! require! the! listing! of! the! calls! that! you! made! whether! it’s! for! business! and! personal.! Ang!
gasoline!naman!I!don’t!know!lang!how!will!you!make!charges!that!this!is!personal,!this!is!business.!Probably,!the!best!way!is!50%!is!business,!
50%!is!taxable!nalang.!But!I!know!you!can!secure!receipts!from!your!friends.!
For!expenses!usually!you!are!given!by!your!employer!transporation!allowances,!gasoline!allowance,!call!allowances,!representation!
and!meal!allowances!like!P100,000!a!month.!Now!it!will!be!taxable!except!if:!
1. You!will!be!required!to!liquidate!the!amount!by!submitting!receipts,!issued!in!the!name!of!the!company,!not!in!your!name.!
!
20. What!about!household!personnel!subject!to!fringe!benefits!tax?.!!
So!apart!from!given!a!free!stay!in!the!condominium!unit,!a!free!motor!vehicle!will!be!given,!a!driver,!a!helper.!The!amount!paid!to!
those!helpers,!drivers,!etc.!will!be!subject!to!fringe!benefits!tax.!You’re!being!given!a!good!life,!it’s!a!perk.!!But!if!the!drivers,!the!maid,!if!the!
driver! example! falls! under! the! payroll! of! the! company! itself! na,! the! amount! given! is! not! subject! to! fringe! benefit! tax! because! his! salary! is!
already!subject!to!withholding!tax.!Whatever!you!get!from!the!company,!the!BIR!can!always!says!it’s!taxable.!!
!
21. If!the!company!grants!you!a!loan!at!0%!interest,!now!the!12%!will!be!assumed!by!the!BIR!as!the!legal!not!charged!by!the!company!to!you,!12%!
of!the!loan!value!of!the!principal!will!be!subject!to!fringe!benefits!even!if!you!did!receive!nothing.!If!the!rate!is!lower!than!12%,!say!perhaps!at!
2%,!is!there!fringe!benefit?!!
Yes.!If!there’s!a!difference!in!the!interest!rate!granted!to!the!employer!against!the!legal!rate!of!12%,!it!has!not!been!changed!`!the!
12%!for!tax!purposes!remains!the!same.!So!the!difference!between!the!12%!and!the!2%!granted!lowered!2%!granted!by!your!company,!the!
10%!even!if!it!is!theoretical!interest!will!be!subject!to!fringe!benefits!tax.!Say!for!example,!you!made!a!loan,!a!loan!from!the!company!so!that!
you!can!buy!a!motor!vehicle,!50%!of!the!motor!vehicle!has!been!subsidized!by!the!company.!There!are!actually!2!kinds!of!benefits!there,!the!
fringe!benefit!on!the!subsidized!portion!of!the!vehicle!and!the!fringe!benefit!on!the!interest!for!gone!by!your!company!granting!you!0%!loan!or!
a!loan!at!a!lower!interest.!
!
22. If!the!company,!you’re!the!manager!of!the!company!and!the!company!enrolled!you!in!a!masteral!class!–!Ateneo,!will!the!tuition!fee!paid!by!
the!company!be!subject!to!fringe!benefits!tax?!It!was!in!your!favor,!you!were!the!one!enrolled.!!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!18"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
As!a!rule,!the!assistance!granted!by!the!employer!to!the!employee!will!be!subject!to!fringe!benefits!tax!if!the!employee!is!not!rank`
and`file.!But!there!are!exceptions,!if!it!is!in!relation!or!in!line!with!the!position!held!by!the!employee!himself!or!would!actually!redound!to!the!
benefit!of!the!employer!and!it!has!to!be!supported!by!a!contract!wherein!the!employee!will!stay!in!the!company!for!a!number!of!years,!it’s!
what!you!call!as!lock!in!contract.!!
I!have!experienced!this!before!when!I!was!in!SGV!and!I!gave!them!the!idea!that!I!will!be!studying!while!working,!they!offered!to!
shoulder!the!expenses!for!schooling!but!on!the!condition!that!I!will!stay!in!the!company!for!7!years!after!graduation!`!7!years!in!Cebu!or!4!
years!in!Manila.!SO!if!that’s!the!case,!when!you!will!still!be!required!by!the!employer!to!stay!with!the!company!and!the!assistance!really…!
education!is!in!support!of!the..!is!in!favor!of!the!company!because!it!is!in!line!of!the!position!you!are!holding,!it’s!not!subject!to!fringe!benefits!
tax.!!
!
23. But!what!about!like!schools!are!granting!the!teachers!or!professors!free!education!for!their!children,!the!dependents!of!the!employees,!up!to!
let’s!say!three!children,!okay!lang!if!San!Carlos,!but!what!if!Cebu!International!School,!tuition!fee!is!this!much,!is!it!subject!to!fringe!benefit!tax?!!
Remember!that!the!burden!on!taxes!of!fringe!benefits!falls!on!the!employer!class!not!employee.!The!employees,!non!rank`and`file,!
receiving!actually!a!benefit!free!of!tax.!!
In!order!for!them!to!avoid!paying!fringe!benefits!tax!on!educational!assistance!granted!to!the!dependents,!not!the!employees:!!
1. Getting! the! assistance! must! be! competitive! in! nature! so! it! should! not! be! given! arbitrary! to! all! dependents! of! the! non`rank`and`file!
employees.!It!must!go!through!stages,!competition!between!the!dependents.!
2. The! dependents! must! actually! maintain! a! grade! required! by! the! corporation! employer! otherwise! if! those! two! conditions! does! not!
existence!in!an!educational!assistance!granted!to!dependents,!it!will!be!subject!to!fringe!benefits!tax.!
!
!
In! our! quiz,! which! of! the! benefits! are! subject! to! fringe! benefits! tax:! a.)! group! health! insurance! taken! by! the! employer! in! favor! of! the!
employees.!Is!it!subject!to!fringe!benefit!tax?!Life!or!health!insurance?!
All! group! life! insurances,! all! hospitalization! insurance! will! not! give! rise! to! fringe! benefit! tax! nor! ordinary! tax! on! rank! and! file!
employees!because!for!the!reason!that!these!group!life!insurance!or!health!insurances!are!never!directed!specifically!to!one!employee.!The!
insurance!is!for!free!for!all!to!those!who!will!become!covered!by!the!insurance!because!when!given!like!a!disability!etc.!!
!
And! we! have! other! kinds! of! benefit! as! well:! Membership! fees! in! a! golf! club,! etc.! those! in! social,! health! or! athletic! clubs! as! well! as! foreign!
travels!and!vacation!expenses.!
!
!
24. How!will!we!compute!the!fringe!benefits!tax?!For!illustration!I!found!in!some!reviewers!they!put!emphasis!on!grossed!up!monetary!value.!
Did!you!happen!to!chance!upon!what!grossed!up!monetary!value!is?!In!ordinary!salaries!or!compensation!or!wage!that!you!received,!
whatever!is!stated!in!the!employment!contract!that’s!your!salary,!you!don’t!expect!to!get!everything!because!the!component!of!that!is!
for!taxes!based!actually!on!the!5!to!32!percent!tax!that!you’re!paying.!SO!this!is!your!basic!salary.!

! 32% of GMV of Fringe Benefit!

!
!
32% of ! ___________________!
!

If! you’re! given! a! fringe! benefit! as! a! non! rank! and! file! employee,! the! fringe! benefit! that! you! received! is! already! net! of! the! tax.! Why?!
Because!it!will!be!the!employer!who!will!shoulder!the!tax.!So!your!entire!benefit,!if!ever!a!fringe!benefit!is!given!you,!is! not!only!that!
which!you!have!received!but!as!well!the!value!of!the!tax!that!is!shouldered!by!your!employer.!!

It’s!just!like!your!salary,!your!salary’s!100,000!a!month,!you!get!85,000!net,!15,000!goes!to!the!BIR.!How!much!is!really!your!salary?!Your!
benefit?! 100,000.! The! same! with! fringe! benefit.! If! you! received! 50,000! and! you’re! no! longer! required! to! pay! tax! on! the! 50,000,! your!
benefit! is! something! bigger! than! the! 50,000.! And! that! is! fringe! benefits! plus! the! tax! shouldered! by! the! employer! equals! your! entire!
benefit!or!entire!compensation!or!perk!that!you!received.!

!
!
!
Salary! ! Php!100,000.00!! LESS! Tax!(5%`32%)!! =!! Net!Pay!
Fringe!Benefit! !!!!!!!!!!50,000.00!tax!at!32%!of!GMV!of!Php!50,000!(net!pay!is!Php!50,000)!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!19"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!
!

25. So! how! would! the! employer! compute! the! fringe! benefits! tax?! The! fringe! benefits! tax! is! a! 32! percent! tax! on! the! grossed! up! monetary!
value!of!your!fringe!benefit.!So!applying!this!formula!to!this!fringe!benefit,!it!will!be!32!percent!on!the!grossed!up!value!of!50,000.!Your!
grossed!up!value!is!simply!fringe!benefit!plus!tax.!So!grossed!up!value.!!

Again.! So! if! you! get! hired! and! under! your! contract! you! will! be! paid! 100,000! a! month! salary,! it! will! be! reduced! of! tax! on! the! 100,000!
computed!at!5`32!%!based!on!your!agreed!compensation.!You!will!only!get!net.!So!if!you’re!already!covered!by!the!highest!bracket!of!
32%!so!now!you!will!only!get!70,000!a!month.!But!if!you’re!given!a!fringe!benefit!of!free!stay!in!a!condominium!unit!valued!at!50,000!per!
month,!you!will!not!be!taxed!at!50,000.!You!will!not!be!subjected!to!tax!on!the!50,000!with!the!BIR!deducting!32%!of!30!days!stay.!The!
BIR!cannot!get!tax!in!kind,!it’s!always!monetary.!So!whatever!the!benefit!you’re!receiving!as!fringe!benefit,!it’s!entirely!net!na.!so!this!is!
net!already.!This!is!the!reverse.!

26. So!how!does!the!employer!compute!for!the!tax!on!the!50,000!–!by!grossing!it!up.!Grossing!it!up!means!to!say!that!the!net!is!brought!to!
the!gross.!Simply!the!net!pay!brought!to!the!gross!by!adding!the!tax.!So!how!is!grossing!up!done?!

There!is!already!a!formula.!!50,000!divided!by!68%!equals!grossed!up!monetary!value!times!32%!fringe!benefit!equals!your!fringe!benefit!
tax.!The!50,000!free!stay!is!already!free!of!tax!on!your!part.!But!someone!else!is!paying!for!that!tax.!How!will!the!employer!pay!the!tax?!
The!employer!will!simply!compute!the!fringe!benefits!tax!!at!the!rate!of!32%,!not!5`32!%.!32%!because!you!are!already!assumed!to!be!
occupying!the!highest!bracket!being!a!manager!or!supervisor.!Automatically!it!is!32!%!of!the!grossed!up!value.!

So!if!you!are!receiving!net!and!you!want!to!gross!it!up,!simply!divide!by!68%!,!which!is!the!gross!less!the!tax!–.!It’s!as!if,!if!you!divide!a!
value!at!the!amount!by!68%,!it’s!as!if!that!value!is!only!68!percent!(???).!You!will!arrive!at!100%.!!

!!
! How!to!compute!Gross!Marked!Up!Value:!
! !
! ! GMV!Formula! :! Php!50,000!! (Example!Above)!
!
! ! ! ! ÷!!!!!!!!!!68%! !
!
!
! ! ! ! _________!
! ! ! ! ! !!!!!!!!!!GMV!
! ! ! ! ! X!!!!!!!!!32%!
! ! ! ! ! ________!
! ! ! ! ! !!!!!!!!!!!!FBT!
!
!

Example,!you!have!a!deposit!of!1million.!In!the!passbook,!you!saw!that!there!is!an!interest!of!1000!for!one!month.!You’re!given!interest!
income.!Then!beside!there!is!tax!of!20%!which!is!200.!How!much!did!you!receive?!800!only.!800!is!80!%!after!the!tax!has!been!deducted.!
If!you!want!to!gross!up!the!800!net!interest,!how!do!you!do!the!grossing!up?!Simply!divide!it!by!80%.!What!did!you!receive!in!percentage,!
it’s!80%!so!divide!it!by!80%.!

In!this!example,!when!you!receive!a!fringe!benefit,!it’s!only!68%!so!in!order!to!get!the!full!100%!value!of!what!you’re!receiving!including!
the!tax!that!has!been!shouldered!by!your!employer,!divide!it!by!68%.!!It’s!as!if!50.000!is!only!60%!of!the!whole!picture.!How!much!if!you!
divide!50,000!by!68%?!(I!don’t!know!the!answer)You!get!the!full!value.!How!much!will!your!employer!pay!to!the!BIR?!32%!of!the!grossed!
up!value.!!

27. I’ll! illustrate! that! in! simpler! terms.! If! you’re! given! a! household! helper,! to! live! with! you! in! the! condominium! unit,! and! the! company! is!
paying!the!household!helper!for!6,800!a!month,!how!much!is!your!fringe!benefit?!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!20"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!

!
GMV Formula : Php 6,800
! How much did you really get:!
÷ 68% !
_________! Php!!!!6,800!! !
!
Php 10,000 (Fringe Benefit plus Tax)! ! +!!!!!!!!!3,200! !
! X 32% (Fringe Benefit Tax)! ! _________!
________! ! !Php!10,000!!!
! Php 3,200.00! ! ! ! !
!
!

What!is!your!fringe!benefit!is!the!6800!net.!How!will!the!employer!pay!the!tax?!Will!the!employer!simply!compute!the!32%!directly!on!the!
6800?!No,!because!this!is!net.!You!gross!it!up!by!dividing!it!by!68%.!6800!is!only!68%!of!the!entire!value!of!the!benefit!you!are!getting.!So!
if!you!gross!it!up,!it!is!10,000.!So!you!received!this!benefit!plus!the!tax.!This!is!what!you!are!really!getting!from!the!company.!6800!worth!
of!services!per!month!plus!the!tax!that!the!BIR!is!collecting!from!the!employer.!

Since! fringe! benefit! is! computed! at! 32%,! how! much! is! the! tax! paid! to! the! government! every! month?! 32%! of! the! GMV?! 3,200.! Double!
check,!how!much!benefit!did!you!really!get!from!the!employer?!6800,!the!presence!of!your!maid!plus!the!tax!that!is!paid!,!total!of!10,000.!
It’s!simple!algebra!(??).!This!is!really!more!burdensome.!Why?!It’s!computed!by!grossing!up.!What!you!received!is!grossed!up.!!

Question:!Are!we!going!to!compute!in!the!exam?!!

Tiu:!If!there’ll!be!computation,!it!is!for!illustration!lang.!

28. The!reason!why!it’s!32%!is!because!the!highest!rate!that!is!imposed!on!employees!is!32%.!What!happens!if!the!employee!is!a!special!alien!
employee!subject!to!15%?!And!that!special!employee!is!given!a!housing!benefit!of!85,000!rates!per!month?!Do!we!use!the!32%!fringe!
benefits!tax!on!a!special!employee?!

NO.!for!special!employees,!income!derived!by!special!employees,!what!is!used!is!15%.!

If!it’s!a!special!employee,!the!fringe!benefits!tax!is!15%!of!the!GMV.!For!ordinary!mortals!just!like!us,!our!fringe!benefit!will!be!computed!
at!32%!of!the!GMV!by!our!employer.!But!if!we!belong!to!special!employees,!since!your!special,!get!special!rate.!15%.!Special!employees!
are!subject!to!15%!preferential!rate!on!their!income.!Only!insofar!as!it’s!related!to!their!employment,!not!other!income.!But!because!they!
are!subject!to!special!rate!of!15%,!the!FBT!on!their!benefits!is!also!computed!at!15%,!not!the!32%.!!

29. Therefore,!if!the!special!employee!is!getting!a!monthly!housing!benefit,!free!stay!in!a!10!bedroom!unit,!what!is!the!GMV!of!85,000!for!
special!employee?!How!do!you!gross!it!up?!

! SPECIAL EMPLOYEE: FBT 15% of GMV!

! GMV!Formula! :! Php!!!!85,000!! Housing!Benefit! True Value:!
! ! ! ! ÷!!!!!!!!!!!!!85%! ! Php!!!!85,000!(Net!Free!Stay)!
! ! ! ! __________! ! +!!!!!!!!!15,000!(FBT)! !
!
! ! ! !Php!100,000!!! ! _________!
!
!
! ! ! X!!!!!!!!!!!!!15%!!! ! !Php!100,000!!!
! ! ! ! __________! ! ! ! !
! ! ! !Php!15,000! !
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!21"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!

85,000! times! 85%.! 85%! because! the! 15%! there! is! the! fringe! benefit! tax.! The! GMV! is! 100,000.! How! much! will! the! government! pay?!If!
you’re!a!special!employee,!the!FB!that!youll!be!receiving!is!only!subject!to!a!lower!rate!of!15%.if!you!want!to!know!what!is!the!true!value!
of!the!benefit!received,!you!have!to!gross!it!up!by!adding!the!tax!component!of!the!benefit.!You!should!use!85%,!not!68%.!68%!is!the!
difference!between!the!full!benefit!minus!the!tax.!This!is!only!85%!of!what!you’re!getting!because!15%!is!the!tax.!Therefore!you!gross!it!
up!by!85%,!you’ll!get!the!full!benefit!of!100,000!which!is!actually!the!15%!tax!plus!the!free!stay!in!the!condominium!unit.!!

30. That!is!not!all.!There!is!another!alien!individual!subject!to!special!rate!to!a!flat!rate!of!25%.!Who!are!these!individuals?!

Non!resident!aliens!who!are!not!engaged!in!business!or!trade!are!subject!to!a!flat!rate!of!25%.!Who!are!non!resident!aliens!who!are!not!
engaged?!Those!who!are!transient!or!sojourners!and!they!stay!here!for!180!days!or!less.!I!love!days,!so!in!the!exam,!you!should!know!180!
days!or!less.!

Non!resident!aliens!not!engaged!in!trade!or!business,!their!FBT!is!not!32%,! not!15%,!but!25%!of!the!GMV.!If!you’re!computing!for!the!
grossed!up!of!a!non!resident!alien!not!engaged!in!trade!or!business,!what!is!your!divisor?!75%!here.!And!25%!here.!!

!
NON-RESIDENT ALIEN: FBT 25% of GMV!
!
!
GMV!Formula! :! Php!!!!75,000!! Housing!Benefit! True Value:!
! ! ! ! ÷!!!!!!!!!!!!!75%! ! Php!!!!75,000!(Net!Free!Stay)!
! ! ! ! __________! ! +!!!!!!!!!25,000!(FBT)! !
! ! ! ! !Php!100,000!!! ! _________!
! ! ! ! X!!!!!!!!!!!!!25%!!! ! !Php!100,000!!!
! ! ! ! __________! ! ! ! !
! ! ! !Php!25,000! !
!

Whenever!you!are!given!a!benefit!that!qualifies!as!FB,!never!mind!the!tax.!It’s!the!employer!who!computes!for!the!tax.!You!will!not!be!
concerned! of! being! deducted! of! any! tax,! not! even! your! basic! salary! will! be! deducted! of! FBT.! But! for! bar! purposes! and! this! class,! you!
should!know!who’s!liable!and!who’s!not.!When!you!should!liable!for!the!payment!of!tax,!etc,!and!who!are!these!concerned!people.!

31. Now,!not!all!benefits!are!taxable.!!There!are!benefits!which!are!exempt!from!tax.!What!are!these?!

Rank!and!file!employees!benefits!–!Why!are!these!not!subject!to!FBT?!For!rank!and!file,!it!will!be!included!in!their!computation!of!their!
ordinary!income.!FBT!applies!only!to!non!rank!and!file!employees.!

32. de!minimis!benefits!–!What!are!de!minimis!benefits?!They!are!those!benefits!that!are!small!amount/value!and!given!to!promote!goodwill.!
Example.! Rice! allowance.! Clothing! allowance.! If! you’re! given! a! clothing! allowance,! without! limit,! for! Prada! clothing! brand,! is! that! de!
minimis?!Not!anymore,!does!not!fall!within!the!definition!that!it!should!be!in!small!amount.!When!you!say!de!minimis,!these!are!benefits!
of!relatively!small!value.!So!you!will!know!that!when!you!are!given!a!rice!allowance,!it’s!your!basic!need.!But!if!the!rice!given!to!you!is!
jasmine!rice,!it’s!no!longer!exempt,!because!it’s!no!longer!a!small!value.!What!is!de!minimis!in!so!far!as!rice!allowance!is!concerned?!only!
1500!in!value,!whether!given!in!cash!or!kind.!Only!to!the!extent!of!1500.!Clothing!allowance,!de!minimis!would!only!be!up!to!the!extent!of!
4000!per!year.!You!don’t!expect!to!change!wardrobe!every!month.!!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!22"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!

! Rice as De Minimis Benefit!

! ! !
! ! Php!! 2,000!!!!!(Value!of!the!Rice)!
! Less! !!!!!!!! 1,500!!!!!!(Allowed!De!Minimis!Benefit)!
! Note if excess is taxable:!
! Php! !!!500!(Taxable)!! If NRF: subject to fringe benefit tax!
!
If RF: subject to ordinary income tax!
!
!
!
!
Take
! Note!can!still!use!exclusions!on!benefits!worth!at!least!Php!30,000:!
!Example:!
!!
Php!10,000!! `!! Php!30,000! =!! Php!20,000!
! th
13 !Month!Pay! ! Exclusions!allowed!! (So!include!the!Php!500!under!this!exclusion!to!be!exempted)!
!

Example,! rice! allowance! per! month! is! 2000.! What! is! considered! de! minimis! is! only! 1500! per! month.! So! the! 500! per! month! is! actually!
th
taxable,! not! the! entire! 2000.! But! you! remember! in! exclusions! from! gross! income,! wherein! it! says! there! ,! 13 ! month! pay! and! other!
th
benefits! not! exceeding! 30,000! during! the! entire! year,! will! be! exempt.! So! if! your! salary! is! only! 10,000,! your! 13 ! month! pay! is! 10,000.!
th th
Usually!that’s!how!it’s!computed,!if!it’s!20,000!that’s!the!14 !month.!So!if!your!13 !month!pay!is!10,000,!!the!free!space!is!20,000!`!to!use!
for!exemption`!for!other!allowances!which!does!not!qualify!under!de!minimis.!

If!a!rank!and!file!employee!receives!this!benefit,!he!has!to!pay!the!tax!on!the!excess.!If!the!employee!who!receives!is!non!rank!and!file,!it!
is!the!company!who!will!shoulder!the!tax!by!grossing!this!up.!

When!you!say!de!minimis,!it’s!defined!as!benefits!of!small!value.!!Benefits!of!relatively!small!value!it!has!already!been!put!into!writing.!So!
if!it’s!rice!allowance,!it’s!1500!per!month.!If!it’s!uniform,!4000!per!annum.!Laundry!allowance,!300!per!month.!Medical!allowance!to!the!
dependents!of!the!employees,!it’s!1500!per!year!in!cash.!Dependents.!But!medical!benefits!to!the!employee!himself!which!should!not!be!
in!cash!is!10,000!per!annum,!to!be!de!minimis.!See!the!disparity.!If!it’s!the!dependent,!medical!allowance!it’s!1500!per!year,!if!it’s!the!
employee!it’s!10,000!per!year!in!kind.!!He!has!to!submit!official!receipts!for!medicines!and!it!does!not!include!vitamins.!Christmas!bonus!
of!5000!per!annum!is!exempt!and!it!is!not!included!in!the!30,000!package.!Achievement,!loyalty!awards!may!be!exempt!to!the!extent!of!
10,000!so!long!as!it’s!given!in!kind.!What!you’ll!have!to!do!is!–!if!you!are!to!be!awarded!for!not!being!late!the!entire!year`!no!tardiness!
award`! 10,000! –! because! the! maximum! is! 10,000,! if! it’s! given! in! cash! to! you,! it’s! taxable.! If! rank! and! file`! taxable,! you’ll! receive! only!
around!7000.!If!you’re!non!rank!and!file,!you!may!get!the!10,000,!the!company!will!gross!it!up!and!pay!FBT.!What!you’ll!have!to!do!is!to!
not!receive!it!in!10,000!cash.!Negotiate!with!the!employer!that!you!want!this!item!from!a!store,!valued!at!10,000,!let!the!company!buy!it!
for!you!and!give!it!to!you!as!an!award.!The!law!says!tangible!property,!not!including!tax.!

Benefits!given!to!non!rank!and!file!are!exempt!fringe!benefits.!They’re!exempt!from!FBT,!but!it!does!not!mean!that!it’s!not!subject!to!the!
ordinary!tax!on!rank!and!file!employees.!Because!the!nature!of!the!exemption!in!number!one!is!the!recipient,!the!type!of!tax.!The!tax!is!
still!there!but!it!cannot!be!FBT!because!their!status!is!non!rank!and!file.!But!for!de!minimis!benefits,!the!exemption!goes!into!the!benefit!
itself,! whoever! the! recipient! is.! So! it’s! exempt! whether! received! by! rank! and! file! or! non! rank! and! file! employees.! It! depends! on! the!
exemption.!!

!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
33. Another! exempt! fringe! benefit! :! Contributions! of! the! employer! for! the! benefit! of! the! employee! to! retirement,! insurance! and!
hospitalization!benefits!plan`!!So!what!is!this!really?!Does!it!include!the!premiums!paid!by!the!employer!on!a!life!insurance!policy!on!the!
life!of!its!president?!!

No.!!

What!does!it!refer!to?!What!type!of!plans?!

We!have!mentioned!before,!whenever!a!company!takes!out!a!life!insurance!policy!over!the!life!of!its!president!or!key!personnel,!we!have!
to!know!who!the!beneficiary!is!for!purposes!of!knowing!whether!it!becomes!income!on!the!part!of!the!insured.!!

Probably!you’ll!remember!this.!!Two!sides!of!the!spectrum.!!Premiums!as!income!and!premiums!as!exempt.!Same!type!of!privilege.!Two!
insurance! policies! taken! out! by! one! company! over! the! same! person.! But! the! first! company! beneficiary! is! the! company! it’self.! In! the!
second!one!the!administrator!of!the!estate.!100K!premiums!per!year!(first!insurance),!50K!premiums!per!year!(second!insurance).!How!
much!was!paid!every!year?!150,000!as!premiums.!Premiums!may!or!may!not!be!considered!as!income!on!whose!part?!The!employee.!
Can!it!be!considered!as!an!expense!or!not!an!expense!on!whose!part?!The!employer.!

Number!one,!is!the!100K!premium!paid!by!the!employer!an!income!on!the!part!of!the!employee!if!the!beneficiary!is!the!company!itself?!
Simple! recall.! There’s! always! logic! in! the! principle! behind! why! it’s! subject! to! tax.! The! company! took! out! two! insurance! companies.!
Beneficiaries!different,!two!premium!payments.!This!same!premium!is!something!to!the!employee!and!something!to!the!employer.!This!is!
a! benefit! to! the! one! who! was! insured! and! an! expense! because! it! is! an! outflow! for! the! one! who! insured! it.! Question,! is! it! deductible!
expense!on!the!employer!and!is!it!a!taxable!income!on!employee?!This!was!discussed!in!Section!32!B,!life!insurance!proceeds!in!section!
36,! non`deductible.! Since! the! employee! was! insured,! but! it! was! the! company! who! was! the! beneficiary,! is! it! really! an! income! on! the!
employee!that!is!taxable?!No,!because!it!will!redound!to!the!company!itself.!

If!the!beneficiary!is!the!administrator,!it!is!taxable!income!on!the!part!of!the!employee.!!

!
! 1) BEN!=!! Company!=!! ! ! Php!100,000!/!year! PREMIUM!
! 2) BEN!=!! Employee!or!Administrator!=!!! Php!50,000!/!year!
!
Benefit!of! INCOME" EXPENSE"
Employee" Employer!
! Amount" Taxable?" Amount" TAXABLE?"
COMPANY! Php!100,000! Not!Taxable! Php!100,000! Not!deductible!

EMPLOYEE!/!ADMINISTRATOR! Php!100,000! Taxable! Php!100,000! Deductible!

!
!
!
! rd
! Is!this!what!is!meant!by!the!3 !exemption!on!fringe!benefit?!NO.!
rd
! This!is!not!meant!by!the!3 !Exemption!in!the!outline!under!fringe!benefit.!
rd
! What!is!meant!by!the!3 !exemption!is!the!exemption!on!the!group!insurance.!
!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
There! were! outflows! of! cash,! 150,000,! is! it! deductible! expense! on! the! part! of! the! company! if! the! beneficiary! is! the! company! itself?!
100,000!is!not!deductible.!Why?!It!is!the!return!of!capital.!If!the!beneficiary!is!the!administrator,!can!the!company!deduct!the!premiums!
as!expense?!Yes,!deductible.!!

!If! it’s! not! an! income! that! is! taxable! on! the! part! of! the! employee,! it! is! not! an! expense! deductible! on! the! part! of! the! employer.! If! it! is!
taxable!as!income!on!the!part!of!the!employee,!it!is!deductible!on!the!part!of!the!employer.!
In!relation!to!exempt!fringe!benefits,!this!is!what!we!are!looking.!Premium!payments!are!income!to!the!employee`!If!the!beneficiary!is!the!
employee!himself.!Is!this!the!one!that!is!exempt!in!our!outline?!Premium!contributions!by!the!employer!for!the!benefit!of!the!employee!
in!a!life!insurance!policy?!Is!it!exempt?!Taxable.!Not!the!one!referred!to.!!

Our!discussion!before!did!not!really!distinguish!what!type!of!tax!will!be!collected!by!the!BIR!if!this!taxable.!Now!we!know,!If!he!is!non!rank!
and!file,!he!is!subjected!to!FBT.!But!if!he!is!rank!and!file,!subjected!to!ordinary!tax!rates.!So!this!is!exempt.!What!is!exempt!is,!this!was!in!
the! quiz,! contributions! made! by! the! employer! on! insurance! policies,! whether! for! retirement,! insurance,! health,! hospitalization! for! the!
group!of!employees.!The!reason!is!why!it!is!not!taxable!the!outflows!of!the!employer!does!not!–!(Student:!does!not!directly!benefit!the!
specific!employee)!There!is!no!specific!benefit!received!by!the!employee!because!the!policy!taken!is!a!group!retirement,!group!insurance!
or!health!or!group!hospitalization!insurance.!

34. Next! item.! Employer’s! convenience! rule.! –! Exempt! because! it! is! required! by! the! nature! of! the! trade,! business! or! profession! of! the!
company!or!employer.!It!is!for!the!convenience!of!the!employer,!it!just!part!of!the!expenses!of!the!company.!Therefore!it!is!not!really!
redounding!to!the!benefit!of!the!employee`!rank!and!file!or!non!rank!and!file.!

35. And!there!is!another!item,!FB!which!are!authorized!or!exempted!from!tax!under!special!laws.!The!catch!all!provision.!(Student):!there!is!a!
law!which!specifies!that!such!benefit!may!not!be!subject!to!FBT.!

We’re!done!with!fringe!benefits.!

36. Expenses!for!foreign!travel!becomes!subject!to!FBT!only!if!it!is!not!for!business!purposes.!And!for!you!to!be!able!to!prove!that!it’s!for!
business! purposes! and! for! the! company! to! avoid! the! FBT,! the! company! should! present! a! letter! of! invitation! from! abroad.! It’s! the!
requirement!under!the!regulations,!a!letter!of!invitation.!So!that!if!you!have!an!employee!and!he!wants!to!go!abroad!for!vacation,!just!
make!sure!he!makes!some!side!trip!for!business!purposes.!The!airfare,!allowances!are!exempt.!The!round!trip!tickets!for!abroad!is!not!
really!that!cheap,!it’s!expensive!if!not!Asia.!It’s!entirely!exempt!from!FBT!if!it’s!for!business!purposes,!unless!the!flight!taken!is!first!class.!
So!even!if!it’s!for!business!purpose,!if!the!flight!is!first!class,!it’s!taxable!to!the!extent!of!30%.!Why?!You!don’t!really!travel!first!class!for!
business.!

We’re!done!with!the!first!category,!compensation!income.!We!said!that!all!types!of!compensation!for!service!rendered!whether!given!in!
cash!or!in!kind!are!as!a!rule!subject!to!tax,!unless!if!it!is!exempt.!

37. Second!type!is!Business/Professional!Income.!

So,!if!an!employee!can!earn!compensation!from!working,!an!employee!can!also!earn!business!or!professional!income!from!an!activity!and!
it!is!also!subject!to!5`32%.!It!is!not!really!interesting!it!will!become!interesting!when!we!come!to!corporate!taxation.!

! BUSINESS TAX: 5% -
32%!
! !

!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!

38. Let’s!go!to!the!third.!What!is!the!third!of!income!that!can!be!earned!by!an!individual?!Passive!income.!What!is!passive!income?!!

What’s!opposite!of!passive?!Active.!Is!this!active!income?!(Compensation!income)!Yes.!Is!this!active!income?!(Professional!income)!Yes.!

What!is!passive!income!as!opposed!to!active!income?!When!you!come!across!an!income!wherein!there!is!no!active!participation!on!the!
part!of!income!earner!to!generate!the!fund,!like!interest!income!on!bank!deposit,!that’s!passive!income.!You!put!the!money!there!and!
you! let! it! grow.! You! don’t! really! engage! in! a! business,! trade! or! profession! and! you! don’t! get! employed! to! get! that! interest.!That! is! an!
example!of!a!passive!income.!There!are!many!kinds!of!passive!income.!Opposite!of!course!is!active,!those!that!you!really!venture!into!
regular!activities!to!come!up!with!the!money.!

We! said! that! compensation! income! and! business! income! is! subject! to! the! regular! rates! of! 5`32%! applicable! to! individuals! as! a! rule.! Is!
passive! income! covered! by! the! 5`32%! rate?! Passive! income! is! not! covered! by! the! same! rate.! What! is! the! method! of! taxing! a! passive!
income?!Passive!income,!is!subjected!to!final!tax.!!

Passive!incomes!are!subjected!to!final!taxes.!What!is!a!final!tax?!Sometimes!it’s!called!final!withholding!tax,!sometimes!final!income!tax.!
There!is!always!the!word!final.!Final!is!always!attached!to!the!word!–!(tax?)!PASSIVE.!What!is!final!income!tax?!Final!income!tax!is!a!–!!
(Final!tax!is!a!particular!tax!made!separately!from!the!income!tax)!you!have!no!idea?!Next!question.!

39. Give! me! a! passive! income.! Royalties.! Give! me! an! example! of! a! royalty! that! derives! royalty! income.! Software.! When! you! purchase! a!
software!that!is!not!off`shelf!but!rather!customized!and!there!is!a!transfer!of!technical!know`how!or!technical!knowledge,!it!will!require!
the!payment!of!royalty!fees.!If!you!pass!on!some!technical!knowledge!for!the!manufacture!of!this!microchip!or!item,!it!will!be!subject!to!
royalty!fees.!Being!a!royalty!fee,!royalty!income!that!is!passive!income,!just!pass!on!the!knowledge!and!it!will!generate!royalty!fee.!It’s!a!
passive!income!subject!to!final!tax.!!

Now,!how!will!it!be!taxed?!!

! Witholds!

! Technical Knowledge
(TKH)! Earns Income!
!
Ṻ! ! HE! Royalty Income!
!
iPUD! You pay ROYALTY FEES!
! ! !

This!is!U.!This!is!HE.!HE!transferred!technical!know`how.!You!are!to!pay!royalty!fees!for!the!knowledge!he!transferred!to!you!where!you!
can!generate!iPud.!Who!is!earning!income!here?!HE.!He!has!royalty!income.!It’s!a!passive!income.!After!he!transferred!the!knowledge,!he!
generates!funds!–!royalty!fees!based!on!a!certain!percentage!of!the!sales!you!generated!from!selling!it.!!

!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
Who!will!pay!the!tax?!!

What!did!we!say!of!passive!incomes?!Passive!incomes!are!subject!to!final!tax.!And!final!tax!is!–!remember!taxation!at!source?!–There!are!
two! types! of! taxation! at! source.! Creditable! withholding! tax! and! final! withholding! tax.! Final! withholding! tax! is! only! imposed! on! passive!
incomes.!Now,!there!is!what!we!call!as!withholding!mechanism.!The!income!earner!is!no!longer!required!to!reflect!the!passive!income!as!
part!of!his!income!at!the!end!of!the!year,!because!it!has!already!been!subjected!with!finality!through!the!final!tax!withheld!by!the!–!who!
will!withhold!the!tax?!!

Passive! incomes! are! those! incomes! generated! from! inactivity,! those! you! don’t! venture! into! as! a! business,! etc.! passive! incomes! are!
incomes!which!are!not!considered!as!part!of!your!business!at!the!end!of!the!year!or!as!part!of!compensation!income.!Whenever!a!passive!
income!is!generated!and!earned!by!U,!it!is!expected!that!it!will!be!withheld!of!final!tax!by!the!payor.!When!the!final!tax!is!withheld!by!the!
payor,!example,!royalty!is!subject!to!20%!if!the!income!earner!is!RC,!NRC,!RA.!When!a!passive!income!has!been!withheld!of!tax,!the!effect!
is! –! it! is! already! taxed! with! finality.! The! tax! withheld! is! constituted! as! the! full! and! final! payment! ,! forget! about! the! income! after! it! is!
earned.!You!don’t!have!to!consider!it!as!part!of!the!other!income!and!recomputed!the!tax!again.!It’s!not!part!of!the!income!at!the!end!of!
the!year,!not!part!of!your!withholding!tax!of!your!income!tax!return.!Because!it!is!taxed!at!every!time!the!income!is!earned.!Remember!
pay!as!you!earn!system,!remember!taxation!at!source?!The!source!of!the!income!itself!at!the!time!it!is!earned,!is!subject!to!tax.!!

40. You! sought! for! a! franchise! of! Julie’s! bakeshop.! You! pay! a! franchise! fee,! just! like! royalty! fees! based! on! the! sales! that! you! generate! for!
selling.!The!fee!payments!that!you!made!on!a!regular!basis!to!Julie’s!bakeshop!for!the!franchise!that!you!got`!is!it!subject!to!withholding!
tax!as!a!passive!income?!!!

No.!

!
! Sought for Julies Bakeshop Franchise! HE Reports such
! ! income as income
! Ṻ! HE! subject to 5% -
32% income tax.!
!! You pay FRANCHISE
FEES!
! !
Instead!
! !
NOT SUBJECT TO ROYALTY TAX!!
!
Not!all!realties!are!subject!to!passive!income!tax.!
!

Why!not?!Is!Julie’s!bakeshop!engaged!in!a!business!extending!franchises?!Yes.!Therefore,!if!any!royalties!are!paid!to!Julie’s!is!that!a!
royalty!income!that!is!passive!on!the!part!of!Julie’s!or!active!income?!Active!income.!Being!an!active!income,!will!it!be!subject!to!the!final!
tax!of!20%?!No.!Are!you!required!to!withhold!the!tax?!No.!so!what!will!Julie’s!do!with!the!payments!that!you!made?!It!will!form!part!of!
the!5`32%!tax!of!Julies.!Point!is,!not!all!royalties!are!passive!income.!If!the!income!earner!of!a!royalty!is!really!engaged!in!extending!
royalties,!franchises!and!other!intangible!assets,!then!it!is!no!longer!passive.!It’s!not!inactivity.!The!business!itself!is!extending!franchises,!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
it!will!not!be!considered!as!passive!income,!therefore!no!final!taxes,!therefore!the!one!paying!the!royalty!is!not!expected!to!withhold!
equivalent!to!at!the!end!of!the!year,!the!payment!simply!forms!part!of!business!income!subject!to!5`32%.!

41. This!is!a!royalty!payment!that!you!are!making!for!a!technical!know`how.!Really!passive.!But!you!are!a!NRA.!You!obtain!1!million!in!
royalties!every!year.!Passive!income.!Is!it!subject!to!20%!final!tax?!!

Non!resident!foreign!corporation`NETB,!you!got!technical!know`how!from!a!domestic!corporation.!Is!it!subject!to!the!final!withholding!
tax!of!20%?!Youre!engaged!in!business!abroad!but!you!are!classified!in!the!Philippines!as!not!engaged!in!trade!and!!

business.!Is!your!payment!to!the!domestic!corporation!subject!to!20%!withholding!tax?!

!
!
!
!

NRFC! Domestic Corp.!

! Technical Knowledge! Domestic Corp.
! !
! declares it as
! Ṻ! HE! income subject to
Royaltee Fees! income tax.!
!! iPUD!
! !
!
Instead!
! NOT SUBJECT TO ROYALTY TAX!! !
Not!an!income!within!for!the!Non`Resident!Foreign!Corp.!
!

A.!Can!you!really!do!the!withholding!from!abroad?!If!the!one!paying!who!is!expected!to!withhold!is!not!from!here,!is!abroad,!not!
registered!with!the!BIR,!there!can!be!no!withholding.!The!government!of!the!Philippines!cannot!compel!this!one!to!withhold.!Even!if!
passive!income,!no!withholding!because!there!is!no!withholding!agent.!What!the!domestic!corporation!will!do!is!simply!declare!by!itself!
the!income!and!be!subjected!to!(rates).!

So!it!simply!means!that!the!passive!income!subject!to!final!tax!must!be!an!income!that!is!paid!by!one!who!can!be!considered!a!
withholding!agent!in!the!Philippines.!Payment!in!the!Philippines,!in!short.!

!!
AUG.*10,*2010*Tuesday*
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
` Situation:! Mr.! X! is! a! legal! consultant! of! A! corporation.! He! was! given! as! part! of! his! compensation! package! housing! allowance.! Is! that!
subject!to!fringe!benefits!tax!(FBT)?!
o NO,!since!FBT!would!only!be!applicable!to!fringe!benefits!granted!to!managerial!or!supervisory!employees.!
o Can!FBT!arise!in!a!non`employer`employee!relationship?!
! FBT!can!only!arise!in!a!fringe!benefit!which!is!granted!in!an!ER`EE!relationship.!If!no!ER`EE!relationship!exists,!no!FBT!
would!be!due!but!whatever!is!the!benefit!received!by!that!independent!contractor!would!be!taxable!on!the!part!of!
the!contractor!by!declaring!it!as!part!of!his!gross!income.!!!
!
` How!do!we!compute!FBT?!
o 32%!final!tax!of!the!grossed`up!monetary!value!(GMV)!
o And!how!is!GMV!derived?!
! Refer!to!last`meeting’s!discussion!
!
` Is!FBT!a!final!tax?!
o YES.!
o What!is!a!final!tax?!Is!there!a!relation!between!a!final!tax!and!passive!income?!
! YES,!since!passive!income!is!subject!to!final!tax.!
! Is!fringe!benefit!subject!to!FBT,!which!is!a!final!tax?!YES.!
! Therefore,!fringe!benefit!is!a!passive!income?!
• Fringe!benefit!is!not!a!passive!income!because!it’s!earned!through!continuous!activity!or!services!rendered!
by!the!employee,!who!is!a!non`rank`and`file!employee!!
• Passive!income!is!an!income!derived!from!an!activity!in!which!the!taxpayer!does!not!materially!participate!
or!an!income!from!inactivity!and!passive!income!is!subject!to!final!tax.!
• As!we!have!said!also,!a!final!tax!constitutes!as!the!full!and!final!settlement!or!payment!of!the!tax!due!from!
the!payee!on!such!particular!income.!
• So!whenever!a!passive!income!is!earned!by!the!person,!whom!we!call!as!payee!of!that!passive!income,!any!
final! tax! that! has! been! imposed! already! on! that! income! is! considered! as! the! full! and! final! settlement.! No!
need!for!that!payee`taxpayer!to!declare!that!passive!income!as!part!of!his!gross!income!at!the!end!of!the!
year!in!filing!the!ITR!(income!tax!return)!because!it’s!already!paid!of!final!taxes.!!
• How!is!the!final!tax!collected!by!the!government!on!a!passive!income?!
o By!a!withholding!agent!–!final!tax!is!withheld!!
o Is!final!tax!the!same!as!final!withholding!tax?!!
! Final!income!tax!is!the!tax!itself!that!is!imposed!on!a!passive!income.!But!when!you!say!
that!it’s!a!final!withholding!tax,!it!is!the!mode!and!manner!of!collecting!the!taxes.!
! Whose!obligation!is!it!to!withhold!the!taxes?!
• The!payor!is!the!one!obligated!to!withhold!the!final!tax!on!the!passive!income!
that!is!paid!to!the!payee.!
• Payee!is!the!one!who!is!going!to!receive!the!passive!income!
• So!the!obligation!to!withhold!the!tax,!the!one!constituted!as!the!withholding!
agent! by! the! government,! is! the! payor! and! in! case! he! fails! to! withhold! the!
taxes,! who! has! a! liability! to! the! government?! Against! whom! can! the!
government!run!after?!
o Example:!If!there!is!A!and!B.!B!is!the!one!earning!the!passive!income!
and! A! is! the! withholding! agent.! A! paid! 100K! royalties! to! B.! Whose!
obligation!is!it!to!withhold?!A.!But!the!income`earner!is?!B.!In!case!
no! withholding! is! made,! the! 20%! is! not! withheld! on! the! gross,!
(Remember:! the! final! tax! is! imposed! based! on! the! gross! amount!
without!benefit!of!any!deduction!for!personal!exemption,!even!if!B!is!
an! individual! –! no! deduction! for! passive! income).! Now! in! case! A!
forgets!to!withhold!the!20%!final!tax!on!the!royalty!payments!to!B,!
from! whom! can! the! BIR! seek! collection! of! taxes,! surcharges,!
penalties?!
!
!
! Royalties!!
A!! B!!
!
as!
Php!100,000! Passive!
! !
withholding! Income!
!
agent! Earner!
!
!
!
! If!A!failed!to!withhold!20%!of!the!royalty,!A!will!pay:!
! 20%!+!25%!surcharge+20%!interest!per!annum!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!
!
Under!the!Tax!Code,!every!person!paying!a!passive!income!
!
that! needs! to! be! withheld! of! tax! is! designated! as! a!
withholding!agent!by!the!government!and!is!imposed!with!
personal!liability!for!the!payment!of!taxes!in!cases!of!non`
withholding.!
! So! the! consequences! for! non`withholding! is! that! the!
withholding! agent! becomes! liable! for! surcharge! and!
interests!and!liable!for!conviction!to!a!penalty!equal!to!the!
amount!of!taxes!not!withheld.!
! So!in!this!case,!if!Mr.!A!failed!to!withhold!the!20%!final!tax!
on! the! 100K,! how! much! is! A! liable! to! the! government?!
20%! of! 100K,! which! is! 20K! plus! surcharge! of! 25%! plus!
interest! running! from! the! date! he! should! have! withheld!
the!tax!until!the!date!he!settles!it!with!the!BIR.!So!if!it’s!like!
3!years!from!now,!3!years!of!20%!interest!per!annum.!
! When!does!the!obligation!to!withhold!the!tax!arise?!
• At!the!point!when!the!income!is!earned!
• Example:!Based!on!the!royalty!contract,!the!100K!is!payable!on!Dec.!31,!2010.!
But!effectivity!of!the!contract!and!the!transfer!of!technical!knowledge!started!
Aug.!10,!2010.!But!the!100K!is!actually!paid!on!January!31,!2011,!when!should!
Mr.!A,!the!payor,!withhold!the!tax!and!remit!it!to!the!government?!When!is!it!
earned?! When! is! the! withholding! tax! due?! If! the! contract! be! terminated!
tomorrow!and!you!have!remitted!the!tax!already,!do!you!think!BIR!will!refund!
you!for!that?!
o Withholding! of! final! taxes! on! passive! income! shall! be! made! at! the!
time!the!passive!income!is!paid!or!payable!whichever!comes!first.!
o When!you!say!payable,!it!must!be!due!and!demandable.!
!
!
!
! 1!Year:!
Royalties!!
! Payable!on!December!31,!2010! A!! B!!
! as!
Php!100,000! Passive!
Effective:!August!10,!2010!
! withholding! ! Income!
Paid:!January!31,!2011!
! agent! Earner!
!
!
! Therefore,!it!must!be!paid!on!
! December!31,!2010!
!
!
` What!is!taxation!at!source?!What!are!the!2!types!of!taxation!at!source?!
o Taxation!at!source!is!taxing!it!from!the!source!of!income!–!from!the!point!it!is!earned!
o 2!types!of!taxation!at!source!or!manners!of!collecting!taxes:!
! Final!withholding!tax!(FWT)!
! Creditable!withholding!tax!(CWT)!
• Both!are!withholding!taxes,!the!payor,!who!pays!the!income!to!the!payee,!has!the!obligation!to!withhold.!
• Difference:!
o 1.! It’s! just! that! if! it’s! a! FWT,! the! income! that! must! be! withheld! of! tax! is! passive! income! while! a!
CWT,!it’s!ordinary!income!–!ordinary!in!the!sense!that!it’s!part!of!business,!trade!or!profession.!
o 2.!In!a!FWT,!the!amount!of!tax!withheld!is!constituted!as!the!full!and!final!payment!of!tax!so!that!
the! passive! income! will! never! form! part! of! the! gross! income! of! the! taxpayer! at! the! end! of! the!
year.!(Remember:!In!passive!income,!you!simply!forget!about!it!right!after!it!has!been!withheld!of!
tax!because!it!has!been!fully!paid!and!finally!paid!of!taxes;!no!longer!part!of!the!gross!income!at!
the! end! of! the! year;! final! settlement! of! taxes! happen! at! the! point! where! income! is! paid! or!
payable,!whichever!comes!first).!While!in!CWT,!whatever!taxes!withheld!under!the!CWT!system!is!
a!tax!which!equals!or!approximates!the!tax!due!on!the!ordinary!income!earned!by!the!payee.!
! Example:! Whenever! a! deduction! is! required! to! be! withheld! of! tax,! the! payor! should!
withhold,!otherwise,!he!is!not!allowed!to!claim!it!as!a!deduction,!such!as!rent!expense.!
Rent! expense! should! be! withheld! of! 5%! CWT.! So! the! rent! expense! of! the! payor! is! the!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
rent! income! of! the! payee! and! the! rent! income! of! the! payee! is! simply! an! ordinary!
income.!Is!an!ordinary!income!of!rent!by!the!payee!part!of!his!gross!income!at!the!end!
of!the!year?!YES.!Is!he!liable!for!tax!to!5`32%!as!an!individual!at!the!end!of!the!year?!YES.!
But!can!the!BIR!wait!at!the!end!of!the!year!for!the!payee!to!declare!the!tax!and!pay!the!
tax?!NO.!
! CWT!and!FWT!are!simply!collection!schemes!or!the!manner!of!how!the!BIR!collects!the!
taxes.! In! CWT,! it! simply! means! to! say! that! the! BIR! is! advancing! the! collection! of! taxes!
from!the!ordinary!income!for!which!the!final!settlement!of!taxes!will!happen!at!the!end!
of! the! year.! In! FWT,! the! full! and! final! settlement! of! the! taxes! happened! at! the! point!
where!the!income!is!paid!or!payable,!whichever!comes!first.!!
! At! the! end! of! the! year,! the! tax,! which! has! been! withheld! under! the! CWT! system!
applicable!to!ordinary!income,!will!simply!be!off`setted!against!the!total!tax!due.!
! Example:!100K!monthly!rent.!His!income!at!the!end!of!the!year!is!1.2M.!Assuming,!the!
tax!due!is!350K.!How!much!was!withheld!under!the!CWT!mechanism!of!5%!per!month?!
5%!of!100K!is!5,000!over!a!period!of!12!months,!which!is!60K.!The!BIR!already!got!60K!
through!the!CWT!mechanism.!Every!month,!5,000.!But!the!word!creditable!means!it!will!
be!credited!against!the!tax!due!at!the!end!of!the!year,!which!is!60K.!So,!you!only!have!to!
pay!290K!at!the!end!of!the!year.!!
• However,!in!passive!income,!this!type!of!income,!do!not!include!them!in!your!
ordinary! income! because! it’s! already! collected! fully! and! it’s! already! finally!
settled!at!the!time!that!the!income!is!paid!or!payable.!
! In!the!FWT!system,!there!is!no!need!to!include!the!passive!income!as!part!of!the!ITR!of!
the!taxpayer!and!no!need!to!pay!taxes!at!the!end!of!the!year.!Whatever!was!withheld!is!
already!the!final!taxes.!No!other!approximation!or!computation!at!the!end!of!the!year.!
!
! Taxation"At"Source"2"Kinds:"
! !
! Final"Withholding"Tax" Creditable"Withholding"Tax"
! ! !
! 1.!Passive!Income! 1.!Ordinary!Income!
!
! !
!
! 2.!Full!and!Final!Settlement! 2.!Tax!which!equals!or!approximates!with!the!ordinary!
! ! income!
! ! !
! 3.!No!longer!part!of!gross!income! 3.!Part!of!Gross!Income!–!End!of!the!Year,!the!tax!withheld!
! will!simply!be!offsetted!against!the!total!tax!due.!
!
! Example!shown!below!
!
!
!
! Computation"of"Tax"Withheld:" Example:"
! " "
! Rent"Income"per"month"" " Php"100,000.00" Rent"Income"per"month"" " Php"100,000"
!
" " " " " x"""""""""""""""12"
!
! " " " " " 1,200,000.00"
! 5%"of"100,000"(amount"withheld)" """"""""""""5,000.00" "
! X"12"months" " " """"""""""""x" """""""12" Tax"Due"" " " 350,000.00"
! Amount"Withheld"Yearly" " """"""""""60,000.00" ! Less:"Tax"Withheld" " ""60,000.00"
! ! " " " " 290,000.00!
!
!
` In! CWT! system,! the! withholding! agent! is! still! liable! in! case! of! failure! to! withhold! taxes! since! he! is! statutory! taxpayer.! However,! the!
ordinary! income! earner! will! declare! it! at! the! end! of! the! year.! If! the! withholding! agent! can! prove! to! the! BIR! that! the! ordinary! income!
earner! fully! declared! the! income! and! paid! the! tax! without! deducting! any! withholding! tax! (because! there! was! really! no! credits! –! no!
withholding!made),!the!withholding!agent!can!escape!paying!the!basic!withholding!tax!that!he!failed!to!withhold.!What!he!only!needs!to!
pay!is!the!interest.!Why!interest?!Because!the!BIR!failed!to!get!hold!the!money!on!the!monthly!basis.!Tax!payment!was!only!made!by!the!
ordinary!income!earner!at!the!end!of!the!year,!which!is!different!from!FWT!system!since!a!passive!income!earner!is!not!required!to!file!an!
ITR!and!make!a!part!of!his!gross!income!the!passive!income.!The!CWT!system!is!much!tedious!since!you!have!to!get!the!records!of!the!
ordinary!income!earner!just!so!to!prove!that!he!actually!and!fully!paid!the!taxes!thereon.!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
` Question:!If!the!rent!payment!is!100K,!how!much!must!the!payee!declare!in!his!gross!income?!The!full!100K!or!the!95K!net!already!of!the!
5%!withholding!tax?!
o Another!distinction!between!CWT!and!FWT!is!that!any!income!earned!by!an!ordinary!income!earner!has!to!declare!it!as!part!of!
his!gross!income!at!the!end!of!the!year!when!he!files!his!ITR.!!
o Must! he! declare! the! full! income! of! 100K! or! the! net! after! tax! withheld,! meaning! 100K! or! 95K! only! after! the! 5%! had! been!
withheld!of!tax?!
! In! all! cases,! an! ordinary! income! earner! must! declare! the! full! amount,! whether! there! has! been! withholding! or! not!
because!the!BIR!has!to!determine!the!correct!tax!at!the!end!of!the!year.!The!question!will!be!did!he!have!any!credits!
for!which!a!CWT!has!been!withheld.!
!
` Is!your!salary!or!compensation!subject!to!FWT!or!CWT?!
o It! is! still! a! form! of! CWT! since! as! you! earn! income! monthly,! the! taxes! that! have! been! withheld! would! be! accumulated! and!
considered!as!part!of!annualizing!your!total!income!for!the!calendar!year.!
!
PASSIVE!INCOME!
!
` Royalties!
o Are!all!royalties!subject!to!final!tax!of!20%?!What!is!covered!by!royalties!subject!to!final!tax?!
! Royalties!is!subject!to!20%!final!tax!except!in!the!case!of!literary!works,!books!and!musical!compositions,!which!are!
subject!to!10%!final!tax.!
! Let’s! say! there! is! a! royalty! income! earned! by! Mr.! A.! It! did! not! arise! from! literary! works! nor! books! and! musical!
compositions.!Is!it!automatically!subject!to!20%!final!tax?!
• Criteria!is:!
o 1.! It! must! not! be! among! those! special! royalties! earned! (literary! works,! books! and! musical!
compositions)!
o 2.!It!must!be!a!passive!income!
o 3.!It!must!be!derived!from!sources!within!the!Philippines!
! Otherwise,! if! royalty! income,! is! derived! from! sources! abroad,! regardless! of! who! the!
payee! is,! the! Philippines! has! no! control! over! the! withholding! agent,! thus,! it! is! not!
covered!by!the!FWT.!
! So!the!first!thing!we!have!to!look!into!is!that:!
• Is!the!royalty!income!a!passive!income?!We!can!only!say!it’s!passive!income!if!the!income`earner!or!payee!is!
not!in!the!business!of!extending!royalties.!!
o Example!of!a!business!in!the!habit!of!extending!royalties:!JULIE’S!BAKESHOP!–!you!pay!franchise!
fee!upfront!but!your!sales!will!be!covered!by!royalty!payments,!a!certain!percentage!of!your!sales!
you! will! have! to! pay! it! to! JULIE’S! or! even! MCDONALDS! or! JOLLIBEE.! They! are! in! the! habit! of!
extending!franchises,!therefore,!it!becomes!an!ordinary!income!for!their!part.!We!don’t!have!to!
withhold!the!final!tax!since!JOLLIBEE,!MCDONALDS!and!JULIE’S!BAKESHOP!will!simply!declare!it!as!
part!of!its!gross!income!at!the!end!of!the!year!subject!to!the!ordinary!income!tax!rates.!
• Second! thing! to! consider! is! that! passive! income! of! royalties! must! be! derived! from! sources! within! the!
Philippines,!which!it!has!jurisdiction!over!the!withholding!agent.!
o REASON:!If!there!is!no!jurisdiction!over!the!withholding!agent,!the!Philippines!cannot!enforce!him!
to!withhold!the!tax!and!cannot!run!after!him!in!case!of!non`withholding.!!
o If!that!happens,!even!if!the!royalty!income!is!categorized!as!a!passive!income,!if!the!withholding!
agent!is!from!outside!and!the!income!earner!is!a!resident!citizen!(Remember:!a!resident!citizen!as!
income!earner!is!taxable!from!sources!within!and!without),!so!if!it’s!a!resident!citizen!who!is!the!
one! earning! the! royalty! income! but! it! so! happens! that! the! payor! is! NRA`NETB,! a! person! over!
which!the!Philippines!has!no!jurisdiction,!then!no!need!for!that!NRA!to!withhold!the!FWT.!Simply,!
the!taxpayer!will!have!to!declare!as!part!of!his!income.!
` NOTE:! A! RA! is! taxed! similarly! as! a! RC! while! a! NRA`ETB! is! taxed! similarly! as! a! RC! and! as! a! RA.! You! will! see! that! they! have! the! same!
withholding!tax!rates!if!these!persons!(RA!and!NRA`ETB)!earn!the!royalty!income!within!the!Philippines.!
` NOTE:!NRA`NETB!is!subject!to!a!flat!rate!of!25%!on!all!its!income!except:!
o Gain!on!sale!of!shares!of!stock!in!any!domestic!corporation!
o Gain!on!sale!of!real!property!located!in!the!Philippines!(Sec.!25)!
!
" RC"(within"or"without)" NRC"(within)" RA"(within)" NRA>ETB"(within)" NRA>NETB"(within)"
Royalties,!all!others! 20%! 20%! 20%! 20%! 25%!
Royalties,!LW,!B,!MC! 10%! 10%! 10%! 10%! 25%!
Prizes! 20%! 20%! 20%! 20%! 25%!
Winnings,! exc! PCSO! and! 20%! 20%! 20%! 20%! 25%!
Lotto!
Interest,!Regular! 20%! 20%! 20%! 20%! 25%!
Interest,!FCDU! 7.5%! `! 7.5%! `! `!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
Interest,!LT,!TF,!DS! `! `! `! `! 25%!
Dividends! 10%! 10%! 10%! 20%! 25%!
Shares!in!a!TP! 10%! 10%! 10%! 20%! 25%!
! ! ! ! ! !
!
` Prizes!
o Are!prizes!passive!income?!
! REMEMBER:!In!exclusions!from!gross!income,!we!have!two!types!of!prizes!and!awards:!
• 1.!Those!given!in!recognition!of!education,!literary,!civic,!religious,!charitable!achievements!so!long!as!you!
did!not!actively!participate!and!that!no!future!services!that!have!to!be!rendered!
• 2.!Those!given!in!sports!competitions!duly!sanctioned!by!the!National!Sports!Association!of!the!Philippines!
and!the!Philippine!Olympic!Committee!
o !These! are! exclusions! from! gross! income! and! becomes! only! taxable! if! you! do! not! satisfy! all! the!
requisites!and!if!you!do!not!satisfy!all!the!requisites,!you!fall!under!this!passive!income!while!you!
are!not!in!a!habit!of!joining!contests!unless!you!make!it!a!business.!
o Example:!You!joined!Mr.!Pogi!in!USC.!You!won!20K,!subject!to!final!tax?!
! Is!that!passive!income?!YES!
! Subject!to!final!tax?!YES!
! If!your!prize!is!only!10K?!Not!subject!to!final!tax!but!subject!to!income!tax!
! If!your!prize!is!exceeding!10K,!it!will!be!subject!to!final!tax!of!20%,!whoever!the!payor!is!will!withhold!the!tax.!So!that!
SM,!if!you!win!100K,!you!only!expect!to!receive!80K!because!it!will!be!withheld!of!20%!final!tax.!
! But!for!smaller!prizes,!10K!and!below,!no!tax!shall!be!withheld!but!since!it!still!an!income,!an!inflow!of!wealth,!you!
have!to!consider!this!as!part!of!your!gross!income!at!the!end!of!the!year!computed!of!the!5`32%!tax.!You!do!not!say!
that!it!is!not!taxable!since!everything!is!taxable!as!prizes!and!awards!unless!it!falls!under!the!exclusions!from!gross!
income.!
!
!
!
20%!Final!Withholding!Tax!
!
Php!10,000! !
! 5%!`!32%!Income!Tax!
! ! !
!
!
` Winnings!
o Situation:!You!won!1M!abroad,!subject!to!final!tax?!
! Not!subject!to!final!tax.!So!long!as!prizes!and!winning!are!not!given!on!account!of!services!rendered!(future!or!past;!
since! it! is! already! considered! as! compensation! income! where! situs! is! where! the! services! are! rendered),! it! will! be!
considered!as!having!situs!in!the!place!where!it!is!given.!If!it’s!given!in!the!US,!it!will!have!situs!abroad.!If!you’re!the!
recipient!and!a!resident!citizen,!it!is!taxable!actually!but!since!the!withholding!agent!is!not!within!the!Philippines,!the!
income!is!derived!from!sources!outside!the!Philippines,!there!is!no!final!tax!to!be!withheld.!It!would!only!be!subject!to!
the!ordinary!tax!in!the!Philippines.!It!will!form!part!of!the!gross!income!of!the!taxpayer!at!the!end!of!the!year,!not!
final!tax.!
! Are!all!winnings!having!situs!in!the!Philippines!subject!to!final!tax?!NO,!since!winnings!from!PCSO!and!Lotto!are!not!
subject!to!any!tax!
! If!you!win!super!lotto,!100M,!you!will!be!free!of!taxes.!
!
` Interests!
o If!you!have!a!bank!deposit!in!Sweden!and!it!is!earning!interest,!is!it!subject!to!final!tax!in!the!Philippines?!
! NO!since!only!sources!from!within!the!Philippines!–!interest!having!situs!in!the!Philippines.!
! We! have! what! we! call! interest! income! coming! from! the! expanded! foreign! currency! deposit! unit! system! (FCD)! in!
foreign!currency.!Is!it!subject!to!the!same!rate!as!20%!and!25%!for!NRA`NETB?!
• NO.!Foreign!currency!–!deposit!unit!system!(FCDU),!example:!You!invest!and!you!deposit!in!dollars!under!
the! FCDU! system! (RA! 8424).! RC! and! RA! will! be! subjected! to! FWT! of! 7.5%! but! for! those! non`residents,!
whether!citizen!or!aliens,!will!be!considered!as!exempt!because!the!expanded!foreign!currency!deposit!unit!
system!is!considered!as!an!extension!from!outside.!!
! Interest!from!long`term!deposits,!trust!funds!and!deposit!substitutes!
• Since!it’s!long!term,!it!will!be!exempt.!(Remember:!In!exclusions!from!gross!income,!when!it!has!a!maturity!
period!of!5!years!or!more,!it!will!not!be!subject!to!any!withholding!tax!by!the!financial!institution)!but!this!
will!be!taxable!if!preterminated!time!deposits.!
o Example:! If! 5`year! time! deposit.! You’re! not! going! to! be! withheld! of! the! 20%! final! tax! –! no! tax.!
Whatever! promise! of! interest,! you! will! get! in! full.! But! once! you! preterminate! it! along! the! way!
before!it!matures!5!years,!you!will!be!withheld!of!tax.!Correspondingly,!if!it’s!less!than!3!years!at!
the!time!you!preterminated!it,!it!will!be!subject!to!20%!FWT,!just!like!a!regular!withholding!tax.!If!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!33"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
you!preterminate!it!3!years!to!less!than!4!years,!12%.!If!you!preterminate!it!more!than!4!years!but!
less!than!5!years,!only!5%.!!
!
!
! RC!(within!or!without)! NRC!(within)! RA!(within)! NRA`ETB!(within)! NRA`NETB!(within)!
Interest,!LT,!TF,!DS! `! `! `! `! 25%!
!
!
! If"Preterminated:"
! ` 4!–!less!than!5!years:!5%!
! ` 3!–!less!than!4!years:!12%!
! ` Less!than!3!years:!20%!
! !
!
!
!
` Dividends!
o Example:!There!is!a!company!who!is!going!to!declare!the!profits!to!its!stockholders!–!5!stockholders!of!different!status.!Is!the!
dividend!going!to!be!declared!by!Company!B!subject!to!final!tax?!
! Would!all!dividends!declared!by!a!corporation,!cash!or!property,!be!subject!to!final!tax!in!the!Philippines?!YES,!but!the!
corporation!or!Company!B!must!be!a!domestic!corporation!since!the!dividends!will!have!Philippine!situs!and!will!have!
a!Philippine!withholding!agent.!
! Why!can!we!not!subject!to!final!tax!the!dividends!declared!by!a!foreign!corporation!as!a!rule?!
! What!dividends!will!be!subject!to!final!tax?!
• 1.! Dividends! declared! by! a! domestic! corporation! since! domestic! corporations! declaring! dividends,! the!
dividends!will!have!Philippine!situs!and!will!have!a!Philippines!withholding!agent.!
• 2.!Taxable!partnerships!which!are!domestic!
• 3.!Joint!stock!companies,!joint!consortiums!which!are!considered!as!corporations!and!domestic!
o You!do!not!restrict!yourself!to!looking!at!domestic!corporations!only!but!you!have!as!well!taxable!
partnerships,!other!corporations,!associations,!which!declare!dividends!so!long!as!it!is!domestic,!
the!dividend!having!situs!in!the!Philippines!will!be!subject!to!Philippine!final!tax.!
! Having! situs! in! the! Philippines! and! having! a! domestic! Philippine! withholding! agent,! is! the! dividends! of! the! 5!
stockholders!subject!to!final!tax?!YES.!
! NRA`NETB!is!subject!to!25%!final!tax!on!all!income!derived!from!sources!within!the!Philippines!except!capital!gains!
from! sale! of! shares! of! stock! in! a! domestic! corporation! and! capital! gains! from! sale! of! real! property! located! in! the!
Philippines.!
! NRA`ETB!is!subject!to!20%!final!tax!
! Dividends!paid!by!a!domestic!corporation!is!subject!to!final!tax!in!the!Philippines.!
! How!about!dividends!paid!by!a!foreign!corporation?!Is!that!subject!to!Philippine!final!tax?!
• Remember:!Situs!of!income!taxation!as!regards!dividends!
• As!a!rule,!dividends!given!by!a!foreign!corporation,!if!it’s!really!foreign!(not!operational!in!the!Philippines),!
will!not!be!covered!by!Philippine!final!tax.!But!if!the!foreign!corporation’s!operations!is!more!than!85%!in!
the! Philippines,! it! is! considered! as! a! domestic! corporation.! If! more! than! 50%,! partly! taxable! in! the!
Philippines.!If!it!is!less!than!50%,!situs!is!abroad,!therefore,!not!covered!of!Philippine!final!tax.!
!
! 1!Resident!Corporation:!10%!
!
!
!
! Company!B! 2!Non`!Resident!Citizen!–!10%!
!
!
Must!be!a!
! domestic!
! Corporation!
!
! 5!Resident!Alien:!10!%!
!
!
!
4!Non`Resident!Alien!–!Not!Engaged! 3!Non`Resident!Alien!–!Engaged!in!
!
in!Trade!or!Business:!25%! Trade!or!Business:!20%!
!
!
!
!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!34"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
! 1!Resident!Corporation!
!
!
!
!
Comp.!B!Now!a! 2!Non`!Resident!Citizen!
!
! foreign!corp.!
! Follow!the!rule!on!
!
situs!on!dividend!
!
! income!
!
! 5!Resident!Alien!
!
! 4!Non`!Resident!Alien!–!Not!Engaged! 3!Non`!Resident!Alien!–!Engaged!in!
! in!Trade!or!Business! Trade!or!Business!
!
!
` Share!in!a!Partnership!
o Is!the!partnership!obligated!to!withhold!final!tax?!
! Any! income! that! will! be! distributed! or! to! be! distributed! by! a! partnership! other! than! a! general! professional!
partnership,!it!will!be!treated!as!a!profit!distributed!by!a!corporation.!
! For!tax!purposes,!a!taxable!partnership!is!taxed!similarly!as!a!corporation!so!any!profit!distribution!by!the!partnership!
will!be!taxed!similarly!as!a!corporation.!
! Taxable!partnership!does!not!include!general!professional!partnership.!
! Therefore,!the!share!in!a!taxable!partnership!will!be!considered!as!dividend,!thus,!such!partnership!is!considered!a!
corporate!taxpayer.!
!
CAPITAL!GAINS!
!
` Is!a!capital!gains!tax!a!final!tax?!
o Capital!gains!derived!from!sale!of!shares!of!stock!and!capital!gains!derived!from!the!sale!of!real!property!are!subject!to!capital!
gains!tax!(CGT).!You!do!not!call!it!withholding!tax.!!
o What!are!the!3!types!of!capital!assets?!
! 1.!Sale!of!shares!of!stock!–!subject!to!CGT!
! 2.!Sale!of!real!property!not!used!in!trade!or!business!–!subject!to!CGT!
! 3.!All!others!which!are!not!considered!as!ordinary!assets!–!subject!to!ordinary!tax!
o Is!capital!gains!an!ordinary!income,!meaning,!is!that!an!income!derived!from!an!ordinary!activity?!
! NO,!so!that!CGT!is!a!final!tax.!Every!time!that!it!is!collected!by!the!government,!no!withholding!involved!just!like!fringe!
benefits.!But!it’s!a!final!tax!in!the!sense!that!the!capital!gains!from!the!shares!of!stock!sold!and!real!property!sold!is!an!
activity!that!is!not!made!often.!It’s!capital!asset!–!it’s!not!in!relation!to!any!business.!!!
o Example:! Corporation! B.! You! are! a! stockholder.! You! have! 1K! shares,! which! you! bought! at! 1.00/share.! The! total! value! of! the!
shares!is!1K.!You!sold!it!to!your!seatmate!for!2.00/share.!Did!you!earn!income?!YES,!1K,!and!such!income!is!called!capital!gains.!
Is!it!subject!to!CGT?!YES.!
! What!if!the!corporation!issuing!the!shares!is!a!foreign!corporation?!Sec.!24!(c)!of!the!Tax!Code.!Since!it!does!not!come!
within!the!ambit!of!capital!gains!tax!“all!shares!issued!by!a!domestic!corporation”,!thus,!shares!of!stock!in!a!foreign!
corporation!will!not!be!covered!by!the!5%!CGT!in!the!first!100K!nor!10%!on!any!excess!but!will!still!be!considered!an!
income!because!it’s!an!inflow!of!wealth,!it!will!be!taxable!at!the!end!of!the!year!using!the!ordinary!tax!rate!of!5`32%.!
! So!automatically,!every!time!it’s!not!an!exclusion!from!gross!income,!such!income!is!always!taxable.!The!question!will!
be!is!it!final!tax,!CGT,!or!ordinary!tax.!
! Let’s!say!Corporation!B!is!a!domestic!corporation.!For!the!5%!CGT!and!10%!CGT!to!apply,!it!must!be!shares!sold!by!a!
stockholder!to!another!person!and!the!shares!must!be!issued!by!a!domestic!corporation.!The!manner!of!selling!is!also!
important.! The! share! must! not! be! listed! through! local! stock! exchange! and! must! not! be! traded! through! local! stock!
exchange!(local!stock!exchange!–!Philippine!stock!exchange).!If!both!exist,!listed!in!the!stock!exchange!and!traded!in!
the!stock!exchange,!it!will!be!covered!by!Sec.!127!on!the!stock!transaction!tax!(STT)!of!½!of!1%!of!the!gross!selling!
price.!
! For!the!5%!or!10%!to!apply,!the!stocks!sold!must!not!be!listed!and!traded!in!the!stock!exchange!because!if!it!is!listed!
and!traded,!it!will!be!covered!by!another!provision!of!the!Tax!Code,!which!is!Sec.!127!on!stock!transaction!tax.!
! What!happens!if!the!stocks!that!you!sold!to!your!seatmate!is!listed!in!the!stock!exchange!but!you!did!not!sell!it!in!the!
stock!exchange,!instead,!you!sold!it!personally!to!her?!Is!it!covered!by!STT!or!CGT?!Listed!but!not!sold!through!the!
stock!exchange?!CGT.!STT!of!½!of!1%!of!the!gross!selling!price!is!very!restrictive.!It!will!only!apply!if!it!is!both!listed!and!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!35"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
traded!in!the!stock!exchange.!If!it’s!listed!but!not!traded!in!the!stock!exchange!(over`the`counter!sale),!automatically,!
the!CGT!of!5%!or!10%!will!apply.!
! In!CGT,!if!no!gains!derived,!no!tax.!However,!in!STT,!whether!or!not!you!derived!a!gain/profit,!since!the!basis!is!the!
gross!selling!price,!it!will!be!subject!to!STT.!
!
! Stockholder!!1000!@!! 1.00/share=! !Php!1,000.00!
!
! ! ! 2.00/share=! !!!!!!!!!2,000.00!
!
!
! ! ! ! ! ___________!
Company!B!
! ! ! ! ! ! Php!1,000.00! Capital!Gains!
Domestic!Corporation!
!
!
!
! `!If!both!traded!and!listed!through!the!local!stock!exchange,!follow!Section!127!STT:!½!of!1%!of!GSP.!
! `!If!listed!but!sold!personally!(meaning!not!either!listed!or!traded),!follow!the!rule!on!capital!gains.!
! !
!
AFTER!BREAK!
!
` The!provision!of!5!and!10%!CGT!is!different!from!STT.!The!½!of!1%!STT!on!the!gross!selling!price!would!only!apply!if!the!shares!being!sold!
by!you!as!the!stockholder!to!another!person!is!both!listed!and!traded!in!stock!exchange.!Absent!any!of!the!requirements!of!listed!and!
traded,! even! if! it’s! listed! but! not! traded! or! totally! not! listed! in! the! stock! exchange,! meaning! it’s! not! a! public! corporation,! with! more!
reason!not!traded!in!the!stock!exchange,!you!apply!the!5%!and!10%.!
` Corporation!means!domestic!corporation.!No!foreign!corporation.!
` 5%!if!the!CG!is!100K!or!less!and!10%!if!more!than!100K!
` When!you!say!capital!gain,!that!is!only!the!gain!after!you!deduct!the!cost!of!the!shares!that!you!have!sold.!
` Example:!1M!shares!at!1.00/share!so!you!actually!bought!it!at!1M!and!you!sold!it!to!your!seatmate!at!2.00/share!so!you!have!2M!gross!
selling!price,!not!listed,!not!traded.!How!much!is!the!CG?!1M.!How!much!is!the!tax!due!to!the!government?!
o The!law!provides!that!the!CG!of!100K!or!less!is!subject!to!5%!CGT.!Any!excess!over!100K!CG!is!subject!to!10%.!Therefore,!first!
100K!(5%)!–!5K.!The!excess!of!900K!(10%)!–!90K.!Thus,!the!tax!due!is!95K.!
o You!don’t!categorize!your!income!automatically!to!10%!if!the!CG!is!more!than!100K.!Always,!it’s!5%!for!the!first!100K.!!
!
!!!!!
! Stockholder!!1,000,000!@!!1.00/share=! !Php!1,000,000.00!!!!!!!!!!Cost!
! ! ! ! 2.00/share=! !!!!!!!!!2,000,000.00!!!!!!!!!!Sold!it!to!seatmate!!
! ! ! ! ! ! ______________!
! Company!B! ! ! ! ! ! Php!1,000,000.00!!!!!!!!!!!Capital!Gains!
!
Domestic!Corporation!
!
!
!
Tax!Due!on!Php!1,000,000:!
! Rule!on!Capital!Gains:! st
! 5%!(100,000!or!less!Capital!Gains)!
1 !Php!100,000!! ! =!Php!5,000!
! Excess!Php!900,000! =!Php!90,000!
10%!(Over!100,000!Capital!Gains)!
! Tax!Due! ! !!!!!!!!!!!!!!!!!!!Php!95,000.00!
!
! !
!
` Now,!change!of!facts.!You!own!200K!shares.!You!bought!it!at!1.00/share.!Cost!is!200K.!You!sold!it!at!2.00/share!so!you’re!gross!selling!
price!if!400K.!So!that!the!CG!is!200K.!How!much!is!the!tax!due?!
o First!100K!(5%)!–!5K!plus!excess!of!100K!(10%)!–!10K!=!a!total!of!15K!
!!
!
!
! Stockholder!!200,000!@!! 1.00/share=! !Php!200,000.00!!!!!!!!!!Cost!
! ! ! ! 2.00/share=! !!!!!!!!!400,000.00!!!!!!!!!!Gross!Selling!Price!!
! ! ! ! ! ! ______________!
! Company!B! ! ! ! ! ! Php!200,000.00!!!!!!!!!!!Capital!Gains!
! Domestic!Corporation!
!
!
!
Tax!Due!on!Php!200,000:!
! st
1 !Php!100,000!! ! =!Php!5,000!
!
Excess!Php!100,000! =!Php!10,000!
Tax!Due! ! !!!!!!!!!!!!!!!!!!!Php!15,000.00!
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
!
!
` You!sold!the!preceding!transaction!today,!Aug.!10.!Tomorrow,!Aug.!11,!you!had!another!transaction.!You!sold!300K!shares!at!1.00!each.!
So! cost! is! 300K.! You! sold! it! at! 2.00! so! the! gross! selling! price! is! 600K,! not! listed,! not! traded.! CG! is! 300K.! What! is! your! liability! to! the!
government?!This!is!your!transaction!no.!2!during!the!calendar!year.!
o The!5%`10%!rule!is!made!to!apply!to!all!capital!gains!transaction!on!sale!of!shares!of!stock!during!the!calendar!year!by…..!So!he!
can!only!avail!one!time!of!the!first!5%!on!the!first!100K.!Any!subsequent!sales,!if!it’s!already!beyond!the!100K,!automatically!
10%.!But!you!don’t!have!to!tell!the!BIR!that!that!is!your!second!transaction.!
o The!point!is,!during!the!calendar!year,!avail!of!the!5%`10%!only!one!time.!If!your!first!transaction!has!only!50K!CG,!automatically!
nd
5%.!2 !transaction,!you!still!have!free!50K!for!5%!and!the!rest!is!10%!until!the!end!of!the!year.!
!
!
!
!
!
!
!
!
ON"AUGUST"10,"2010:"You"traded:"
!
! !
!
! Stockholder!!200,000!@!! 1.00/share=! !Php!200,000.00!!!!!!!!!!Cost!
! ! ! ! 2.00/share=! !!!!!!!!!400,000.00!!!!!!!!!!Gross!Selling!Price!!
! ! ! ! ! ! ______________!
! Company!B! ! ! ! ! ! Php!200,000.00!!!!!!!!!!!Capital!Gains!
! Domestic!Corporation!
!
!
!
Tax!Due!on!Php!200,000:!
! st
1 !Php!100,000!! ! =!Php!5,000!
!
! Excess!Php!100,000! =!Php!10,000!
! Tax!Due! ! !!!!!!!!!!!!!!!!!!!Php!15,000.00!
! !
!
!
! Then,"ON"AUGUST"11,"2010:"You"traded"again:"
! !
!
! Stockholder!!300,000!@!! 1.00/share=! !Php!300,000.00!!!!!!!!!!Cost!
!
! ! ! 2.00/share=! !!!!!!!!!600,000.00!!!!!!!!!!Gross!Selling!Price!!
!
! ! ! ! ! ______________!
! Company!B!
! ! ! ! ! ! Php!300,000.00!!!!!!!!!!!Capital!Gains!
Domestic!Corporation!
!
!
!
! Tax!Due!on!Php!300,000:!
! Total!Php!300,000! =!Php!300,000!
!
! ! ! !!X!!!!!!!!!!!!!!10%!
!
! Tax!Due! ! !!!!!!!!!!!!!!!!!!!Php!!!30,000!
! !
!
` If!you’re!a!broker!of!shares,!will!you!be!covered!by!5!and!10%?!
o NO,!since!a!broker!is!engaging!in!business!of!trading!shares!of!stock,!therefore,!his!taxability!would!be!covered!by!ordinary!tax!
rates!of!5`32%!
o If! you! are! in! the! business! of! selling! shares! of! stock,! it’s! no! longer! passive! income,! it’s! no! longer! capital! income! because! it!
becomes!you’re!ordinary!transaction!subject!to!the!ordinary!tax!rates!of!5`32%!as!an!individual.!
!
` What!if!Corporation!B!issuing!the!shares!as!a!foreign!corporation,!will!it!be!subject!to!Philippine!tax!of!5!and!10%?!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o NO! since! it! is! not! a! domestic! corporation.! Not! being! a! domestic! corporation,! foreign! corporations! have! situs! outside! the!
Philippines!and!only!resident!citizens!are!taxable!within!and!without.!Therefore,!resident!citizens!receiving!gains!from!sale!of!
shares!of!stock!issued!by!a!foreign!corporation!would!be!taxable!at!the!rate,!not!5!and!10%,!but!5`32%.!All!others,!RA,!NRA`ETB,!
NRA`NETB,!no!tax!on!shares!sold!by!a!foreign!corporation!because!situs!is!without,!as!a!rule.!
!
Capital!gains!on!sales!of!real!property!
!
! Capital!Gains!on!Real!Property!Considered!as!CAPITAL!ASSETS
!
` Would!all!sale!of!real!property!be!subject!to!the!CGT!of!6%?!
o NO,!since!if!the!sale!of!real!property!is!part!of!his!real!estate!business!then!it!will!never!be!subject!to!CGT!since!a!person!or!
corporation! engaged! in! real! estate! business! is! ordinarily! engaged! in! real! estate! transactions,! therefore,! their! real! properties!
shall!be!considered!as!ordinary!assets!not!subject!to!CGT.!What!is!subject!to!CGT!is!only!capital!gains!from!capital!assets.!
` If!you!are!in!a!manufacturing!business!and!you!sell!your!parcel!of!land!in!which!you!utilized!it!for!manufacturing!plant!or!factory,!is!it!
subject!to!CGT!of!6%!or!is!it!subject!to!the!ordinary!rate!of!5`32%?!
o The!subject!parcel!of!land!is!an!ordinary!asset.!Being!an!ordinary!asset,!it!does!not!satisfy!the!requirement!that!for!6%!CGT!to!
apply,! it! must! be! imposed! on! the! sale! of! real! property! considered! as! capital! asset.! Capital! assets! are! those! which! are! not!
ordinary!assets.!Real!properties!used!in!business!are!considered!as!ordinary!assets.!Therefore,!the!sale!of!the!subject!parcel!of!
land!is!subject!to!the!ordinary!rate!of!5`32%.!
` Example!of!real!property,!that!is!considered!as!a!capital!asset!subject!to!the!6%!CGT!
o Residential!lot!is!a!capital!asset.!If!he!decides!to!sell!it,!it!will!be!subject!to!the!6%!CGT!on!the!gross!selling!price!or!the!zonal!
value,!whichever!is!higher.!
o Zonal!value!can!be!derived!by!the!(found!in!Sec.!6!of!the!Tax!Code)!BIR!or!Local!Assessor!
o There!are!3!choices,!whichever!is!higher:!
! 1.!Gross!selling!price!as!decided!by!the!parties!
! 2.!Fair!market!value!(FMV),!may!be!the!zonal!value!by!the!Local!Assessor!!
! 3.!FMV!by!the!BIR!Commissioner!
• Whichever! is! higher! of! these! three,! it! will! be! the! basis! of! the! 6%! CGT,! regardless! of! any! income! earned,!
meaning,!even!if!you!sell!your!capital!asset!of!real!property!at!a!loss,!because!the!basis!is!the!gross!selling!
price!or!FMV,!whichever!is!higher.!There!is!at!all!times!a!basis!on!which!the!tax!will!be!imposed!on.!There!
could!be!no!0!gross!selling!price!or!no!0!FMV,!otherwise,!it!becomes!a!donation!if!it’s!0!gross!selling!price.!!
o The!FMV!–!the!price!at!which!the!seller!is!not!obligated!to!sell!and!the!buyer!is!not!obligated!to!buy.!This!type!of!FMW!is!not!
part!of!the!choices.!
!
!
! Basis!of!Capital!Gains!Tax:!
! !
! 1. Gross!Selling!Price!!!!`!!!!!!!!!!!Decided!by!the!parties!
! !
! 2. Fair!Market!Value! Local!Assessor
6%!
! ! Section*6 Capital!Gains!Tax
! 3. Fair!Market!Value! Local!Assessor
!
!
!
!
4. Fair!Market!Value! This!is!the!price!you!are!not!obligated!to!sell!and!not!obligated!to!buy!
!
!
!
` Situation:!You!have!a!residential!lot!in!the!US.!You!also!have!a!principal!residence!with!a!house!(home)!in!the!Philippines.!You!sold!both!
properties.!Will!you!be!subject!to!the!6%!CGT!on!both!properties?!
o Residence!assumes!that!you!have!a!family!inside.!(home)!
! Requirements!to!be!exempt!from!CGT!on!sale!of!principal!residence:!
• 1.!Proceeds!are!fully!utilized!in!acquiring!or!constructing!a!new!principal!residence!within!18!months!from!
the!date!of!sale!or!disposition!
o What! happens! if! you! don’t! utilize! the! entire! proceeds! from! the! sale! of! the! residential! home! to!
construct!another!house?!
! If!the!proceeds!of!the!sale!of!your!principal!residence!is!not!fully!utilized!to!construct!or!
acquire!another!principal!residence!within!18!months,!the!difference!or!the!excess!will!
be!subject!to!the!CGT.!
• 2.! Historical! cost! or! adjusted! basis! of! the! real! property! sold! or! disposed! shall! be! carried! over! to! the! new!
principal!residence!built!or!acquired!
o This!simply!means!that!whatever!the!value!of!the!principal!residence!that!you!sold,!it!will!still!be!
the!value!of!the!new!house!constructed.!So!subsequently,!your!new!house!that!you!constructed,!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
the!cost!is!the!old!cost!or!the!historical!cost!of!your!new!house.!It!will!have!a!bearing!because!if!
you!sell!it!subsequently,!the!cost!will!still!be!way!below!because!it’s!based!on!the!old!property.!!!!
• 3.!Notice!to!the!Commissioner!of!Internal!Revenue!shall!be!given!within!30!days!from!the!date!of!sale!or!
disposition!
• 4.!This!exemption!can!only!be!availed!of!once!every!10!years!
• 5.!If!the!proceeds!of!the!sale!were!not!fully!utilized,!the!portion!of!the!gain!presumed!to!have!been!realized!
from!the!sale!or!disposition!shall!be!subject!to!CGT!
o If!you!intend!to!sell!your!principal!residence,!it!will!be!exempted!from!the!6%!CGT!on!the!following!conditions:!
! 1.!Your!principal!residence!is!certified!to!as!your!principal!residence!by!the!barangay!in!your!area!
! 2.!It!must!be!located!in!the!Philippines!
! 3.!The!proceeds!derived!in!the!sale!must!be!used!to!acquire!or!construct!a!new!principal!residence!within!18!months.!
! 4.!Notify!the!Bureau!within!30!days!that!you!are!availing!of!the!exemption!
• Reasonable!because!in!every!capital!gains!sale!of!real!property!or!shares!of!stock,!you!have!to!file!the!CGT!
return!within!30!days!
! 5.! Historical! cost! or! adjusted! basis! of! the! real! property! sold! or! disposed! shall! be! carried! over! to! the! new! principal!
residence!built!or!acquired!
! 6.!Availed!of!only!once!every!10!years!
o How!about!the!residential!lot!sold!abroad?!Subject!to!6%!CGT!or!5`32%!ordinary!tax!rates?!
! Subject!to!the!ordinary!tax!rates!of!5`32%!
! For!6%!CGT!to!apply:!
• 1.!It!must!be!a!real!property!
• 2.!The!real!property!must!be!classified!as!a!capital!asset!(not!used!in!trade!or!business;!not!primarily!sold)!
• 3.!It!must!be!located!in!the!Philippines!
! Anything!that!is!located!abroad!and!is!sold,!even!if!it’s!a!real!property!considered!as!a!capital!asset,!will!be!subject!to!
5`32%!if!the!seller!is!a!RC.!
! But!if!the!residential!lot!is!located!abroad!and!the!seller!is!NRA,!not!subject!to!any!Philippine!tax!since!he!is!only!taxed!
from!sources!within.!
• What!if!it’s!a!RA!selling!residential!lot!located!in!his!home!country?!NO,!since!situs!of!real!property!is!where!
such!property!is!located!so!if!it’s!a!real!property!located!abroad,!only!resident!citizens!will!be!taxable!for!its!
sale.!All!other!taxpayers,!who!are!only!taxable!for!sources!within!the!Philippines,!would!not!be!taxable!on!a!
residential!lot!sold!and!located!abroad.!
!!!!!
o GR:!All!real!properties!considered!as!capital!assets!located!in!the!Philippines!is!subject!to!6%!CGT!on!the!gross!selling!price!or!
FMV,!whichever!is!higher.!
! E:!
• 1.!Sale!involves!principal!residence!provided!the!requisites!are!complied!with!
• 2.!Property!is!located!abroad!
• 3.! If! the! buyer! of! the! real! property! is!the! government,! political! subdivisions! or! GOCCs,! in! which! case,! the!
seller!will!have!the!option!of!being!taxed!at!6%!or!the!graduated!rates!of!5`32%!as!an!individual!taxpayer.!
o Which!do!you!prefer?!Based!on!the!6%!CGT!of!gross!selling!price!or!FMV!or!graduated!rates!of!5`32%?!
! Example:!Gross!selling!price!or!FMV!is!10M.!Cost!is!9M.!You!have!1M!profit.!Do!you!want!to!be!taxed!at!6%!or!5`32%!
if!you!are!given!an!option!when!the!buyer!is!the!government?!
• If! you! are! selling! at! a! loss,! then! go! to! 5`32%! because! such! tax! rate! is! based! on! the! profit! (net! taxable!
income)!
• But!if!you!are!selling!at!a!higher!gain,!go!for!6%!CGT.!
• But!if!you’re!gain!is!just!minimal,!you!compute.!6%!of!1M,!you!are!expected!to!pay!600K.!5`32%!of!1M,!you!
are!expected!to!pay!285K.!
!
!! FMV! =! Php!10,000,000.00! If!based!on!the!CGT!of!6%:!
! Cost! =! !!!!!!!!!!9,000,000.00! 10,000,000!@!6%!=!600,000!
!
! ! ! Php!!!1,000,000.00!
! !
If!Based!on!the!graduated!rate:!
!
Php!!FIRST!500,000!@!32%!=! 160,000!
!
!
!!!!!!!!!EXCESS!OF!500,000!@!25%!=!!!!125,000!
! ! ! ! 285,000!
! !
!
` Categories!of!income!that!an!individual!taxpayer!may!earn:!
o 1.!Compensation!income!for!services!rendered!
o 2.!Income!from!business,!trade!or!profession!
o 3.!Passive!income!due!to!material!inactivity!of!the!taxpayer!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o 4.!Capital!gains!on!sales!of!shares!of!stock!which!is!not!listed!in!the!local!stock!exchange!or!even!if!listed,!so!long!as!it’s!not!
traded!through!the!local!stock!exchange!
o 5.!Capital!gains!on!sales!of!real!property!considered!as!capital!assets!and!located!in!the!Philippines!
o 6.!Other!income!
! a.!Rent!income!other!than!royalties!
! b.!Interest!income!other!than!interest!income!on!bank!deposit!
! c.!Dividend!income!
! d.!Income!from!other!sources!and!this!may!include:!
• d.1.!Bad!debts!recovered!
• d.2.!Illegal!gains!derived!from!gambling!
• d.3.!Tax!refunds!
• d.4.!Compensation!for!private!property!expropriated!by!the!government!for!public!use!
• d.5.!Damages!
• d.6.!cancellation!of!indebtedness!
!
` Cancellation!of!indebtedness!
o If!it!must!be!without!rendition!for!services,!past!or!future,!it!may!be!considered!as!a!donation!or!gifts!subjected!to!donor’s!tax,!
thus!excluded!from!gross!income,!thus,!not!subject!to!income!tax.!
o If!service!will!be!rendered,!it!will!be!considered!as!a!compensation!and!subject!to!income!tax! !
!
` Bad!debts!recovered!and!tax!refunds!
o They!may!be!subject!to!income!tax.!
o If!the!bad!debts,!at!the!time!that!it!was!claimed!as!an!expense,!has!benefited!the!taxpayer!by!paying!less!due!to!the!availment!
of!the!expense,!the!recovery!of!that!will!be!considered!as!an!income!to!offset!the!expense!that!you!have!claimed!prior.!
o If!at!the!time!of!claiming!the!bad!debts!as!an!expense!did!not!benefit!tax!wise!the!taxpayer,!when!it!is!subsequently!recovered,!
the!bad!debts!will!not!be!taxable.!
o BAD!DEBTS!–!unpaid!debts!
o Example:!Let’s!say!that!you’re!Mr.!A.!You!have!extended!a!loan!of!100K!to!Mr.!B.!Mr.!B!failed!to!pay.!You!are!in!the!business!of!
selling!cosmetics.!Mr.!B!was!judicially!declared!insolvent!so!that!Mr.!A!could!no!longer!collect.!In!2009,!you!had!1M!net!income!
before!deducting!the!credit!that!you!have!extended!to!Mr.!A.!Cosmetics!you!delivered!to!Mr.!B!to!sell,!he!failed!to!pay.!So!you!
considered!bad!debts!as!an!expense.!If!you!100K!as!an!expense,!you!actually!will!be!paying!tax!only!on!the!900K.!But!your!tax!
was!reduced!to!the!extent!of!the!tax!on!the!100K!expense!for!the!unpaid!debts.!In!2011,!Mr.!B!won!the!lotto!so!that!he!paid!
you!100K.!You!receive!100K.!Is!that!100K!that!you!recovered!from!Mr.!B!taxable!or!not?!
! Taxable! because! at! the! time! you! decided! that! you! can! no! longer! collect! the! 100K,! you! deducted! it! as! an! expense!
benefiting!you!from!being!taxed!on!the!100K.!Instead!of!being!taxed!of!1M,!it!is!only!900K!because!you!claimed!the!
100K!as!an!expense.!!
! When! the! bad! debts! was! recovered,! it! will! be! considered! as! taxable! because! it! benefited! you! at! the! time! you!
deducted!the!expense.!
! What!are!the!requirements!to!be!able!to!deduct!bad!debts!as!an!expense?!
• 1.!The!indebtedness!must!be!entirely!worthless.!
• 2.!The!indebtedness!must!no!longer!be!collectible!after!taking!legal!steps!to!recover!it.!
!
!
! MR.!A! MR.!B!(Declared!Insolvent)!
! ! !
!
! Php!100,000.00!
! !
!
!
! Failed!to!pay!
! !
!
!
! 2009:*Mr.*A*decided*to*deduct*it*as*bad*debt:* 2011:***MR.*B*PAID:*
! ! !
! Net!Income! ! Php!1,000,000! Paid! ! Php!100,000!
!
Bad!Debt!Deduction! !!!!!!!!!!(100,000)!
!
! ! ! ! !!!!!!!!!!!!900,000!
! X!!!!!!!!5%!`!32%!
! THIS!IS!TAXABLE!!
! ! ! !!!!!!!!!!TAX!DUE!
! !
!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
!
o If!you!have!only!100K!net!income,!then!you!deducted!the!bad!debts!of!100K!as!an!expense,!will!the!subsequent!recovery!of!the!
bad!debts!be!taxable?!
! YES,!since!you!benefited.!You’re!net!income!before!the!bad!debts!is!100K!but!because!you!deducted!the!bad!debts!of!
100K,!you!did!not!pay!any!tax.!Instead!of!paying!tax!on!the!100K!net!income,!you!deducted!the!100K!bad!debts,!you!
did!not!pay!any!tax.!You!were!benefited!to!the!extent!of!the!tax!on!the!100K,!therefore,!any!subsequent!recovery!is!
taxable.!
!
!
!
!
! Next!Scenario:!Same!as!Mr.!A!as!creditor!and!Mr.!B!as!declared!insolvent:!
! !
!
! 2009:*Mr.*A*decided*to*deduct*it*as*bad*debt:* 2011:***MR.*B*PAID:*
! ! !
! Net!Income! ! Php!100,000! Paid! ! Php!100,000!
! Bad!Debt!Deduction! !!!!!!!(100,000)!
! ! ! ! !!!!!!!!!!!```!0!```!
!
X!!!!!!!!5%!`!32%!
! SUBSEQUENT!RECOVERY!IS!TAXABLE!!
! ! ! ! !!!!NO!TAX!DUE!
!
! !
o But!if!you!are!actually!operating!at!a!negative!loss,!you!will!deduct!the!bad!debts!which!was!worthless!and!uncollectible.!Will!
the!subsequent!recovery!be!taxable?!
! NO,!since!you!were!not!benefited.!Whether!or!not!you!deducted!the!100K!bad!debts,!still!you!will!not!be!paying!any!
tax!because!you!were!at!a!loss!prior!to!you!availing!the!expense!deduction!on!bad!debts.!
! A!subsequently!recovered!bad!debts!can!only!be!made!taxable!at!the!time!of!recovery!if!such!bad!debts!benefited!the!
individual!at!the!time!of!payment!as!an!expense.!!
!
!
!
Next!Scenario:!Same!as!Mr.!A!as!creditor!and!Mr.!B!as!declared!insolvent:!
! !
! 2009:*Mr.*A*decided*to*deduct*it*as*bad*debt:* 2011:***MR.*B*PAID:*
! ! !
! Net!Income! ! Php!(100,000)! Paid! ! Php!100,000!
!
Bad!Debt!Deduction! !!!!!!!!(100,000)!
!
! ! ! ! !!!!!!!!!!!```!0!```!
! X!!!!!!!!5%!`!32%!
! SUBSEQUENT!RECOVERY!IS!NOT!TAXABLE!!
! ! ! !!!!NO!TAX!DUE!
! !
!
!
!
o Say!for!example:!Your!net!income!is!50K.!At!this!time,!you!decided!to!deduct!the!bad!debts!because!it’s!already!worthless!and!
uncollectible.!Will!the!subsequent!recovery!of!100K!be!taxable?!
! YES,!but!only!partial!because!the!benefit!was!also!partial.!You!wipe!out!only!50K!for!the!year!so!you’ll!only!be!taxable!
50K!when!it’s!recovered.!
!
!
!
Next!Scenario:!Same!as!Mr.!A!as!creditor!and!Mr.!B!as!declared!insolvent:!
!
!
!
! 2009:*Mr.*A*decided*to*deduct*it*as*bad*debt:* 2011:***MR.*B*PAID:*
! ! !
! Net!Income! ! Php!!!50,000! Paid! ! Php!100,000!
! Bad!Debt!Deduction! !!!!!!!(100,000)!
!
!
! ! ! !!!!!!!!!!!```!0!```!
! X!!!!!!!!5%!`!32%!
FIRST!Php!500,000:! 2nd!Php!500,000:!
! ! ! ! !!!!NO!TAX!DUE!
!
!NOT!TAXABLE!! TAXABLE!!
!
! ! !
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!

Entitlement"to"deductions"
!
` Taxpayers,!the!4!of!them!(RC,!NRC,!RA,!NRA`ETB),!they!are!all!allowed!to!claim!deductions.!
` The!NRA`NETB!is!subject!to!the!flat!rate!of!25%!on!gross!income!without!the!benefit!of!any!deductions.!
` How!about!special!employees?!
o Special!employees!are!subject!to!the!flat!rate!of!15%!`!no!business!income,!otherwise,!if!they!have!business!income,!they!will!
still!be!covered!to!the!5`32%!or!the!25%!flat!rate.!
` What!are!the!deductions!allowed!to!the!individuals!if!an!individual!is!simply!working!without!earning!business!income,!employed?!
o Personal!and!additional!exemptions!
o Kinds!of!personal!exemption:!
! 1.!Basic!personal!exemption!–!50K!
• What!status!do!you!have!to!be!if!you!want!to!claim!50K!personal!exemption?!Is!it!regardless!of!being!single!
or!married?!YES.!Do!we!still!have!head!of!the!family?!NO.!
• Every!individual!taxpayer,!whether!he’s!actually!working!as!an!employee!or!engaged!in!business,!every!one!
of!us!is!entitled!to!basic!personal!exemption!of!50K,!regardless!of!our!status!–!whether!single!or!married.!
! 2.!Additional!exemption!–!25K!for!every!qualified!dependent,!but!not!to!exceed!4!
• Who!is!allowed!to!claim!additional!exemption?!Those!taxpayers!who!have!qualified!dependents!but!not!to!
exceed!4!
• Qualified!dependents!–!refers!only!to!the!legitimate,!illegitimate!or!legally!adopted!children!of!the!taxpayer!
o The!child!is:!
! i.!living!with!the!taxpayer!
! ii.!Chiefly!dependent!upon!the!taxpayer!for!support!
! iii.!Not!more!than!21!years!of!age!
! iv.!Not!married!
! v.! not! gainfully! employed! or,! even! though! over! 21! years! old,! incapable! of! self! support!
because!of!mental!or!physical!defect!
• If!you!are!21!years!of!age,!is!there!by!any!chance!he!be!considered!as!a!qualified!dependent?!
o YES!if!you!are!incapable!of!self`support!because!of!mental!or!physical!defect.!
• Every! person! having! a! qualified! dependent! is! allowed! to! claim! additional! exemption! of! 25K! up! to! the!
maximum!of!4.!
• A!qualified!dependent!is!a!child,!whether!legitimate,!illegitimate!or!legally!adopted,!who!must!not!be!more!
than!21!years!of!age,!living!with!the!taxpayer!claiming!the!exemption,!chiefly!dependent!on!the!latter!for!
support,!not!gainfully!employed!(he!can!be!employed!but!if!it’s!not!gainful!employment,!he!can!still!qualify!
as!a!dependent),!not!married.!
• If!you!lack!any!of!the!above!requirements,!you!will!be!taken!out!from!the!list!of!qualified!dependents.!!
• Can!a!senior!citizen!being!taken!cared!of!by!a!taxpayer!be!considered!a!dependent?!
o Senior! citizen! –! someone! who! is! at! least! 60! years! old! and! earning! along! the! poverty! line! of! not!
more!than!60K.!
o Senior! citizens! cannot! be! treated! as! a! qualified! dependent! since! dependents! only! pertain! to!
children.!So!additional!exemption!would!only!refer!to!children.!
o SEE!TABLE:!refer!to!outline!
!
" RC" NRC" RA" NRA>ETB" NRA>NETB"
Basic!Personal! !! !! !! !! X!
Additional!Exemption!(Only!to!Children)! !! !! !! X! X!
!
!
! Only!these!3!are!allowed!to!claim!additional!exemption!!
! !
!
!
!
` A!NRA`ETB!can!only!claim!basic!personal!exemption!of!50K!if!his!home!country!allows!Filipinos!not!residing!in!that!home!country!to!also!
claim!personal!exemption.!But!in!so!far!as!the!amount!of!exemption!is!concerned,!how!much!will!the!NRA`ETB!be!allowed?!
o Lifeblood! doctrine.! If! the! home! country! of! the! NRA`ETB! grants! similar! personal! exemptions! to! Filipinos! not! residing! in! that!
home!country!in!an!amount!of!not!more!than!50K,!let’s!say!for!example!20K!only!for!Filipinos!there,!then!the!NRA`ETB!can!only!
claim! 20K! as! personal! exemption.! If! the! Filipino! can! claim! 100K,! then! the! NRA`ETB! can! only! claim! 50K.! All! in! favor! of! the!
government.!
!
` Situation:! You! have! a! child! who! was! born! on! January! 1,! 1989.! If! you! file! your! ITR! for! 2010,! can! you! claim! your! child! as! a! qualified!
dependent?!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!42"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
o Here!the!child!is!almost!22!by!the!end!of!December!2010.!Taking!into!consideration!your!income!from!Jan.!1!to!Dec.!31,!2010,!
can!you!claim!your!child!as!25K!additional!exemption?!YES.!Status`at`the`end`of`the`year!rule.!Whatever!changes!in!the!status!
of!the!child!at!the!end!of!the!year,!whether!it!be!a!death,!a!birth!or!marriage,!everything!in!favor!of!the!taxpayer!will!have!to!be!
construed.!Everything!is!made!as!if!he!was!born!earlier!or!later.!
!
!
!
! You!have!a!child!born!on:!January!1,!1989!
! Can!claim!on!2010?!
! !!!!!!!!! ! !!Note:!By!the!end!of!December!2010!almost!22!years!old.!
! !
!
! January!!1!!`````````````````````````!December!31,!2010!
!!
!
!
! Covered!as!Additional!Dependent!
! !
!
o If!such!child!got!married!on!Dec.!31,!2010,!can!you!still!claim!for!the!additional!exemption?!
! YES.!There!wouldn’t!be!any!difference.!All!in!favor!of!the!taxpayer.!But!the!subsequent!year!2011,!automatically,!such!
child!is!no!longer!part!of!the!qualified!dependent!since!he!is!more!than!21!and!he’s!already!married.!
!
!
January!!1!!`````````````````````````!December!31,!2010!!(Your*child*got*Married*on*Dec.*31,*2010)*
!
!
!
! Covered!as!Additional!Dependent!
! !
!!!!!!
` NOTE:!The!requirement!for!you!to!be!able!to!claim!as!qualified!dependent,!he!must!be!living!with!you,!not!necessarily!everyday!in!your!
house.!He!may!stay!away!during!the!course!of!studying!law,!for!example.!You!are!still!considered!as!living!with!your!parents.!AND!chiefly!
dependent!so!that!your!allowances!would!have!to!come!from!them.!
o So!if!there!is!a!slight!deviation!such!as!when!you’re!living!with!them!but!chiefly!dependent!from!someone!else,!then!you!will!not!
be!covered!by!the!qualified!dependents.!
!
` Who!can!claim!the!deduction!of!25K?!Both!spouses?!
o The!default!for!claiming!the!deduction!is!the!husband!in!case!both!are!working.!
o But!if!only!one!is!working,!automatically!claiming!the!additional!exemption!belongs!to!the!working!spouse.!
o But!can!the!husband!waive!his!right!to!claim!the!additional!exemption!in!case!both!are!working?!YES!
! Is!it!automatic!waiver?!Or!what!are!the!requirements!for!waiving?!
• For! a! husband! to! relinquish! his! right! in! claiming! the! additional! exemption! against! his! gross! income,! the!
husband! must! explicitly! put! into! writing! his! waiver! and! inform! the! BIR! and! his! employer! and! the! wife’s!
employer!in!order!for!the!wife!to!validly!claim!the!additional!exemption.!
!
` What!is!the!other!deduction!allowed!to!a!purely!employed!individual?!
o Premiums!on!health!and!hospital!insurance!
o Here,!who!took!the!insurance?!
! Employee,!not!employer!
! For! the! premium! payments! deductible,! the! insurance! should! be! taken! by! the! employee! himself.! So! if! you’re! the!
employee!right!now,!you!have!an!insurance!policy!on!health!and!hospitalization.!You!took!it!out!on!your!own.!Inform!
your!employer!that!you!will!deduct!2,400!so!long!as!your!family!income!is!not!more!than!250K.!
o Can!all!individuals!claim!as!deduction!the!premium!payments!on!health!and!hospital!insurance?!
o So!I!am!an!employee!and!I!take!out!a!health!and!hospital!insurance!for!which!I!am!paying!100K!annual!premiums,!can!I!deduct!it!
from!my!gross!compensation!income!in!USC?!
! NO,!since!we!must!have!to!consider!the!limitations:!
• i.!premium!payments!deducted!must!not!be!more!than!2,400!a!year!(i.e.!200!a!month)!
• ii.!The!immediate!family!of!the!taxpayer!must!have!an!income!of!not!more!than!250K!a!year!
o This!refers!to!minimum!wage!income!earners!
o If!you!have!still!your!father,!mother!and!you’re!single,!and!your!father!is!earning!100K!a!year,!your!
mother!is!earning!100K!a!year,!and!you’re!earning!100K!a!year,!that’s!a!total!of!300K.!You!can!no!
longer!qualify!deducting!the!2,400!premiums!a!year!
• iii.!The!claimant!must!be!the!spouse!claiming!the!additional!exemption!
o What!spouse?!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!43"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
! In! default,! the! husband! if! both! are! working! but! if! only! one! is! working,! the! employee`
spouse.!If!husband!validly!waives,!then!it’s!the!wife.!
!
` The! deductions! of! personal! and! additional! exemptions! plus! the! premiums! on! health! and! hospital! insurance! are! deductible! from! the!
compensation!income!of!an!individual!who!is!purely!employed!
o What!if!he!engages!in!business!having!purely!business!income!and/or!engaged!in!business!and!still!employed!(mixed!income),!
can!he!avail!of!the!said!deductions?!
• Personal!and!additional!exemptions!
• Premiums!on!health!and!hospital!insurance!
• Itemized!deductions!
! Say!for!example!you’re!a!businesswoman.!You!have!a!sole!proprietorship.!What!deductions!can!you!avail!of?!
• Personal!and!additional!exemptions!
• Premiums!on!health!and!hospital!insurance!
• Itemized!deductions!–!those!expenses!incurred!in!relation!to!trade,!business!or!profession!
o Is! the! itemized! deductions! available! to! all! types! of! classes! of! individual! taxpayers! engaged! in!
business?!
! So! long! as! the! individual! is! engaged! in! trade! or! business,! he! can! claim! itemized!
deductions!but!only!to!the!extent!of!the!expenses!incurred!in!relation!to!trade,!business!
or!profession!and!incurred!in!the!Philippines!for!those!taxable!of!income!from!sources!
within.!
! If!your!taxable!as!a!RC!on!global!income,!then!it!is!rightful!that!you!also!claim!the!global!
expense! as! well.! But! if! you’re! a! RA! or! a! NRA`ETB,! who! is! taxable! from! income! only!
within,!then!only!the!expenses!incurred!within!the!Philippines!is!offsettable!against!such!
income.!
! Exceptions"to"claiming"itemized"deductions:"
• Individual!taxpayers!earning!purely!compensation!income!since!personal!and!
family!living!expenses!are!non`deductible!items!
• NRA`NETB! since! they! are! taxed! on! their! gross! income! without! benefit! of!
deduction!
• Aliens! employed! by! Regional! Area! HQs,! Regional! Operating! HQs,! Offshore!
Banking!Units,!Petroleum!Service!Contractors!&!Subcontractors!because!they!
are!only!taxable!on!their!compensation!income!except!when!they!are!engaged!
in!business!
!
` What!is!optional!standard!deduction!(OSD)?!
o A! standard! deduction! available! to! individuals! except! NRA,! in! an! amount! not! exceeding! 40%! of! the! gross! income,! in! lieu! of!
itemized!deductions.!
o It! is! a! fixed! percentage! at! 40%! allowed! as! a! deduction! against! the! gross! income! of! certain! taxpayers! without! any! regard! of!
whether!actually!expenses!have!been!incurred!or!not.!It’s!arbitrary!rate!of!40%.!!
o Proof! of! substantiation! for! such! expense! of! 40%! deduction! is! not! necessary.! So! automatically,! 40%! of! your! gross! income! is!
deductible!if!you!opt!for!OSD.!
st nd
o If!you!are!a!taxpayer!having!a!business,!sole!proprietorship.!You!opted!for!OSD!in!filing!your!1 !quarter!ITR.!You!realized!2 !
rd
quarter! or! 3 ! quarter! or! annual,! when! you! try! to! consolidate! everything,! that! your! actual! expenses! supported! by! official!
receipts!and!invoices!is!way!higher!than!the!40%!OSD.!Can!you!choose!itemized!deduction!at!the!end!of!the!year?!
!
st nd rd th
! 1 ! ! 2 ! ! 3 ! ! 4 !
! 40%!OSD! ! ! Revocable?!
! !
! ! st
!
! NO.!The!OSD!of!40%,!once!you!opt!to!go!for!OSD!during!the!1 !quarter,!it!becomes!irrevocable!during!the!entire!year,!
regardless!of!whether!you!actually!incurred!expenses!at!the!end!of!the!year!90%!of!your!gross!income,!you!can!no!
longer!change!your!option.!!
! Although,!the!default!is!always!itemized!deduction.!Without!indicating!that!you!choose!OSD!of!40%,!automatically!the!
BIR!will!go!for!itemized!deduction.!
! Who!are!allowed!to!claim!OSD?!
• RC,!NRC!and!RA.!
• NRA!are!not!allowed!to!claim!OSD.!
!
" RC" NRC" RA" NRA>ETB" NRA>NETB"
!
Itemized!Deduction! !! !! !! !! X!
Optional!Standard!Deduction! !! !! !! X! X!
! Corporations,!can!they!claim!OSD?!
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! T A X A T I O N ! T R A N S C R I P T I O N S ! B Y ! L L B ! I I I ! 2 0 1 0 ! ! ! P a g e !|!44"
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Ms.!Emery!Tiu!
• YES,!except!non`resident!corporations!
!
!
!
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
August'31,'2010'
PART%IV%–%CORPORATE%INCOME%TAX%
A.%Introduction%and%Definition%of%Terms%

Corporation%–%includes%partnership%no%matter%how%created%or%organized,%joint%account%companies,%insurance%companies%and%other%associations%
except:%
%%%%%%%%%1.%General%professional%partnership%
%%%%%%%%%2.%Joint%Venture%for%the%purpose%of%undertaking%construction%projects%
%%%%%%%%%3.% Joint% consortium% for% the% purpose% of% engaging% in% petroleum,% geothermal% and% other% energy% operations% pursuant% to% a% consortium%
agreement%with%the%government%

N What'is'a'corporation?'Does'it'include'partnership?'What'does'it'include?'
o Yes,'except'general'professional'partnerships.'
N A'corporation'is'defined'based'on'Section'22,'includes'partnership'no'matter'how'created'or'organized,'joint'account'companies,'insurance'
companies'and'other'associations'except:'
! 1.'General'professional'partnership'
! 2.'Joint'Venture'for'the'purpose'of'undertaking'construction'projects'
! 3.' Joint' consortium' for' the' purpose' of' engaging' in' petroleum,' geothermal' and' other' energy' operations' pursuant' to' a'
consortium'agreement'with'the'government'

Sec'22.'(B)'The'term!"corporation"'shall'include'partnerships,'no'matter'how'created'or'organized,'jointNstock'companies,'joint'accounts'
(cuentas' en' participacion),' association,' or' insurance' companies,' but' does' not' include' general' professional' partnerships' and' a' joint'
venture' or' consortium' formed' for' the' purpose' of' undertaking' construction' projects' or' engaging' in' petroleum,' coal,' geothermal' and'
other' energy' operations' pursuant' to' an' operating' consortium' agreement' under' a' service' contract' with' the' Government.% "General!
professional!partnerships"!are'partnerships'formed'by'persons'for'the'sole'purpose'of'exercising'their'common'profession,'no'part'of'the'
income'of'which'is'derived'from'engaging'in'any'trade'or'business.'

N Why' does' it' exclude' general' professional' partnership?' For' tax' purposes,' that' a' corporation' includes' all' partnership' except' general'
professional'partnership?'Are'there'any'type'of'partnership'that'you'know?'
o Partnerships'may'be'taxable'business'partnerships'or'the'nonNtaxable'partnerships'which'is'the'general'professional'partnership.'In'
some'books'or'in'some'discussions,'you'will'see'general'coNpartnership,'but'they'are'actually'partnerships'which'are'still'taxable.''
o Generally,'let’s'just'classify'them'into'2'kinds.'
! The'taxable'partnerships,'these'are'the'business'partnerships,'the'unregistered'partnerships/'
! And'the'nonNtaxable'partnerships,'which'are'the'general'professional'partnerships.'
N What'is'a'partnership?'So'if'this'room'forms'a'partnership,'it'will'be'taxable'to'30%?''
o Binigyan'answers:'Yes.''
N Does'corporation'include'associations?'Is'an'association'a'corporation?'Note:'Don’t'confuse'yourself'with'corporations'being'taxable'all'the'
time.'My'question'is'simple,'is'an'association'a'corporation?'Does'it'fall'under'corporate'tax'payers?''
o Note'that'NOT'ALL'corporations'are'taxable.'
o Yes,''
N What'is'a'joint'venture?'Example.'
o If' you' have' a' 10' hectare' parcel' of' land' and' you' put' it' in' a' corporation.' So,' corporation' is' a' real' estate' corporation' because' the'
business'is'into'land'holdings.'What'will'you'do'if'you'want'to'develop'the'land'but'you'don’t'have'the'funds'to'do'it?'
'
40'Million' To'Your'Income'
' !''''''!' 60'Million'
To'the'income'of'the'Construction'Company'
'
!''''''!' 100'Million'total'income'

'
Is'this'really'exempt'from'income'tax?'
'
NO!'Someone'else'is'liable'and'not'the'joint'venture.'(Someone'else'is'taxed'separately)'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''1'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Corporations'enter'into'joint'ventures'with'other'corporations'for'purposes'of'developing'construction'projects.'if'you'are'
a' land' owner' and' you' don’t' have' funds' to' develop' that' land' that' you' own.' You' task' a' construction' company' who' will'
develop'the'parcel'of'land'and'make'condominium'units,'subdivision'units'out'of'it.'Sharing'would'be'40N60'fusion'or'30N
70.'You'don’t'spend.'You'are'the'owner'of'the'land,'you'don’t'spend'for'anything'in'the'construction.'After'all'is'finished,'
40%'of'the'units'given'to'you'and'70'percent'of'the'units'will'be'owned'by'the'construction'company.''
o In'that'case,'if'you'are'the'land'owner'and'you'get'to'have'40%'of'the'subdivision'units'transferred'in'your'name,'
is'this'subject'to'Capital'Gains'Tax?'Is'it'a'sale?'
! CGT'is'imposed'not'only'in'sale'and'exchange'but'any'other'modes'of'disposition.'But'in'this'case'it'is'
NOT' subject' of' CGT' for' the' reason' that' the' transfer' is' not' really' for' a' disposition' of' property' but' to'
simply'effect'what'has'been'agreed'in'the'joint'venture'agreement.''
! Now,'if'the'joint'venture'between'your'corporation'and'the'construction'company'earns'income,'is'it'subject'to'income'
tax?'Is'your'joint'venture'subject'to'the'corporate'tax'rate'of'30%?''
o General'corporation'or'partnerships,'they'are'not'subject'to'the'corporate'tax.'They'are'exempt'from'income'tax'
actually.' The' income' of' joint' ventures' between' 2' corporations' under' the' ' sole' management' of' either' one'
company'or'particular'group'of'persons'will'also'be'not'covered'under'the''corporate'tax'of'30%.'
! But'is'the'income'really'taxable?'Can'the'government'not'collect'any'form'of'tax'covered'by'the'joint'venture?'Parcel'of'
land' with' houses,' everything' was' sold,' 40%' of' the' income,' 40' million' was' given' to' you,' 60' million' was' retained' by' the'
construction'company.'Since'the'total'of'100million'income'is'not'taxable'in'a'joint'venture.'So'is'this'really'free'from'tax?'
Can'the'government'not'really'collect'any'form'of'tax'on'the'income'derived'from'the'activity'covered'by'the'joint'venture'
agreement?'Who'will'be'liable'for'the'100million'income,'is'it'the'joint'venture'or'someone'else?''
o Someone'else.'Who'is'this'someone'else?''
o Joint' venture' for' purposes' of' undertaking' construction' projects' are' not' subject' to' corporate' tax' of' 30%.'
Nonetheless,'any'income'distributed'to'the'parties'who'enter'into'a'joint'venture'agreement'will'be'separately'
taxable'to'income'tax.''
o So,'meaning'to'say,'that'the'40'million'will'be'added'to'your'other'income'of'your'corporation'and'the'60'million'
to'the'income'of'the'construction'company.'It'will'still'be'subject'to'30%'tax'still'as'part'of'the'income'for'the'
entire'taxable'year.''
o It'does'not'mean'that'joint'venture'is'really'free'from'the'corporate'tax'of'30%.'It'is'free'from'the'corporate'tax'
of'30%'but'the'liability'will'be'shouldered'separately'by'the'parties'of'the'joint'venture'agreement.'Now'that’s'
joint'venture.'
N Corporations'are'defined'to'include'partnerships,'associations'or'joint'ventures,'joint'stock'companies,'joint'accounts'except'for'3:'
o 1.'General'Professional'Partnerships'
o 2.'Joint'Venture'for'the'purpose'of'undertaking'construction'projects'
o 3.'Joint'consortium'for'the'purpose'of'engaging'in'petroleum,'geothermal'and'other'energy'operations'pursuant'to'a'consortium'
agreement'with'the'government'
! You' have' to' be' specific,' all' joint' ventures' as' a' rule,' are' subject' to' the' corporate' tax' of' 30%' except' if' it' for' undertaking'
construction' projects' or' a' joint' consortium' for' the'petroleum,' geothermal' and' other' energy' operations' but' it' has' to' be'
with'the'government.'
! If'it’s'a'joint'consortium'NOT!in!contract!with!the!government,'it'is'taxable%still.'So'you'have'to'be'careful'on'the'requisites'
for'these'3'entities'which'are'not'covered'by'the'definition'of'a''corporation.'

General%Professional%Partnership%(GPP)%–%partnerships%formed%by%person%for%the%sole%purpose%of%exercising%their%common%profession,%no%part%of%
the% income% of% which% is% derived% from% engaging% in% any% trade% or% business.% Persons% engaged% in% business% as% partners% in% a% GPP,% shall% be% liable% for%
income%tax%only%in%their%separate%and%individual%capacities.%For%purposes%of%computing%the%distributive%share%of%the%partners,%the%net%income%of%
the% partnership% shall% be% computed% in% the% same% manner% as% a% corporation.% Each% partner% shall% report% as% gross% income% his% distributive% share,%
actually%or%constructively%received,%in%the%net%income%of%the%partnership.%Income%of%a%GPP%is%deemed%constructively%received%by%the%partners.%

N General'Profession'partnership.'We'now'know,'that'the'income'of'a'joint'venture'is'not'taxable'to'the'joint'venture'but'taxable'separately.'
How'about'general'professional'partnerships?'Would'the'income'of'general'professional'partnerships'be'absolutely'be'free'from'tax'or'is'it'
taxable'on'someone'else?'
o You' remembered' when' we' said' that' any' share' of' the' partners' in' GPPs,' the' undistributed' shares' will' still' be' considered' as'
constructive'income'already'taxable'on'the'part'of'the'individual'partners.'Now,'even'if'the'GPP'is'not'subject'to'30%'corporate'tax'
rate'on'the'net'income,'the'net'income'is'considered%as%earned'by'the'partners'composing'the'GPP.'And'taxable'separately'on'the'
part'of'these'partners'to'5%N'32%.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''2'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o But'is'the'GPP'free'from'the'obligation'of'filing'an'income'tax'return?''
! General'professional'partnerships'even'if'they'are'exempt'from'income'tax'are'required%to%file%an%Income%Tax%Return'for'
the'simple'reason'that'it'is'the'only'tool'that'the'government'will'use'to'determine'whether'the'partners'composing'the'
GPP'are'correctly'declaring'their'income.'It’s'the'basis,'if'there'are'3'partners,'the'only'thing'that'the'government'will'do'is'
divide'it'into'3,'1/3'must'have'been'reported'as'part'of'the'income'tax'return'of'the'individual'partners.''
! In' fact,' the' individual' partners,' when' they' submit' their' income' tax' return,' strictly,' they' have' to' include' and' submit' the'
income'tax'return'of'the'GPP.'
N So' you' will' see' class' that' taxation' may' not' be' imposed' in' this' type' of' person,' whether' natural' or' juridical' but' somehow' since' there' is' an'
income,'the'tax'will'be'imposed'upon'some'other'tax'payer.''

Joint% Venture% –% created% when% 2% corporations,% while% registered% and% operating% separately,% are% placed% under% one% sole% management% which%
operated%the%business%affairs%of%said%companies%as%though%they%constituted%a%single%entity%thereby%obtaining%substantial%economy%and%profits%in%
the%operation.%
Joint%Account%–%created%when%2%persons%form%or%create%a%common%fund%and%such%persons%engages%in%a%business%for%profit.%This%may%result%in%a%
taxable%unregistered%association%or%partnership%
Joint%Stock%Companies%–%the%midway%between%a%corporation%and%a%partnership,%a%hybrid%personality”,%somewhat%a%corporation%because%this%is%
managed% by% a% Board% of% directors% and% such% persons% may% transfer% their% share/s% without% the% consent% of% others,% and% somewhat% a% partnership%
because%it%is%an%association,%and%persons%or%members%of%the%same%contribute%fund,%money%to%a%common%fund.%
Emergency%Operation%–%these%may%be%formed%by%2%corporations%with%separate%personalities.%If%they%form%that%emergency%operation%(it%is%a%really%
a% special% activity)% to% engage% in% a% joint% venture.% Corporation% 1% may% be% taxed% only% from% the% income% derived% from% such% business.% The% income%
derived%from%such%emergency%operation%should%also%be%included%in%that%taxable%income%subject%to%corporate%income%tax.%In%the%same%way,%that%
corporation%2,%has%a%separate%and%distinct%personality;%if%it’s%a%part%of%that%emergency%operation,%the%income%derived%from%such%special%activity%
should%also%be%included%in%the%income%of%that%corporation%2,%subject%to%corporate%income%tax,%even%if%it%is%not%registered%with%the%Securities%and%
Exchange%Commission.%%

N Joint%Venture:'it'is'between'2'corporations'placed'under'one'sole'management'for'sometimes,'a'special'operation.''
N Joint%Account:'it'is'between'2'persons'forming'or'creating'a'common'fund'for'profit.'It'is'usually'an'unregistered'association.'They'do'not'
need'to'register'that'with'the'SEC.'
N Joint%Stock%Companies:'probably,'the'only'time'this'will'come'out'is'when'you'are'asked'to'define'what'it'is.''
N Is'a'coNownership'a'taxable'entity?'
o General%rule:'A'coNownership'is'taxNexempt.'It'is'not'considered'as'a'corporation,'not'a'partnership.'
o Exception:'when'the'coNowners'in'a'coNownership'are'earning'profits,'it'will'be'considered'as'an'unregistered'partnership,'subject'to'
30%'tax.'
! When' you' say' earning' profits,' does' elevating' their' status' as' an' unregistered' partnership,' does' it' include' sharing' in' the'
income'of'the'estate'left'to'them'by'the'decedent?'
o If'a'coNowned'property'produces'income'and'enjoyed'by'the'coNowners,'it'is'not%automatic'that'it'will'be'subject'
to'the'corporate'tax'rate'of'30%'as'an'unregistered'partnership.''
o It' will' only' be' considered' as' an' unregistered' partnership' if' coNowners' themselves' have' undertaken' steps' to'
infuse'investment'and'make'it'a'profitable'business.'
'
B.%Taxable%Corporations%–%DC,%RFC,%NRFC%
1.'Domestic'Corporations'(DC)'See'Section'27'

A%corporation%formed%or%organized%under%Philippine%laws.%It%is%subject%to%tax%on%its%net%taxable%income%from%sources%WITHIN%and%WITHOUT%%the%
Philippines.%

2.'Resident'Foreign'Corporation'(RFC),'See'Section'28A'

A%corporation%formed,%organized,%authorized%or%existing%under%the%laws%of%any%foreign%country,%and%engaged%in%trade%or%business%WITHIN%the%
Philippines.%It%is%subject%to%tax%on%its%net%taxable%income%from%sources%within%the%Philippines.%
There%is%no%fixed%criterion%as%to%what%constitutes%“engaged-in-trade-or-business”.%Being%“engaged%in%business”%implies%continuity%of%commercial%
transactions%or%dealings%_%%continuity%of%business%or%continuity%of%intention%to%conduct%continuous%business.%

3.'NonNResident'Foreign'Corporations'(NRFC),'See'Section'26B'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''3'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
A%corporation%formed,%organized,%authorized,%or%existing%(foae)%under%the%laws%of%any%foreign%country.%It%is%subject%to%tax%on%its%gross%income%
from%sources%WITHIN%the%Philippines.%
Such%gross%income%may%include%interests,%dividends,%rents,%royalties,%salaries,%premiums%(except%reinsurance%premiums),%annuities,%emoluments%
or%other%fixed%or%determinable%annual,%periodic,%or%casual%gains,%profits,%and%income%and%capital%gains,%EXCEPT,%capital%gains%from%the%sale%of%
shares%of%stock%not%traded%in%the%stock%exchange.%

N Who'are'the'taxable'corporations?'How'do'we'classify'corporations'in'the'Philippines,'as'taxpayers?''
N Illustration'of'Atty.'In'the'board:'(explanation'below'the'illustration)%
' CORPORATE'
'
' DOMESTIC' FOREIGN'

' ' '

1.'Philippine'Laws' 1.'Foreign'Laws'
' ' '
' 2.'Within'and'Without' 2.'Abroad'
' '
' 3.'NET' 3.'Within'
' '(allowed'to'deduct'expense'within'and'without)' ''If'allowed'to'deduct'expense'depends'on:'

'
' Resident'Foreign'Corporation' NonNResident'Foreign'Corporation'
' '
' ' '

1. Taxed'at'NET' 1. Taxed'at'GROSS'
' 2. Allowed'to'deduct'expenses'WITHIN' 2. NOT'Allowed'to'deduct'expenses''
% 3. Tax'Rate:'30%' 3. Tax'Rate:'30%'

Tax%Rates:%
Domestic%Corporation% Resident%Foreign%Corporation% Non_Resident%Foreign%Corporation%
30%' 30%' 30%'
'
• Domestic%corporations%
1. formed'and'organized'under'Philippine'laws'
2. income'is'taxable'within'and'without'
3. In'so'far'as'computing'their'tax'due,'they'are'allowed'to'deduct'expenses,'and'taxable'on'their'net'taxable'income'
4. Tax'rate'–'30%'
'
!! ! IN!CONTRAST!WITH:!
• Foreign%corporations%
1. Formed'and'organized'under'laws'of'a'foreign'country'
2. Income'is'taxable'within'
3. In'so'far'as'computing'their'tax'due'and'whether'they'can'deduct'expenses,'it'depends'whether'they'are:'
'
a. Resident%foreign%corporation%%
1. Allowed'to'deduct'expenses'but'only'those'in'relation'to'income'generated'within'the'Philippines.''
2. Since'resident'foreign'corporations'are'taxable'only'on'income'generated'within,'therefore,'NET,'meaning'they'
are'allowed'to'deduct'expenses;'the'expenses'that'they'are'allowed'to'deduct'against'their'income'would'only'
be'expenses'within'the'Philippines'or'those'which'they'have'incurred'in'relation'to'producing'the'income'that'is'
taxable'under'Philippine'laws;''
3. As'to'tax'rate'–'30%'
%
b. Non_resident%foreign%corporation%%
1. NOT'allowed'to'deduct'expenses.''
2. Therefore,'they'are'taxed'at'GROSS,'meaning'there'are'no'deductions;'“expenses'within'and'without”'have'no'
bearing'because'it'is'subject'to'tax'at'gross.''
3. tax'rate'–'30%'
N You' see,' under' the' diagram' shown' above,' corporate' tax' payers' are' simpler' to' understand.' There' are' only' 3' kinds' of' taxable' corporations.'
They' do' receive' some' other' source' of' income' which' is' passive' income,' we' don’t' have' the' 25%' for' nonNresident' not' engaged' in' trade' or'
business.'All'of'them'are'taxable'at'30%.'The'main'difference'is'that'this'is'taxable'worldwide'and'no'expenses'allowed'for'NRFC.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''4'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N What' makes' a' foreign' corporation' “Resident”' and' what' makes' it' a' “nonNresident”' corporation?' What' is' the' simplest' way' of' determining'
whether'it'is'resident'or'nonNresident?'
o If'we'go'to'the'legal'phase,'a'foreign'corporation'would'like'to'do'business'in'the'Philippines,'to'register'itself'as'a'resident'foreign'
corporation'in'the'Philippines.'So'if'it'is'registered'as'a'Philippine'branch'of'a'foreign'company,'it'is'automatically'considered'as'a'
resident%foreign%corporation.''
o But'NONNREGISTRATION'of'a'foreign'corporation'does'not'mean'that'you'can'never'be'classified'as'a'resident'foreign'corporation.'
Why?'
! Because'the'criteria'really'is'not'the'registration'for'tax'purposes,'or'your'official'registration'in'the'Philippines.' But'it'is'
WON'you'are'doing'business'in'the'Philippines.''
! “Doing% business% in% the% Philippines”' would' require' the' determination' of' whether' the' activity' you' are' doing' in' the'
Philippines'is'done'in'a'continuous'basis'or'regular'basis.'
! So' you' cannot' escape' taxation' simply' by' not' registering.' Because' nonNresident' foreign' corporations' are' foreign'
corporations'not'doing'business'in'the'Philippines.'If%they%are%considered%as%not%doing%business%in%the%Philippines,%why%do%
we%have%to%discuss%them,%as%a%corporate%taxpayer?'
o Notwithstanding'that'this'foreign'corporation,'organized'or'incorporated'abroad,'not'doing'business'in'the'
Philippines,' we' also' consider' them' as' part' of' the' 3' types' of' corporate' taxpayers' because' in' some' cases,'
foreign' corporations' not' registered' in' the' Philippines,' not' doing' business' in' the' Philippines' enters' into'
isolated% transactions% with% a% domestic% corporation% or% an% individual.' Therefore,' just' for' the' purpose' of'
knowing' what' their' taxability' is' in' the' Philippines,'to' consider' them' as' part' of' the' taxpayer' “NOT' DOING'
BUSINESS”,' meaning' not' regular' or' not' on' a' continuous' basis,' but' taxable' still' to' the' same' 30%.' ' The'
problem'is,'they'are'taxable'on'the'gross.''
Filing%of%an%Income%Tax%Return%(ITR)%
N Domestic% corporations' are' liable' for' 30%' on' the' net' income' (because' they' are' allowed' expenses' incurred' within' and' without),' are' they'
required'to'file'an'ITR'at'the'end'of'the'year'or'on'a'quarterly'basis'and'finalize'at'the'end'of'the'year?''
o Corporations,'especially'domestic'corporations,'it'abounds'in'the'Philippines,'they'are'required'to'declare'their'income'in'a'quarterly'
basis.'These%are%mere%estimates%and%at%the%end%of%the%year%it%is%annualized.'On'their'own,'they'have'to'do'that,'this'is'called'selfN
assessment' (you' assess' yourself' as' to' how' much' your' income' is,' how' much' expenses' and' what' is' your' tax' liability' to' the'
government).'
N Resident%foreign%corporations:'Are'they'required'to'file'an'ITR'at'the'end'of'the'year?'
o YES,'being'resident'foreign'corporations,'they'are'categorized'still'having'the'same'obligation'of'filing'the'ITR'at'the'end'of'the'year'
and/or'a'quarterly'basis.'
N But' what' about% Non_resident% foreign% corporations.' These' are' corporations' organized' abroad;' not' doing' business' in' the' Philippines.' When'
they'enter'into'one'isolated'transaction'in'the'Philippines,'are'they'required'to'file'an'ITR'at'the'end'of'the'year'or'on'a'quarterly'basis?'
o If'you'are'from'the'BIR,'what'ways'are'there'available'to'collect'the'30%'tax'on'the'gross'income?'
! Any'payments'made'to'nonNresident'foreign'corporations,'just'like'payment'to'nonNresident'aliens'NOT'engaged'in'trade'
or'business'of'25%,'since'they'are'not'considered'as'doing'business'in'the'Philippines,'they'would'have'to'be'withheld'of'
the'tax.''
Payments'to:'
o Non_RFC'N'withhold'30%'of'the'tax'
o Non_resident% aliens% not% engaged% in% trade% or% business' –' withhold' 25%' (they' will' receive' 70%' free' from' tax'
already'or'75%)'
! REASON:' the' Philippine' government' does' not' have' jurisdiction' over' these' taxpayers,' hence,' the'
government'cannot'expect'them'to'declare'their'income'at'the'end'of'the'year'or'on'a'quarterly'basis.''
! What'it'expects'is'that,'any'payor'of'the'income,'meaning'to'whom'these'persons'is'transacting'with'
has'the'obligation'of'a'withholding'agent.'As'a'withholding'agent,'he'will'be'liable'for'nonNwithholding.'
! Is' this' a' final' tax' or' a' creditable' tax?' Is' the' tax' withheld' from' a' nonNresident' foreign' corporation,'
including' nonNresident' alien' not' engaged' in' trade' or' business' a% final% withholding% tax% or% creditable%
withholding%tax?'
• A'final'withholding'tax.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''5'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
• Is' a' non_resident% foreign% corporation' expected' to' file' an' ITR' at' the' end' of' the' year?' No,'
because'he'is'not'doing'business'in'the'Philippines,'and'not'even'registered'as'a'business'in'
the' Philippines.' Therefore,' not' being' required' to' file' an' ITR' everytime' payment' is' being'
made'to'them,'it'should'be'taxed'with'finality.''
• What'is'the'“Withholding'with'finality”'–'it'is'the'final'withholding'tax'considered'as'the'full'
and'final'payment'of'the'tax.'
• Contrarily,' the' nature' of' a' creditable% withholding% tax' is' that' it' is' a' tax' withheld' to'
approximate'the'liability'of'the'taxpayer/payee'at'the'end'of'the'year.'We'don’t'expect'these'
foreign'corporations'to'file'at'the'end'of'the'year.'
! Example:'if'you'have'a'domestic'corporation,'and'you'enter'into'a'contract'with'a'foreign'corporation'
for' them' to' render' repairs' to' your' machinery' in' the' Philippines,' is' that' subject' to' tax?' Yes.' If' the'
contract'fee'is'1'Million'US'dollars,'how'much'will'you'pay'to'them?'
• General% Rule:' You' only' pay' them' 700' US' dollars.' 300' US' dollars' will' be' remitted' to' the'
government.'That'is'the'general'rule,'there'is'always'an'exception.'
• In'some'schools,'they'are'required'to'read'at'least'1'tax'treaty.'Usually'in'a'tax%treaty,'there'
is'a'provision'on'business'profits,'which'says'that'“If'a'foreign'corporation'not'doing'business'
in'the'Philippines'transacts'business'with'a'domestic'corporation,'the'payment'to'the'foreign'
corporation' is' not' taxable' as' long' as' that' foreign' corporation' has' no' permanent'
establishment'here'in'the'Philippines'(meaning'no'office'or'any'branch'in'the'Philippines).'In'
that'case,'if'we'go'by'the'Tax'Code,'that'is'taxable'of'30%,'deduct,'it’s'a'final'tax.'But'the'tax'
treaty'is'something'that'gives'a'relief'from'double'taxation.''
! Why'does'it'give'relief'from'double'taxation?'In'what'way'does'it'give'relief'from'double'taxation'if'you'
would'not'be'required'to'withhold'the'30%?'
• That'foreign'corporation'who'came'to'the'Philippines'for'1'week'to'repair'the'equipments'of'
Ms.' Dumagat' will' surely' be' taxable' in' the' country' where' it' is' a' resident.' Being' a' resident'
abroad,' it' is' taxable' within' and' without,' and' we' will' tax' that' foreign' corporation,' that' is'
double'taxation'already.'Although'not'in'a'strict'sense,'because'these'are'2'different'taxing'
jurisdictions.''
• Under'the'Tax'Code,'it'is'30%.'
• But'if'we'invoke'the'Tax'Treaty,'that'is'totally'tax'free.'
• In' cases' of' conflict' between' the' (Municipal' law)' Tax' Code' and' Tax' Treaty,' usually' the' Tax'
treaty'will'prevail'because'we'respect'agreements'with'other'countries.'Only'in'case'where'
the'Tax'treaty'is'more'burdensome,'do'we'follow'the'Tax'Code.'In'more'cases'than'not,'the'
tax'treaty'is'there'in'order'to'give'relief,'that'is'the'purpose'why'the'tax'treaty'is'there,'to'
ease'the'burden'of'that'corporation'from'2'taxations'in'2'different'taxing'jurisdictions.'
N SEC.'28.'Rates'of'Income'Tax'on'Foreign'Corporations.'–'

(B)'Tax%on%Non%resident%Foreign%Corporation.%–''
(1)'In!General.'N'Except'as'otherwise'provided'in'this'Code,'a'foreign'corporation'not'engaged'in'trade'or'business'in'the'Philippines'shall'
pay'a'tax'equal'to'thirtyNfive'percent'(35%)'of'the'gross'income'received'during'each'taxable'year'from'all'sources'within'the'Philippines,'
such'as'interests,'dividends,'rents,'royalties,'salaries,'premiums'(except'reinsurance'premiums),'annuities,'emoluments'or'other'fixed'or'
determinable' annual,' periodic' or' casual' gains,' profits' and' income,' and' capital' gains,' except' capital' gains' subject' to' tax' under'
subparagraphs'(C)'and'(d):'Provided,'That'effective'1,'1998,'the'rate'of'income'tax'shall'be'thirtyNfour'percent'(34%);'effective'January'1,'
1999,' the' rate' shall' be' thirtyNthree' percent' (33%);' and,' effective' January' 1,' 2000' and' thereafter,' the' rate' shall' be' thirtyNtwo' percent'
(32%).'

N If'you'read'through'SEC.'28'B'on''nonNresident'foreign'corporations,'the'gross'income'of'nonNresident'foreign'corporations'includes'the'same'
gross'income'that'has'been'enumerated'in'nonNresident'aliens'not'engaged'in'trade'or'business,'such'as:'
1. Interests'
2. Dividends'
3. Rents'
4. Royalties'
5. Salaries'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''6'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
6. Premiums'
7. Annuities,'etc'
Except:'Capital'gains'on'sale'of'shares'of'stocks,'which'will'be'subject'to'the'same'rate'of:'5%'and'10%'
• Why'did'it'not'mention,'“except'capital'gains'on'the'sale'of'real'property”?'
! NonNresident'aliens'not'engaged'in'trade'or'business'are'subject'to'25%''final'tax'on'gross'income,'for'all'types'of'
gross' income' including' interest,' etc.' except' capital' gains' on' sale' of' shares' of' stock' and' sale' of' real' properties'
classified'as'capital'assets.'In'this'case,'exception'is'only'capital'gains'on'sale'of'shares'of'stock.'The'reason'is'that'
nonNresident'foreign'corporations'are'not'expected'to'have'probably'real'properties'in'the'Philippines.'
N These'are'the'general'rules,'the'30%.'
N Towards'the'end'of'the'outline,'you'will'see'special'domestic'corporations'and'special'resident'foreign'corporations'and'nonNresident'foreign'
corporations.'The'tax'rates'are'different,'it'is'not'the'30%.'
N As'of'now,'let'us'concentrate'on'income'being'subject'to'30%.'
C.%Income%Tax%Exempt%Entities,%Section%30%

1.%General%Professional%Partnership%
2.%Joint%venture%for%the%purpose%of%undertaking%construction%projects.%
3.% Joint% consortium% for% the% purpose%of% engaging% in% petroleum,% geothermal% and% other% energy% operations% pursuant% to% a% consortium% agreement%
with%the%government%
4.%Labor,%agricultural%or%horticultural%organization%not%organized%principally%for%profit%
5.%Mutual%savings%bank%not%having%capital%stock%represented%by%shares%and%cooperative%bank%without%capital%stock%organized%and%operated%for%
mutual%purposes%and%without%profit%
6.%A%beneficiary%society,%order%or%association,%operating%for%the%exclusive%benefits%of%the%members%such%as%fraternal%organization%operating%under%
the%lodge%system%(one%which%must%operate%under%a%parent%and%subsidiary%associations),%or%a%payment%of%life,%sickness,%accident,%or%other%benefits%
exclusively%to%the%members%of%such%society,%order%or%association,%or%non_stock%corporation%or%their%dependents%
7.%Cemetery%company%owned%and%operated%exclusively%for%the%benefit%of%its%members%(must%be%a%non_profit%cemetery)%
8.%Non_stock%corporation%or%association%organized%and%operated%exclusively%for%religious,%charitable,%scientific,%athletic,%or%cultural%purposes,%or%
for%the%rehabilitation%of%veterans;%no%part%of%its%income%or%asset%shall%belong%to%or%inure%to%the%benefit%of%any%member,%organizer,%officer,%or%any%
specific%person%
9.%Business%league,%chamber%of%commerce,%or%board%of%trade,%not%organized%for%profit,%and%no%part%of%the%net%income%of%which%insures%to%the%
benefit%of%any%private%stockholder%or%individual%
Requisites:%
% % a.%This%must%be%established%for%common%business%interest%
% % b.%No%part%of%the%income%shall%inure%to%the%benefit%of%a%particular%individual%
10.%Civic%league%or%organization%not%organized%for%profit%but%operated%exclusively%for%the%promotion%of%social%welfare%

11.%Farmers%associations%or%like%associations,%organized%and%operated%as%a%sales%agent,%for%the%purpose%of%marketing%the%products%of%its%members%
and%turning%back%to%them%the%proceeds%of%sales,%less%the%necessary%selling%expenses%on%the%basis%of%the%quantity%produce%finished%by%them%(must%
be%a%non_profit%association)%

12.%Farmers%cooperative%or%other%mutual%typhoon%or%fire%insurance%company,%mutual%ditch%or%irrigation%company,%or%like%organization%of%a%purely%
local%character,%the%income%of%which%consists%solely%of%assessments,%dues,%and%fees%collected%from%members%of%the%sole%purpose%of%meeting%its%
expenses%
13.%Government%educational%institution%
14.%Non_stock%and%non_profit%educational%institution%
General% Rule:% All% corporations,% agencies% or% instrumentalities% owned% and% controlled% by% the% government% shall% pay% such% rate% of% tax% upon% their%
taxable%income%as%are%imposed%upon%corporations%or%associations%engaged%in%a%similar%business,%industry%of%activity.%
Exception:%
15.%GSIS%(Government%Service%Insurance%System)%
16.%SSS%(Social%Security%System)%

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''7'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
17.%PHIC%(Philippine%Health%Insurance%Corporation)%
18.%PCSO%(%Philippine%Charity%Sweepstakes%Office)%
19.%NAPOCOR%(Special%Law)%

N Give'me'1'entity'not'subject'to'tax.''
N Example'of'an'educational'institution'owned'by'the'government.'
o Government'educational'institutions'are'among'the'income'tax'exempt'entities.'In'outline'letter'C'you'will'see'several'enumerations'
of' entities' not' subject' to' income' tax,' found' in' section' 30,' for' those' associations' or' entitites' not' made' for' profit.' Section' 22,'
definition'of'a'corporation'in'the'Tax'Code.'And'from'15N19'in'the'outline,'these'are'government'controlled'corporations'which'are'
among'the'exceptions'not'subject'to'income'tax.''

SEC.%30.%Exemptions-from-Tax-on-Corporations.'N'The'following'organizations'shall'not'be'taxed'under'this'Title'in'respect'to'income'received'by'
them'as'such:''
(A)'Labor,'agricultural'or'horticultural'organization'not'organized'principally'for'profit;''
(B)'Mutual'savings'bank'not'having'a'capital'stock'represented'by'shares,'and'cooperative'bank'without'capital'stock'organized'and'operated'for'
mutual'purposes'and'without'profit;''
(C)'A'beneficiary'society,'order'or'association,'operating'fort'he'exclusive'benefit'of'the'members'such'as'a'fraternal'organization'operating'under'
the'lodge'system,'or'mutual'aid'association'or'a'nonstock'corporation'organized'by'employees'providing'for'the'payment'of'life,'sickness,'accident,'
or'other'benefits'exclusively'to'the'members'of'such'society,'order,'or'association,'or'nonstock'corporation'or'their'dependents;''
(D)'Cemetery'company'owned'and'operated'exclusively'for'the'benefit'of'its'members;''
(E)'Nonstock'corporation'or'association'organized'and'operated'exclusively'for'religious,'charitable,'scientific,'athletic,'or'cultural'purposes,'or'for'
the'rehabilitation'of'veterans,'no'part'of'its'net'income'or'asset'shall'belong'to'or'inures'to'the'benefit'of'any'member,'organizer,'officer'or'any'
specific'person;''
(F)'Business'league'chamber'of'commerce,'or'board'of'trade,'not'organized'for'profit'and'no'part'of'the'net'income'of'which'inures'to'the'benefit'
of'any'private'stockNholder,'or'individual;''
(G)'Civic'league'or'organization'not'organized'for'profit'but'operated'exclusively'for'the'promotion'of'social'welfare;''
(H)'A'nonstock'and'nonprofit'educational'institution;''
(I)'Government'educational'institution;''
(J)'Farmers''or'other'mutual'typhoon'or'fire'insurance'company,'mutual'ditch'or'irrigation'company,'mutual'or'cooperative'telephone'company,'or'
like'organization'of'a'purely'local'character,'the'income'of'which'consists'solely'of'assessments,'dues,'and'fees'collected'from'members'for'the'
sole'purpose'of'meeting'its'expenses;'and''
(K)'Farmers','fruit'growers','or'like'association'organized'and'operated'as'a'sales'agent'for'the'purpose'of'marketing'the'products'of'its'members'
and'turning'back'to'them'the'proceeds'of'sales,'less'the'necessary'selling'expenses'on'the'basis'of'the'quantity'of'produce'finished'by'them;'

Notwithstanding'the'provisions'in'the'preceding'paragraphs,'the'income'of'whatever'kind'and'character'of'the'foregoing'organizations'from'any'of'
their'properties,'real'or'personal,'or'from'any'of'their'activities'conducted'for'profit'regardless'of'the'disposition'made'of'such'income,'shall'be'
subject'to'tax'imposed'under'this'Code.''

(TAKE%NOTE:%in'the'outline'there'are'additional…'like'from'number'1'–'3):'
N Are'the'collections'made'by'a'condominium'corporation'subject'to'30%'income'tax?'No.''
N What'is'a'condominium'corporation?'
o This' is' a' condominium' building.' ABC' is' the' developer.' The' income' of' ABC' is' from' the' sales' of' the' condominium' units.' Is' ABC' the'
condominium'corporation'that'we'are'talking'about?'
! NO.'
! Once'a'condominium'building'is'set'up,'the'developer'is'separate'from'this'building'and'every'unit'owner'is'a'separate'
taxpayer.'So'if'he'decides'to'lease'it'out,'he'will'be'subject'to'income'tax'on'the'rents.''
! But'there'will'be'a'condominium'corporation'composed'by'the'different'unit'owners'for'the'management'of'the'entire'
building.'You'call'it'a'condominium%corporation.'The'proceeds'or'collections'of'a'condominium'corporation'are:'
1. Association'dues'
2. Electricity'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''8'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
3. Common'charges'expense'
4. Water'
o Are' these' collections' collected' by' the' condominium' corporation' subject' to' income' tax' imposable' on' the'
condominium'corporation?'Or'would'a'condominium'corporation'fall'under'income'tax'exempt'entity'(Sec'30)?''
o Are'these'considered'income'collected'for'profit?'And'are'condominium'corporations'made'for'profit?'
! NO,'these'are'not'income'and'these'are'not'collected'for'profit!!!'
! Condominium'corporations'are'not'made'for'profit.'
! Condominium'corporations'in'so'far'as'they'collect'association'dues,'membership'dues,'etc.'so'long'as'
it'is'not'made'for'markNup'or'for'profit,'they'are'not'subject'to'income'tax,'VAT,'local'business'taxes.'
! EXCEPTION:'Once'collections'of'condominium'corporations'exceed'more'than'that'which'they'require'
for'the'maintenance'of'the'building,'it'will'be'subject'to'tax.'%
! Because' in' some' areas,' like' IT' Park,' although' it' is' not' a' condominium,' but' there' is' a' corporation'
association' of' all' the' locators.' If' they' collect' for' electricity' to' raise' (atty' said' rise,' but' mura' pud' ug'
raise)'the'actual'usage'of'that'locator,'or'unit'owner,'then'it'is'already'incomeNearning,'it'is'a'profitable'
activity,' it' will' already' be' subject' to' tax.' But' so' long' as' it' is' only' for' minimum' membership' dues' to'
maintain' this,' the' maintenance' of' the' building,' and' recover' only' for' the' common' charges,' it' is' not'
taxable.%
! What'is'taxed,'the'excess'or'the'entire'amount?'%
! Whichever' way,' because' if' we' have' to' declare' the' entire' amount,' you' can' deduct' the' actual' cost.'
What'will'be'paid'of'tax'is'only'the'difference.'
N If'there'is'a'cemetery,'and'there'is'a'big'space'rented'out'for'a'concert,'will'the'proceeds'be'subject'to'tax?'
N What'if'the'proceeds'will'be'used'to'repaint'the'gravestones?'
o YES,'it'is'taxable.'
o Even'if'that'leasing'out'would'not'fall'under'activities'for'profit,'let’s'say'it'is'only'for'once'a'year'or'twice'a'year,'still'it'is'an'income'
generated'from'the'use'of'the'real'property.''
o Legal'basis''
! There'is'a'caveat'in'the'last'paragraph'of'Section'30,'that'notwithstanding'that'these'exempt'entities'have'been'granted'
exemption'from'income'taxes,'they'will'still'be'subject'to'income'tax'if%and%when%they%realize%income%coming%from%any%of%
these%three:'
1. The'usage'of'a'real'property,'whether'it'is'regular'or'not.'
2. The'usage'of'a'personal'property,'whether'regular'or'not.'
3. Any'activity'made'for'profit,'which'is'regular.'
These' are' subject' to' income' tax' regardless' of' how' the' proceeds' will' be' used' or' utilized.' Even' if' it' will' be' used' for'
beautification'purposes.'Since'the'law'is'clear'that'it'does'not'give'any'preference,'whether'it'is'used'for'the'purpose'
or'not,'it'will'be'subject'to'income'tax.'
! If'you'run'through'the'income'tax'exempt'entities,'under'Section'30,'you'will'note'that'these'are'actually'associations'or'
entities'which'are'made:'
o NOT'for'profit.'
! Letter'A:'Labor,'agricultural'or'horticultural'organization'not'organized'principally'for'profit.'
o It'can'be'profitable'in'some'sense,'as'long'as'it'is'not'“principally”'but'other'entities'or'associations'are'strictly'
requiring'that'it'is'not'for'profit.'And'some'of'these'entities'or'associations'should'only'cater'for'members.''
N Once'there'is'an'activity'or'usage'of'any'real'or'personal'property'defining'the'rule'in'the'last'paragraph'automatically,'it'will'be'subject'to'
income'tax.'
N How'will'the'BIR'expect'payment'from'these'types'of'organizations?'What'first'comes'to'mind'is'that,'if'you'make'up'a'cemetery'company,'
(not'the'one'selling'the'lots'because'it'is'a'corporation),'a'cemetery'company'is'usually'not'for'profit,'can'the'BIR'keep'track'of'the'liabilities'of'
these'corporations'or'entities?'Or'how'will'they'keep'track'the'liabilities'of'these'entities?'Are%these%entities%required%to%file%an%ITR,%if%the%
default%is%that%they%are%exempt%from%income%tax,%but%once%they%venture%3%activities,%they%will%be%subject%to%income%tax?'
o YES,'they'will'be'required'to'file'an'ITR.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''9'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Once'you'register'an'association,'entity'or'corporation'with'the'SEC'and'with'it'comes'the'registration'of'the'BIR,'you'are'expected'
to'be'under'the'coverage'reportorial'requirements'that'have'to'be'complied'with'before'the'BIR.'Even'if'it'is'among'the'tax'exempt'
entities,'but'you'are'registered'for'BIR'purposes,'you'are'expected'to'file'an'ITR'year'in'year'out.'All'you'have'to'do'is'simply'put'
there'the'details,'whatever'proceeds'there'is,'the'expense,'and'at'the'bottom'that'it'is'exempt.''
o If'you'want'to'avoid'the'reportorial'requirements,'anyway'you'are'not'liable'for'income'tax,'you'have'to'prove'before'the'BIR,'get'a'
ruling'that'you'are'exempt'so'that'you'will'be'taken'out'from'the'coverage'of'those'who'are'required'to'file'an'ITR.'
o Once'registered'in'the'BIR,'the%default'is'whether'you'are'exempt'or'not,'you'are'expected'to'file'an'ITR,'unless'you'have'been'given'
a'special'privilege'of'exemption'of'not'filing'an'ITR.''
o This' is' one' way' of' monitoring' the' activities' of' tax' exempt' entities,' because' if' you' do' declare' huge' amounts' of' proceeds' but' still'
considered'as'exempt,'it'is'one'way'for'the'tax'authorities'to'examine'the'legality'of'the'exemption'being'claimed.'Because'usually,'
when'you'are'a'tax'exempt'entity'you'don’t'have'huge'amounts'of'proceeds'and'how'the'expenses'will'go'as'well.'
! 3'Categories'of'the'TaxNexempt'entities:'
1. Those'which'do'not'come'within'the'definition'of'a'corporation'
2. TaxNexempt'entities'under'Section'30'
3. From'numbers'15N19'of'letter'C'in'the'outline,'their'exemption'does'not'come'from'Section'30,'but'from'Section'
27(c)'which'covers'domestic'corporations.'GOCC'are'domestic'corporations.'Section'27'is'domestic'corporation.'
Section'28'is'resident'foreign'corporation'
! General%Rule'–'GOCC'are'taxable.'
! Exception:%
There%are%4%GOCCs%as%specified%under%the%tax%code:%
1. GSIS'
2. SSS'
3. PHIC'
4. PCSO'
o NAPOCOR'is'not'by'virtue'of'the'tax'code,'is'a'special'law.'And'there'are'many'special'laws'that'we'actually'
don’t'need'to'study'in'taxation.'Probably'when'you'are'in'practice.''
N In'individual'income'taxation,'we'identified'what'are'the'types%of%income%that%an%individual%may%be%earning.%%
1. Compensation'income'
2. Business'income'
3. Gains'derived'from'dealings'in'property'
4. Interests'
5. Rents:%
N ATTY:'I'included'here'rents,'because'there'is'a'bar'question,'on'what'is'the'difference'between'an'operation'lease'and'financial'lease.'When'
you'say'that'you'are'spending'rent'payment'of'an'office'space,'is'that'an'operating'lease'or'financial'lease.''
N Example:'You'are'renting'an'apartment'in'Cebu.'Is'that'rental'payment'an'operating'lease'or'financial'lease?'Lease'and'rent'are'the'same.'
N What'distinguishes'lease'as'operating'lease'and'lease'as'financial'lease?'
o The'basic'difference'between'these'2'types'of'leases,'I'usually'associate'it'with'the'word'“nalang”'(not'clear'what'word'Atty.'means'
")'
o Operating%Lease%%
! Normal'rent/lease'that'we'know.''
! What'you'are'paying'is'for'the'temporary'use'of'property'without'the'transfer'of'ownership'at'the'end'of'the'lease'period.'
! The'owner'of'the'property'does'not'foresee'relinquishing'ownership'over'it'at'the'end'of'the'contract'period,'while'the'
one'using'it'is'only'paying'for'the'temporary'usage'of'it.'
! It'is'for'the'operation'of'the'business'of'the'one'leasing'it.'
o Financial%Lease%'(Full'payout'lease)%

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''10'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! “Lease'to'own”'in'common'term.''
! A'purchase'of'the'property''
! The'owner'will'relinquish'ownership'over'the'property'at'the'end'of'the'contract,'while'the'one'leasing'it'will'become'the'
owner'of'the'property.'
! The'owner'of'the'property'is'expecting'that'over'the'lease'period'not'to'go'below'730'days,'he'will'recover'the'full'value'
of' the' property.' So' if' you’re' in' a' financial' lease,' whatever' you' are' paying' to' the' lessor' is' a' purchase' price,' you' don’t'
recognize' it' as' an' expense' in' your' books.' If' you’re' into' business' and' you' lease' out' under' financial' lease,' whatever'
payments'you'are'making'is'not'an'expense,'but'is'an'advance'payment,'part'of'the'purchase'price.''
N F.%Royalties%
o There' are' many' types' of' activities' for' which' you' can' pay' royalties.' (right' or' privilege' use' of' intellectual' property,' commercial'
equipment,'etc.')'
o Under'Section'42,'can'you'name'some'activities:'
! In' letter' c,' do' you' think' the' royalty' payments' made' by' XYZ' to' the' Republic' of' Zimbabwe,' classifies' under' any' of' the'
classification?'It'was'more'on'extracting'the'economic'rent'or'the'privilege'to'extract'natural'resources'in'a'foreign'land.'
o Nonetheless,' you' will' see' that' it' is' more' of' a'right,' privilege,' or' use.' Use' or' privilege' which' can' command' the'
payment'of'royalties.'It’s'not'the'simple'McDonald’s'that'we'have'been'talking'about.'Royalty'payments'can'be'
the'transfer'of'technical'knowledge.''
o If%you%purchase%a%software,'it'can'be'covered'as'royalty'payment'or'not.'
! 'It' will' be' royalty' payment' if' what' you' purchase' is' customized,' with' the' transfer' of' technical'
knowledge.''
! But'the'software'you'purchase'is'an'offshelf'available'to'all.'You'are'not'required'to'pay'royalty'fees'
for'that.'It'is'simply'the'purchase'of'an'item.''
o So'royalties'are'more'on'the'privilege'of'having'the'right'to'use'a'scientific'or'technical'knowledge.'
N G.%Dividends%
N How'many'types%of%dividends'do'we'have'as'of'today?'
o Under' the' Corporation' code,' a' corporation' can' declare' dividends' in' any' form' so' long' as' it' has' unrestricted' retained' earnings,'
meaning,'profits'which'have'accumulated'in'the'corporation'are'distributable'to'the'owners.'In'what'way'this'will'be'distributed,'
that'we'have'the'different'kinds'of'dividends:'
1. Cash%dividends'–'given'through'cash'
2. Property%dividends%%
o All'encompassing;'whatever'property'you'would'wish'to'give'to'your'stockholders'it'will'be'taxable.''
o Example:' if' you' are' Manny' Villar' and' you' have' investors.' You' like' to' distribute' dividends,' in' the' form' of'
subdivision'units,'is'the'subdivision'units'given'to'stockholders'subject'to'tax?'
'
' ' '' House'and'Lots'
'
' ' '
' ' '' ' Give'1'each'as'dividend'

'
VILLA'MANNY'
' There'were'46'investors'
o This' is' Villa' Manny.' There' are' different' subdivision' units.' 46' investors,' aside' from' Manny' Villar.' After'
accumulating'profits,'instead'of'distributing'cash,'let’s'say'the'financial'statement'of'Villa'Manny'is'in'short'of'
cash.'It'is'not'liquid,'but'it'has'enough'properties'to'declare'as'dividends.'He'decided'to'give'1'each'stockholder,'
is%this%subject%to%tax?%'
! Recall'that'dividend'is'a'passive'income.'Income'derived'from'an'activity'in'which'you'don’t'materially'
participate,'and'under'the'law,'10%'tax'shall'be'imposed'on'a'cash'and/or'property'dividend.'Who%is%%
liable%to%remit%the%10%%tax%on%the%government,%you%or%Villa%Manny?%It%is%not%given%in%cash,%so%how%
will%we%pay%the%tax%on%the%dividends?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''11'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
# If'you'wish'to'receive'this'property'as'a'stockholder,'you'better'prepare'10%'as'the'tax'
on'the'property'dividends'you'will'be'receiving.''
a. Illustration:' You' are' a' stockholder.' Corp' A' declared' stock' dividends' and' also' gave' you' B'
shares.'Corp'A'is'the'owner'of'Corp'B.'Instead'of'giving'cash'dividends,'what'Corp'A'did'was'
to'declare'as'dividends'the'shares'it'holds'in'Corp.'B.'The'effect'is'that'U'V'W'X'Y'will'be'partN
owners'of'Corp.'B'by'virtue'of'the'shares'given'by'A'to'these'stockholders.'Is%the%issuance%of%
B%shares%to%U%V%W%X%Y%Z%to%the%stockholder,%a%property%or%stock%dividend?%Is%it%subject%to%
tax?'
'
' Is'the'owner'
Company'A' ' Company'B'
B'Shares'
'
'
Ü''''
'
V'''
' Company'A'declares'is'stock'in'B'as'dividend'–'
'W''
PROPERTY'DIVIdend'
'
'X''
'
'Y'
'
''Z'
'
# Who'is'the'income'earner?'UVWXY'
# Payor?'Corporation'A'
# Is'Corp.'B'a'part'of'the'payorNpayee'relationship'of'UVXWY?''
B'is'the'item.'It'is'not'the'taxpayer'or'the'withholding'agent.'B'is'simply'the'
item'given'by'A'to'its'stockholders.''
# If'Corp.'A'decides'not'to'give'in'cash'or'any'other'property,'but'instead'gives'out'the'B'
shares' that' it' holds' to' the' stockholders.' A' is' the' payor' of' the' dividend.' UVXWY' is' the'
income'earner'of'the'dividend.'B'is'the'property'given'by'A'to'UVWXY.''
# The'difference'is'the'shares.'
b. Is%that%a%stock%dividend?%Because%what%are%given%are%shares.%%
# Take'note'of'what'shares'will'be'declared'by'the'corporation'as'dividends.'
RULES:%
# If'what'are'declared'as'dividends'are'the'shares'of'Corp.'A'(or'its'own'shares);'therefore'
increasing'their'ownership'in'the'corporation'–-STOCK-DIVIDEND,'because'what'is'given'
are'the'same'corporation.'
'
'
' Company'A' ' Company'B'
B'Shares'
'
Ü'''100''''+''''100'
' '
V''''100''''+''''100'
'
W'''100'
'
X''''100' Stock'Dividends'
'
Y''''100'
'
'
Example:'If'UVWXY'owns'100'shares'each'and'instead'of'giving'cash,'A'said'ok'I'will'give'
another'100'A'shares.'These'are'stock'dividends'not'yet'realized'income,'unless'it'will'
be'converted'into'cash,'or'under'the'exemptions'given.'
# If'what'Corp.'A'will'be'giving'out'is'the'share'of'any'other'corporation,'except'its'own,'it'
is'not'a'stock'dividend,'because'it'is'not'the'stocks'of'Corp.'A,'rather'it'is'the'property'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''12'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
investment'of'Corp.'A.'If'other'shares'will'be'given,'it'is'_PROPERTY-DIVIDEND,'subject'
to'tax'just'like'a'cash'dividend.'''
3. Stock%Dividends%%
! Illustration:'10'years'ago'you'formed'a'corporation.'You'are'46'all'in'all.'You'put'46'Million,'1'Million'each.'
You'are'a'partNowner,'you'have'been'given'1'Million'shares'each'for'the'1'Million'investment'that'you'put'
into'the'corporation.'
'
st
1 'Day'of'business' ' ' 10'years'
'
'
' Assets' ' 46'Million' ' ' 500'Million'
Liabilities'' ''''NNNNNN'(no'liabilities'yet)' ' 100''Million'
'
Net'Worth' 46'Million' ' ' 400'Million'

!'
' Capital'(less)' 46'Million' ' ' 46'Million' 46Million'
For'each'to'receive'1M'
' Profits' ' ''''''NNNNN'(no'profit'yet)' ' 364'Million'
'
'
' ' ' ' ' ' ' ' '
! 364'Million'profit'is'distributable'to'all'of'you.'It'is'part'of'the'500'Million'asset.'If'you'have'a'cash'of'500'M'
you'can'distribute'364'M'to'the'owners.'%
! But'what'if'this'500'M'is'in'property,'you'cannot'distribute'in'cash,'unless'you'sell'first'the'property.'And'
selling' property' would' entail' tax' on' the' income.' So' you' don’t' sell' it,' otherwise' it' will' be' double.' You' sell'
property'in'order'to'generate'cash,'then'you'are'taxable'on'the'income'from'selling.'When'you'declare'it'as'
→cash'dividends,'taxable'again.'So'might'as'well'declare'it'automatically'as'→property'dividends,'because'
there'is'only'1'tax'on'the'property'dividend.%
o But' as' stockholders,' if' you' don’t' want' to' pay' any' tax' to' the' BIR,' all' you' have' to' do' is' declare'
→STOCK' DIVIDENDS.' And' dividends' can' be' declared' out' of' the' unrestrictive' profits' of' the'
corporation.%
o How%to%declare%stock%dividend?'Simply'put'in'or'transfer'the'profits'to'the'capital.'%
o If' you' have' 1' M' each,' and' you' are' given' another' or' another' 46' M' will' be' transferred' there.' It'
means'to'say'that'you'received'1'M'stock'dividends.'Are%you%subject%to%tax?'%
# Not'yet,'because'there'is'simply'a'transfer'of'capital.'Your'ownership'will'increase'but'
you'have'not'realized'the'income'as'yet,'unless'you'sell'it'or'it'is'in'cash.'
# General%Rule:'Stock'Dividends'are'NOT'taxable.%
Stock' Dividend' representing' the' transfer' of' surplus' to' capital' account' shall' not' be'
subject'to'tax.'
# Exception:%when'stock'dividends'will'be'taxable.'
1. If%subsequently%cancelled%and%redeemed%by%the%corporation%_'If'in'order'to'avoid'
the'tax'on'dividends,'you'declare'stock'dividends'and'the'corporation'will'cancel'or'
redeem'it'right'after.''
Imagine'46'M'will'be'declared'as'stock'dividend.'As'a'rule,'it'is'not'taxable.'But'if'
behind'that,'there'is'already'an'agreement'after'declaration'it'will'be'cancelled'or'
redeemed'by'the'corporation,'meaning'as'stockholders'you'will'surrender'that,'and'
the' corporation' will' redeem' that,' in' lieu' of' 1' M' each.' You' are' circumventing' the'
law,' instead' of' outrightly' declaring' that,' you' went' through' the' path' of' stock'
dividends' first' then' exemption.' That' is' subject' to' tax,' as' if' it' was' an' automatic'
declaration'of'cash'dividends.'
2. If% it% leads% to% a% substantial% alteration% in% the% proportion% of% tax% ownership% in% a%
corporation.'
%
%
%
''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''13'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
'

!'
' Capital'' 46'Million' Declared'50'Million'as'
' ' Stock'Dividends'
Profits' 364'Million'
'
'
Illustration:'50-M-as-stock-dividend-
' '
' ' ' Beginiing'Investment'''''''+' Declared'SD''''''=' Total'New'investment'

' 45'(classmates)' ='1'Million'each' ' ''1'Million'''''''''''='' ''''''''2'Million'

' 1'(Ms.'Cristoria)' ='1'Million'' ' ''5'Million'''''''''''=' ''''''''6'Million'

' ' ' ' '' '

''4'Million'
'
TAXABLE!!!%
'
You'decided'to'declare'stock'dividends'awhile'ago'of'46'M.'Let’s'say'you'want'50'
M'to'be'declared'as'stock'dividend.'But'the'problem'is,'you'are'only'46.'All'of'you'
45' will' receive' 1' M' each.' But' the' 1' person' Ms.' Cristoria,' will' receive' the' 5' M'
remaining.'It'will'lead'to'an'alteration'of'the'interest'of'proportional'holdings'in'the'
corporation.' Instead' of' all' of' you' equally' owning' the' corporation' through' shares,'
she'will'now'have'an'edge.'Her'total'investment'will'be'6'M.'Her'original'1'M'plus'
the' 5' M' stock' dividends.' All' the' rest' will' be' having' only' 2' M.' Since' it' lead' to' a'
substantial'alteration'of'delusion'>????'in'your'interest'or'ownership,'it'will'now'be'
subject'to'tax.'
But'what'is'subject'to'tax'is'only'the'difference'of'1'M.'
Why%is%it%subject%to%tax?%Because'she'gave'an'income'over'the'other'stockholders.'
What' she' will' be' receiving' is' more' than' what' you' will' be' receiving' in' the' future.'
Alteration'
N Lovely’s'question:'When'can'we'say'it'is'“substantial”'or'any'difference'will'be'taxable'already?'
o In' some' books,' it' is' simply' delusional???(ambot' unsa' na' word)' The' interest' of' the' other' stockholders' it' will' already' be' taxable.'
Substantial,' probably' what' it' meant' kung' 1' share' lang' or' 1' peso.' But' once' the' percentage' of' shareholdings' will' be' different,'
automatically'it'will'be'subject'to'dividend’s'tax'or'the'final'tax.'Why?'Because'there'is'a'rule'in'Corporation'Code,'that'declaration'
of'stock'dividends'must'follow'strictly'the'percentage'of'ownership'of'the'stockholders'that'are'to'receive'it.'So'if'it'is'1'over'46'all'of'
you,'it'is'2'over'46'na'that'she'will'receive,'it'is'already'an'alteration.'She'will'have'more'interest'in'the'corporation.''
N Carlo’s'question:'Who'pays'for'the'final'tax'in'property'dividend?''
o Corporation'will'remit'it'in'behalf'of'the'recipient.'In'case'it'is'a'pure'property'dividends,'the'corporation'will'have'to'collect'in'cash'
from'the'stockholders,'your'property'dividends.'Before'the'dividends'will'be'given'out,'10%'will'be'remitted'or'else'to'be'paid'by'the'
stockholder'to'the'corporation,'who'will'in'turn'remit'it'to'the'government.'
N Follow'up'Question'of'Carlo:'What'will'be'deducted'from'the'retained'earnings?'
o It’s'really'the'value'in'the'books,'not'the'fair'market'value.'For'tax'purposes,'10%'will'be'computed'in'the'fair'market'value.'But'for'
the'books'of'the'corporation,'what'will'be'deducted'is'the'actual'cost'that'went'out'of'its'ownership.'
N What'are'disguised%dividends?'What'type'of'payment'will'be'considered'as'disguised'dividends?'
o NSo'are'you'saying'these'are'really'dividends'coming'from'the'profits'of'the'corporation?'
o The' other' dividends' that' we' have' discussed,' in' cash' property' and' stock' came' from' retained' earnings' and' profit.' But' disguised'
dividends'is'something'else,'but'it'is'called'dividends.'
o Disguised'dividends'are'payments'made'by'the'corporation'to'the'stockholders'in'any'other'form,'other'than'dividend'payment.'
st
! 1 'Example:'If'the'owners'composed'of'the'Board'of'Directors,'and'the'honorarium'for'every'meeting'every'month'is'1'M'
for'the'presence'of'a'10Nminute'meeting,'is'that'not'a'dividend'distribution'disguised'as'honorarium.'
! It' may' be' any' other' kind' of' payment' to' the' owners' or' stockholders' not' denominated' as' dividends' but' actually' profit'
distribution'simply'to'avoid'tax.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''14'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
nd
! 2 ' Example:' Refer' to' previous' illustration.' 46' owners.' Instead' of' declaring' the' 364' Million' you' will' be' given' 1' motor'
vehicle' each.' It' will' be' claimed' by' the' company' as' an' expense,' not' as' a' dividend' distribution.' The' company' will' be'
benefited'by'the'depreciation'of'the'motor'vehicle'that'they'acquire.''
! The'point'is,'whenever'there'are'huge'amounts'of'payments'to'the'owners'not'considered'as'dividends,'they'are'actually'
disguised'dividends.'
o Are'disguised'dividends'taxable?'
! Example:'There'is'a'parent'company'abroad.'There'is'a'subsidiary'in'the'Philippines.'Whenever'the'subsidiary'will'declare'
dividends'abroad'it'will'be'subject'to'15%'final'withholding'tax.'But'if'the'corporation'will'simply'pay'royalties'of'5%,'or'
royalties'declared'to'foreign'corporation,'it'will'not'be'taxed'of'15%'final'withholding'tax'in'dividends.'But'once'payments'
to' its' stockholder,' which' is' its' parentNcompany' becomes' too' excessive,' it' will' be' considered' as' dividend' distribution'
subject'to'the'rate'of?'What%rate%is%imposed%on%disguised%dividends?'
! The' point' is,' once' excessive' payment' of' expenses' is' considered' as' a' disguised' dividend,' the' taxability' of' the' disguised'
dividend'would'be'the'same'as'cash'or'property'dividends'being'given.''
# If%the%recipient%of%the%disguised%dividend%is%an%individual'–'follow:'
10%'N'for'Resident'citizens,'NonNresident'citizens'and'resident'aliens'
20%'N'for'nonNresident'aliens'engaged'in'trade'or'business'
25%'N'for'nonNresident'aliens'NOT'engaged'in'trade'or'business'
# If% the% recipient% is% a% domestic% corporation' –' payments' to' domestic' corporations' of' dividends' ARE' NOT' AS' YET'
TAXABLE.'
Why?'Because'it'is'still'an'umbrella'before'the'ultimate'owner'will'receive'the'dividends.'If'it'is'corporation'to'
corporation'domestically,'no'tax.'
Nonetheless,'it'is'not'yet'part'of'the'topic,'but'the'point'is,'if'a'distribution'of'payment'is'found'to'be'a'disguised'
dividend,'it'is'taxable'just'like'cash'or'property'dividends.'
N What'is'a'liquidating'dividend?'
o When' you' decide,' your' corporation' decides' to' stop' operations,' you' ____.' You' dissolve,' liquidate' whatever' remaining' assets' you'
may'have.'The'distribution'will'be'considered'as'liquidating'dividend.'Whatever'you'receive'will'be'subject'to'tax.'On'what'tax,'it'will'
be'.'.'.'.'.'.'YOUR'ASSIGNMENT!!!'"''
SEPT.-7,-2010-Tuesday-
DISGUISED%DIVIDENDS%
N Disguised'dividends'may'be'considered'as'distributed'to'an'individual'who'is'not'a'stockholder.'Agree'or'disagree?'
o Disagree.'Dividends'are'only'given'to'stockholders'of'a'corporation.''
o Thus,' whenever' an' excessive' payment' of' honorarium' (1M' a' month)' is' given' to' a' President' of' the' Company,' who' is' not' a'
stockholder,'it'will'not'be'treated'as'disguised'dividends.'But'what'will'happen'to'the'payment?'Taxable'still?'
! It'will'be'taxable'on'the'part'of'the'President'but'not'as'dividends.'Whatever'income'will'be'derived'by'an'individual,'
it'will'be'taxable.'In'what'way?'It'depends'on'what'is'the'treatment'given'by'the'Tax'Code.'In'case'excessive'payment'
is'made'to'an'individual'who'is'a'stockholder,'it'will'be'treated'as'disguised'dividends'and'subject'to'the'usual'rates'of'
10%' for' RC,' NRC' and' RA,' 20%' for' NRANETB,' and' 25%' for' NRANNETB.' But' if' it' so' happens' that' the' individual' who'
received' excessive' payouts' or' payments' is' not' a' stockholder,' it' will' not' be' considered' as' disguised' dividends.' No'
dividends'shall'be'given'to'a'nonNstockholder.'But'still,'being'an'income'or'an'inflow'of'wealth'in'the'hands'of'such'
individual,'it'will'be'taxable'subject'to'the'ordinary'rates'to'be'withheld,'if'he’s'an'employee,'of'the'5N32%'income'tax'
according'to'the'withholding'tax'on'wages'table.'
LIQUIDATING%DIVIDENDS%
N Whenever'a'corporation'dissolves,'liquidates'and'winds'up'its'business'operations,'it'may'happen'that'assets'will'be'left'after'paying'all'
the'creditors'and'these'assets'will'be'distributed'to'the'stockholders'in'accordance'with'the'proportion'of'ownership'that'they'have'in'
the'business'and'it’s'called'liquidating'dividends.'It’s'taxable.'
o Liquidating'dividends'given,'like'cash,'properties'or'other'remaining'assets'after'paying'out'all'the'creditors'of'the'corporation,'
if'distributed'to'the'stockholders,'will'it'be'subject'to'FWT'10%,'20%'or'25%'depending'on'the'classification'of'the'taxpayer'or'
the'corporation?'
! NO.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''15'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Do'you'think'a'stockholder'will'experience'loss'in'receiving'a'liquidating'dividend?'YES.'
'
Assets' ' 46,000,000' 100,000,000'
'
Liabilities'' ''''''N'0'N''''''''''''''''''''''''60,000,000'
' Net'worth' 46,000,000' '40,000,000'
Capital'stock' 46,000,000' ''''1,000,000'
'
Profits' ' '''''N'0'N'
'
o Example:'46M'as'invested'by'46'people'for'1M'each'10'years'ago'and'0'liability.'Net'worth,'therefore,'is'46M.'
Capital'stock'of'first'day'of'operation'is'46M'and'profits'is'0.'10'years'after,'assets'grew'to'100M,'liabilities'to'
60M.'Net'worth,'therefore,'is'40M.'If'you'dissolve'and'wind'up'the'affairs'of'the'corporation,'you'distribute'the'
40M'after'you'payout'the'liabilities'to'the'creditors.'Would'the'stockholders'be'receiving'the'same'amount'that'
they' invested' of' 1M' each?' NO.' The' stockholders' will' receive' less' than' 1M.' Is' there' a' gain' subject' to' tax?' NO,'
since'there'is'a'loss.'Can'we'consider'the'less'than'1M'receipt'of'cash,'property'or'assets'as'liquidating'dividend?'
YES.'Would'such'liquidating'dividend'be'taxable?''NO,'it'will'be'deductible.'
o So' if' it' will' happen' that' your' receipt' of' liquidating' dividend' is' less' than' what' you' have' invested' in' the'
corporation,'you'actually'suffered'a'loss'from'the'investment.'Whatever'you'received,'considered'as'liquidating'
dividend,'is'not'subject'to'tax.''
'
'
'
'
Assets' ' 46,000,000' 400,000,000'
' Liabilities'' ''''''N'0'N''''''''''''''''''''''''60,000,000'
' Net'worth' 46,000,000' 340,000,000'
Capital'stock' 46,000,000' ''''1,000,000'
' Profits' ' '''''N'0'N'
'
• But' if' it’s' the' other' way' around,' there' is' a' gain' or' you' receive' more' than' what' you' have' invested.' And'
whatever' you' have' invested' is' the' cost' of' your' investment.' Any' difference' of' what' you' receive' as'
liquidating'dividend'from'such'cost'will'be'considered'as'taxable'income'subject'to'the'rate'of'5N32%.''
• So'whenever'you'receive'a'liquidating'dividend,'just'treat'it'as'a'capital'income.'Compute'your'tax'liability'
together'with'all'your'other'income.'It’s'never'subject'to'FWT.'
• What'happens'if'the'stockholder'receiving'the'liquidating'dividend'is'a'corporation?'
o Example:'Corporation'XYZ'is'owned'by'ANF'and'JKL'Corporation.'If'XYZ'Corporation'liquidates'and'
distributes' the' remaining' assets' to' all' 6' individual' stockholders' and' a' corporate' stockholder.' Is'
such'corporate'stockholder'subject'to'tax?'
' XYZ'Corp.'
'
A'
'
B'
' C'
D'
'
E'
' F'
JK'Corp.'
'
! Whatever'the'taxability,'on'a'normal'basis,'if'the'stockholder,'whether'he'is'subjected'
to'5N32%'or'25%'because'he'is'a'NRANNETB,'or'the'stockholder'is'a'corporation'subject'
to'30%,'then'use'those'rates'in'computing'the'tax'due'on'the'difference'between'your'
liquidating'dividend'and'the'initial'investment'or'the'cost'of'the'investment'that'you'put'
into' the' corporation.' After' all,' it’s' the' income' that' matters.' You' shall' not' be' taxed' on'
the'cost'of'the'investment'you'put'into'unlike'cash'and'property'dividend,'you'get'it'out'
free'from'the'cost'as'yet'because'the'corporation'is'not'winding'up.'Still'whenever'you'
receive' cash' and' property' dividends,' your' capital' is' intact' in' the' corporation.' But' in'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''16'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
liquidating' dividends,' it’s' the' end' of' the' corporation' and' the' end' of' your' investment.'
Any'income'is'taxable.'Any'loss'is'deductible.''
! NOTE:' Losses' from' investment' or' income' from' investment,' such' as' liquidating'
dividends,' are' capital' losses' and' capital' income,' respectively.' They’re' only' taxable' as'
capital'income'and'deductible'against'capital'income'if'a'loss'is'experienced.'
E.'DEDUCTIONS'
1.'Fundamental'Principles'
N Are'corporations'allowed'deductions?'YES.'The'same'as'the'available'deductions'for'individual'taxpayers?'NO.''
o What'types'of'deductions'and/or'exemptions'are'available'to'individual'taxpayers?'
! 1.'Personal'and'additional'exemptions'
! 2.'Premiums'on'health'and'hospitalization'insurance'
! 3.'Itemized'deductions,'or'in'lieu'of'such,'optional'standard'deductions'
• However,' not' all' these' three' are' available' to' all' types' of' individuals.' If' an' individual' is' purely' a'
compensation' income' earner,' only' 1' and' 2' would' be' deductible.' But' if' the' individual' is' into' business'
already,' whether' together' with' ERNEE' relationship,' he' can' also' claim' any' of' the' itemized' deductions' or'
optional' standard' deductions' because' itemized' deductions' is' for' business' expenses.' But' then,' all' three'
would' not' be' available' to' an' individual' who' is' classified' as' a' NRANNETB.' In' so' far' as' the' corporation' is'
concerned,'which'of'the'3'deductions'are'available'to'a'corporation?'
o Itemized'deductions,'or'in'lieu'of'such,'optional'standard'deductions'
o REASON:'Corporations'venture'into'an'activity'which'is'for'profit.'Therefore,'it'is'for'business'and'
with' it' comes' the' incurrence' of' business' expenses.' That’s' why' as' a' rule,' corporations' doing'
business'in'the'Philippines,'in'fact,'all'corporations'engaged'in'trade'or'business'in'the'Philippines'
can'deduct'itemized'deductions'or'optional'standard'deduction'if'it'so'chooses.'But'exemptions'
are'not'available'because'it'covers'for'personal'and'family'living'expenses'and'corporations'are'
not' natural' persons.' And' premiums' on' health' and' hospitalization' insurance' are' not' as' well'
considered'as'deductions.''
N What'are'the'underlying'principles'that'need'to'be'followed'before'a'corporation'can'deduct'itemized'deductions?'
o i.'The'taxpayer'must'prove'that'there'is'a'law'authorizing'deductions'
o ii.'The'taxpayer'must'prove'that'he'is'entitled'to'deductions'
o iii.'If'the'law'provides'for'requirement'that'the'amount'or'the'expense'payment'needs'to'be'withheld'of'tax,'a'tax'should'have'
been'withheld,'otherwise,'the'deduction'is'not'allowed'
o iv.'Always,'we'construe'it'strictly'against'the'taxpayer'
N But'what'about'OSD?'Can'corporations'really'claim'OSD?'
o YES,'except'NRFC.'
! REASON' for' exception:' Such' corporation,' its' tax' base' is' at' gross.' And' the' mere' fact' that' a' NRFC' is' construed' as' a'
corporation'NETB,'there'is'no'deductions'allowed'from'their'income.'Whatever'they'earn'in'the'Phil.'is'subject'to'30%'
income'tax'except'those'capital'gains'from'the'sale'of'shares'of'stocks'in'a'domestic'corporation.'
N Can'OSD'be'allowed'as'a'deduction'if'the'corporation'is'not'allowed'to'claim'itemized'deductions?''
o NO,'OSD'is'in'lieu'of'itemized'deductions.'So'if'a'corporation'or'any'taxpayer'is'not'allowed'to'claim'itemized'deductions,'there'
is'no'OSD'allowed.'But'there'are'cases'or'exceptions'when'itemized'deduction'is'allowed'but'OSD'is'not'allowed,'such'as'when'
the'taxpayer'is'a'NRANETB'since'OSD'can'be'claimed'by'any'individual'except'NRA'but'NRANETB'can'claim'itemized'deductions'
because'they'are'subject'to'tax'on'net'income.'
o OSD' example:' If' your' gross' income' is' 1M,' you' can' automatically' deduct' OSD' of' 400K.' Pay' tax' as' a' corporation' on' the' 600K.'
Itemized'deduction'is'only'300K,'go'for'OSD.'You'don’t'need'to'substantiate'it'with'receipts.'You'don’t'even'have'to'incur'such'
expense.' But' if' your' itemized' deduction' is' 900K,' forget' about' OSD.' Claim' such' itemized' deduction' as' an' expense.' The' only'
problem'is'that'your'books'will'be'audited'to'determine'whether'you'really'have'incurred'900K'in'total'expenses'and'whether'it'
is'substantiated'with'official'receipts,'or'invoices'or'in'contracts.'
N Who'are'not'allowed'to'claim'itemized'deductions?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''17'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o 1.' Individuals,' whoever' that' individual' is,' if' he' is' purely' earning' income' from' ERNEE' relationship,' forget' about' itemized'
deduction'because'itemized'deduction'is'only'in'business,'trade,'or'profession.'
o 2.'If'the'individual'is'a'NRANNETB,'no'itemized'deduction.'
o 3.'NRFC'are'never'allowed'itemized'deduction'or'OSD.'
N Itemized' deduction' becomes' the' default' of' every' businesses.' Every' business,' whether' individual' taxpayer' or' a' corporation,' is' required' to'
report'on'a'quarterly'basis'the'income'tax'liability'of'that'business.'
o If' the' taxpayer' forgets' to' choose' which' option' is' it' taking,' whether' it' is' itemized' deduction' (ID)' or' OSD,' automatically,' the'
default'is'ID.'But'once'in'the'first'quarter,'the'taxpayer'has'already'chosen'OSD,'you'can'no'longer'shift'back'to'or'revert'back'
to'ID'for'the'entire'year.'So'that'means,'OSD,'as'an'option,'is'irrevocable'for'the'year'at'issue.'
o Can'the'taxpayer'choose'ID'the'following'year?'YES'because'irrevocability'of'an'OSD'is'only'for'the'current'year.'It’s'on'a'yearN
toNyear'basis.'
o If'a'GPP,'who'is'not'taxable,'elects'to'report'its'taxable'income'choosing'OSD,'then'the'partners'who'have'to'report'their'tax'
liability'and'paid'will'also'be'liable'under'OSD.'If'the'GPP'elects'ID,'the'partners'don’t'have'any'other'choice'but'to'go'for'ID.'So'
GPPs'and'the'individual'partners'are'taken'as'a'single'entity'for'tax'purposes.'Not'one'of'the'taxpayers,'GPP'or'the'partners,'
can'choose'the'other'and'the'other'one'go'for'the'other'option.'
EXPENSES' '
N What'are'ordinary'and'necessary'expenses?'
o Ordinary'expenses'(OE)'–'refers'to'the'expenses'which'are'normal,'usual'or'common'to'the'business,'trade'or'profession'of'the'
taxpayer.'
o Necessary'expenses'(NE)'–'one'which'is'useful'and'appropriate'in'the'conduct'of'the'taxpayer’s'trade'or'profession.'
N Can'a'NE'of'one'business'be'a'NE'of'another'business?'Or'is'it'always'the'case'that'if'the'expense'is'necessary'in'this'business,'it'is'always'
necessary'expense'for'another?'
o NO.'
o Example:'If'you’re'into'banking'business'and'your'friend'is'into'siomai'business.'What'expense'is'necessary'for'your'business'
but' is' not' necessary' for' your' friend’s' business?' Banking' business' has' to' hire' security' guards' and' rent' armored' car' for' its'
business'as'a'NE,'which'is'not'a'NE'in'a'siomai'business.'
o So'what'is'necessary,'useful'and'appropriate'for'one'type'of'business'may'not'be'useful'and'appropriate'for'another'kind'of'
business.'So'there'is'no'standard'rule'for'what'type'of'expenses'may'be'deductible'for'this'corporation'or'another'corporation.'
You'can'name'more'than'a'hundred'expense'accounts'in'your'business,'but'may'not'be'found'in'another'type'of'business.'But'
so'long'as'the'classification'of'that'business'is'that'it’s'necessary,'useful,'appropriate'and'it’s'ordinarily'incurred'in'the'business'
operations,'for'those'who'are'similarly'situated,'then'it'is'classified'as'a'deductible'business'expense.'
o Is'a'capital'expense'deductible?'YES.'
! What'are'capital'expenses'(CE)?'
• They'are'expenditures'for'the'extraordinary'repairs'which'are'capitalized'and'subject'to'depreciation.'These'
are'extraordinary'expenses'which'tend'to'increase'the'value'or'prolong'the'life'of'the'taxpayer’s'property.'
! What'important'requisite'for'the'deductibility'of'an'expense'is'not'complied'with'by'a'capital'expenditure'making'it'
nonNdeductible'on'the'year'of'incurrence?'
• Capital'expenditures'are'extraordinary'expenses'which'prolong'the'life'of'an'asset'that'has'been'repaired.'It'
either'increases'the'value'or'increases'the'life'or'prolongs'the'life'of'the'asset'such'that'it'violates'the'rule'
for'an'expense'to'be'deductible,'it'must'be'paid'or'incurred'during'the'taxable'year.''
• When'you'say'“paid”,'it'is'expense'but'it'must'also'pertain'to'the'year'for'which'that'expense'is'related'to'
the'income'generated'by'the'business.'If'it’s'incurred'during'the'year,'if'the'CE'would'prolong'the'life'of'an'
asset'over'which'the'asset'would'be'useful'for'10'years,'then'the'expense'of'the'CE'should'be'distributed'
over' 10' years' as' well' to' benefit' the' company.' It’s' the' matching' principle' wherein' you' only' deduct' the'
expenses'which'is'related'to'the'business'activity.'If'it’s'only'1/10'every'year,'then'only'1/10'of'the'expense'
is'deductible.'
• The' reason' why' it' is' deductible' but' not' in' the' year' of' payment' or' not' in' the' year' when' the' year' it' was'
constructed,'purchased,'repaired,'etc….'
N What'are'the'common'requisites'to'make'an'ordinary'or'necessary'expense'deductible?'
o i.'The'expenses'must'be'ordinary'and'necessary'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''18'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! It’s'ordinary'when'it’s'normal,'usual'and'common.'Although'sometimes'it'does'not'necessarily'need'to'be'incurred'
dayNin,'dayNout'but'so'long'as'it’s'usual'in'the'type'of'business'or'the'industry'to'which'that'business'is'in'then'it'can'
be'considered'as'OE,'not'unusual.'
! It’s'NE'when'it’s'useful'and'appropriate'for'the'business'activities.'
o ii.'It'must'be'paid'or'incurred'during'the'taxable'year'(whether'calendar'or'fiscal'year)'
! Exception:'net'operating'loss'carryNover'
! If'the'expense'that'you’re'claiming'as'a'deductible'item'this'year'is'an'expense'for'the'operation'of'the'previous'year,'
it'is'not'deductible'expense.'So'your'expense'claims'must'be'paid'this'year'or'if'not'paid'this'year,'it'must'have'been'
incurred.''
! What’s'the'difference'between'paying'an'expense'and'incurring'an'expense?'
• In' the' Phil.,' we' do' not' usually' follow' the' cash' method' in' determining' whether' your' income' is' already'
taxable' or' not.' We' follow' the' accrual' method' of' accounting.' Cash' method' of' accounting,' whatever' you'
receive'in'cash'is'considered'as'sales'and'whatever'you'have'paid'for'in'your'expense,'is'deductible'and'the'
difference'is'taxable'under'the'cash'accounting'method.'But'the'accrual'method,'whatever'you'have'sold,'
so' long' as' you' have' completed' the' transaction,' whether' it' has' been' paid' by' your' customer' or' not,' is'
reported'as'sales'already'and'whatever'you'have'paid'as'an'expense'including'those'expenses'for'which'you'
have' effected' already' the' transaction,' the' services' have' already' been' performed' in' your' favor,' and' it’s'
payable,'meaning,'the'other'party,'your'supplier,'has'already'the'legal'right'to'demand'payment'from'you'
but'not'as'yet.'Probably,'there'is'a'period'within'which'you'can'pay.'It’s'already'deductible.'It'simply'follows'
the'“allNevents'test”.'You'have'all'the'events'to'complete'the'transaction,'then'the'sale'has'been'perfected,'
whether'paid'or'not,'taxable.'Expense,'whether'paid'or'not,'so'long'as'service'has'been'performed,'goods'
have'been'delivered,'it’s'deductible.'
• So'in'the'expense,'so'long'as'it'has'been'paid'this'year'or'has'been'incurred'and'it'pertains'to'this'year’s'
operations,'the'expense'is'deductible.''
• If'you’re'claiming'an'expense'which'is'for'the'future,'advance'rental'payments,'is'it'deductible?'
o Under'the'accrual'method,'it'would'be'deductible.'''''
• Is'the'expense'pertaining'to'last'year’s'activity'deductible?'
o NO.' All' the' expenses' must' be' paid' or' incurred' during' the' year' except' net' operating' loss' carryN
over.'
o NET'OPERATING'LOSS'CARRYNOVER'(NOLCO)'
! If' the' business' incurs' a' loss,' it’s' deductible.' But' once' a' business' incurs' NOL,' meaning,'
the'bottomline'figure'for'the'entire'year’s'operations'is'a'loss,'there'is'an'option'for'the'
business'to'carry'it'over'to'the'next'3'years.'
! So,'it'means'to'say'if'it’s'carried'over'to'the'next'3'years,'in'the'next'3'years,'it’s'not'the'
expense'during'those'years.'It'pertains'to'the'previous'years.'But'since'it'is'mandated'by'
law'to'be'deductible,'it’s'an'exception'to'the'rule'that'it'does'not'really'have'to'pertain'
for'this'year’s'operations.''
o iii.'It'must'be'paid'or'incurred'in'connection'with'the'trade,'business'or'profession'of'the'taxpayer'
! Example:' In' you’re' in' 3' businesses.' One' manufacturing' corporation.' One' real' estate' business.' And' the' other' is' a'
siomai' business.' You' don’t' mix' the' expenses.' You' cannot' claim' the' expenses' of' this' business' to' that' business.' It'
should'necessarily'be'connected'with'the'business'that'you’re'in.''
o iv.'It'must'be'reasonable'in'amount;'
! If'you'are'the'president'of'the'corporation'earning'100K'a'month,'it'may'be'reasonable'in'so'far'as'that'business'is'
concerned'but'your'100K'will'be'unreasonable'in'another'type'of'corporation.'
! So'there'is'no'fix'amount'within'which'we'can'determine'whether'this'type'of'expense'claimed'is'reasonable'or'not.'
No'fix'amount'but'you'have'to'consider'it'in'so'far'as'the'operation'is'concerned.'
! But' there' is' one' type' of' expense' that' is' regulated' by' the' tax' authorities' and' that' expense' is' Entertainment,'
Amusement'and'Recreation'expense'(EAR'expense).'
• Why?'Because'this'type'of'expense'as'a'deduction'has'been'abused.'Many'businesses'claim'representation'
expense' –' bringing' clients' to' clubs.' And' the' amount' is' unreasonable.' Instead' of' distributing' as' dividends,'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''19'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
they'claim'it'as'representation'expense'–'they'require'stockholder'or'employee'to'bring'in'receipts'and'thy'
can'even'ask'receipts'from'you'and'have'it'reimbursed,'such'as'medical'representatives.'
• EAR'expense'has'been'abused.'
• There'is'already'a'regulation'that'sets'a'quota'for'such'expense.'What'is'the'ceiling'set'by'the'Secretary'of'
Finance?'
o EAR'expense'–'to'the'extent'only'of'1%'of'the'net'sales'if'the'corporation'is'engaged'in'services.'
And'0.5%'of'the'net'sales'if'the'corporation'is'into'the'sale'of'goods'or'properties.'
o REASON' for' the' difference:' Because' those' engage' in' services' usually' needs' representation'
expense' to' entertain' their' clients' or' treat' them' over' meetings,' lunch' meetings,' etc.' But' if' it' is'
goods'or'properties,'so'long'as'you'have'the'product,'you'can'sell'it.'
o What'happens'if'you'are'both'engaged'in'the'sale'of'service'or'in'the'sale'of'goods?'Which'will'
you'follow?'
! You' still' have' to' follow' the' formula' –' 1%' for' the' service' and' 0.5%' for' the' goods' and'
properties.'
• Example:' So' it' means' to' say' that' if' the' corporation,' net' sales' is' 1M' and' it' is'
engaged' in' the' sale' of' service' and' goods,' the' maximum' EAR' expense' for'
services'is'only'10K'while'for'goods'or'properties,'it’s'only'5K.'
• If' the' corporation' has' 50K' expense,' automatically,' 45K' is' not' deductible' for'
goods'or'properties'since'only'5K'is'the'maximum'deductible'amount.'
• In'so'far'as'salaries'are'concerned'or'bonuses'of'directors,'it’s'provided'under'the'Corporation'Code'that'
Board'of'Directors,'as'honorarium,'should'not'exceed'10%'of'the'net'income'of'the'corporation'because'if'it'
exceeds,'it'will'be'considered'already'as'disguised'dividends.'
o Example:'If'the'net'income'is'only'1M,'only'100K'should'be'given'to'the'Board'of'Directors'for'the'
entire'year'–'for'all'of'them.'Any'excess'will'be'considered'as'unreasonable.''''
o v.'It'must'be'substantiated'by'sufficient'evidence'such'as'official'receipts'and'other'official'records;'and'
! Official'receipts'
! Adequate'records'
! Amount'of'expense'being'deducted'
! Date'and'place'where'such'expense'is'paid'or'incurred'
! Nature'of'expense'–'direct'connection'or'relation'of'the'expense'being'deducted'to'the'development,'management,'
operation'and/or'conduct'of'the'trade,'business,'or'profession'of'the'taxpayer'
• The' evidence' must' be' recognized' or' produced' by' the' third' party.' If' the' evidence' solely' comes' from' the'
company' –' you' made' it,' you' drafted' it,' no' signature' from' the' other' party,' it' is' selfNserving' so' it' is' not'
sufficient'evidence.''
• Example:' You’re' in' the' business' of' manufacturing' wooden' toys' for' export' in' Europe.' And' for' costNcutting'
purposes,' you' don’t' have' a' large' pool' of' employees' so' that' you' subNcontract' the' raw' materials' to' the'
different' homeworkers.' And' those' homeworkers' are' actually' not' registered' in' the' business.' They' just' do'
what' they’re' required' to' do' and' when' they' bring' it' back' to' you,' you' pay' them.' Homeworkers,' not' being'
registered'with'the'tax'authorities'because'they’re'not'really'into'business,'cannot'produce'an'O.R.'nor'an'
invoice.' What' proof' will' you' present' to' the' tax' authorities' in' order' to' claim' the' payments' you' made' to'
these'homeworkers?'
o A'contract'or'an'acknowledgment'receipt'will'do.'They'can'surely'sign.'It’s'not'always'in'all'cases'
that'you'can'require'your'supplier'to'produce'an'O.R.'In'one'of'the'major'cases'that'we'have'in'
the' Philippines' is' those' in' the' business' of' manufacturing' “carajinan”.' You' purchase' it' from'
different' suppliers' to' grow' such' but' they' are' not' registered' in' the' business' of' supplying.' They'
cannot' produce' an' O.R.' The' problem' is' that' if' they' do' not' produce' an' O.R.,' what' proof' do' you'
present' to' the' government' that' indeed' that' you’ve' made' payments' for' these' when' it' cost'
millions?'
! So'in'one'of'the'companies'here,'the'only'thing'that'they'can'produce'is'the'proof'that'it'
had' been' weighed' by' a' reputable' weighing' company,' the' deposit' that' they' made' in'
millions'to'an'individual'in'Mindanao.'But'if'you'really'want'them'to'produce'an'O.R.,'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''20'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
they'can'show'you'their'guns.'So'as'a'business'man,'you'don’t'force'them'to'issue'an'
O.R.'So'how'to'prove'to'the'BIR'that'these'are'valid'and'legitimate'expenses?'
• There’s' already' a' SC' actually' following' the' Cohan' Rule' in' the' U.S.' that' some'
expenses'need'not'be'supported'by'O.R.'but'so'long'as'it'can'be'substantiated'
with'other'adequate'records'proving'that'in'fact'it'has'been'purchased'by'the'
company' and' the' goods' received' by' the' company' which' were' actually'
converted'to'the'product'sold,'can'be'proof'enough'that'expenses'have'been'
paid'or'incurred.'But'not'in'all'instances.'
• In'this'type'of'requisite,'is'it'necessary'when'you'want'to'claim'OSD?'
o NO,' because' the' law' in' OSD' says' “whether' or' not' you' have' incurred' actual' expenses”.' So' this'
requisite'applies'only'in'so'far'as'ID'is'concerned.''
o vi.'It'must'not'be'against'law,'morals,'public'policy'or'public'order'
! Example:'Bribes'and'kickbacks'given'to'government'personnel'
• You' have' an' assessment' of' 10M' in' unpaid' taxes' or' delinquent' taxes.' You' come' into' a' compromise' or'
common'grounds.'You'will'only'pay'5M'and'you'will'be'issued'a'tax'clearance.'And'for'the'5M'that'you'will'
pay,'only'2.5M'will'be'receipted'as'received'by'the'government.'Wherever'the'other'2.5M'will'go,'we'do'
not'know.'How'much'is'deductible'from'your'business'operations?'10M,'5M,'2.5M'or'none'of'the'above?''
o NONE' of' the' above.' Whatever' payments' you' made' to' the' government,' as' kickbacks' or' bribes,'
even' to' the' members' of' the' BOC' or' BIR' or' DOF,' so' long' as' it’s' not' a' legitimate' payment' of' an'
expense,'it'is'not'deductible.'
o How'about'payments'to'rebels'as'revolutionary'taxes?'Telecommunications'towers,'so'that'it'will'
not'be'blown'up,'you'have'to'pay'a'certain'amount.'Is'that'deductible?'
! NO.'All'taxes,'as'a'rule,'are'deductible,'except'income'tax'paid'to'the'Phil.'government,'
income' tax' paid' to' the' foreign' government,' estate' tax,' donor’s' tax' and' VAT.' All' the'
other'taxes'are'deductible.'However,'even'if'they'call'it'as'a'formal'tax'that'is'paid'to'
the'rebels,'it'doesn’t'go'to'the'government,'therefore,'however'media'will'try'to'make'it'
legal' in' the' news,' it’s' still' a' nonNdeductible' expense' because' it’s' contrary' to' law' and'
public'order.'''''
ADVERTISING%AND%PROMOTIONAL%EXPENSE%(APE)%
N As'a'rule,'APE'are'deductible'unless'it'borders'to'creation'of'goodwill'for'the'company'or'creating'a'name'for'the'company,'future'recall,'
etc…'
o Example:'Dandruff'shampoos'–'we'have'Guard,'Head'and'Shoulders.'We’ve'been'through'that'for'years'already.'When'Clear'
came'in,'almost'all'actors'and'actresses'became'endorsers'for'it.'How'much'did'they'have'as'a'budget'for'that?'It’s'1B.'Is'it'
deductible'as'APE'in'the'year'it'was'incurred?'
! NO.'It’s'excessive'and'the'purpose'of'actually'of'Clear'is'not'to'make'it'as'an'expense'in'the'year'of'entry'but'rather'
its'purpose'was'to'give'a'brand'and'give'a'name'recall'for'the'customers'and'it’s'expected'to'benefit'a'number'of'
years'for'the'company,'therefore,'whatever'expense'it'had'paid'during'the'year'of'entry'will'be'amortized'over'future'
years.'Let’s'say,'for'5'years.''
TRAVEL%EXPENSES%(TE)%
N TE'are'deductible'even'if'it’s'not'receipted'because'they’re'TE'that'we'incur'without'having'a'receipt'from'the'carriers,'etc…'
OPTION%TO%PRIVATE%EDUCTIONAL%INSTITUTION%(OPEI)%
N PEIs'have'the'option'to'deduct'capital'expenditures'in'the'year'it'was'paid'or'incurred'or'the'other'option'is'to'depreciate'the'expense'
over'the'useful'life'of'the'asset.'
o Example:' USC' would' purchase' a' 100M' value' building.' It' can' opt' to' deduct' entirely' the' 100M' in' the' year' of' purchase' or'
amortized'the'100M'over'its'useful'life.'In'any'case,'whatever'the'option'chosen'by'USC,'since'it’s'not'subject'to'tax,'it'won’t'
have'any'effect.'It'doesn’t'need'to'match'the'expense'incurred'today'against'the'income'for'today'or'yearNtoNyear'basis.''
INTERESTS%EXPENSE%(IE)%
N What'is'interest?'
o It’s'the'amount'paid'for'the'use'or'forbearance'of'money.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''21'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Example:'If'you'have'a'business'and'you'obtained'a'loan'for'the'working'capital'of'your'operation'and'you'are'to'pay'
10K' monthly' as' interest.' Is' the' 120K' for' the' entire' year' be' deductible' as' a' business' expense' if' it’s' related' to' the'
business?'
• YES.'
• As' a' rule,' IE' incurred' by' a' business,' corporation,' company' or' PP' is' deductible' so' long' as' the' common'
requisites'are'complied'with:''
o 1.'The'interest'must'be'ordinary'and'necessary.'
! So'if'you'obtained'a'loan'to'use'it'as'a'working'capital'of'your'operations,'the'interest'
paid'is'deductible.''
o 2.'It'must'be'reasonable.'
! Reasonableness'would'depend'on'the'size'of'the'business'operation.'
o 3.'It'must'be'paid'or'incurred'during'the'taxable'year'
o 4.'It'must'be'paid'or'incurred'in'connection'with'the'business'
o 5.'It'must'be'substantiated'by'the'contract'itself'and'payment'vouchers,'etc.'
o 6.'It'must'not'be'contrary'to'law'
o Other'additional'requisites'to'make'IE'deductible:'
! i.'There'must'be'an'obligation'which'is'valid'and'subsisting'
! ii.'There'must'be'an'agreement'in'writing'to'pay'interest'
• Otherwise,'not'in'writing,'no'IE'deduction,'whether'or'not'you'have'actually'
paid'an'interest'
! iii.'This'must'observe'the'limitation'under'the'arbitrage'rule'
! iv.'This'must'not'be'between'related'taxpayers'
N IE'which'are'nonNdeductible:'(See'outline)'
o Corporation'to'corporation'where'only'one'individual'is'maintaining'the'controlling'interest,'the'interest'is'not'deductible.''
! Example:' Co.' A' (parent' company)' and' Co.' B' (subsidiary' company).' Usually' the' parent' company' grants' a' loan' to' a'
subsidiary'company'for'operational'purposes.'If'the'agreement'is'stated'that'interest'shall'be'paid'in'writing,'is'the'
individual,'according'to'the'grandfather'rule…'If'Co.'A'is'owning'Co.'B'100%'and'the'loan'is'granted'to'the'subsidiary'
company' where' interest' is' stipulated' to' be' paid,' is' the' interest' payments' made' by' the' subsidiary' to' the' parent'
company'deductible?'NO.'Here,'Co.'A'is'a'holding'company'of'Co.'B.'When'one'is'a'holding'company'of'the'other'and'
extends'loans,'the'IE'becomes'a'nonNdeductible'expense.'The'50%Nrule'(controlling'interest'rule)'is'only'applicable'to'
nonNexisting'holding'companies.''
o Interest'expense'on'preferred'stock'
! Example:' A' company' declares' dividends.' Dividends' comes' out' from' your' shareholdings' and' shareholdings,' usually,'
shares'that'you'have'can'be'classified'as'common'shares'or'preferred'shares.'Whenever'you'organize'a'corporation,'
you'may'say'that'this'group'has'common'shares,'this'group'will'have'preferred'shares.'The'term'preferred'shares,'
you'will'have'a'preference'in'the'distribution'of'dividends,'as'a'rule.'If'there'comes'a'point'in'time'that'the'business,'
in'a'certain'year,'cannot'declare'a'dividend,'some'dividend'would'accrue'to'them'but'not'totally'paid'out,'nothing'
would'accrue'to'you.'Meaning,'they'have'a'collectible.'In'the'following'year,'when'distribution'happens,'they'will'get'
their'priorNyear'accrual'dividends'plus'interest,'you'will'receive'yours'for'the'year.'Will'the'interest'on'the'preferred'
shares'be'considered'as'deductible'IE?'
• The'concept'of'paying'interest'and'interest'as'a'deducible'expense'item'is'it'must'be'payment'for'the'use'of'
someone'else’s'money'–'the'forbearance'of'money.'You'temporarily'borrow'money,'use'it'and'for'the'use,'
you'are'to'pay'interest'in'addition'to'the'principal'payments'that'you'will'make.'But'dividend'declaration'is'
not'an'obligation'of'the'corporation.'In'fact,'under'the'Corporation'Code,'a'dividend'can'only'be'declared'if'
there' is' enough' unrestricted' retained' earnings' or' corporate' profits' that' a' corporation' has.' If' it' is' not'
dependent' upon' corporate' profits' on' the' preferred' shares,' it' is' deductible.' If' it' is' dependent' upon'
corporate'profits,'as'a'rule,'it'is'not'deductible'expense.'REASON:'The'corporation'did'not'really'loan'any'
money'coming'from'the'stockholders.'The'corporation'is'obligated'to'pay'out'dividends'once'it'has'profits.'
N What'is'the'Arbitrage'Rule?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''22'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o The'taxpayer’s'allowable'deduction'for'IE'shall'be'reduced'by'an'amount'equal'to'33%'of'the'interest'income'earned'by'him'
which'has'been'subjected'to'final'tax.'
o The'arbitrage'rule'automatically'limits'the'deductibility'of'the'IE'by'reducing'33%'of'the'interest'income'subject'to'final'tax,'
whether'or'not'engaged'in'backNtoNback'loan'transactions.''
! Example:'Let’s'say'that'the'company'has'an'IE'of'600K'but'it'has'no'interest'income,'is'the'IE'deductible'fully?'YES.'
Say'for'example,'Co.'A'(earning'interest'income'of'100K'subject'to'20%'final'tax),'Co.'B'(earning'100K'interest'income'
from' loans' to' employees)' and' Co.' C' (no' interest' income).' All' of' them' obtained' the' 1M' loan' running' for' 10' years'
wherein' they' would' be' liable' each' for' 600K' annually' as' IE.' Which' of' the' 3' corporations' can' claim' the' full' 600K' as'
expense'and'which'cannot?'
• 'Co.'A'cannot'claim'fully'the'600K'as'a'deductible'IE'but'only'567K'(600K'–'[33%'x'100K]).'The'arbitrage'rule'
applies'since'Co.'A'is'earning'interest'income'subjected'to'final'tax.'If'none,'the'arbitrage'does'not'apply,'
automatically'full'interest'payment'can'be'deductible.'
• Co.' B' can' fully' claim' the' 600K' as' a' deductible' IE' since' its' interest' income' is' not' subjected' to' final' tax.'
Interest'income'subjected'to'final'tax'is'only'those'coming'from'the'banking'institutions.''
• Co.'C'can'fully'claim'the'600K'as'a'deductible'IE'since'it'is'not'earning'interest'income.'
o The'principle'why'such'rule'exists:'
! To'discourage'BackNtoNBack'loan'transactions'–'obtaining'loan'from'one'bank'and'invest'it'to'another'bank'in'order'to'
benefit'the'difference'between'the'tax'due'on'interest'income'and'the'tax'benefit'from'the'IE.''
o If'the'IE'is'100K,'interest'income'subject'to'final'tax'is'100K,'do'you'have'a'deductible'IE?'YES.'You'have'a'deductible'IE'of'67K'
(100K'–'[33%'x'100K]).'
o If'the'interest'income'is'500K'subject'to'final'tax,'IE'is'100K,'do'you'have'a'deductible'IE?'NO.''33%'of'500K'is'165K.'So'the'165K'
will'be'deducted'to'100K,'which'results'to'no'deductible'IE.'
N What'is'theoretical'interest?'Is'it'deductible?'
o It’s'an'interest'which'is'computed'or'calculated,'not'paid'or'incurred,'for'the'purpose'of'determining'the'opportunity'cost'of'
investing'in'a'business.'It’s'not'real.'There’s'no'payment'at'all.'Thus,'it’s'not'deductible'nor'taxable.'''
N What'is'imputed'interest?'Is'it'deductible?'Is'it'an'actual'expense?'
o Sec.'50'of'the'tax'code'–'Allocation'of'Income'and'Deductions'–'In'the'case'of'2'or'more'organizations,'trades'or'businesses'
(whether'or'not'incorporated'and'whether'or'not'organized'in'the'Philippines)'owned'or'controlled'directly'or'indirectly'by'the'
same' interests,' the' Commissioner' is' authorized' to' distribute,' apportion,' or' allocate' gross' income' or' deductions' between' or'
among'such'organization,'trade'or'business,'if'he'determines'that'such'distribution,'apportionment,'or'allocation'is'necessary'
in'order'to'prevent'evasion'of'taxes'or'clearly'to'reflect'the'income'of'any'such'organizations,'trades'or'businesses.'
o Such' provision' is' powerful' in' the' sense' that' the' BIR' can' do' anything' with' it' so' long' as' it' sees' relationships' between'
corporations.'
! Example:'If'Co.'A'is'related'to'Co.'B'as'the'controlling'or'fully'owning'the'other'corporation,'any'expense'loan'(let’s'
say'1M)'to'Co.'B,'which'is'interestNfree,'so'Co.'A'did'not'earn'any'interest'income.'Can'Co.'B'deduct'IE?'Automatically,'
no' IE' because' IE' must' be' stipulated' in' writing' and' there' is' no' interest' payment' made.' But' the' BIR' can' impute' an'
interest' based' on' the' legal' rate' of' 12%' and' subject' such' interest' income' on' the' part' of' Co.' A' to' tax.' But' Co.' B' is'
absolutely'not'allowed'to'claim'the'IE'for'no'interest'has'been'paid'and'there'is'no'stipulation'in'writing.'
N Can'payment'of'interest'for'delinquent'taxes'be'deductible?'
o YES.'Whenever'a'taxpayer,'corporate'or'individual,'is'assessed'of'delinquent'taxes,'that'taxpayer'is'not'only'liable'to'pay'the'
basic'tax'but'also'has'to'pay'surcharges'of'25%'and'50%'if'it'is'found'to'be'fraudulent'plus'interest'of'20%'pa'and'additional'
compromise' penalties.' So' whether' or' not' these' payments' are' deductible,' is' interest' deductible?' YES,' because' it’s' an'
indebtedness' to' the' government.' You' temporarily' withheld' the' payment' of' taxes' to' the' government' for' the' use' of' money'
during'the'time'which'you'have'not'paid'properly'your'taxes.'But'in'so'far'as'penalties,'surcharges'and'compromise'penalties'
are'concerned,'on'top'of'the'tax','these'are'not'deductible.'The'taxpayer'cannot'benefit'from'a'violation'that'he'committed'
against'the'government.'It'is'only'the'interest'that'is'deductible.'
N Optional'treatment'of'IE'(OTIE)'
o At'the'option'of'the'taxpayer,'interest'incurred'to'acquire'property'used'in'trade,'business'or'exercise'of'a'profession'may'be'
allowed'as'a'deduction'or'treated'as'a'capital'expenditure.'
! Example:'Co.'A'obtained'a'loan'for'working'capital'purposes.'Co.'B'obtained'a'loan'for'construction'of'a'building.'Both'
of'them'paid'1M'in'interest.'1M'in'IE'and'no'interest'income'subject'to'final'tax.'Thus,'the'IE'not'limited'with'the'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''23'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
arbitrage' rule.' Does' Co.' A' or' Co.' B' have' an' option' in' treating' the' IE,' whether' deductible' now' or' deductible' in' the'
future?'
• Co.'A,'the'incurrence'of'expense'is'for'working'capital'purposes,'dayNin'dayNout'operations,'the'IE'incurred,'
if'it’s'not'subjected'to'arbitrage'rule,'would'be'fully'deductible'as'an'expense'for'the'year'of'incurrence.'But'
since' Co.' B' obtained' a' loan' to' construct' a' property' that' is' a' capital' expenditure,' the' IE' can' also' be'
considered'as'a'capital'expenditure.'Where'the'principal'cost'goes,'the'accessory'interest'expense'can'also'
join' the' principal' cost.' So' if' the' building' has' an' estimated' life' of' 10' years' or' 20' years,' the' IE' can' be'
considered' as' capital' added' to' the' cost' of' the' building' and' it' will' be' considered' as' an' expense' over' the'
estimated'life'of'the'asset'that'was'acquired'using'the'loan'amount.'
3.'TAXES'
N GR:'All'taxes,'national'or'local,'paid'or'incurred'within'the'taxable'year'in'connection'with'the'taxpayer’s'trade,'business'or'profession'are'
deductible'from'gross'income.'
o E:'
! i.'Special'assessment'–'tax'imposed'on'the'improvement'of'a'parcel'of'land'
! ii.'Income'tax'–'includes'foreign'income'tax'
• Philippine'income'tax'–'absolute'rule:'totally'not'deductible'
• Foreign'income'tax'
o Paid' by' domestic' corporations' and' resident' citizens' ' (taxable' within' and' without)' –' may' be'
claimed'as'a'deduction'if'it'opts'for'tax'deduction,'otherwise,'it'becomes'nonNdeductible'if'it'uses'
the'foreign'tax'paid'as'tax'credits.'
! If'the'foreign'tax'is'claimed'as'a'tax'credit,'you'cannot'claim'it'as'a'tax'expense.'But'if'
you'claim'it'as'a'tax'expense,'you'cannot'claim'it'as'a'tax'credit.'
! Claiming'it'as'a'tax'credit,'you'can'claim'the'full'benefit'of'the'tax'paid'abroad'since'tax'
credit'is'a'deduction'from'Philippine'income'tax.'But'if'you'claim'it'as'an'expense,'only'
to'the'extent'of'30%'of'that'foreign'tax'will'it'reduce'the'tax'due'since'tax'deduction,'as'
an' expense,' is' a' deduction' from' gross' income' in' computing' the' net' income.' Thus,' tax'
credit'is'more'beneficial.'
! iii.'Taxes'which'are'not'connected'with'the'trade,'business'or'profession'of'the'taxpayer'
• Whatever'type'of'tax'that'is,'since'it’s'not'connected'with'the'trade,'business'or'profession'of'the'taxpayer,'
automatically,'it’s'not'deductible.'
! iv.'Estate'tax,'donor’s'tax'
! v.'VAT'''''''
N Is'the'real'property'tax'(local'tax)'payment'made'by'the'corporation'on'its'real'property'used'in'trade'or'business'a'deductible'expense'
for'purposes'of'computing'income'tax'liability,'not'real'property'tax'liability?'
o YES.'Real'property'taxes'are'deductible'so'long'as:'
! 1.'It'is'ordinary'and'necessary'
! 2.'Reasonable'in'amount'
! 3.'It'has'been'paid'or'incurred'during'the'taxable'
! 4.'It'has'been'paid'or'incurred'in'connection'with'trade,'business'or'profession'
! 5.'Substantiated'with'O.Rs'
! 6.'It’s'not'contrary'to'law,'public'policy'or'morals'
N Example'of'national'tax'that'is'deductible:'Customs'duties'when'the'corporation'is'engaged'in'importation'of'goods.'
N All'taxes,'whether'national'or'local'tax,'will'be'considered'as'deductible'from'gross'income'in'computing'the'net'taxable'income'so'long'
as'it'follows'the'requisites'of'being'paid'or'incurred'during'the'taxable'year'in'connection'with'the'trade,'business'or'profession'of'the'
taxpayer'subject'to'the'exceptions.'
N What'type'of'taxpayer'can'offset'the'foreign'taxes'directly'by'100%'against'the'Philippine'tax'due?'
o i.'Resident'Citizens'–'since'liable'of'income'within'and'without'to'avoid'double'taxation'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''24'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! NRC'–'not'included'because'liable'of'income'within'only'–'no'double'taxation'
o ii.'Domestic'corporations'–'since'liable'of'income'within'and'without'to'avoid'double'taxation'
o iii.'Members'of'GPPs'
o iv.'Beneficiaries'of'estates'and'trusts'
N If'the'tax'paid'in'China'is'10M'and'the'tax'due'on'your'entire'income'here'in'the'Philippines'is'30M,'can'Co.'B'(which'operates'80%'in'the'
Philippines'and'20%'in'China'with'100M'total'income.'Thus,'20M'from'China'and'80M'from'the'Philippines),'can'Co.'B'fully'deduct'the'
10M'against'the'30M?'
o NO,' since' the' foreign' income' tax' paid' to' the' foreign' country' is' not' always' the' amount' that' may' be' claimed' as' tax' credit'
because'under'the'limitation'provided'under'the'tax'code,'it'must'not'be'more'than'the'ratio'of'foreign'income'to'the'total'or'
global'income'multiplied'by'the'Phil.'income'tax'due.'
o Thus,'20M'(foreign'income)/100M'(global'income)'='20%'x'30M'(Phil.'income'tax)'due'='6M'limit.'Therefore,'only'6M'can'only'
be'claimed'as'a'tax'credit.'
o Had'it'been'the'other'way'around,'if'the'limit'is'higher'than'the'actual'tax'payment'abroad,'you'claim'whichever'is'lower'in'
favor'of'the'government.''''
September-14,-2010-
N Q:' What' have' we' discussed' in' taxes' as' a' deductible' expense.' What' are' the' taxes' that' are' deductible' and' what' are' those' that' are' not'
deductible'expense?'
o Generally'taxes'are'deductible,'however'there'are'exceptions.''
! They'are'not'deductible'if'it'is:'
o 1.'Philippine'income'tax''
o 2.'Value'added'taxes'
o 3.'Capital'gains'tax/final'taxes'
o 4.'Estate'and'donor’s'taxes,'taxes'–'local'benefit.'
o Why'is'estate'and'donors'taxes'not'deductible?''
! They'are'not'deductible'because'they'are'not'related'to'the'business'of'the'taxpayer.'
o Why'is'valueNadded'tax'not'deductible,'when'in'fact'it'is'related'to'selling'your'product'or'services?''
! Value'added'tax'is'not'deductible'for'computing'gross'income'because'VAT'is'an'indirect'tax,'not'only'that,'the'VAT'that'
the'corporation'is'paying'to'the'government'is'a'tax'that'has'been'shouldered'by'the'customer'or'consumer.'While'the'
VAT'that'the'corporation'actually'pays'on'its'purchased'product'are'not'considered'as'part'of'the'cost'of'the'product'but'
offsetNable'against'the'tax'payable'to'the'government.'
N Special'assessments'of'levy'–'are'they'deductible?'No.'Is'real'property'tax'a'deductible'tax?'Yes,'it'is'deductible'but'special'assessments'are'
not'deductible.'
o Special'levies'are'imposed'on'the'improvement'or'the'fact'that'a'parcel'of'land'has'been'benefited'by'an'improvement.'It’s'some'
form'of'a'real'property'tax.''
! Why'is'it'not'deductible?'What’s'the'difference?'
o The'special'assessment'is'a'tax'on'the'improvement'on'a'property'but'that'improvement'is'not'owned'by'the'
owner'of'the'property.'Special'assessment'is'that'being'paid'or'collected'by'the'government'from'landowners'
whose'property'has'been'benefited'by'an'improvement'made'by'the'government,'which'makes'it'some'kind'of'a'
tax'on'the'property.''
! What'makes'it'different'from'real'property'tax'being'deductible'taxes?''
o Real' property' tax' is' a' tax' on' the' land' itself' while' assessment' is' a' tax' directed' against' the' land' for' the' benefit'
derived'from'the'improvement'made'by'the'government.''
o It'is'not'deductible'because'this'is'not'the'basic'real'property'tax.'All'real'properties'are'subject'to'real'property'
taxes,'and'whenever'real'properties'are'used'in'trade'or'business,'the'real'property'taxes'due'from'these'real'
properties'are'rightfully'deductible'against'the'gross'income'of'the'corporation.''
o But'special'assessments'are'one'kind,'only'happens'when'there'are'improvements,'and'these'are'only'premium'
fees'that'you'need'to'pay'whenever'you'have'derived'any'benefit'–'which'is'not'directly'related'to'the'operation'
of'the'business'itself'which'makes'it'non'deductible.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''25'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N Mr'X,'a'non'resident'citizen,'has'income'within'and'income'without.'Income'within'amounted'to'1M,'income'without'amounted'to'1M.'Tax'
due' paid' in' the' respective' countries' amounted' to' 300,000' and' 300,000' as' well.' Is' this' income' tax' paid' to' the' Philippine' government' a'
deductible'tax?'Is'this'a'deductible'tax?'NO.'Philippine'income'taxes'are'not'deductible'against'gross'income.''
o The'tax'paid'to'the'US'government'is'a'foreign'income'tax.'Is'it'deductible?'If'this'has'already'been'paid'to'the'US,'this'300,000'tax'
on'1M'income'earned'abroad,'what'benefit'will'Mr'X'get'out'of'the'300,000'income'tax?'Is'there'any'benefit?'Do'you'think'it'is'
proper'for'Mr'X'to'claim'as'deduction'the'300,000'paid'to'the'US'as'an'expense'deduction'or'at'his'option'as'a'tax'credit'against'his'
Philippine'tax'due?'''
' MR.'X,'NonNresident'Corporation:'

' ''''''''''''''''''''''''''''''''''''''''''''''Tax'Due'
'''Within'' =''''1,000,000''=''''300,000' ''Not'Deductible'$'Because'income'tax'not'allowed'
' ''Without'=''''1,000,000''=''''300,000' ''Not'Deductible'$'Because'NRC''
'
! It'is'not'deductible,'in'computing'whether'an'expense'is'deductible'or'not,'we'are'only'concerned'with'what'is'within'the'
jurisdiction'of'the'Philippines.'Being'a'non'resident'citizen,'the'jurisdiction'of'the'Philippine'taxing'authority'pertains'only'
to'income'within.'It'means'to'say'that'only'expenses'within'the'Philippines'are'deductible,'expense'related'to'the'income'
generated'by'the'taxpayer.''
! If'it'is'not'a'deductible'expense,'can'the'foreign'income'tax'paid'be'offsetted'against'the'Philippine'income'tax'due?'NO,'
cannot'be'claimed'as'tax'credit.'''
o Foreign'income'tax'has'only'been'computed'directly'against'the'foreign'income,'and'the'Philippine'income'tax'
has' been' exclusively' computed' only' against' the' Philippine' income.' No' component' of' this' Philippine' tax' due'
pertains'to'any'foreign'income.'Exclusively'Philippine'tax,'exclusively'foreign'tax.''
N What’s'the'difference'between'allowing'it'as'a'tax'credit'or'allowing'it'as'a'deductible'expense?'Are'they'in'the'same'direction?''
o The'deductibility'of'an'expense'is'always'premised'on'whether'or'not'it'is'related'to'the'trade,'business'or'profession'or'whether'it'
is'directly'related'to'the'income'of'the'taxpayer.''
o Foreign'tax'credit'can'only'be'claimed'or'offsetted'against'the'Philippine'tax'due'if'the'Philippine'tax'due'is'that'of'a'resident'citizen'
or'domestic'corporation'because'these'two'types'of'taxpayers'are'taxable'on'income'within'and'income'without.'If'you'say'within'
and'without,'the'Philippine'tax'already'comprises'of'tax'on'the'Philippine'income'and'the'foreign'income.'Therefore,'component'of'
that'is'a'foreign'tax,'which'should'rightfully'be'managed.'
o Say' for' example,' this' is' a' resident' citizen,' would' your' answer' be' different' or' the' same?' Let’s' say' income' within' is' 1M,' income'
without'is'1M.'Philippine'tax'is'still'at'300,000,'for'income'within'and'without.'Foreign'tax'paid'is'300,000.'Can'the'taxpayer'claim'
the'foreign'income'tax'as'an'expense'deduction'or'offsetted'as'a'tax'credit?'Can'he'claim'it'as'an'expense?''
! Yes,' since' a' resident' citizen' is' taxable' within' and' without,' and' required' to' declare' the' total' global' income,' he' can' also'
claim'it'as'an'expense.''
! His'other'option'is'to'claim'it'as'a'tax'credit,'directly'offsetted'against'the'Philippine'income'tax'due.''
o Same'facts,'can'Mr'X'claim'300,000'as'foreign'tax'credit?''

' MR.'X,'Resident'Corporation:'
' ''''''''''''''''''''''''''''''''''''''''''''''Tax'Due'
Therefore,'½'of'300,000'is'recognized'
'''Within'' =''''1,000,000''=''''300,000'
' by'Philippine'government.'
''Without'=''''1,000,000''=''''300,000'
'
' ''1'million'
' X'300,000'='Max'150,000'
''2'million'
'
! He'can'claim'in'part,'not'the'whole'300,000.''
! How'much'can'he'claim?'Since'this'is'only'one'foreign'country,'you'can'directly'go'to'global'limitation.'If'there'are'more'
than'two'foreign'countries,'you'go'for'both'limitations,'whichever'is'lower.''
! Since'this'is'only'one'foreign'country,'what'is'the'formula?'So,'you'will'not'forget'the'formula.'
o Formula:'NN'
! The'tax'credit'that'shall'be'allowed'to'the'taxpayer'Mr'X'shall'only'be'to'the'extent'of'the'foreign'tax'
component'in'the'Philippine'tax'due.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''26'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Imagine' this' being' the' entire' Philippine' tax' due' of' his' global' income.' What' is' the' component'
recognized'by'the'Philippine'tax'authorities'as'forming'part'in'this'tax?''
• What'is'that'foreign'component?'It'is'the'proportion'of'his'foreign'income'against'his'entire'
income'multiplied'by'his'Philippine'income'tax.''
• How'much'is'his'income'abroad?'1M.''
• How'much'is'his'total'income?'2M.''
• You' will' note' that' if' this' is' the' amount' collected' by' the' Philippine' tax' authorities,' and' the'
ratio'is'oneNhalf,'oneNhalf'of'this'is'a'foreign'tax'recognized'by'the'Philippine'tax'authority.''
• Therefore,'the'maximum'limit'that'can'be'claimed'as'a'tax'credit'is'only'150,000,''this'cannot'
be'claimed'totally'as'a'tax'credit.'Mr'X'cannot'claim'fully,'because'tax'credit'claim'shall'not'
exceed'the'limit'provided'by'law.''
N Let'us'change'the'facts.'If'the'tax'paid'abroad'is'100,000,'and'the'limit'still'remains'the'same.'OneNhalf'proportion','oneNhalf'the'proportion'of'
the'foreign'income'against'the'entire'global'income'against'the'Philippine'tax'due'so'the'component'is'still'150,000'foreign.'The'limit'is'still'
150,000.'How'much'can'Mr'X'claim'as'a'foreign'tax'credit?''
' MR.'X,'Resident'Corporation:'
' ''''''''''''''''''''''''''''''''''''''''''''''Tax'Due' ' ''1'million' 150,000'
'''Within'' =''''1,000,000''=''''300,000' X'300,000'='Max''
' ''2'million' 150,000'
''Without'=''''1,000,000''=''''100,000'
'
Therefore,'claim'only'Php'100,000'whichever%is%lower'
'
o 100,000.'It'shall'not'exceed'the'maximum'limit'or'the'actual'payment'abroad,'whichever'is'lower.'You'will'see'there'a'per'country'
limitation.''Per'country'limitation'would'still'be'the'same.''This'means'to'say,'what'the'resident'citizen'or'domestic'corporation'has'
more'than'one'foreign'source,'in'considering'what'is'the'maximum'limit,'for'a'taxpayer'who'has'more'than'two'foreign'sources,'he'
has'to'consider'the'global'limitation'and'the'per'country'limitation.'Per'country,'the'taxpayer'should'know'per'country'how'much'is'
the'maximum'total,'in'global'limitation,'foreign'income'against'worldwide'income.''
'
'
''Per'Country'Limit' '''Global'Limitation' '''Actual'Within''''''''''''''
' ''''''150,000' '''''''''400,000' ''''''200,000'
''''''150,000'
'
''''''300,000'
'
' Therefore,'claim'only'Php'200,000'(?).'

o If'there'are'two'foreign'countries'and'the'limit'is'150K,'150K,'this'is'300,000.'This'is'what'will'come'out.''
o So'global'limitation,'we'don’t'compute'the'limit'per'country.'You'don’t'have'this'formula'for'every'country.'In'the'global'limitation,'
you'“pull'in???”'all'the'foreign'countries'here,'maintain'the'same.'So'if'the'total'of'the'global'limitation'is'400,000,'and'your'actual'
tax'payment'is'200,000,'your'tax'credit'would'only'be'200,000.'
' ''Per'Country'Limit' '''Global'Limitation' '''Actual'Within''''''''''''''
''''''150,000'''''''''''''''''''400,000' ''''''500,000'
'
''''''150,000'
' ''''''300,000'
'
Therefore,'claim'only'Php'400,000.'
'
o If'your'actual'tax'payment'abroad'is'500,000,'you'can'only'claim'300,000.''
o If' there' is' more' than' one' foreign' country,' compute' the' limit' per' country,' compute' it' globally' using' still' the' same' formula,' and'
compare' it' to' the' actual.' Whichever' is' the' lowest' is' the' available' tax' credit.' Use' the' principle.' The' government' f' the' Philippines'
would'only'allow'you'to'claim'a'foreign'tax'credit'to'the'extent'of'what'you'have'actually'paid'or'to'the'extent'of'what'it'recognizes'
as'a'foreign'component'of'the'Philippine'tax'that'it'is'trying'to'collect,'whichever'is'lower'in'all'cases.''''Lifeblood'doctrine.'
N In'order'to'claim'foreign'tax'credits,'what'are'the'proofs'that'you'need'to'show?'
o The'taxpayer'must'establish'to'the'satisfaction'of'the'Commissioner'the'following:''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''27'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! (1)'the'total'amount'of'income'from'sources'without'the'Philippines,''
! (2)the'amount'of'income'derived'from'each'country,'the'tax'paid'or'incurred'to'which'is'claimed'as'a'credit,'and''
! (3)'all'other'information'necessary'for'the'verification'and'computation'of'such'credits.'
N The'reason'there'in'letter'C'in'the'outline,'who'may'claim'tax'credits'for'taxes'of'foreign'countries:'
o Resident'citizens'
o domestic'corporations'
o We'may'as'well'mention'members'of'general'professional'partnerships'in'the'Philippines,''
o Beneficiaries'of'estates'and'trusts.''
! Why'member'of'GPPs'in'the'Philippines'–'they'should'still'be'resident'citizens.''
! As' a' rule,' we' only' have' Filipino' practitioners,' foreign' individuals' cannot' engage' in' the' practice' of' law.' Beneficiaries' of'
estates'and'trustsN'they'are'allowed'to'claim'foreign'tax'credit,'but'we'will'discuss'that'when'we'reach'estate'taxation.'''
N Foreign' income' tax,' if' you' look' at' the' tax' code,' It' is' one' of' the' exceptions' to' the' rule' that' it' is' deductible' unless' if' it' is' claimed' as' a' tax'
deduction.'The'topic'is'itemized'deductionsN'the'topic'is'expense,'can'it'be'claimed'as'an'expense?''
o As' a' rule,' probably' you' can' say' foreign' income' tax' is' not' deductible' as' an' expense' unless' the' taxpayer' is' a' resident' citizen' or' a'
domestic'corporation,'wherein'he'has'the'option'to'claim'it'as'an'expense'or'a'tax'credit.'Because'the'tax'credit'benefit'always'is'
available'to'domestic'corporation'and'resident'citizens.'He'can'always'forego'claiming'the'tax'credit'and'opt'for'expense.'So'it’s'a'
little'bit'complicated'if'you'don’t'know'the'principle.'You'try'to'memorize'it.'
o 'Again,'let’s'restate'it.'Foreign'income'tax'is'one'of'the'exceptions'to'the'deductibility'of'taxes.'But'it'can'be'a'deductible'tax'if'the'
taxpayer'is'a'resident'citizen'or'a'domestic'corporation,'because'the'option'lies'with'him'either'to'claim'it'as'a'tax'credit'or'a'tax'
expense.''
N Because'it'is'more'strict'to'claim'the'tax'paid'abroad'as'a'credit,'can'a'tax'subsequently'refunded'to'a'taxpayer'be'taxable?'Say'for'example'
you'have'overpaid'taxes,'you'sought'for'a'refund,'you'were'refunded.'Is'that'a'taxable'refund'or'inflow'of'money'or'not?''
'
'
' Tax%Refund%
' 'Sales' ' ''10,000,000'
'Cost' ' ''''8,000,000'
' 'Gross'Income' ''''2,000,000'
' 'Less:'Expenses' ''''1,000,000' +'1,000,000'
'Net'Taxable'Income''1,000,000'
'
o Let’s'put'that'into'illustration.'In'2007,'you'have'overpaid'1M'in'income'taxes.'You'are'a'resident'citizen,'no'income'abroad.'The'1M'
tax'that'you'have'overpaid'pertains'strictly'to'Philippine'income.'In'2008,'you'immediately'applied'for'a'refund.'In'2009'you'were'
granted'the'refund.'In'filing'your'income'tax'return'for'2009,'would'you'take'into'consideration'the'inflow'of'1M''cash'that'has'been'
refunded'to'you'for'overpaid'taxes?'
! Yes,'you'will'be'taxable.'You'will'have'additional'30%'tax,'you'will'have'additional'300,000'taxes'on'the'1M.''
! No'exception'to'that?''
o You'have'to'answer'the'question:'Have'you'been'benefited'previously?'Because'the'taxability'of'a'tax'that'has'
been'subsequently'refunded'would'lie'on'whether'you'have'been'benefited'in'prior'years.''
o Remember,'bad'debts'that'have'been'subsequently'refunded'can'only'be'taxable'to'the'extent'that'you'have'
been'benefited'by'the'expense'that'you'have'previously'claimed.'In'this'case,'would'all'tax'refunds'be'taxable?'
Were'you'benefited'by'the'foreign'tax'that'you'have'overpaid'prior?''
! Remember' bad' debts' expense.' Bad' debts' expense' is' an' expense' that' you' claim,' it' will' reduce' your'
income'tax'due.''
! If' it' is' subsequently' refunded' because' your' debtor' has' funds' to' pay' you,' all' you' need' to' know' is'
whether'in'the'year'that'you'claimed'it'as'an'expense,'or'in'the'year'that'you'decided'it’s'no'longer'
collectible,' did' your' tax' liability' decrease?' If' it' did,' then' it' will' be' taxable' at' the' year' that' you' will'
collect'it'or'you'are'able'to'recover'it'from'your'debtor.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''28'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o In'this'case'it'is'the'same,'in'the'tax'that'you'have'subsequently'been'refunded,'did'it'decrease'your'tax'liability'
in'the'prior'years?'Did'you'ever'claim'income'tax'as'an'expense'before?'No.''
! Therefore'–'Remember'the'tax'benefit'rule?'If'this'is'your'finances,'gross'income'2M,'your'expenses'is'
1M,'your'taxable'income'is'1M,'therefore'you’re'liable'for'300,000.''
! If'within'the'same'year'you'decide'to'claim'as'an'expense'the'bad'debts'amounting'to'1M'also,'this'will'
be' your' other' expenses' plus' the' uncollectible' loan' of' your' debtor.' This' will' become' zero.' Your' tax'
would'be'zero.''If'in'the'subsequent'year'this'was'recovered,'the'1M'is'fully'deductible.'''
• Why?' The' government' will' seek' to' recover' the' tax' that' it' failed' to' collect' because' you'
claimed'it'as'an'expense.'So'if'it'is'subsequently'recovered'by'you,'you'have'to'pay'300,000.''
o That'is'the'same'principle'in'tax'refund.'Now,'if'the'tax'that'has'been'refunded'to'you'is'not'a'deductible'tax,'
there'is'never'any'taxable'income'at'the'time'that'it'is'refunded.''
! Why?'Because'you'never'claimed'it'as'an'expense.'It'never'reduced'your'tax'liability.'Income'tax'is'not'
a'deductible'tax,'so'if'it'subsequently'refunded'by'the'government,'it’s'not'taxable.''
N If'its'real'property'tax'(RPT)'that'has'been'refunded'to'you,'will'the'RPT'subsequently'refunded'be'taxable?'You'overpaid'Real'Property'Taxes'
after'filing'a'claim'for'refund,'you'are'given'Php1M'refund'in'cash,'will'the'Php'1M'subsequently'received'as'a'tax'refund'be'subject'to'tax?'
Yes'or'no?'
o Yes,'to'the'extent'of'the'benefit'that'you'have'derived.''
o For'example,'So'that'if'you'deducted'Php1M'real'property'tax'here,'which'erased'your'tax'liability,'if'subsequently'that'expense'that'
you' claimed' has' been' refunded' because' it' was' a' wrongful' tax' that' you’ve' paid,' that' will' be' taxable' because' that' RPT' which' you'
erroneously'paid'before,'effectively'reduced'your'tax'liability.'The'government'will'only'try'to'recover'that'which'you'have'not'paid.''
o But' if' the' RPT' only' benefited' to' the' extent' to' the' portion' of' the' tax,' only' to' that' extent' will' the' refund' of' taxes' be' taxable.' It' is'
entirely'the'same'principle'as'bad'debts'that'you'subsequently'recovered,'in'all'aspects.'The'only'difference'is'that''(in'all'aspects'
daw'but'there'is'a'difference):'
! In'bad'debts,'so'long'as'you'can'prove'that'it’s'worthless,'uncollectible,'you'have'taken'legal'actions,'etc.,'is'deductible'
expense.''
! As'for'taxes,'you'have'to'be'very'aware'what'kind'of'taxes'has'been'refunded.'If'it’s'a'deductible'tax,'follow'the'bad'debts'
principle.'If'it’s'not'a'deductible'tax,'forget'about'the'principle.''
4.%Losses%
N Are'all'losses'deductible'losses?'No.'
N What'losses'are'deductible?'What’s'the'opposite'of'ordinary'losses?'''
o For' tax' purposes,' we' have' ORDINARY' losses,' for' those' losses' arising' from' ordinary'transactions' involving' ordinary' assets.' Capital'
losses'are'those'losses'arising'from'capital'transactions'and'capital'transactions'involve'capital'assets.'SO'you'know'that'ordinary'
losses'are'those'that'which'have'been'sustained'ordinarily'in'the'course'of'trade,'business'or'profession.'And'these'are'deductible.'
N What'is'a'net'operating'loss?'In'our'formula,'change'it'to'an'operating'loss.'What'will'you'change'in'the'formula?'Change'the'cost'to'3M'and'it'
will'become'net'operating'loss.'Because'if'you'change'the'sales'to'12M,'this'will'be'gross'loss.'But'usually'you'don’t'go'into'business'selling'at'
a'loss.''
o Example,'if'you'have'this,'you'purchase'siopao'at'Php'10,'you'don’t'sell'it'at'Php'6'pesos'or'Php'8'pesos.'You'usually'sell'it'at'a'mark'
up.'Let’s'say,'you'bought'it'at'Php'10,'you'sold'it'at'Php'12,'you'still'have'gross'income'of'Php'2.'But'you'may'suffer'a'net'operating'
loss'because'the'salary'of'your'tinder'is'Php'10,000'a'month.'This'is'what'will'produce'the'net'operating'loss'because'ordinarily,'tax'
authorities'would'expect'this'(gross'income)'to'be'positive.'On'this'level'only.''
o The'cost.'This'is'the'house'that'you'are'selling'(Sales'Portion).'Cost'is'the'construction'of'the'house.''
N What'is'net'operating'loss'carry'over?'Let’s'make'the'expenses'Php5Million'your'net'operating'loss.'Because'usually'in'the'initial'stages'of'
your'business,'we'will'suffer'a'loss.'If'your'operating'loss'is'Php'3Million,'the'law'provides'that'it'can'be'carried'over'to'the'next'3'succeeding'
years.'And'it'is'the'exception'to'the'rule'that'expenses'or'deductions'shall'only'pertain'during'the'year,'paid'or'incurred'during'the'year.'In'this'
case,'if'the'Php'3million'is'carried'over'as'a'deduction,'it'is'a'valid'deduction'notwithstanding'that'this'Php3Million'is'not'incurred'in'year'2,'
not'incurred'in'year'3,'nor'incurred'in'year'4'because'that'is'the'exception.'
N '
% YEAR%1% YEAR%2% YEAR%3%
N '
Sales' 10,000,000' 10,000,000' 10,000,000' No'taxable'income'because:'
N '
Less:'Cost' 8,000,000' 8,000,000' 4,000,000' Net'Taxable'Income:''''''4,000,000'
N Gross'Income'
' 2,000,000' 2,000,000' 6,000,000' Less:'
Less:'Expenses' 5,000,000' 4,000,000' 2,000,000' ''''''Loss'on'Year'1:'''''''''''3,000,000'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''29'|'P
Net'Taxable'Income' (3,000,000)' (3,000,000)' 4,000,000' age'
''''''Loss'on'Year'2:'''''''''''1,000,000'
' ' ' '
'No'Taxable'Income'''''''''''''''N0N'
Taxable'Income' N0N' N0N' N0N'
'
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N '
N '
N '
N '
N In'year'2,'assuming'expenses'exclusive'of'losses,'can'you'carry'over'the'Php3M,'suffered'in'year'1?'Can'you'carry'over'or'can'you'utilize'the'
Php3Million' net' operating' loss' in' year' 1' to' year' 2?' Can' you' use' the' Php3Million' loss' in' year' 2?' We' are' done' with' year' 1,' the' losses' or'
whatever'net'operating'loss'that'you'have'suffered,'you'can'carry'it'over'to'the'next'3'succeeding'years.'If'in'year'2,'you'suffered'still'a'loss,'
can'you'use'the'loss'of'Php3Million'in'year'1?'No.'Why?'Because'you'still'suffered'a'loss'in'year'2.'
N For'year'3,'given'the'facts,'how'much'is'your'net'taxable'income?'Php'4million.'So'you'have'to'pay'30%'of'Php'4'million'as'a'corporation?'How'
much'will'you'pay?'How'much'is'your'tax'liability'in'year'3?'ZERO'because'you'used'used'up'Php3Million'for'year'1'and'Php'1Million'for'year'
2.'
o You'accumulated'losses'at'the'end'of'year'1'is'Php'3Million.'Your'accumulated'losses'as'of'year'2'is'already'5'million.'At'this'point'in'
year'2,'you'cannot'use'the'Php3'million'because'you'are'at'a'loss.'Therefore,'your'losses'will'only'accumulate.''
o In'year'3,'when'you'already'earned'positive'income,'you'can'utilize'the'loss'in'year'1.'Because'the'loss'in'year'1'is'usable'in'year'2,'
year'3'and'year'4.'This'has'a'life'of'3'years.'It'does'mean'that'you'should'use'the'loss'in'year'1'in'year'2,'that'you'should'use'it'
rd
consecutively.'If'it'has'no'use'in'the'next'year,'then'the'next'succeeding'year,'until'the'3 'year.''
o So'in'year'3,'you'already'used'Php'4million'of'losses,'your'accumulated'loss'is'only'1'million.'And'1'million'is'taken'from'year'2.'Year'
1'has'been'entirely'used'up'already.''
o So'this'is'on'a'first'in,'first'out.'Whatever'came'in'first'as'an'accumulated'loss,'will'have'to'go'out'and'offsetted'against'the'income.''
N Point'is,'whatever'loss'that'you'suffered,'is'already'a'deductible'loss.''
N Is' it' favourable' to' the' government?' You' might' think' it' is' not.' But' of' course' the' government' has' devised' a' way' to' still' collect' taxes'
notwithstanding'that'you'are'losing.'You'may'be'at'a'loss'at'the'level'of'net'income'but'you'still'have'to'pay'taxes'at'the'level'of'gross'income,'
whichever'is'higher.'We'will'discuss'this'once'we'reach'minimum'corporate'income'tax.'Let'us'not'combine'the'2'as'yet.''
N For'losses'only,'if'the'loss'in'the'first'year,'is'not'used'up'the'next'3'years,'whether'fully'or'partially,'it'goes'down'the'drain,'it'is'no'longer'
th
usable'in'the'4 'year'after'it'has'been'suffered'as'a'loss.'Only'3'years'at'a'time.'Year'1'is'allowed'3'years.'Year'2'has'a'life'of'3'years.''
N Let’s' change' the' facts.' This' is' XYZ' Corporation,' it' has' been' given' 4' years' income' tax' holiday.' For' the' first' 4' years' of' operation,' it' totally'
th
suffered'annual'operating'losses.'In'the'5 'year'of'operation,'it'earned'income.'Can'the'losses'suffered'in'the'previous'years'be'used'up'to'
th
offset'against'the'taxable'income'in'the'5 'year?'No.'
o Why?'What’s'the'reason?'Whenever'a'corporation'is'at'a'stage'or'it'is'granted'exemption'from'income'taxes,'any'losses'suffered'
during' those' years' covered' by' the' exemption' cannot' be' considered' as' a' loss' or' carry' over.' It' will' not' benefit' years' that' the'
corporation'will'subsequently'be'taxable.''
o Meaning'or'which'means'to'say'that'net'operating'losses'that'can'be'carried'over'can'only'arise'when'a'corporation'is'subject'to'
income'tax.'
N XYZ'Corporation'and'ABC'Corporation,'both'companies'owned'80%'by'A.'Shown'below'are'the'list'of'shares'in'each'company.'
'
'
'
'
A'80%' A'80%'
' '
XYZ'Corporation' ABC'Corporation' B'''5%'
U'''5%'
' '
V''''5%' C''''5%'
Year'1' MERGE' Year'1'
'
W'''5%' ' D'''5%'
' LOSS' INCOME'
' ' '
X''''5%' E''5%'
' '
'
' Year'5' Year'5' '
'
o A'total'of'100%'ownership'for'both'companies.'Year'1'until'year'5,'operate'at'a'loss.'Year'1'to'year'5'for'ABC'Corporation'operated'
positive.'The'stockholders'of'XYZ'Corporation'could'not'use'the'losses'suffered'in'year'1'to'the'next'3'years'nor'the'losses'in'year'2'
to'the'next'years.'Why?'Because'it'consistently'operated'at'a'loss.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''30'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! In'this'case,'ABC'has'been'paying'huge'income'taxes.'So'what'stockholders'of'both'corporation'decided'was'to'merge'in'
the' hope' of' using' the' losses' of' XYZ' Corporation' to' offset' against' the' income' of' ABC' Corporation' and' claim' it' as' a'
deductible'expense.''
! Is'it'allowed?''Yes'as'long'as'the'change'in'ownership'is'not'less'than'75%.''
! Should'it'be'more'than'75%?'Which'means?'Not'less'than'75%'is'75%%or%above.'
o So'if'the'facts'above'is'changed'to'75%'ownership:'Can'the'loss'be'considered'as'deductible'in'the'merged'corporation?'Yes.'It'is'still'
deductible'because'the'merger'because'the'ownership'is'still'owned'by'A'at'75%.'
o Combining'corporations'in'order'to'use'up'the'losses'suffered'by'1'corporation'is'allowed'so'long'as'there'is'no'substantial'change'in'
ownership'from'the'individual'corporations'down'to'the'merged'corporation.'
! Substantial' ownership,' no' change' in' substantial' ownership' means' that' at' least' 75%' of' the' paid' up' capital' of' the'
corporation'is'still'held'by,'or'in'behalf'of'the'same'person(s).''
! So'in'that'case,'it'is'still'Mr.'A'who'is'still'holding'the'same'percentage'prior'to'merger.'So'long'as'after'merger,'it'is'still'A'
who'is'holding'atleast'75%.''
o In'cases,'where'it'does'not'reach'75%'or'there'is'a'substantial'change'in'the'ownership,'the'opposite,'substantial'change'meaning'
there'is'already'a'change'of'more'than'25%.'It'means'to'say'that'the'loss'suffered'by'1'corporation'cannot'be'used'by'the'merged'
corporation.'When'it'merges,'or'there'is'a'merger'of'corporation,'there'is'only'1'surviving'entity'will'remain.''
N CAPITAL'LOSS'CARRY'OVER'
N What'is'meant'by'capital'loss'carry'over?'Losses'from'sale'or'exchange'of'capital'assets.''
o So'can'you'say'that'there'can'be'capital'losses'on'sale'of'real'properties'classified'as'capital'assets?'NO.'
! You'do'not'disturb'these'rules'class.'There'are'only'3'types'of'capital'assets'which'can'give'rise'to'capital'transactions.''
o Sale'of'real'properties'classified'as'capital'assets.'
o Sale'of'shares'of'stock'wherein'you'are'not'a'broker'of'securities'subject'to'capital'gains'tax.'
o And'ALL'other'capital'assets.'
! Real'properties'are'taxable'on'the'gross'selling'price'or'fair'market'value'whichever'is'higher.'So'any'loss'that'you'suffered'
from'the'sale'of'this'property'cannot'be'carried'over'because'it'is'on'a'per'transaction'basis'and'you'are'never'taxed'on'
the'profit'alone.'You'are'taxable'on'the'gross'selling'price'or'the'fair'market'value'itself.''
! But'on'the'other'2,'you'can'have'capital'losses.'(Meaning'capital'losses'can'only'arise'in'sales'of'shares'of'stocks'and'all'
other'capital'assets.'Never'on'the'sale'of'real'properties.)''
o Motor'vehicle'that'you'personally'own.'So'if'you'sell'a'motor'vehicle'that'you'personally'own.'You'are'not'in'the'
business' of' leasing' or' buying' or' selling' of' motor' vehicles.' You' bought' it' at' Php' 4million' and' sold' it' at' Php'
2Million,' you' suffered' a' loss.' This' is' capital' loss.' And' there' is' also' what' we' call' as,' NET' CAPITAL' LOSS' CARRY'
OVER.'
o The'loss'that'you'suffer'in'a'capital'transaction'excluding'the'sale'on'real'properties'can'be'carried'over'only'to'
the'NEXT'YEAR.'Not'3'years.''
'

'
CAPITAL'ASSETS:'
' ' ' ' ' ' '''Applicable'NCLCO?'
'1.'Real'Property''''''''$'''''6%'Capital'Gains'Tax'''''' X'
' '2.'Shares'of'Stock'''''$'''''5%'/'10%''''''''''''''''''''''''''''''''''''''''''"'
'3.'All'other'MV'(personally'own)'
o ' ' '''''''''''''''''"'
'''''''''''''' Bought'' ' 4Million'
' ' Sold' ' 2Million' Carry'this'
' over'the'
' Capital'Loss' 2Million'
NEXT'YEAR!!
NCLCO'can'only'be'carried'over'the'NEXT%YEAR%ONLY!'
' ' '

N Does'this'rule'apply,'for'capital'losses'to'be'carried'over,'is'this'available'to'corporate'taxpayers?'It'is'NOT.'As'provided'in'the'outline,'it’s'not'
available'to'corporate'taxpayers.'Therefore,'we'will'discuss'the'mechanics'of'this'one'once'we'reach'capital'transactions'towards'the'end'of'
the'semester.''
o Can'you'give'me'some'example'of'capital'losses?''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''31'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Securities' becoming' worthless' simply' means' to' say' that' if' you' are' a' corporate' tax' payer' and' have' invested' in' another'
corporation' which' that' investing' corporation,' the' other' corporation' which' you' have' invested' in,' is' suffering' a' loss,'
insolvent'or'dissolved,'etc.'Your'shares'or'securities'held'in'that'corporation,'your'ownership'is'already'worthless.'So'the'
losses'that'you'suffer'is'a'capital'loss.'This'is'not,'you'are'not'into'active'trading'of'shares.'
N How'about'liquidating'loss?''
o When' the' corporation'in' which' you' have' invested' in' as' a' stockholder' has' given' you' a' liquidating' dividend' lower' than' your' initial'
investment'or'your'investment'cost.'Is'the'loss'a'capital'loss?'
! Losses'from'liquidation'of'corporations'are'in'the'same'category'as'securities'becoming'worthless.'It’s'a'capital'loss.'And'
whoever' the' tax' payer' experiencing' a' loss,' it' would' have' to' depend' whether' or' not' he' can' carry' over' such' loss.' Only'
individual'taxpayers'experiencing'capital'losses'have'the'option'to'carry'it''over'to'the'next'succeeding'year.'Without'an'S.''
! In'the'outline,'losses'arising'from'failure'to'exercise'privilege'to'sell'or'buy'property'like'option'money'that'you'have'for'
which'you'did'not'exercise'the'option,'it’s'a'loss'if'you'are'the'one'who'put'up'the'option'money.'It’s'a'capital'loss.''
N Abandonment'losses'in'the'case'of'natural'resources'wherein'you'have'invested'in'a'property'hoping'to'find'natural'resources'or'minerals'
only'to'find'out'that'there'is'none.'So'abandonment'losses'is'a'capital'loss'because'you'are'not'yet'in'the'operation'of'the'mining'business.'It’s'
still'under'exploratory'stage.''
N Losses'from'wash'sales'or'stock'securities,'I'want'you'to'read'that'class.'We'will'discuss'that'once'we'reach'capital'transactions.''
o Wash'sales'or'stock'securities'are'just'like'I'think'a'simulated'sale.'Is'this'a'simulated'sale?'Wherein'a'sale'and'a'purchase'of'the'
same'type'of'stocks'or'securities'happens'within'30'days.'No'deduction'of'capital'losses'experienced'will'be'allowed'unless'the'one'
experiencing'it'is'a'dealer'of'stock'securities.'Because'wash'sales'are'type'of'simulated'sales'of'securities'in'order'to'influence'the'
stock'market.''
! So'as'to'make'it'appear'that'the'shares'of'this'company'is'actively'traded'in'the'market'in'order'to'increase'its'value,'some'
person' in' trading,' within' the' span' of' 30' days,' would' buy' himself' for' the' same' but' it' is' simply' simulated' in' order' to'
influence'the'value'of'the'shares'in'the'market,'its'not'any'loss'that'is'deductible.''
! Unless'you'really'are'a'dealer'in'shares.'Because'if'you'really'are'a'dealer'in'stock'securities,'your'eyes'really'is'on'the'stock'
market.'You'buy'and'sell'shares'many'times'within'the'day.'
N Are'gambling'losses'deductible?'Can'you'deduct'the'excess'of'your'gambling'loss'over'your'gambling'gains?'Can'you'deduct'the'excess'against'
your'ordinary'business'income?'You'cannot'deduct?'
o Say'for'example'your'gambling'gain'is'Php2million,'your'gambling'loss'is'Php5'million,'separate'days.'Your'net'gambling'loss'is'Php'
3million.'Can'you'offset'the'3'million'against'your'business'income'of'Php100million?'
! Capital'losses'can'NEVER'BE'DEDUCTED'AGAINST'ORDINARY'INCOME.'Capital'losses'are'off'settable'against'capital'gains'to'
the'extent'of'the'gain.'Any'excess'so'long'as'its'NOT'ILLEGAL'losses'can'be'carried'over'as'an'individual'taxpayer'to'the'
next'year.'''
! Corporate'forget'about'it!'No'carry'over'of'net'capital'losses.''
! Ordinary'income'can'only'cater'to'ordinary'expenses'and'ordinary'losses'because'one'of'the'common'requisites'that'we'
have'in'order'for'an'expense'to'be'deductible,'is'that'it'must'be'incurred'or'paid'directly'in'relation'to'the'trade,'business'
or'profession.'Your'gambling'losses'is'NOT'really'related'to'your'business.''
! Therefore,'you'put'a'border'line'but'in'the'end,'as'a'individual'taxpayer'or'corporate'tax'payer,'you'report'under'1'income'
tax'return'your'ordinary'income,'ordinary'losses,'bottom'line,'you'pay'for'the'tax.'As'long'as'you'don’t'cross'over.'Capital'
for'capital'and'ordinary'for'ordinary.'
! Casualty'Loss'
N What'is'the'casualty'loss?'And'what'are'the'requisites'to'make'it'deductible?''
o Number' 1,' whenever' ' you,' whenever' the' business' suffers' a' casualty' loss' and' casualty' losses' are' those' major' losses' really,' fire,'
storm,'shipwreck,'robbery,'embezzlement,'and'theft'losses.'It'must'be'duly'reported'within'45'days'by'a'sworn'statement'to'the'tax'
authorities.''
o The'loss'must'be'incurred'in'trade'or'business'
o It'must'be'actually'sustained'during'the'year'in'which'you'want''the'charge'it'off'against'your'income.'
o Evidenced'by'a'close'and'completed'transaction.''
o Actually'sustained'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''32'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Must'not'be'compensated'by'an'insurance.'In'case'there'is'an'insurance,'remember'that'only'the'difference'between'that'that'has'
not'been'compensated'by'the'Insurance'Company'is'deductible.'And'we'know'for'a'fact'that'property'can'only'be'insured'to'the'
extent'of'the'value'otherwise,'any'excess'will'become'over'insurance.'It'will'not'be'paid'by'the'insurance'company.'
! So'we'don’t'actually'have'to'discuss'the'excess'of'the'insurance'over'the'loss'because'these'are'property'losses,'casualty'
losses.'Unless'of'course'if'its….ok!'(Wala'gi'tiwas'n'atty.'Iya'sentence..:(')'
! Which'leads'me'to'princess'of'the'stars.'Is'the'loss'deductible'in'so'far'as'sulpicio'lines'is'considered?'Deductible'fully'or'
does' it' have..?' Is' it' still' floating' class?' Here,' class' interacts' na' no' na' daw.' So' it' will' be' total' loss' not' floatable' na.'
Deductible?''
o It'happened'in'2008.'And'insurance'companies'will'only'pay'when'everything'has'been'cleared.'The'finding'of'
the'fault,'etc.,'etc.,'in'so'far'as'the'shipping'company'is'concerned.''
! When'do'you'think'is'the'casualty'loss'deductible?'In'2008'or'in'2009,'assuming'that'it'is'only'in'2009'
that' everything' has' been' settled' with' the' insurance' company.' It' is' only' in' 2009' that' the' insurance'
company'admitted'that'it'is'liable'to'pay.'If'it'remains'unclear'by'2008'whose'fault'was'it'leading'the'
insurance'company'to'suspend'the'payment'of'the'payment'or'the'face'value.'Do'you'think'you'can'
charge'it'still'in'2009?'Or'it'would'depend'if'you'are'for'the'government'or'for'the'company'in'that'
case?''
• In'2009,'because'only'then'there'is'a'closed'and'completed'transaction'of'the'loss.'
• Diba'you'know'that'it'sunk'in'2008'but'if'its'still'under'investigation'as'to'whose'fault'is'it,'
the' government' will' not' allow' you' to' deduct' fully' in' 2008' when' you' are' expecting' to' be'
compensated' by' the' insurance' company' in' 2009.' So,' unless' and' until,' in' Atty.’s' opinion,'
everything'has'been'settled'with'the'insurance'company,'only'then'can'you'determine'how'
much'is'your'deductible'loss.''
• Because'only'to'the'extent'of'the'value'that'is'not'compensated'by'the'insurance'company'
can'you'claim'the'loss.'You'cannot'claim'fully'the'loss.''
• Probably' that’s' the' reason' why' Atty.' has' heard' that' it' has' or' it' should' not' still' float.' Atty'
.does'not'know'the'reason.''
• Gaboobs:'Is'there'a'prescription?''
• T:'I'think'that'is'the'problem'of'Sulpicio'Lines'because'if'the'investigation'would'drag'on,'to'
claim'the'exemption,'it'should'at'least'approximate'the'time'when'the'loss'was'suffered.''
• So' I' think' that' has' to' be' settled' because' this' is' a' special' case' which' needs' to' be' settled,' I'
heard' with' the' BIR' that' Sulpicio' Lines,' their' hands' should' not' be' tied' in' claiming' the'
exemption' this' year' or' next' year.' It' would' have' to' be' based' on' ' the' agreement' with' the'
insurance'company'and'the'tax'authorities'as'to'when'really'there'is'a'closed'and'completed'
transaction'of'the'loss.''
• Because'if'you'wait'forever'for'the'insurance'company,'and'its'10'years'after'already,'it'will'
not'be'deductible'already'because'there'is'no'matching'of'the'losses'that'occurred'in'2008'
and'10'years'after.''
o Nonetheless,'you'have'an'idea'that'in'case'casualty'loss'is'suffered,'you'should'act'within'45'days'to'report'the'loss.'Non'reporting'
of'the'loss'would''result'to'non'deductibility.'
! Hopefully'nalang,'when'its'covered'by'insurance,'there'is'no'real'loss.'
5.%BAD%DEBTS%
N Bad'Debts.'What'are'bad'debts?''
N These'are'debts'due'to'the'taxpayer'which'are'usually'ascertained'to'be'worthless'and'charged'off'within'the'taxable'year.'
N When'can''you'say'that'it'is'already'worthless?'
N If'you'are'a'credit'card'company,'if'you'are'the'bank.'We'know'that'there'are'many'credit'card'holders'who'don’t'pay'or'settle'their'accounts.'
You'will'hire'a'lawyer'for'the'collection'case.'And'if'the'credit'card'holder'will'not'pay'even'upon'receipt'by'the'demand'letter'issued'by'the'
lawyer,' is' it' enough' for' you' as' a' credit' card' company' to' claim' the' unpaid' account' as' a' deductible' bad' debt?' If' the' loan' is' only' Php10,000'
pesos,'is'the'filing'of'the'case'needed?'
o In'many'supreme'court'cases,'there'are'had'been'many'instances'that'the'Supreme'Court'actually'denied'the'claiming'of'a'bad'debt'
or'a'debt'unpaid'as'a'deductible'expense.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''33'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o For' example,' if' the' debtor' is' already' dead' is' it' enough' for' you' to' say' that' it' is' an' uncollectible' and' worthless' loan?' Can' you'
automatically'deduct'the'unpaid'debt'of'that'decedent'who'just'recently'died?'
! In'1'SC'case,'No!'Because'you'still'have'the'estate'against'which'to'collect.'It’s'not'yet'bad,'you'call'it'bad'na'if'you'cannot'
collect'the'unpaid'debt.''
o So'unless'probably'that'when'you'are'declared'as'insolvent.'
! When' can' you' become' insolvent' again' class?' When' your' liabilities' will' exceed' your' assets.' If' your' liability'is' equal' your'
asset,'your'still'mid'solvent,'you'are'still'solvent.'You'will'become'insolvent'only'after'when'your'liabilities'exceed'Php1'
over'your'asset.'
N What'are'the'requisites'to'make'a'debt'a'deductible'bad'debt?'
! 1.'So'number'1,'must'arise'from'a'valid'and'subsisting'obligation.''
! 2.'Number'2,'arising'from'trade,'business,'or'profession.'
! 3.' Number' 3,' it' must' have' been' ascertained' to' be' worthless,' and' to' be' worthless,' there' are' steps' that' we' need' to'
undertake:'
o Sending'statements'of'accounts.'
o A'collection'letter.'
o Referral'to'lawyer'
o Demand'letter'
o And''if'the'debtor'still'fails'to'pay,'you'file'an'action'in'court.''
! 4.'And'once'you'determine'it'to'be'worthless'this'year,'automatically'charge'it'against'your'income'this'year.'Otherwise,'it'
will'no'longer'be'deductible'in'the'subsequent'years.''
o So,' when' you' are' able' to' determine' it' to' be' worthless,' that' is' the' only' year' when' you' charge' it' against' your'
income'as'an'expense.'
! 5.'The'final'requisite,'number'5,'is'that'it'must'be'uncollectible'in'the'near'future.''
o So'it'probably'will'be'collectible'in'the'far'future'but'not'in'the'near'future.''
o Atty.'Tiu'does'not'know'what'is'near.'As'long'as'not'next'year,'not'two'years'from'now.'Far'away.'
o Say'for'example,'you'and'your'seat'mate,'you'have'separate'businesses.'But'during'the'election,'you'placed'your'bet'on'Brother'
Eddie.'The'other'party'placed'her'bet'on'President'Noy.'You'won.'So'you'tried'to'collect'as'agreed,'Php1Million.'She'failed'to'pay'
despite'persistent'collections.'Can'you'claim'the'Php1million'as'a'bad'debt'expense?'
! First,'It'is'not'related'to'the'trade'or'business'or'profession'that'you'are'in.''
! Second,'it'did'not'arise'from'any'valid'and'subsisting'obligation'to'pay.'Remember'it’s'just'a'betting'game.''
6.%DEPRECIATION%
N What'is'depreciation?''

The' gradual' diminution' of' the' useful' value' of' the' property' used' in' trade,' business,' or' profession' of' the' taxpayer' arising' from' wear' and' tear' or'
natural'obsolescence.'The'term'is'also'applied'to'amortization'of'the'value'of'intangible'assets,'the'use'of'which'in'trade'or'business'is'definitely'
limited'in'duration.'

N As'against'depletion,'what'is'the'difference?'
N Depletion'is'the'exhaustion'of'natural'resources'like'mines'and'oil'and'gas'wells'as'a'result'of'production'or'severance'from'
such'mines'or'wells.'These'are'nonNreplaceable'assets.'
N We'all'know'that'all'properties'and'assets,'as'a'general'rule'would'diminish'in'value'unless'of'course'if'it'pertains'to'parcels'of'land,'which'as'a'
rule,'opposite,'will'appreciate'in'value.'Is'there'an'instance'where'a'parcel'of'land'will'diminish'in'value?'Wear'or'tear?'Is'it'really'wear'and'
tear?''
! It'does'not'depreciate'as'a'rule'but'the'value'may'decrease'in'some'instances.'Like'if'the'volcano'near'by'will'erupt.'LaharN
filled,'the'value'will'go'down.'
! What' happens' if' the' parcel' of' land' that' you' are' holding' becomes' a' red' district?' Ermita' for' example' in' Manila.' Does' it'
appreciate'in'value'or'depreciate?'As'a'rule,'it'will'increase'in'value'because'of'the'trade'and'profession.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''34'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N So'when'you'are'talking'about'depreciation,'we'refer'to'properties'or'assets'which'depreciate'or'whose'value'gradually'diminish'naturally.'
The'wear'and'tear,'obsolescence,'etc.''
o So'a'machinery'will'depreciate'in'value.'
o Even'your'personal'laptops.'You'bought'it'for'this'much,'after'probably'a'year,'only'½'of'its'price.'Your'resale'value'is'only'½.''
N Depletion'refers'only'to'natural'resources.'It'is'easier'to'depreciate'than'to'deplete.'Because'depreciation'is'an'exact'computation.'You''only'
have'a'formula.'If'it'will'exist'for'10'years,'then'divide'it'for'ten'years.''
o But'natural'resources'sometimes'is'undetermined.'You'will'have'to'depend'on'how'much'the'estimated'produce'from'that'parcel'of'
land.''
! If'you'think'you'can'produce'10'truck'loads'of'diamonds'in'10'years,'you'cannot'divide'it'for'over'10'years.'The'only'thing'
that'you'can'do'if'you'expect'10'truckloads'of'diamonds'is'if'you'can'produce'this'year'2'truckloads,'over'10'expected,'
then'20%'of'your'cost'of'your'property'should'be'depleted'already.''
o If'you'produce'5'truckloads'in'the'first'year,'estimated'is'10.'So'½'of'the'natural'resources'should'be'depleted'as'
of'that'year.''
o So'its'dependent'on'the'natural'resource.'
N How'different'is'this'against'amortization?'(Did'it'ring'already?'So'she'can'finish'amortization)'Amortization'is'applied'to'intangible'assets.''
o What'asset'can'be'amortized?'You'can'amortize'intangible'properties'that'you'have'for'example:'
! There'are'new'rules'already,'for'goodwill,'that’s'an'intangible'property.'For'accounting'properties,'goodwill'is'no'longer'
deductible.'But'for'tax'purposes,'it'may'be'deductible'if'you'really'PURCHASED'the'good'will.'If'you'PURCHASED.'
o But' if' it’s' a' goodwill' that' you' just' put' up' your' business' without' any' extra' cost.' It’s' not' deductible.' It’s' not'
amortizable.'
! Another' instance' wherein' you' can' amortize' an' expenses' is' when' you' under' go' research.' Research' and' development,'
during' those' stage' you' accumulate' cost' for' coming' up' with' a' model' or' a' prototype.' The' cost' of' your' research' and'
development'can'be'amortized'over'5'years'once'you'go'full'production.'Anyway,'research'and'development'is'not'really'
tangible.'So'its'amortized'rather'than'depreciated'or'depleted.''
September-21,-2010-
LAST%WEEK’S%QUIZ:%
N Last'week’s'quiz,'many'of'you'didn’t'get'it'right.'XYZ'Corporation'obtained'a'loan'from'a'bank,'wholly'owned'by'a'foreign'government.'It'paid'
interest'of'Php1M'for'the'entire'taxable'year.'But'no'withholding'of'tax'was'made.'Does'it'make'any'relevance'class?'Doesn’t.'This'is'just'a'
recap'of'what'we'have'learned'before'midterms.'
o That'whenever'an'interest'is'paid'on'a'loan'made'from'a'bank'that'is'wholly'owned'from'a'foreign'government,'it'is'not'subject'to'
tax'therefore,'there'is'no'need'to'withhold.'It’s'just'a'matter'of'fact.'
o Question'is'the'interest'a'deductible'expense?'I'am'referring'to'the'interest'payments'made'to'the'foreign'bank.'On'the'part'of'the'
domestic'corporation'if'during'the'same'taxable'year'it'earned'interest'income'of'Php2M'from'loans'of'affiliate'companies.'Discuss'
your'answer'briefly.'
! So'the'question'was'simple,'is'the'interest'deductible'in'light'of'the'existence'of'the'interest'income'earned'from'loans'
extended'to'affiliate'companies.'There'were'less'than'5'who'got'it'right.'
o Answer'is'it’s'deductible'because'it'is'a'valid'expense.''
o Some'were'saying'that'it’s'not'deductible'because'the'loans'were'to'affiliate'companies.'How'could'you'relate'
the'bank'as'an'affiliate'company'when'the'interest'expenses'were'being'paid'to'a'foreign'bank,'interest'income'
was'earned'from'an'affiliate'company.''
! The'only'issue'is'if'the'interest'expenses'were'being'paid'to'the'affiliate'companies?'Here,'it’s'actually'
the'other'way'around.'The'interest'expense'were'valid'payments.''
o The'issue'was'or'is'it'fully'deductible'in'light'of'the'income'that'was'earned'from'loans'to'affiliate'companies?'
What'did'we'say'about'interest?'Interest'is'deductible'subject'to'the'arbitrage'rule.'In'the'assumption'that'all'
other'requisites'are'present,'interest'expense'is'fully'deductible'unless'the'arbitrage'rule'will'apply.''
! Does'the'arbitrage'rule'will'apply'if'the'interest'income'that'the'company'is'earning'comes'from'loans'
extended' to' affiliate' companies?' No.' Because' arbitrage' rule' will' only' apply' if' the' interest' income'
earned'by'the'company'is'subject'to'final'tax.'And'interst'income'that'is'subject'to'final'tax'are'those'
interests' incomes' earned' from' deposits' and' investments' or' placements' in' banking% institutions% and%
financial%institutions%or%intermediaries.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''35'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! So'FULLY'DEDUCTIBLE!'
o Many'answered'subject'to'the'arbitrage'rule.'Diba'we'made'illustrations'gani,'Company'ABC,'one'earning'interest'income'subject'to'
final'tax.'One'earning'interest'income'not'subject'to'final'tax.'One'not'totally'earning'interest'income.'And'in'so'far'in'our'discussion,'
we'were'all'in'the'same'track.'
o As'to'the'rule'wherein'you'cannot'deduct'if'you'did'not'withhold'taxes?'Okay'Section'34K(?)'of'the'tax'code'says'that'in'so'far'as'it'is'
required'that'it'needs'to'be'withheld,'it'should'be'withheld,'otherwise,'it'will'not'be'deductible.'Many'answer'this.'
! To'whom'were'interest'payments'made?'It'was'made'to'the'foreign'government.'To'the'bank'that'is'fully'owned'by'the'
foreign'government.'Section'32B,'says'of'the'exclusion'that'investments'of'the'foreign'government'which'includes'loans'
extended'to'domestic'corporations'is'not'subject'to'tax,'therefore'no'withholding'is'necessary.'
N One'more'area,'ABC'Corporation'declared'dividends'in'favor'of'its'stockholders.'The'dividends'were'given'in'form'of'XYZ'shares'of'stock'held'
by'ABC'corporation.'Will'the'dividends'be'subject'to'final'withholding'tax?'Many'said'it'is'not'subject'to'withholding'tax'because'it'is'a'stock'
dividend.'
o Did'we'not'say'that'stock'dividends'would'only'refer'to'dividends'given'in'the'form'of'shares'issued'by'the'issuing'company?'If'the'
shares'given'by'the'company'is'the'shares'held'as'in'an'investment'of'another'corporation,'it'is'just'like'a'property'of'that'company'
and'if'given,'making'the'stockholders,'the'stockholders'of'the'investing'company,'it'will'be'considered'as'property'dividends.'And'
property'dividends'are'subject'to'tax'just'like'cash'dividends.'
N 'True' or' false,' regional' operating' headquarters' are' exempt' from' income' tax' except' if' it' derives' income' from' any' of' its' real' or' personal'
properties'or'from'any'of'its'activities'conducted'for'profit.'FALSE.'
o Regional'operating'headquarters'are'NOT'exempt.'That’s'the'only'statement'that'we'need'to'address.'Regional'AREA'headquarters'
are'the'ones'that'are'exempt'from'tax.''
N ABC'Corporation,'a'resident'foreign'corporation'paid'Php5M'income'taxes'to'the'United'states'for'the'taxable'year'2010.'Is'this'an'expense'
deductible,'why'or'why'not?'Totally,'the'expense'is'NOT'deductible'because'the'Php'5M'income'taxes'paid'to'the'US'is'for'taxes'on'income'
that'is'earned'outside'the'Philippines.'Resident'foreign'corporations'are'not'taxable'for'income'outside.'Therefore,'the'Php5M'income'taxes'
are'not'deductible'not'even'for'tax'credit'or'expense.'
N Mr.'A'invested'Php1M'in'XYZ.'5'years'after'he'received'Php5M'in'case'dividends.'After'another'5'years,'the'business'was'dissolved'and'its'
remaining'assets'were'distributed'to'the'creditors'and'after'which'stockholders'got'properties'in'proportion'to'the'interest'they'hold'in'the'
corporation.'To'which'Mr.'A'received'Php1M'in'properties.'Is'it'subject'to'income'tax'or'final'withholding'tax?'
o It' is' not' subject' to' income' tax' because' the' corporation' is' already' in' the' process' of' liquidation.' Whatever' will' be' received' will' be'
considered' as' liquidating' dividends' which' is' not' a' guarantee' that' tax' will' be' imposed.' Liquidating' dividends' if' the' value' of' the'
properties'received'in'time'of'liquidation'is'more'than'the'investment'made'in'the'company.''
o And'if'the'investment'is'only'pHp1M'and'what'he'received'thereafter'is'Php1M,'there'is'no'gain,'no'tax.''
o What' about' the' Php5M' that' was' received' throughout' the' existence' of' the' corporation' and' given' as' dividends?' It' was' already'
subjected'to'final'withholding'tax'as'passive'income.'It'will'not'be'considered'in'determining'whether'gain'was'earned'or'not.'
Start%of%Classes:%
6.%Depreciation%
N Depreciation' is' the' gradual' diminution' of' the' useful' value' of' a' property' that' is' used' in' trade,' business,' or' profession' of' the' taxpayer,'
corporation'or'individual'which'gradual'diminution'of'the'useful'value'refers'to'the'gradual'wear'and'tear'or'the'natural'obsolescence'of'the''
property'that'is'depreciated.''
N And' whenever' a' property,' I' heard' this' came' out' in' the' mockbar' exam' last' Sunday,' what' are' the' methods' for' depreciating' a' property' as'
provided'in'the'tax'code,'the'easiest'that'we'can'determine'is'the'straight'line'method.'But'if'you'are'asked'to'enumerate.'But'I'doubt'it'if'you'
will'be'asked'to'explain.'If'you'are'asked'to'enumerate,'there'are'4:'
o StraightNline'method.'So'the'number'of'years'that'the'property'is'estimated'to'be'useful'is'the'factor'with'in'which'we'spread'out'
the'value'of'the'property.'So'if'its'100'years,'then'you'depreciate'the'property'over'a'hundred'years.'
o Declining'Balance'Method.'
o Sum'of'years'digit'method.'This'is'for'accountants.'
o Last'method'is'any'other'method'that'can'be'agreed'upon'or'prescribed'by'the'Secretary'of'Finance'which'would'include'double'
declining'method,'etc2x.'
! Whenever'a'corporation'comes'into'an'agreement'as'to'the'depreciation'mode'or'method'of'depreciating'a'property,'it'
shall'be'used'as'long'as'that'property'shall'exists'in'the'books'unless'you'will'apply'for'a'new'method'that'will'be'used'for'
that'same'property.'Apply'where?'Apply'with'the'Bureau'of'Internal'Revenue'for'approval'that'you'will'be'using'another'
method.''
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''36'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Example:' If' you' purchase' a' building' or' machinery,' let’s' say' machinery' nalang' because'probably' a' building' will'
have' an' equal' and' gradual' diminution' of' the' value' diba?' But' machineries' do' not' have.' In' the' first' few' years'
machineries'would'have'maximum'use,'towards'the'end,'it'will'have'minimal'use.'So'the'proper'depreciation'for'
machineries'that'will'be'used'fully'in'the'earlier'years'will'either'be'the'double'declining'method'or'the'sum'of'
year'digit'method.''
! So,'if'you'have'come'into'an'agreement'with'the'Bureau'of'Internal'Revenue'that'you'would'be'using'
the' sum' of' years' digit' method' for' a' particular' machinery,' you' should' use' it' all' through' out' the'
existence'of'the'machinery.'If'you'intend'to'change'it'say'for'example'to'straight'line'method'–'why'do'
you'have'to'change'it'class?'Sometimes'you'need'to'change'in'order'to'make'do'with'your'financials.'If'
you'want'to'claim'more'expenses,'minimize'the'expenses,'you'can'do'something'with'the'method'of'
depreciating'the'assets.''
! So' if' you' need' to' change' it,' it’s' a' change' in' the' method' of' depreciation,' it' requires' approval' by' the'
Bureau' of' Internal' Revenue.' No' approval,' depreciation' shall' not' be' allowed.' No' expense' shall' be'
deductible.'
N How' about' if' your' property' will' be' obsolete' already?' What' are' the' kinds' of' properties' that' may' become' obsolete' in' a' few' years' time?'
Software,'electronics'(Class'ni'answer'ni.'Ingon'Atty:'Exactly!).'These'properties'should'not'exist'for'more'than'5'years'in'the'business.''
o Probably,'if'at'the'point'that'there'will'be'no'introduction'of'new'technology'and'you'think'that'your'asset'is'already'obsolete'even'
if'you''have'not'fully'utilized'the'number'of'years'intended'for'it'to'be'useful,'you'can'claim'it'as'an'obsolete'product'and'you'can'
claim'an'expense'in'addition'to'the'depreciation'that'you'are'already'claiming.''
o For'example,'you'put'it'a'new'technology'and'expected'it'to'last'for'5'years.'So'its'Php5million,'Php1million'per'year'through'the'
rd
straight'line'method.'If'on'the'3 'year,'you'determine,'that'it'is'no'longer'usable'forever,'then'the'remaining'value'of'the'asset'can'
be'claimed'as'obsolescence'of'the'property.'It’s'a'deductible'expense'so'long'as'it'can'be'proven.''
N And'we'said'that'depletion'of'assets'would'only'refer'to'assets'which'are'referred'to'as'natural'resources.'And'we'have'actually'illustrated'
that'depleting'a'natural'resource'would'depend'on'some'factors:'
! The'basis'of'property'
! The'estimated'total'recoverable'units'in'the'property'
! And'the'number'of'units'recovered'during'the'taxable'year.'
o Diba' remember,' if' you' expect' that' this' is' the' number' of' units' that' you' can' recover' and' these' are' the' number' of' units' that' you'
actually'recovered,'it’s'the'percentage'of'the'ratio'that'you'can'deplete'the'natural'resource.'
N And'finally'we'said'that'amortization'is'as'well'available'to'intangible'properties.'If'and'when'you'purchased'an'intangible,'you'have'ACTUALLY'
SPENT'or'shelled'out'money'for'an'intangible,'such'as'patent,'goodwill,'copyright,'etc,'you'spend'for'it,'can'be'depreciated'over'its'useful'life.''
o But' if' the' intangible' is' built' solely' on' goodwill' for' which' you' cannot' truly' identify' the' actual' cost' that' you' have' spent,' it' is' not' a'
deductible'expense.'Only'for'those'intangibles'in'which'you'have'actually'incurred'an'expense.'That'is'amortized'over'its'useful'life.'

7.%Charitable%Contributions%
N Are'contributions'and'donations'deductible'in,'say'for'example'you'have'a'business,'and'you'have'this'concern'for'social'welfare.'Are'your'
contributions' and' donations' deductible' for' purpose' of' computing' your' tax' liability' to' the' government?' What' are' the' requisites' to' make' a'
charitable'contribution'deductible?'
o 1.' The' contribution' must' actually' be' paid' or' made' to' the' Philippine' Government' or' any' political' subdivision' or' to' any' of' the'
domestic'corporations'or'associations'specified'by'the'Tax'Code.'
o 2.'No'part'of'the'net'income'of'the'beneficiary'must'inure'to'the'benefit'of'any'private'stockholder'or'individual;'
o 3.'It'must'be'made'within'the'taxable'year;'
o 4.'It'must'not'exceed'10%'in'the'case'of'an'individual'and'5%'in'the'case'of'a'corporation'of'the'taxpayer’s'taxable'income'except''
where'the'donation'is'deductible'in'full'to'be'determined'without'the'benefit'of'the'contribution;'and'
! 10%'of'what?'Of'taxable'income.''
! Would' all' contributions' and' donations' and' limitations' be' subject' to' the' limitation' that' it' shall' not' exceed' 10%' for'
individuals,'10%'of'the'taxable'income'of'individuals'or'5%'of'taxable'income'of'corporations?'No.''
o There'are'actually'3'cases'class'that'a'contribution'or'donation'may'be''
! Deductible'in'full''
! It'may'be'deductible'partially'subject'to'the'limitations'of'5%'or'10%'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''37'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Or'it'may'be'totally'not'deductible'expense.'
o 5.'It'must'be'evidenced'by'adequate'records'or'receipts'
N First,' fully' deductible.' We' call' these' special' contributions.' What' are' the' fully' deductible' contributions?' Or' rather' to' whom' will' the'
contributions,'because'class'in'our'outline,'we'have'said'that'contributions'will'be'classified'into'2:'
! Special'Contributions'
! Ordinary'Contributions''
o The' easiest' to' think' is' that,' if' and' when' a' contribution' is' made' to' particular'persons' which' qualify' to' special' contributions,' then,'
your'contribution'is'fully'deductible,'whatever'amount'it'is.'If'you'decide'to'contribute'or'donate'your'entire'taxable'income'to'a'
specific'entity'that'is'among'the'recipients'of'these'special'contributions,'totally'that'is'deductible.''
'
' Special'Contributions'N' Ordinary'Contributions'N Contributions'N'
'
Deductible' Deductible' NonDeductible'
1' Recipients' Recipients' All'others' '
2' Not'inure'to'a'private' Not'inure' '
'
stockholder'
3' Within'Taxable''Year' Within'Taxable'Year' ' '
4' Sufficient'Records' Sufficient'Records' '
'
5' Fully'Deductible' Partially'Deductible' '
' '
N But'nonetheless,'special'contributions,'ordinary'contributions,'and'contributions'which'are'not'deductible.'
o First,' you' have' to' know' who' the' recipients' are.' All' others' which' do' not' qualify' to' the' recipients' in' the' special' and' ordinary'
contributions.'
o No.' 2' whatever' you' make' contributions' that' you' make' your' recipients' in' order' to' be' dedutible,' it' must' not' inure' to' a' private'
stockholder'or'an'individual.'Otherwise,'you'will'just'be'transferring'funds,'avoiding'taxation.''
o No.'3,'it'must,'as'all'other'common'requisites,'it'must'be'made'within'the'taxable'year.'
o No.'4,'sufficient'records.'
o No.' 5,' the' main' difference,' special' contributions' are' fully' deductible' and' ordinary' contributions' are' partially' deductible,'
requirements'no.'2,'3,'and'4,'are'in'order'for'a'contribution'and'donation'to'be'deductible,'both'contributions'specially'made'or'
ordinarily'made'must'not'inure'to'any'private'individual'or'stockholder,'it'must'be'made'within'the'taxable'year'within'which'you'
want'to'charge'off'the'expense.'There'must'be'sufficient'records'to'support'your'contribution'or'donation.''
! But'in'so'far'as'who'the'recipients'are,'there'is'a'difference.'In'so'far,'as'the'tax'wise'or'the'benefit,'special'contributions'
are'fully'deductible'and'ordinary'contribution'is'not'fully'deductible'or'just'partially'deductible.'
N Who,'for'special'contributions,'who'are'the'recipients?'
o 1.'Government'or'to'any'of'its'agencies'or'political'subdivisions,'including'GOCCs,'exclusively'to'finance,'to'provide'for,'or'to'be'used'
in'undertaking'PRIORITY'PROJECTS.'
! What'do'you'call'these'(sports,'health,'and'educational,'etc)?'
! What' areas' would' all' contributions' to' a' local' government' unit' be' fully' deductible' for' tax' purposes?' It' must' for' priority'
projects.'Priority'projects'would'be'SHE:'
o Sports'development,'science'and'invention'
o Health'and'human'settlement'
o Educational'and'economic'development'
! So' what' happens' if' your' donation' is' made' to' the' Government' or' political' subdivisions' or' GOCC' and' it' Is' intended' to'
finance'a'nonNpriority'project?'Is'that'deductible?'Yes.'However'not'fully'deductible.'
o 2.'Foreign'government'or'institution'and'international'civic'organizations.'
! Give'me'an'example'of'an'international,'civic'organization?'Wherein'you'make'a'donation'that'is'fully'deductible?'Unicef.'
International'Rights'Research'Institute,'etc.'
o 3.'Accredited'NGO.'
! What'must'be'registered?''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''38'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Would'all'donations'to'a'nonNgovernment'organization'that'is'organized'for'education'be'fully'deductible?''The'NGO'class,'
NOT'ALL'donations'to'nonNgovernment'organizations'would'be'fully'deductible,'you'have'to'determine'whether'the'NGO'
is'accredited'or'not.''
! And'accreditation'would'mean'that'it'has'been'accredited'by'the'duly'appointed'accrediting'entity.'
o Prior' it' has' been' the' Philippine' Council' for' NGO' Certification' which' is' PCMC.' But' there' is' already' a' new'
accrediting'entities,'DSWD,'CHED.'So'it'would'actually'depend'on'what'type'of'NGO'it'is.'Formed'or'organized'
for'educational'purposes,'then'you'know'that'the'accrediting'body'would'refer'to'CHED'or'DECS.'
o If'its'for'Science'then'it'should'be'DOST.'And'its'for'social'welfare,'DSWD.'
! Accrediting' would' mean,' the' process' of' accreditation' is' that' these' accrediting' bodies' would' determine' whether' indeed'
that'NGO'has'complied'with'all'the'requirements'that'it'is,'example'education,'that'it'is'to'address'or'to'support'indigent'
students,'etc.'The'activities'itself'and'that'no'member'of'that'organization'would'be'directly'or'indirectly'benefited'by'any'
fundings' made' by' outsiders.' Not' more' than' 30%' of' its' funding' or' donations' or' contributions' would' be' used' for'
administrative'purposes.'
o Imagine'class'if'you'are'allowed'to'use'the'donation,'if'you'are'an'organization'and'allowed'to'use'the'donation'
without' any' limit' for' administrative' purposes,' you' can' make' the' entire' 90%' as' your' salary,' to' run' the'
organization,'which'is'not'actually'addressing'the'issue.''
o If'its'nonNgovernment'for'civic'purposes,'it'should'be'for'specific'purposes'and'to'benefit'other'people'not'the'
stockholders,'not'the'members.'
N If'we'only'have'3'categories'of'recipients'in'order'to'make'a'donation'fully'deductible,'who'are'the'recipients'wherein'the'donation'is'subject'
to'limitations?''
o You'only'have'three'categories'of'recipients'of'donations'or'contributions:'
! (1)'the'Philippine'government,'political'subdivisions,'GOCCs'for'priority'projects,''
! (2)'foreign'governments'or'international'civic'organizations,''
! (3)' non' government' organizations' which' are' duly' accredited' for' purposes' of' health,' education,' research,' charitable,'
sports,'etc.''
N So'give'an'example'of'a'recipient'of'a'donation'wherein'a'donation'is'covered'only'as'ordinary'but'not'special'donation:'
o When'the'donation'is'given'to'a'nonNaccredited'NGO,'because'if'it'were'an'accredited'NGO,'the'deduction'is'fully'deductible.''
N Question:'so'if'it'is'given'to'an'NGO'that'is'not'accredited,'it'is'still'a'deductible'expense'but'not'fully'–'meaning'subject'to'limitations?'Would'
a' donation' or' a' contribution' to' a' particular' group' of' individuals' that' is' not' organized' as' an' association,' not' an' entity,' not' an' NGO,' be'
deductible'contributions?''
o I'don’t'think'so.'The'accreditation'is'only'needed'for'the'amount'of'deductions,'but'regardless'of'that,'it'should'be'made'to'an'NGO'
(?).''
N You’re'saying'that'A'donation'to'a'particular'group'of'individuals'that'is'not'organized'properly'is'not'a'deductible'expense?'Totally?'So'what’s'
the'difference'between'(white'board)?''
o NGO'is'a'non'profit'corporation,'so'any'group'of'individuals'who'have'convened'under'a'charitable'cause'does'not'necessarily'mean'''
that'they'are'a'nonNprofit'corporation.'In'the'law,'it'may'only'be'deductible,'whether'fully'or'partially'if'it'is'formed'as'a'non'profit'
corporation.''
N So,'class,'when'you'say'that'there'is'a'donation,'you'cannot'automatically'conclude'that'it'is'either'partially'deductible'or'fully'deductible.'It'
may'be'not'deductible.'Because'for'a'donation'to'be'deductible,'it'must'be'made'to'the'government,'its'political'subdivisions,'GOCCs,'or'to'a'
social'welfare'institution'or'to'an'NGO'whether'accredited'or'not.''
o The'difference'lies'in'that'if'you'give'your'contributions'or'donations'to'these'kind'of'entities,'the'only'question'that'you'have'is'–'
does'it'belong'to'an'ordinary''donation'or'a'special'donation.''
o But'if'the'recipient'of'your'donations'is'beyond'those'identified'in'the'tax'code,'not'the'government'etc,'any'donation'outside'of'
those'will'NOT'be'deductible.'
o If'you'give'it'to'the'government,'political'subdivisions,'etc,'it’s'fully'deductible'if'you'fund'it'for'a'priority'project.''
! If'it’s'not'a'priority'project,'it’s'partially'deductible.''
o Donation'to'a%foreign%government%or%international%civic%organization'always'fully%deductible'because'there'is'no'qualification'made'
under'the'tax'code.''
o But'for'NGOs,'it'will'be'fully'deductible'if'it'is'accredited'for'the'purpose'of'research,'health,'education,'charitable'and'sports.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''39'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! If'it’s'an'NGO'that'is'not'accredited'by'an'accrediting'body,'the'donation'will'still'be'deductible'but'subject'to'limitations.''
! If'it’s'a'social'welfare'institution'that'is'still'not'accredited,'it'will'belong'(deductible).'Other'than'that,'all'others'are'not'
deductible.'''
'
If%fully%deductible:% If%OC_D:%
' % %
Sales' ' 11Million' Sales' ' 11Million'
' Cost' ' 9'Million' Cost' ' 9'Million'
Note:'Expenses'
' Gross'Income' 2'Million' here'do'not'
Gross'Income' 2'Million'
Less:'Expenses' 1'Million' include' Less:'Expenses' 1'Million'
'
''''Taxable/' charitable' ''''Taxable/'
' Net'Income' 1'Million' donations' Net'Income' 1'Million'
' CD'' ' (1Million)' CD'' ' '50,000'
Tax'Due' ' ''''N'0'cN' Tax'Due' ' '950,000'
'
N So'when'you'say'that'it'is'subject'to'a'limitation,'(illustration)'you'have'sales'of'11M,'you'have'cost'of'9M,'your'gross'income'is'2M,'expenses'
is'1M.'Where'do'you'base'your'limited'deductibility'of'the'expense?'Under'Taxable'income.''
o So'if'this'is'a'corporation,'what'is'the'extent'of'the'donation'that'you'can'make'to'a'nonNaccredited'NGOs?''
! It'must'not'be'more'than'5%'of'1M'which'is'the'taxable'income'or'50,000.''
o The'basis'of'the'limit'for'a'corporation,'they'can'actually'donate'everything.'They'can'donate'the'1M,'but'if'they'donate'the'entire'
1M'because'they'want'to'avoid'paying'the'tax'to'these'kind'of'recipients,'it'will'be'fully'deductible'–'no'tax'due,'zero'N'assuming'this'
expense'does'not'include'yet'the'donations.''
o If'the'recipient'of'the'1M'donation'is'recipient'no'1'(government,'political'subdivisions,'etc)'for'priority'projects,'it’s'fully'deductible'
as'expense,'you'report'zero'taxable'income,'you'pay'zero'tax'dues.''
o If'the'recipient'is'a'nonNaccredited'NGO,'you'donated'the'entire'1M'(same'facts'and'figures),'will'you'be'liable'to'tax?''
! Yes,'you'will'get'a'deduction'but'you'will'still'be'liable'for'tax.''
! What’s'the'basis'for'your'tax'liability?''You'made'1M'contribution,'you'contributed'the'entire'1M'to'an'NGO'that'is'not'
accredited,'you'said'you'are'still'liable'for'tax'to'the'BIR.'What'is'the'basis'of'your'30%'tax'due?''
o 950,000'is'the'basis'for'your'tax'due.''
o OK'class,'even'if'you'donate'the'entire'1M,'but'since'your'donation'is'subject'to'limitation'because'the'recipient'is'not'one'of'those'
reported'as'fully'deductible'donation,'you'will'still'be'liable'for'tax.''
! The'basis'would'be'the'net'taxable'income'less'the'maximum'limit'that'you'can'actually'contribute'which'is'5%'of'your'net'
taxable'income,'it’s'not'based'on'gross.'You'pay'30%'of'the'950,000'regardless'of'zero'cash.'
! What'usually'happens'now'is'that'every'NGO'is'striving'to'have'itself'accredited'in'order'to'encourage'donors,'because'
donors'would'only'be'encouraged'to'donate'to'NGOs'that'are'accredited'because'they'can'claim'full'deduction'of'expense'
and'they'can'also'be'exempt'from'paying'the'donors’'tax.'
N Another'exception'provided'by'your'special'law'is'when'you'adopt'a'school.'There'is'what'we'call'as'adoptNaNschool'program.'You'provide'
books,'computer'equipments'etc,'and'whenever'you'do'that,'have'yourself'accredited'and'whatever'your'donation'to'that'school'is,'it’s'fully'
100%'deductible'plus'50%'deductible.'This'is'beyond'the'tax'code,'this'is'special'law.'So'if'you'donate'1M'in'books'to'a'school'that'you'have'
adopted,'your'deductible'donation'is'1.5M.''
N I'think'we'discussed'already'research'and'development,'there'are'some'research'and'development'expenses'that'you'can'fully'claim'as'an'
expense'in'the'year'that'you'have'incurred'it'or'those'that'you'can'chose'to'amortize'over'5'years'so'long'as'it'is'attributable'to'a'capital'asset'
or'capital'account.''
N Question:'for'that'donation'to'be'deductible,'is'acceptance'necessary?'
o 'There'can'be'no'donation'if'the'donation'is'not'perfected,'and'perfection'of'the'donation'can'only'happen'if'there’s'acceptance'
which'is'different'on'a'case'to'case'basis'depending'on'what'is'being'donated.''
o If'it’s'a'real'property,'it'should'be'accepted'in'writing'in'the'document'or'in'a'separate'document..''
o If'it’s'more'than'5000'N'in'another'document,'if'it’s'less'than'5000'in'cash'–'oral'acceptance'is'allowed.'''
o When'you'have'a'perfected'donation'because'there’s'acceptance,'donors'tax'is'imposed'depending'on'whether'or'not'exemption'is'
allowed.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''40'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N You'remember'our'discussion'on'retirement'plans?'Every'corporation'is'encouraged'to'have'a'retirement'plan'in'order'to'address'the'need'if'
someone'in'the'company'would'be'retired.'
'
'
Corporation' Retirement'Plan' Employees'
'
' Separate'Entity'

'
Deductible%Expense?%Yes!%
'
o This'is'the'retirement'plan,'this'is'the'corporation.'If'you'have'a'retirement'plan,'any'money'that'is'placed'by'the'corporation'here,'
for'whose'benefit'is'this?'For'the'employees.'This'is'a'separate'entity'from'the'corporation.'If'the'corporation'puts'in'money'to'this'
retirement'plan'for'the'exclusive'benefit'of'its'employees,'this'is'totally'a'separate'entity'and'any'income'earned'from'this'plan'is'
not'an'income'of'the'corporation.'Mind'you,'the'income'of'this'retirement'plan'is'totally'tax'free.''Would'the'transfer'of'funds'to'
this'retirement'plan'by'the'corporation'be'a'deductible'expense?''
! Yes.'In'order'for'the'contributions'to'be'deductible,'the'amount'contributed'to'the'plan'must'be:'
o 'Reasonable,'the'contribution'must'be'given'by'the'employer''and'the'amount'contributed'must'no'longer'be'
under'the'control'of'the'corporation.'Once'the'corporation'has'transferred'the'money,'the'corporation'may'no'
longer'get'back'the'money'or'use'it'in'their'operations.''
o Second'requisite,'the'payment'has'not'yet'been'allowed'as'a'deduction'–'it'cannot'be'deducted'twice.'And'plan'
is' for' the' benefit' of' the' employees' and' deductions' apportioned' in' equal' portions' over' 10' consecutive' years'
beginning'in'the'year'in'which'the'transfer'was'first'made.''
o Whenever'the'corporation'gives'out'money'for'the'retirement'plan'for'the'benefit'of'the'employees,'it'is'already'considered'as'an'
expense' because' it' will' not' go' back' to' the' coffers' of' the' corporation.' This' is' a' separate' entity' so' whatever' comes' out' of' the'
corporation'is'an'expense.'Whether'or'not'it'is'deductible'is'another'issue.''
o Are'all'contributions'made'by'a'corporation'to'a'retirement'plan'deductible?'No.''
! If'it'is'for'that'year,'it'can'be'deductible'if'it'is'considered'as'ordinary'expense'for'that'year.'But'if'such'deductions'were'
made'for'services'that'have'been'rendered'for'the'past'years,'you'can'have'it'amortized'over'a'period'of'10'years.'Divide'
the'amount'to'be'paid'over'the'next'10'years.''
o Whenever'a'corporation'sets'up'a'retirement'plan,'the'money'is'given'to'an'insurance'company'or'whoever'is'considered'to'hold'
the'money'in'trust.'Whenever'an'employee'retires,'the'funds'will'not'be'taken'from'the'corporation'but'from'the'plan.''
o Do'you'know'actuaries?'Those'who'compute'the'retirement'fees'of'individuals,'they'will'compute'how'many'individuals'are'there'in'
the'company,'what'is'the'average'length'of'service'they'will'render,'etc.''
! So'if'they'will'determine'that'there'are'100'employees'and''the'''corporation'need'to'put'in'1M'every'year,'this'1M'every'
year'will'be'deductible'expense.''
! Why?' This' is' for' the' current' year' service' of' the' employees.' If' 1M' will' be' placed' in' the' funds' this' year,' then' the' 1M' is'
entirely'and'fully'deductible'for'that'year.'This'is'not'like'other'expenses,'this'will'only'be'deductible'if'it'is'paid'–'meaning'
there'is'an'actual'contribution.'If'the'corporation'does'not'contribute'this'year,'there'will'be'no'deduction'of'expense.''
'
2010% 2011% %
' ' ' 1Million'–'For'Current'Year' 100%'Deductible'
' ' 1Million'–'For'Past'year' 1/10'DR'
'
Contribution:' 2Million'
'
N Let'us'say'the'following'year,'the'corporation'made'a'contribution'of'2M,'1M'for'the'year'which'it'failed'to'contribute'and'1M'for'the'current'
year.'How'much'contribution'did'the'corporation'give'to'the'retirement'plan?'2M.''
o The'details:'2010'the'corporation'is'required'to'contribute'1M.'This'is'for'the'current'service'of'the'employees'covered'by'the'plan.'
In'2011,'it'is'required'to'contribute'another'1M.''
th
o How'much'is'deductible'for'next'year?'1M'which'is'for'the'current'year'and'1/10 'of'the'1M.''
! Why?'If'the'corporation'does'actually'contribute'1M'this'year,'this'will'be'fully'deductible'because'this'year'pertains'to'the'
current'year'service'of'the'employees'covered'by'the'plan.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''41'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! If'it'foregoes'contributing'and'decides'to'contribute'next'year'2M,'it'is'allowed'but'the'problem'is'that''if'it'contributes'
only'next'year,'what'is'current'for'next'year?''
o This' one' only' (1M),' the' other' (1M)' is' for' the' past' year’s' service' of' the' employees.' And' since' we' said' that'
expense'can'only'be'deducted'in'the'year'that'it'pertains,'this'is'100%'deductible'(1m'current'year)'and'this'is'
th
only'1/10 'deductible'(1M'past'year).''
o How'about'the'9/10?''
! It'will'be'spread'out'for'the'next'years.'What'will'happen'if'the'corporation'does'not'contribute'for'10'
years,'there’s'no'deduction'for'10'years'of'1M.''
th
! If'on'the'11 'year,'it'decides'to'put'in'bulk'of'11M,'only'1M'is'current'and'fully'deductible',''while'the'
10M'will'only'be'deductible'1/10'every'year.'This'still'addresses'the'common'requisite'that'an'expense'
must'pertain'to'the'taxable'year'for'it'to'be'deductible.'
G.'Tax'Rates'
N Let’s'go'to'tax'rates.'We’re'already'familiar'that'the'tax'rate'for'all'corporations'is'always'at'30%.'Unless'if'it'falls'under'special'corporations.'
The' general' rule' is' 30%' tax' of' the' net' taxable' income' and' there' is' an' option' not' to' be' taxed' at' 30%.' ' The' option' is' given' to' the' domestic'
corporations' and' resident' foreign' corporations' where' they' can' choose' to' be' taxed' at' the' preferred' rate' of' 15%' gross' income' taxation,'
provided'that'certain'conditions'are'met.'That,'the'ratio'of'the'cost'to'their'gross'sales'or'receipts'from'all'sources'should'not'exceed'55%,'
and'if'they'shall'elect'that'option,'it'shall'be'irrevocable'for'three'years.''
N What'is'15%'gross'income'taxation?'Where'shall'you'apply'the'15%?''
' Sales'' ' 11,000,000'
55%'of'11M'is'605,000.'
Cost' ''' '''9,000,000'
' This'is'the'cost'to'avail.'
15%'Gross'Income' ''' '''2,000,000''='300,000'
'
' '' Less' ' ''''''500,000'
' 30%'Net'Income' ' '''1,500,000'='400,000%
'

o In'the'2M'(gross'income/same'illustration).'Using'this'data,'would'you'want'to'be'subjected'to'the'30%'net'taxable'income'or'would'
you'want'to'pay'15%'of'the'gross'income?''
! What’s'30%'of'1M'–'300,000.'What'is'15%'of'gross'income'2M'–'300,000.'''
! You'don’t'actually'benefit''in'choosing'either.'You'should'only'opt'for'the'15%'gross'income'taxation'if'it'is'more'beneficial'
to'you.''
o Now'(refer'to'lower'part'of'illustration)'still'the'gross'income'is'2M,'expenses'500,000,'therefore'net'taxable'income'of'1.5M.''30%'
of'1.5M'is'450,000.''She'wants'to'chose'gross'income'taxation'of'15%,'because'15%'of'2M'gross'income'is'only'300,000.'Are'you'
allowed'to'pay'300,000?'Assuming'that'all'the'ratios,'the'GDP'rate'etc,'are'present?''Yes.''
o Would'everybody'be'allowed'to'choose'15%'gross'income'taxation?'NO.'
! Only'available'to'domestic'corporations'and'resident'foreign'corporations.''
! NonNresident' foreign' corporations' are' not' expected' to' file' these' tax' returns' and' are' subject' to' final' withholding' tax' of'
30%.''
o Assuming'illustration'is'a'domestic'corporation,'can'the'domestic'corporation'chose'to'pay'15%'based'on'gross'income?''
! Yes,'only'available'if'the'ratio'of'cost'of'sales'to'gross'sales'or'receipts'should'not'exceed'55%.''
! Does'this'satisfy'that'requirement?'NO.''
! Does'9M'(costs)'exceed'55%'of'11M'(sales)?'OK,'55%'of'11M'is'6.05M.'This'(costs)'should'not'exceed'6M.''
o You'don’t'have'the'complete'liberty'of'choosing'15%'gross'income.'The'only'time'that'you'can'opt'to'pay'the'15%'gross'income'
taxation,'assuming'that'all'conditions'are'present'is'that:'
! (1)'you'must'either'be'a'domestic'corporation'or'resident'foreign'corporation,''
! (2)''the'ratio'of'the'cost'to'your'sales'must'not'exceed'55%.''
o Otherwise,' if' you' have' no' limit' here,' for' example' this' is' 10M' (costs)' which' is' almost' 100%,' you' will' surely' be'
benefited'by'gross'income'taxation.'Lifeblood'doctrine'still'dictates'that'you'have'to'pay'more.''
Minimum'Corporate'Income'Tax'
N When'are'you'required'to'pay'the'minimum'corporate'income'tax?'MCIT'is'2%'from'the'gross'income'of'the'corporation.''
o Is'that'income'tax?'Yes.''
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''42'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Does'the'corporation'have'to'pay'MCIT'always?'No.''
o When'is'a'corporation'required'to'pay'the'MCIT?'A'corporation'is'required'to'pay'the'MCIT'if'the'normal'corporate'income'tax'is'
less'than'the'2%'gross'income'tax'which'is'the'MCIT.''
N Minimum'corporate'income'tax'is'a'2%'tax'on'the'gross'income'of'a'corporation.''
o Whether'or'not'a'corporation'is'liable'at'all'times'for'MCIT,'the'answer'is'No.''
! Why?'If'the'corporation'is'not'subject'to'the'30%'normal'corporate'income'tax,'then'it'will'not'also'be'subject'to'the'MCIT.''
o Can'it'happen'that'a'corporation'may'be'liable'for'both'the'30%'regular/normal'corporate'tax'and'the'2%'MCIT?'No.''
! What'is'the'relationship'of'these'two'types'of'taxes?'It'excludes'the'other.'If'one'is'used,'the'other'is'excluded'from'being'
applied.'The'2%'MCIT'will'apply'if'the'2%'MCIT'is'higher'than'the'30%'normal'rate'of'gross'income.'''
! So:'
o (1)'if'the'2%'MCIT'is'higher'than'the'30%'normal'corporate'tax,'the'MCIT'will'apply'and''
o (2)''if'the'corporation'is'operating'at'a'loss'then'the'MCIT'will'apply.'2%'MCIT'which'is'2%'of'the'gross'income,'
not'the'net'taxable'income,'is'only'a'tax'that'is'made'in'lieu'of'the'30%.''
! Your'actual'tax'liability'to'the'government'is'always'the'30%'tax.'But'in'years'wherein'the'corporation'is'operating'at'a'
loss,'you'don’t'have'30%'tax,'you'will'have'to'pay'the'2%'MCIT.'Or'in'years'wherein'the'corporation’s'regular'tax'on'net'
income' is' lower' than' 2%' MCIT,' you' have' to' pay' the' 2%' MCIT.' Whichever' is' more' favorable' and' higher' in' taxes' to' the'
government'for'your'operations,'you'have'to'pay'it'to'the'government.''
N What'is'the'principle'of'imposing'the'MCIT,'prior'to'1998,'this'was'not'imposed,'because'corporations'are'abusing'expenses.'They'bloat'the'
expenses'resulting'to'either'minimal'net'taxable'income'or'they'bloat'this'to'the'extent'of'reporting'a'loss,'therefore'there'will'be'no'income'
tax.'And'normally'you'don’t'exist'for'10'years'at'a'loss,'you'should'have'closed'your'business'already.''This'is'what'the'BIR'was'looking'into,'
there'are'corporations'which'were'operating'at'a'loss'for'more'than'10'years.'The'problem'was'there'was'overNclaiming'of'expenses'but'the'
BIR'would'not'believe'you'if'you'would'report'this'at'a'loss'at'this'level.'Now'at'least'the'BIR'is'assured,'if'you'report'a'loss,'the'BIR'is'assured'
of'collection.''
N Can'the'2%'MCIT'be'imposed'if'you'are'not'liable'for'the'30%'normal'corporate'income'tax?''
o NO,'it'will'only'be'applicable'if'you'are'liable'for'30%'tax'so'those'entities'which'are'exempt'from'the'30%'tax'are'not'liable'for'the'
MCIT.''
o If'you'are'a'corporation'that'has'been'granted'income'tax'holiday'for'4'or'6'years,'during'those'years'when'you'are'not'liable'for'the'
30%'normal'corporate'income'tax','you'will'not'as'well'be'liable'for'the'2%'MCIT.''
N How'about'nonNprofit'hospitals'or'proprietary'educational'institutions?'They'are'subject'to'10%'tax'on'net'income.''
o Are'they'liable'for'2%'MCIT'in'case'they'operate'at'a'loss.'No,'MCIT'also'not'applicable'because'the'30%'normal'tax'is'not'applicable'
to'them.''
N Next'example,'a'corporation'that'is'registered'with'the'Philippine'Economic'Zone'Authority'or'the'Subic'Bay'Free'Port'Enterprise,'they'are'
subject'to'5%'tax'on'gross'income'in'lieu'of'all'taxes,'are'they'subject'to'the'2%'MCIT?''
o Not'subject'to'2%'MCIT,'unless'if'it'refers'to'another'activity'or'they'are'doing'another'activity'in'which'they'are'not'registered.''
o Those'corporations'that'are'located'inside'the'economic'zone'and'even'in'IT'Park,'if'they'opt'to'be'subject'to'5%'income'tax'based'
on'gross'income'in'lieu'of'all'taxes,'they'are'not'liable'for'VAT,'not'liable'for'other'taxes,'they'will'not'be'liable'to'MCIT'at'all'because'
it'is'only'imposed'if'you'are'subject'to'30%.''
o These'corporations'within'the'economic'zones'however'are'only'allowed'to'pay'5%'tax'on'activities'that'have'been'registered'with'
the'government.'If'they'venture'into'activities'that'are'not'covered'by'the'5%'tax,'then'–'Imagine'Timex,'it’s'within'the'zone.''

' Timex%
''''' ''100'Million' ''''5'Million'
'
'''''' 'Registered'' Selling'FF,'E,'M'
' '''''''''''' '''''''5%' '''''''' '''''''30%'
''MCIT:'''''''''''''X' ' ''''''''"%
'
o Timex' has' 100M' sales' of' registered' activities' (watch' manufacturing' and' sales' etc).' And' they' earn' 5M' income' from' selling' old'
furniture,'equipments,'motor'vehicles,'etc,'is'this'covered'by'the'registration?''
! No,'this'is'not'subject'to'5%'tax,'this'will'be'subject'to'30%.'As'to'whether'MCIT'applies'to'these'activities,'it'would'depend'
on'whether'MCIT'is'higher'or'normal'corporate'tax'rate'is'higher.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''43'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N Question:'does'that'rule'apply'also'to'proprietary'educational'institutions?''
' Proprietary%Educational%Institutions%
'''''MCIT%
'
''''''YES' GR:'10%'on'NTI'
' ''''''NO' Exc:'30%'on'NTI'

o Proprietary'educational'institutions'are'those'private'institutions'which'are'owned'and'administered'by'individuals'and'organized'
for'profit.'These'are'not'nonstock'nonprofit.''
o Are'they'subject'to'tax?'Yes,'general'rule'is'that'they'are'subject'to'10%'tax'rates'on'their'net'taxable'income.''
! Exception'is'if'the'profits'are'a'result'of'engaging'in'activities'that'are'not'related'to'the'trade'and'it'exceed'50%'of'their'
income'–'the'rate'is'30%'normal'tax'on'net'taxable'income.''
' Gross%Income:%%
' % 100,000,000''''from'Tuition'Fees'
' 100,000,000''''from'Rental'Fees'
'

"'
''''''''''''''''''200,000,000'''Total'
'
Subject'to'10%'
'
o If'you'own'a'school,'and'your'gross'income,'a'proprietary'educational'institution,'is'100M'from'tuition'fees'and'100M'from'rental'
fees.''You'have'200M'total'income.'What'is'the'tax'rate'applicable?''
! It'is'still'10%'because'it'did'not'exceed'50%'of'the'gross'income.'10%'tax'on'the'entire'net'taxable'income.''
! Proprietary' educational' institutions' and' nonprofit' hospitals' are' subject' to' 10%' tax' on' their' net' taxable' income' as'
preferred'or'special'corporations.''
! But'once'they'violate'the'predominance'test,'meaning'once'their'income'from'other'activities'(other'than'educational'or'
other'than'hospital'services),'the'entire'income'will'be'subject'to'the'regular'rate'of'30%.'You'do'not'divide'the'income.''
! Say'for'example'the'gross'income'from'tuition'fees'is'100M'and'from'rental'fees'is'100M,'total'of'200M.'It'did'not'violate'
the'rule'that'it'should'not'exceed'50%,'it’s'50N50.'''Therefore,'the'entire'taxable'income'of'this'school'is'subject'to'10%'
tax.''
' Gross%Income:%%
% 100,000,000''''from'Tuition'Fees'
'
' 100,000,000''''from'Rental'Fees'
'

"'
''''''''''''''''''200,000,000'''Total'
' Subject'to'10%'
'
o If'this'becomes'101M'(from'rentals,'other'income),'what'rate'shall'apply?'Once'the'other'income'(other'sources)'exceeds'50%'of'
the'total'income,'30%'would'apply'on'the'whole'net'taxable'income.'It’s'either'10'or'30'applied'to'the'whole'income.''
o Question,'still'on'MCIT:'if'the'school'is'still'under'10%'tax,'is'MCIT'applicable?'NO.''
! If'the'corporation'surpasses'the'50%'boundary,'subject'to'30%,'will'MCIT'apply?'YES.''
o Just'simple'class'(!),'whenever'30%'is'present,'2%'is'lurking'around.''So'MCIT'will'only'be'present''if'the'school'is'30%'taxable.''
N When' do' you' begin' to' impose' the' MCIT,' on' the' first' year' of' operations?' No,' in' the' fourth' taxable' year' beginning' after' the' year' the'
corporation'has'commenced'(pertains'to'registration'with'BIR)'business'operations.''
o So,'in'2005'December'24:'you'registered'your'business.'When'should'you'start'comparing'your'2%'MCIT'against'your'30%'normal'
corporate'tax?'In'2009.''
! Why?'It’s'the'fourth'year'after'2005.'Beginning'the'fourth'taxable'year'following'the'year'in'which'you'commenced'your'
business'operations.''
o You' registered' your' business' with' BIR' in' 2005,' assuming' you' follow' the' calendar' year,' ' when' is' the' year' after' you' commenced'
business'operations'–'2006.'''
N The'2%'MCIT'is'based'is'on'gross'income.'When'you'say'gross'income,'what'is'gross'income'as'a'general'rule'and'what'is'gross'income'for'a'
corporation'that'is'engaged'in'the'sale'of'service'and'a'corporation'that'is'engaged'in'the'sale'of'merchandise?'
o So' when' you' actually' want' to' know' what' is' gross' income' for' purposes' of' computing' the' 2%' MCIT,' it' would' only' refer' to' the'
definition'found'in'Sec.'27(e)'of'the'Tax'Code.'But'if'you’re'engaged'into'merchandising'or'trading'business,'the'cost'that'you'can'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''44'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
deduct' on' your' sales' in' order' to' arrive' at' the' gross' income' would' only' pertain' to' the' products' that' you' actually' trading' plus' the'
insurances'plus'the'costs'to'put'that'product'into'the'location'or'sale.''
o So' if' you’re' selling' siomai,' what' would' be' the' cost' is' the' siomai' that' you' bought,' if' it’s' trading,' and' the' transportation' cost' from'
getting' it' from' the' supplier' down' to' your' business.' Of' course,' the' transportation' that' would' pertain' from' the' delivery' to' your'
consumers'or'customers'would'no'longer'form'part'of'the'cost.'It'would'already'form'part'of'your'selling'expenses.''
o The'cost'would'pertain'to'the'expenses'for'bringing'the'product'into'the'location'or'sale.'
o And'it'would'also'depend'if'you’re'into'one'type'of'business.'If'it’s'manufacturing'business'–'the'cost'of'the'raw'materials,'the'cost'
of'buying'the'raw'materials,'the'freight/shipment,'the'insurance,'the'commission'from'buying'it,'and'of'course,'the'processing'of'
the'product.'So'these'are,'in'short,'the'direct'expenses'–'the'direct'cost'to'put'the'product'available'for'sale,'whether'the'product'
be'goods'or'services.''
o You'cannot'deduct'the'expenses'which'are'already'for'operation'and'for'selling'or'for'marketing.'When'you'say'transportation'cost,'
it'would'refer'to'transportation'from'buying'or'transportation'from'selling.'
o So'gross'income'is'very'restrictive.'That'is'the'reason'why'the'tax'rate'of'MCIT'is'very'low'–'2%'lang'unlike'30%'taxable'income'of'
normal'corporate'income'tax'(NCIT)'because'you’re'allowed'to'deduct'all'the'business'expenses'that'you’re'incurring.'
N The' MCIT' is' only' a' tax' temporarily' in' lieu' of' the' income' tax' that' you' cannot' pay' probably' because' you’re' losing' or' the' NCIT' is' low.' It’s' a'
temporary'tax'that'you'have'to'pay'but'eventually,'you'are'allowed'to'credit'the'excess'of'the'MCIT'that'you’ve'paid'beyond'the'NCIT.'
o What'is'that'rule'again?'
! Any'excess'of'the'MCIT'over'the'NCIT'can'be'carried'over'to'the'next'3'consecutive'years'and'offsetted'against'the'NCIT.'
! Can'it'be'offsetted'against'MCIT?'
o NO.'
! So'any'excess'or'the'excess'of'your'MCIT'over'your'NCIT,'dba'when'are'you'required'to'pay'MCIT?'Only'if'your'NCIT'is'
lower'than'the'MCIT'or'when'you’re'totally'at'a'loss'wherein'you'don’t'pay'any'NCIT.'So'what'you’ll'have'to'pay'is'MCIT'–'
any'excess'over'the'NCIT'can'be'used'up'as'a'credit'against'your'future'NCIT'in'the'succeeding'3'years.'It’s'an'offset.'
N Tiu:'I'will'illustrate'how'it'works……'
th th th th th th
' 4 %year% 5 %year% 6 %year% 7 %year% 8 %year% 9 %year%
Sale% 10M' 10M' 10M' 10M' 10M' 10M'
Less:%Cost% 5M' 2M' 2M' 3M' 4M' 4M'
Gross%income%(2%%MCIT)% 5M' 8M' 8M' 7M' 6M' 6M'
Less:%Expenses% 5M' 7.8M' 7.7M' 6.8M' 5.5M' 5.6M'
Net% taxable% income% (30%% 0% 200K% 300K% 200K% 500K% 400K%
NCIT)%
30%%tax%due%(NCIT)% 0% 60K% 90K% 60K% 150K% 120K%
MCIT%(2%)% 0% 160K% 160K% 140K% 120K% 120K%
Paid%to%the%government% 0% 160K% 160K% 140K% 0% 20K%
Excess%MCIT% 0% 100K% 170K% 250K% 100K% 0%
'
th
N Given'the'table'above,'in'the'4 'year,'how'much'are'you'going'to'pay'to'the'government?'
o Remember,'when'do'we'commence'computing'MCIT?'
th
! Beginning'the'4 'taxable'year'following'the'year'that'you'commence'business'operations'or'which'means'to'say,'following'
the'year'you'registered'your'business'for'BIR'purposes.'
th
o So' in' the' 4 ' year,' how' much' is' your' tax' liability?' 0.' MCIT' is' 0.' At' this' point,' you’re' not' yet' liable' to' MCIT' because' MCIT' will'
th th
commence'at'the'4 'taxable'year'following'the'year'that'you'commence'business'operations,'which'in'fact'is'the'5 'year.'In'this'
th
case,'it'is'still'the'4 'year.'
o Since'here,'your'NCIT'is'also'0,'your'payment'to'the'government'is'0.'Your'excess'MCIT'is'0.'
th
N Let’s'go'to'the'5 'year.'How'much'is'your'liability'to'the'government?'How'much'are'you'going'to'pay'to'the'government?'
o 160K.'So'the'government'will'receive'160K'because'MCIT'is'higher'than'NCIT.'
o How'much'is'your'excess'MCIT?'100K.'At'this'point,'you'have'a'reserve'nah!'Your'true'tax'liability'to'the'government'is'only'the'
NCIT,' but' you' paid' the' MCIT' of' 160K' because' MCIT' is' higher' than' NCIT.' Therefore,' you' have' a' reserve' of' 100K' that' is' creditable'
against'your'future'tax'liability'in'the'succeeding'3'consecutive'years.'
th
N Let’s'go'to'the'6 'year.'How'much'will'you'pay'to'the'government?'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''45'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o 160K'because'MCIT'is'higher'than'NCIT.'
o Can'you'not'deduct'your'reserve'of'100K?'
! NO,'because'excess'MCIT'is'only'offsettable'against'the'NCIT.'It'cannot'be'credited'against'the'MCIT.'You'always'have'to'
pay'the'MCIT,'whatever'it'is.'But'once'you'reach'to'the'point'that'your'liability'is'already'the'NCIT,'it’s'when'you'can'use'
the'reserve.'In'this'case,'your'payment'to'the'government'is'MCIT'so,'therefore,'you'cannot'deduct'the'reserve'yet.'
o So'how'much'is'your'reserve'at'this'point?'170K.'
th
N Let’s'go'to'the'7 'year.'How'much'is'MCIT?'
o 140K.''
o How'much'are'you'going'to'pay'to'the'government?'140K'because'MCIT'is'higher'than'the'NCIT.'
o How'much'is'your'reserve'now?'250K.'
th
N In'the'8 'year,'how'much'will'you'pay'to'the'government?'
o 0.'Here,'the'NCIT'is'higher'than'the'MCIT,'therefore,'you'don’t'need'to'pay'the'MCIT.'You'pay'the'NCIT'supposedly.'But'since'in'this'
case,'you'have'an'existing'250K'total'of'excess'MCIT,'thus,'such'excess'is'offsettable'against'the'150K'NCIT,'so'the'remaining'reserve'
is'100K'[250KN150K].'
th
N In'the'9 'year,'how'much'will'you'pay'to'the'government?'
o How'much'is'your'MCIT?'120K.'
o How'much'is'your'NCIT?'120K.'
o So,'therefore,'you'pay'20K'to'the'government'[120KN100K]'
o You'only'pay'the'MCIT'if'the'company'is'operating'at'a'loss'or'when'NCIT'is'lower'than'MCIT.'In'this'case,'it’s'equal,'so'you'still'pay'
the'NCIT.'But'since'you'have'an'excess'reserve'still'of'100K'coming'from'the'prior'years,'you'can'offset'it'against'the'120K,'which'is'
the'NCIT,'so'therefore,'you'only'pay'20K.'
N At'any'point,'did'any'excess'MCIT'expire?'Was'there'an'expiration'of'excess'MCIT,'meaning,'it'was'carried'forward'for'3'years'but'was'never'
used?'
o NO.'
th th
o Let’s'look'at'the'5 'year.'Was'the'100K'used'within'the'3'succeeding'years?'YES,'it'was'used'in'the'8 'year'[first'inNfirst'out'dba?].'So'
th th th
the'100K'excess'in'the'8 'year'pertains'to'a'portion'of'the'excess'MCIT'in'the'6 'year'and'7 'year.'Therefore,'nothing'expired.'
th th
N How'much'is'your'total'tax'due'(NCIT)'from'the'5 'year'to'the'9 'year?''
o 480K.'
o How'much'did'you'actually'pay'to'the'government?'480K'still.'
o The'difference'is'that'your'true'tax'liability'is'always'the'30%'NCIT.'But'at'any'point'that'you'operated'at'a'loss'or'your'NCIT'is'lower'
than'MCIT,'you'will'be'required'by'the'government'to'pay'MCIT'as'an'advance'payment'for'future'years.'Why'an'advance'payment'
for'future'years?'Because'whatever'excess'MCIT'that'you'pay'to'the'government'will'be'creditable'to'the'next'3'years.'
th th
o So'instead'of'paying'60K'in'the'5 'year,'you'are'required'to'pay'160K.'In'the'6 'year,'instead'of'90K,'you'are'required'to'pay'160K.'
th th th
In'the'7 'year,'instead'of'60K,'you'are'required'to'pay'140K.'But'in'the'8 'year,'instead'of'paying'150K,'you'paid'actually'0.'In'the'9 '
year,'instead'of'paying'120K,'you'only'paid'20K.'
o So'bottomline,'your'true'tax'liability'(NCIT)'for'these'years'is'only'480K.'The'amount'that'you'actually'paid'is'also'480K.'So'long'as'no'
MCIT'expires,'meaning'nothing'is'unused,'you'will'always'arrive'at'equal'amounts.'But'if'at'any'point,'there'will'be'an'unused'MCIT,'
that'expired'MCIT'will'be'the'amount'that'you'have'overpaid'the'government.'
th
o So' assuming' that' the' excess' 100K' in' the' 5 ' year' is' not' used' at' any' time' because' you' operated' MCIT' all' throughout,' your' actual'
payment'would'be'higher'than'your'true'tax'liability'(NCIT).'
o So' MCIT' is' not' really' your' tax' liability.' It’s' not.' It’s' just' an' advance' payment' of' your' NCIT' offsettable' against' your' future' NCIT'
because'the'government'would'want'to'collect'regularly'from'you.''
Example:'Where'MCIT'expires'
th th th th th th
' 4 %year% 5 %year% 6 %year% 7 %year% 8 %year% 9 %year%
Sale% 10M' 10M' 10M' 10M' 10M' 10M'
Less:%Cost% 5M' 2M' 2M' 3M' 4M' 4M'
Gross%income%(2%%MCIT)% 5M' 8M' 8M' 7M' 6M' 6M'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''46'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
Less:%Expenses% 5M' 7.8M' 7.7M' 6.8M' 5.7M' 5.4M'
Net% taxable% income% 0% 200K% 300K% 200K% 300K% 600K%
(30%%NCIT)%
30%%tax%due%(NCIT)% 0% 60K% 90K% 60K% 90K% 180K%
MCIT%(2%)% 0% 160K% 160K% 140K% 120K% 120K%
Paid%to%the%government% 0% 160K% 160K% 140K% 120K% 0%
Excess%MCIT% 0% 100K% 170K% 250K% 180K% 0%
th th
N Given'the'table'above,'let’s'startNoff'with'the'8 'year.'How'much'will'you'pay'to'the'government'in'the'8 'year?'
o 120K'because'MCIT'is'higher'than'the'NCIT.'
th th
o What'will'happen'to'your'excess'MCIT'in'the'8 'year?'How'much'is'your'total'reserve'for'the'8 'year'that'is'usable'or'that'can'be'
th
carried'forward'in'the'9 'year?'
th
! '180K'[(250KN100K)'+'30K].'250K'is'the'total'reserve'of'the'7 'year'and'you'deduct'the'100K'from'250K'because'the'100K'
th th
excess'MCIT'of'the'5 'year'has'already'expired.'Then'you'add'30K'which'is'the'excess'MCIT'in'the'8 'year.'So'therefore,'
the'total'reserve'would'now'be'180K.'
th th th th th
! The'100K'excess'MCIT'of'the'5 'year'can'only'be'carried'forward'in'the'6 ,'7 'and'8 'year.'Since'at'the'end'of'the'8 '
th th
year,' we’re' looking' at' the' excess' MCIT' that' will' be' applied' in' the' 9 ' year,' you' only' cover' the' excess' MCIT' from' the' 6 '
th
year.'The'excess'MCIT'of'the'5 'year'has'already'expired'because'you'were'unable'to'use'the'excess'MCIT'of'100K'of'the'
th th
5 'year.'The'life'of'the'100K'excess'MCIT'of'the'5 'year'would'only'exist'for'3'years'after.'Since'such'excess'was'not'used'
th th
because'in'the'8 'year,'you'paid'MCIT,'it’s'no'longer'usable'in'the'8 'year,'so'you'have'to'take'it'out'on'the'total'reserves'
th th th
in'the'8 'year.'So'you'only'have'180K,'which'comes'from'30K'excess'MCIT'of'the'8 'year'+'80K'excess'MCIT'of'the'7 'year'
th
+'70K'excess'MCIT'of'the'6 'year.'
th th
N If'we'have'the'same'figures'in'the'9 'year,'how'much'will'you'pay'to'the'government'in'the'9 'year?'
o 0.'
th th
o In'this'case,'it'is'only'in'the'9 'year'wherein'you'benefited'from'the'excess'MCIT'payments'because'it'was'only'in'the'9 'year'that'
you'have'a'higher'NCIT.'
th th
N How'much'did'you'actually'pay'to'the'government'from'the'5 'year'to'the'9 'year?'
o 580K.''
o How'much'is'your'true'tax'liability'(NCIT)?'480K.'
o REMEMBER:'Your'true'tax'liability'is'only'the'NCIT.'So'long'as'no'MCIT'excess'will'expire,'your'actual'payment'to'the'government'
will'equal'your'NCIT'liability.'
th th
o But'in'this'case,'we'have'an'expiry'of'excess'MCIT'in'the'8 'year.'The'first'100K'excess'MCIT'of'the'5 'year'was'not'being'utilized.'
Therefore,'although'your'true'tax'liability'is'480K,'you'actually'paid'580K'because'you'failed'to'utilize'your'excess'MCIT'or'advance'
payments'to'the'government.'
o So'that’s'the'difference'when'there'is'an'expired'excess'MCIT.'
rd
o So'if'you'feel'that'on'the'3 'year,'something'is'expiring,'report'a'higher'NCIT'so'you'can'utilize'your'excess'MCIT.'
N What'are'the'instances'wherein'you'can'ask'temporary'relief'from'the'payment'of'MCIT?'
o 1.'Prolonged'labor'dispute'
o 2.'Force'majeure'
o 3.'Legitimate'business'reverses'
N MCIT'means'that'you'are'required'to'pay'regularly'to'the'government.'It’s'just'an'advance'payment.'You'can'utilize'it'afterwards.'It’s'in'order'
to'plug'the'loophole'in'the'tax'code'wherein'the'taxpayer'is'abusing'the'expenses'that'they'claim'as'deductible.'You'can'zero'out'your'net'
taxable'income'by'claiming'huge'expenses'then'when'you'zero'out'your'net'taxable'income,'you’re'not'required'to'pay'any'income'tax'due.'
rd
But'because'of'the'MCIT,'you'will'be'paying'MCIT'due.'And'in'order'to'avoid'expiring'the'MCIT,'at'some'point,'in'the'3 'year,'you'will'be'
honest'enough'to'declare'your'true'income'tax'in'order'to'be'liable'for'NCIT.''
SPECIAL'DOMESTIC'CORPORATIONS'
N Proprietary'Educational'Institutions'(PEI)'–'what'are'the'requirements?'Or'should'it'be'a'formal'EI'for'you'to'avail'of'the'10%'special'rate?'
o YES,'it'must'have'been'issued'a'permit'to'operate'from'the'DECS'or'CHED,'or'TESDA,'as'the'case'may'be.'
o What'are'the'rules'on'the'taxability'of'PEI'or'NonNProfit'Hospital'(NPH)?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''47'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Tax' rate' is' 10%' if' its' income' derived' from' unrelated' trade,' business' or' activity' does' not' exceed' 50%' of' its' gross' total'
income.'
! Tax' rate' is' 30%' ordinary' tax' rate' is' its' income' from' unrelated' trade,' or' business' or' activity' exceeds' 50%' of' its' gross'
income.'
! So' we' have' to' consider' that' if' this' is' the' gross' total' income' of' the' PEI,' how' much' of' it' comes' from' unrelated' trade,'
business'or'activity.'If'more'than'50%,'then'automatically,'the'net'taxable'income'of'that'PEI'would'be'subject'to'30%.'You'
don’t'apportion'10%'to'tuition'fees'and'related'educational'income'and'30%'to'other'income.'It’s'either'all'the'net'income'
will'be'subject'to'10%'because'it'did'not'exceed'50%'on'unrelated'trade,'business'or'activity'or'all'the'net'income'will'be'
subject'to'30%.''
! But' for' purposes' of' determining' whether' the' predominance! test' has' been' violated' or' not,' you' look' into' the' gross' total'
income,'not'the'net'income,'because'the'net'income'of'educational'activities'and'the'net'income'of'commercial'activities'
is'different.'You'have'lots'of'expenses'that'you'can'claim'in'commercial'activities'but'for'educational,'tuition'lang,'etc…'it’s'
not'many.'
N NPH'–'same'rule'as'PEI'
o But'if'it’s'profitable?'It’s'subject'to'the'30%'ordinary'tax'rate.'
N PEI'and'NPH'are'special'domestic'corporations,'which'are'taxable'from'sources'within'and'without.'
SPECIAL'RESIDENT'FOREIGN'CORPORATIONS'
N International'Air'Carrier'(IAC)'and'International'Shipping'(IS)'are'taxable'within'on'their'tax'base'of'Gross'Phil.'Billings'(GPB)'at'the'tax'rate'of'
2.5%.'
o For'purposes'of'IAC,'GPB'refers'to'the'amount'of'gross'revenue'derived'from'carriage'of'persons,'excess'baggage,'cargo'and'mail'
originating'from'the'Philippines'in'a'continuous'and'uninterrupted'flight'irrespective'of'the'place'of'sale'or'issue,'and'the'place'of'
payment'of'the'ticket'or'passage'document.'Tickets'revalidated,'exchanged,'and/or'endorsed'to'another'international'airline'form'
part'of'the'GPB'is'the'passenger'boards'a'plane'in'a'port'or'point'in'the'Philippines.'
o For' purposes' of' IS,' GPB' means' gross' revenue' whether' from' passenger,' cargo' or' mail' originating' from' the' Philippines' up' to' final'
destination,'regardless'of'the'place'of'sale'or'payments'of'the'passage'or'freight'documents.'
N Lets'say'a'corporation,'SILKAIR,'which'is'based'in'Singapore,'opens'an'agency'in'the'Philippines'to'accept'purchase'of'tickets'for'Singapore'
airlines.'Would'it'be'subject'to'the'2.5%'tax'on'GPB?'The'outlet'caters'to'all'sales'of'SILKAIR'tickets.'
o It’s'an'outlet'–'a'sale'of'tickets'–'whether'or'not'originating'in'the'Philippines.'
o If'you'register'a'foreign'corporation'here'and'it'ventures'on'the'sale'of'tickets'from'whatever'point'of'origin'or'airport'of'origin,'
would'the'sales'be'considered'as'subject'to'2.5%'tax'as'GPB?'
o What'is'the'basic'requirement'for'a'foreign'corporation'to'be'allowed'to'avail'of'the'lower'rate'of'2.5%?'
o Would'all'foreign'corporations'selling'tickets'here'in'the'Phil.'be'subject'to'the'2.5%'on'GPB?'
! NOT' NECESSARILY.' So' what' is' the' requirement?' What' is' that' basic' requirement' that' makes' the' tax' rate' a' lower' rate' of'
2.5%'on'GPB?'
! GPB'would'not'apply'to'all'sales'of'airways'or'airlines'or'transport'companies.'GPB'would'only'apply,'specifically,'to'the'
amount'of'gross'revenues'derived'from'the'carriage'of'passengers,'excess'baggage,'cargo'and'mail'ORIGINATING'FROM'
THE'PHIL.'in'a'continuous'and'uninterrupted'flight'regardless'of'where'the'ticket'is'sold.'
! Now,' if' and' when' a' foreign' corporation,' like' SILKAIR' or' QATAR' AIRWAYS,' open' up' an' agency' or' outlet' here' in' the' Phil.'
selling'tickets,'whatever'the'destination'is'or'the'port'of'origin'or'airport'of'origin,'it'will'already'be'covered'by'the'normal'
tax'rate'for'RFC,'not'the'special'rate.'Why?'It’s'already'engaged'in'selling'tickets.'On'the'normal'basis,'it'becomes'subject'
to'the'30%'tax.'
! If' the' existence' of' such' corporation' is' really' to' sell' tickets,' whatever' the' port' of' origin' or' airport' of' origin' is,' it' will' be'
subject'to'the'normal'tax'of'30%'because'the'2.5%'on'GPB'refers'only'to'the'revenues'based'on'a'flight'originating'from'
the'Phil.'in'a'continuous'and'uninterrupted'flight.'It'would'also'include'ticket'sales'made'elsewhere'other'than'the'Phil.'so'
long'as'the'origin'of'the'flight'is'in'the'Philippines.'
! So'it’s'different.'When'you'put'up'a'corporation'and'register'it'here'and'you'sell'tickets,'it'does'not'guaranty'you'2.5%'on'
GPB.'It'would'really'depend'on'what'you’re'selling'and'what'is'covered'by'GPB.'
N Regional'Operating'Headquarters'(ROHQs),'subject'to'tax'on'what?'
o They'are'subject'to'10%'tax.'
o Why'10%?'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''48'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! A'ROHQ'is'defined'in'your'Sec.'22'of'the'tax'code,'maybe'engaged'in'operations'in'the'Phil.,'therefore,'being'operational,'
it'will'generate'profits,'and'any'profits,'the'taxable'income'of'which,'will'be'subject'to'the'special'rate'of'10%,'in'the'same'
manner'that'the'employees'of'these'ROHQs'of'multinational'corporations'are'given'the'preferential'rate'of'15%'so'long'as'
they’re'occupying,'if'foreigner,'managerial'or'technical,'if'Filipino,'managerial'and'technical'positions,'ROHQs'as'well'are'
granted'the'preferential'rate'as'a'corporation'at'10%.'
N ROHQs'are'just'like'any'other'corporations.'It'has'employees.'It'will'be'liable'for'other'taxes.'It’s'just'that'as'far'as'income'tax'is'concerned,'it'
will' be' subject' to' the' preferential' rate' of' 10%.' The' question' as' to' whether' it' will' be' required' to' withhold' taxes' on' the' employees’'
compensation?'YES.'Will'it'be'required'to'remit?'YES.'Everything'is'the'same'except'to'the'preferential'rate'of'10%'to'the'corporation'and'15%'
to'its'employees'occupying'managerial'and/or'technical'positions.'
N In'so'far'as'RAHQs'are'concerned,'are'Regional'Area'Headquarters'(RAHQs)'liable'for'income'tax'as'a'special'RFC?'
o NO.'Being'nonNoperational,'it'will'not'be'subject'to'income'tax.'
N How'about'OffNshore'Banking'Units'(OBUs)?'
o As'RFC'also,'OBUs'are'only'taxable'on'income'derived'within.'
o But'what'type'of'income'is'subject'to'tax?'
! Income'derived'by'the'OBUs'from'foreign'currency'loans'to'residents'is'subject'to'the'preferential'rate'of'10%.'But'if'the'
income'is'derived'from'foreign'currency'loans'or'transactions'to'nonNresidents,'other'OBUs,'local'commercial'banks,'it'will'
be'exempt.'And'if'it’s'an'income'derived'from'investments'or'deposits'or'other'loans'to'nonNresidents,'whether'individual'
or'corporation,'is'exempt.'
! Easy' recall' would' be' –' if' the' income' is' derived' by' the' OBUs' from' residents,' individual' residents,' taxable' at' 10%.' If' the'
income' is' derived' from' nonNresidents,' whether' individuals,' corporations,' OBUs,' exempt.' But' there' is' one' EXCEPTION' to'
the'rule'–'if'the'income'is'derived'from'a'Phil.'commercial'bank'or'a'local'commercial'bank,'it'is'still'exempt.''
! OBUs' are' just' an' extension' of' foreign' banks.' When' it' grants' foreign' currency' loans' to' also' nonNresidents,' it’s' as' if' offN
shore.'It’s'beyond'the'Phil.'jurisdiction.'That’s'why'it’s'exempt.'But'if'the'foreign'currency'loan'to'residents,'dba'what'is'
the' situs' of' interest' or' income' from' loan' transactions?' It’s' where' the' debtor' resides.' And' if' the' loan' is' granted' to' a'
resident'and'a'resident'of'the'Phil.,'the'situs'is'in'the'Phil.'It’s'an'income'within'for'OBUs.'That’s'why'it’s'taxable'at'10%.'
BRANCH%PROFITS%REMITTANCE%TAX%
N Branch'Profits'Remittance'Tax'(BPRT),'what'is'that?'When'are'they'required'to'pay'it?'What'does'it'imply?'Would'a'DC'be'liable'for'the'15%'
BPRT'before'it'pays'off'to'a'FC?'What'kind'of'relationship'must'exist'for'the'15%'BPRT'to'apply?'
o Illustration:'There'is'A'International'Corp.'There'is'B'Corp.'(domestic),'which'is'100%'fullyNowned'by'A'International'Corp.,'and'C,'
which'is'a'Phil.'Branch'of'A'International'Corp.'Which'relationship'must'exist?'The'relationship'between'A'and'B'or'A'and'C?'
! A'and'C'relationship.'
! BPRT'will'only'be'applied'in'the'A'and'C'relationship'and'not'A'and'B'relationship.'
! The' A' and' B' relationship' –' when' a' NRFC' fully' owns' a' corporation,' you' call' such' relationship' as' the' parentNsubsidiary'
relationship.' Here,' B' is' a' separate' corporation' distinct' from' the' parent' company.' B' is' registered' with' its' own' set' of'
stockholders' and' own' set' of' Board' of' Directors.' A' as' well' has' its' own' set' of' stockholders' and' own' set' of' Board' of'
Directors.'
! The'A'and'C'relationship'–'you'call'it'a'homeNoffice'branch'under'the'single'entity'concept.'A'and'C'are'one'and'the'same.'
Since' C' is' a' mere' branch' of' the' homeNoffice' abroad' established' in' the' Philippines' as' a' RFC,' C' doesn’t' have' any'
stockholders.'In'the'absence'of'the'stockholders,'it'means'to'say'that'the'owner'of'C'is'the'owner'of'A.'There'is'no'set'of'
Board'of'Directors.'Just'a'general'management'because'the'set'of'Board'of'Directors'is'found'in'the'home'office,'which'is'
A'International'Corporation.'''
! If' let’s' say' A' invested' in' B' corporation' and' A' put' up' a' branch,' C.' Both' are' performing' well' (B' and' C).' How' would' B'
distribute' the' profits' to' A' and' how' would' C' distribute' the' profits' to' A?' How' would' B' corporation' give' profits' to' its'
stockholders?'Or'how'would'A'get'profits'from'B?'
o B'corporation'will'declare'dividends.'B,'whenever'it'has'unrestricted'retained'earnings,'the'next'step'for'it'is'to'
declare'the'profits'in'favor'of'its'ownerNstockholders.'So'it'will'go'outside'of'the'country.'You'call'this'declaring'
dividends'to'its'stockholders.'
! The' dividends' that' will' be' declared' by' B' in' favor' of' A' as' stockholder,' who' is' a' NRFC,' what' is' its'
taxability?' Dividends' declared' by' a' DC' to' a' DC' is' exempt.' Dividends' declared' by' a' DC' to' a' RFC' is'
exempt.'But'once'dividends'will'be'declared'to'a'NRFC,'it'is'subject'to'tax.'
! Illustration:'DC,'owned'by'5'individuals'(I1,'I2,'I3,'I4'and'I5).'Another'DC.'Another'RFC.'If'the'DC'will'
declare'dividends'to'I1'–'I5,'all'individuals,'it’s'subject'to'10%'FWT'on'dividends'if'it’s'cash'or'property'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''49'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
to'RC'and'NRC,'20%'if'it’s'NRANETB'and'25%'if'it’s'NRANNETB.'But'what'about'a'stockholder'who'is''DC'
and' a' stockholder' who' is' RFC?' Both' are' exempt.' Why' exempt?' In' order' to' avoid' double' taxation'
because'DCs'are'also'owned'by'corporations.'At'the'point'that'the'DC'declared'dividends'to'another'
DC'of'property'and'cash'dividends,'it'is'exempt'to'avoid'double'taxation.'The'profit'is'simply'transfer'
to' the' other' DC.' Taxability' would' only' arise' once' it' goes' out' to' an' individual.' Because' if' you' tax' the'
dividend' given' to' the' other' DC' and' the' ultimate' distribution' to' the' latter’s' individual' stockholders,'
there'would'be'now'2'stages'of'tax'nah.'There'should'only'be'one.'Thus,'the'dividends'given'to'a'DC'is'
simply'a'transfer'of'profits.'In'the'same'way'that'RFCs'are'also'exempt'for'further'distribution'to'its'
individual'stockholders.'
! But'in'receiving'the'dividends'from'a'DC,'when'the'recipient'is'NRFC,'it'follows'the'general'rule'that'all'
incomes' of' a' NRFC' are' subject' to' the' 30%' tax' except' on' capital' gains' from' capital' gains' on' sale' of'
shares.'It'means'to'say'that'dividends'received'by'a'NRFC'are'subject'to'the'normal'rate'of'30%.'But'
what'is'that'special'rule'on'dividends'being'given'to'NRFC?'
• If'a'foreign'government'grants'or'allows'tax'credits'to'Phil.'corporations'abroad,'what'credit'
does'it'give?'At'least'how'much?'If'the'foreign'country'grants'tax'credits'of'at'least'15%'to'
Filipino'corporations'deriving'income'from'any'domestic'corporations'abroad,'the'NRFC'will'
be'subject'to'15%'intercorporate'dividends.'
• Example:'If'the'DC'gives'dividends'to'another'DC'or'to'a'RFC,'it’s'exempt.'But'if'the'recipient'
is'a'NRFC,'it’s'15%,'which'is'30%'tax'rate'for'NRFC'minus'15%'credit'granted'by'the'foreign'
government.' This' is' just' to' put' the' same' relationship,' same' taxability.' Whether' you' are' a'
foreign' corporation' investing' in' a' branch' in' the' Phil.' or' investing' in' its' subsidiary' that' is'
totally'distinct'from'itself,'any'profit'going'outside'the'Phils.'will'be'subject'to'the'same'tax'
rate.'
o C,'since'it'has'no'stockholders'on'its'own,'it'would'simply'merge'its'income'with'A.'It'will'remit'whatever'profits'
it'has'received.'You'call'this'remitting'profits'of'the'branch'to'the'head'office.'Here,'the'profit'that'is'earmarked'
for'abroad'to'be'remitted'to'its'head'office'will'be'subject'to'15%'BPRT.'
o Would'all'Phil.'branches'be'subject'to'the'15%'BPRT'on'remittances'made'abroad?'
! The' tax' code' provides' that' if' and' when' the' Phil.' branch' is' located' within' the' economic' zone,' any'
remittances'made'to'its'home'office'will'not'be'covered'by'the'15%'BPRT.'In'order'to'totally'avoid'the'
15%'BPRT'and'totally'avoid'the'15%'intercorporate'tax'dividends,'you'locate'yourself'as'a'Phil.'branch'
within'the'economic'zone'(Tax'avoidance'scheme).'That’s'why'there'were'some'subsidiaries'within'the'
economic' one' that' converted' itself' into' Phil.' branches' so' that' to' avoid' the' 15%' BPRT.' So' everything'
that'goes'outside'the'Phil.'branch'office'will'be'totally'taxNfree.''
'
October-5,-2010-Tuesday-
N Can'a'DC'be'liable'for'the'15%'BPRT?'NO.'BPRT'is'only'applicable'to'RFC.'
N When'is'BPRT'due'to'the'government?'
o BPRT'is'due'to'the'government'when'a'RFC,'which'is'a'homeNoffice'branch'here'in'the'Philippines'of'a'NRFC'under'the'singleNentity'
concept,'remits'profits'to'such'NRFC.'
o So'is'it'possible'that'a'DC'be'liable'for'15%'BPRT?'Is'it'possible'for'the'government'to'collect'BPRT'on'a'profitNdistribution'made'by'a'
DC'to'a'NRFC?'NO,'since'BPRT'is'only'applicable'to'a'homeNoffice'branch'relationship'under'the'singleNentity'concept'between'a'RFC'
and'NRFC.'
N BPRT'visNàNvis'intercorporate'dividends'or'under'the'tax'sparing'credit'rule.'What'is'the'difference'between'the'two?'
'
NRFC'
'
'
100%'
'
'
'
''''''''''''DC'
' Subsidiary'Corp.' '''''''RFC'
Phil.'Branch'
'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''50'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Illustration:'If'a'NRFC'puts'two'investments'in'the'Phils.'One'in'a'DC,'fullyNowning'it'and'one'establishing'a'Phil.'branch.'A'DC,'being'a'
subsidiary' corporation,' will' have' entirely' different' sets' of' officers,' its' own' capital' stock,' etc…' only' that' 100%' of' it' is' owned' by' a'
parent'company.'So'any'distribution'made'by'a'DC'is'called'dividendsNdistribution.'It’s'not'remittance'of'profits'because'for'every'
capital'stock'that'is'owned'by'a'stockholder,'the'fruit'of'that'capital'stock'is'a'dividend.'But'when'that'NRFC,'likewise,'establishes'or'
opens'up'a'Phil.'branch,'such'branch'is'not'a'separate'entity'from'the'NRFC.'It'is'simply'a'branch'–'an'extension'of'its'homeNoffice'–'
and' any' profit' of' the' branch' is' directly' a' profit' of' the' homeNoffice.' It’s' just' that' for' every' instance' that' there' will' be' profits'
earmarked'for'remittance'abroad,'it'will'cross'borders'–'territorial'jurisdiction'–'it'will'already'be'subject'to'the'15%'BPRT'in'order'to'
equal'the'tax'on'the'dividends'that'will'be'declared'by'the'subsidiary'corporation.'So'in'both'cases,'a'NRFC,'whether'he'chooses'the'
parentNsubsidiary' type' of' investment' or' the' homeNoffice' branch' type' of' investment,' will' be' subject' at' the' same' rate' of' 15%,'
differently'termed.'One'is'intercorporate'dividends.'The'other'is'a'BPRT.'
N In'BPRT,'this'involves'2'countries'–'the'Philippines'and'one'from'abroad,'a'foreign'country.'There'will'be'no'BPRT'of'a'DC'having'a'branch'
anywhere'in'the'Phils.'because'it’s'one'and'the'same'entity'covered'by'one'jurisdiction'–'the'Phil.'jurisdiction.'So'BPRT'should'involve'the'
Phils.'and'another'foreign'country.'
o Would' all' Phil.' branches' of' a' NRFC,' when' it' earmarks' profits' for' remittance' abroad,' be' liable' for' the' 15%' BPRT?' As' a' rule,' Phil.'
branches'of'a'NRFC'is'liable'for'15%'BPRT'on'the'total'profits'that'it'earmarks'for'remittance'abroad'except'if'the'Phil.'branch'is'
located'within'the'economic'zone'that'is'legally'recognized'by'the'government.'
N Intercorporate'dividends.'What'is'the'general'rule'of'the'taxability'of'a'NRFC?'
o All'income'received'by'a'NRFC'will'be'subject'to'30%'tax'except'capital'gains'from'the'sale'of'shares'of'stock,'not'traded'in'the'stock'
exchange.'
o But'would'dividends'declared'and'paid'by'a'subsidiary'corporation'to'a'NRFC'be'subject'to'the'30%'tax?'If'the'foreign'government'of'
such'NRFC'allows'or'grants'tax'credit'to'Phil.'corporations'located'abroad,'the'intercorporate'dividends'would'be'subject'to'15%'tax,'
not'the'30%'tax.'
o The'reason'why'intercorporate'tax'on'dividends'is'at'15%'is'because:'
! 1.'In'order'to'equal'the'rate'of'the'BPRT'
! 2.'As'a'rule,'NRFC'will'be'taxed'at'30%'on'gross'income'including'dividends'earned'from'a'DC.'But'if'there'is'a'tax'credit'
that' is' granted' by' the' foreign' country' to' Phil.' corporations,' not' a' resident' there,' equivalent' to' 15%' then,' we' can' only'
impose'tax'of'15%'as'well.'It'means'to'say'that'30%'tax'rate'of'NRFC'less'the'tax'credit'that'is'expected'to'be'granted'by'
the' foreign' country' to' Phil.' corporations' at' 15%' N' so' the' difference' is' 15%.' The' difference' of' 15%' is' the' rate' of'
intercorporate'tax'on'dividends.'
N RAHQs'are'not'taxable'because'they’re'not'expected'to'be'performing'any'profitable'activities'in'the'Phils.'
N What'about'ROHQs?'
o They' are' subject' to' 10%' tax' on' their' taxable' income' derived' within.' ROHQ' is' operating' activities' within' the' Phils.' in' favor' of' its'
affiliates'within'the'Asia'Pacific'Region.'It'is'considered'as'a'special'RFC'subject'only'to'10%,'instead'of'the'30%'tax,'on'the'income'
coming' from' within' the' Phils.' The' tax' base' is' only' the' taxable' income' because' it’s' regarded' as' a' RFC' and' RFCs' are' taxed' at' net'
income.'
o And'if'ever'a'ROHQ'remits'profits'abroad'to'its'homeNoffice,'it'will'also'be'subject'to'the'15%'BPRT.''
o The'10%'is'income'tax.'The'15%'is'the'tax'on'the'profits'remitted'abroad.'It’s'just'like'a'corporation'taxable'on'its'income'and'a'
corporation'required'to'withhold'on'the'dividends'or'the'profits'that'it'will'remit'abroad.'
SPECIAL'NRFC'
N NonNresident'cinematographic'film'owner,'lessor'or'distributor'–'taxed'at'25%'on'their'gross'income'derived'from'within.'
o A'cinematographic'film'owner,'lessor'or'distributor'–'it'does'not'include'leasing'out'DVDs'or'CDs.'What'it'includes'is'only'films'–'one'
which'is'used'probably'for'movies.''
N NonNresident'owner'or'lessor'of'vessels'chartered'to'Filipino'Nationals'or'Corporations'–'taxed'at'4.5%'on'gross'rentals,'lease'or'charter'fees'
derived'from'within'
o The'Charter'Agreement'of'which'is'approved'by'Maritime'Industry'Authority.'
o Some'DCs'would'lease'out'vessels'from'foreign'owners'in'order'to'ship'in'the'raw'materials'that'they’re'purchasing.'So'whatever'the'
arrangement'is'with'the'lease,'whether'it'be'by'bareboat'charter'or'demise'charter,'whether'it’s'with'crew'or'not,'it’s'covered'by'
the'4.5%'on'gross'income'for'the'lease'payments.'
N NonNresident'owner'or'lessor'of'aircraft,'machinery'and'equipment'–'taxed'at'7.5%'on'gross'rentals'or'fees'derived'from'within'
PASSIVE'INCOME'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''51'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
N Individuals,'as'a'rule,'are'subject'to'the'20%'tax'withheld'on'the'interest'income'that'they'earn,'except'that'if'they’re'NRA.'
N When'we'look'at'corporate'taxpayers,'they’re,'as'a'rule,'subject'to'the'20%'tax'withheld'on'the'interest'income'that'they'earn'–'DC'and'RFC.'
o How' about' NRFC?' Are' they' subject' to' the' general' rule' of' 30%?' Or' are' they' given' the' preference' as' well' of' 20%' tax' on' interest'
income?'
! Let’s'say'that'you'are'the'manager'of'the'bank.'A'NRFC'places'a'time'deposit'in'your'bank.'Are'you'going'to'withhold'on'
the'interest'income?'YES.'At'what'rate?'30%.'
! Let’s'say'the'NRFC'placed'its'time'deposit'in'an'OBU.'Subject'to'tax'or'not?'NO,'since'they’re'exempted.'Can'we'consider'it'
as'a'passive'income'subject'to'FWT?'Or'what'is'covered'by'passive'income'of'corporations'subject'to'FWT?'When'you'say'
passive'income'of'corporation'that'is'subject'to'FWT,'it'must'be'an'income'that'is'derived'within'the'Phils.'in'order'for'us'
to'have'jurisdiction'over'the'withholding'agent.'If'the'income,'whether'it'is'a'kind'of'passive'income,'is'earned'abroad'or'
has'situs'abroad,'it'will'not'be'considered'as'income'subject'to'FWT'but'the'income,'if'applicable,'will'just'simply'form'part'
of'the'other'income'of'the'taxpayer,'whether'corporate'or'individuals.'
! An'interest'income'is'a'passive'income.'An'income'derived'from'inactivity.'When'a'DC'or'a'RFC'derives'interest'income'
from'bank'deposits,'it'will'still'be'subject'to'the'same'20%'imposed'on'individuals.''
! When'a'NRFC'derives'interest'income'on'bank'deposits,'it’s'30%.'But'interest'income'on'loans,'20%'final'tax.''
N Under'the'expanded'FCDU,'it’s'7.5%'for'RFC'and'DC'while'NRFC'is'exempt'just'like'placing'your'deposit'or'investment'in'an'OBU.'It’s'offshore.'
It’s'outside'the'jurisdiction'of'the'Phils.'so,'although'it’s'located'in'the'Phils.,'as'a'special'treatment,'it'is'exempt'if'the'depositor'and'the'bank'
that'is'accepting'the'deposit'are'treated'as'nonNresidents.'
N Royalties'derived'within'the'Phils.,'if'the'incomeNearner'is'a'DC'or'a'RFC,'it’s'both'at'20%.'It'does'not'negate'from'the'rates'that'is'applicable'
to'individual'taxpayers.'But'if'the'royalty'income'that’s'considered'as'passive'income,'the'earner'is'NRFC,'it’s'30%'because'as'a'rule,'NRFCs'are'
taxable'at'30%.''
o NOTE:' Royalties' should' be' considered' first' as' a' passive' income' before' you' apply' the' special' rates' of' 20%' and' 30%.' If' the' royalty'
income'is'already'an'active'income'that'is'earned'in'the'usual'course'of'trade'or'business'of'the'corporation,'it'will'be'subject'to'the'
ordinary'tax'rate'of'30%.'
N For'capital'gains'derived'from'the'sale'of'shares'of'stock:'
o If'it'is'listed'and'traded'thru'local'stock'exchange:'½'of'1%'of'the'GSP'
o If'it'is'not'listed'or'traded'thru'local'stock'exchange:'Not'over'100K'–'5%'and'over'100K'–'10%'
! Is'this'the'same'rate'applicable'to'individual'taxpayers?'YES.'
! Would'the'rates'differ'if'the'seller'is'a'NRFC?'NO.'This'is'one'income'or'one'type'of'gain'–'capital'gain'–'wherein'the'rate'
holds'true'or'the'same'for'all'types'of'corporate'taxpayers.'If'you'look'into'Sec.'28(b)'–'NRFC'are'subject'to'30%'tax'on'
gross'income….'Blah,'blah,'blah…'all'types'of'income'have'been'mentioned,'except'capital'gains'on'sale'of'shares'of'stock,'
which'means'that'it'will'be'subject'to'the'5'and'10%.'
N Capital'gains'derived'from'the'sale'of'real'property.'What'is'the'taxability'of'the'different'corporate'taxpayers?'
o For'DC'–'6%'of'the'GSP'or'Zonal'Value,'whichever'is'higher'
o For'RFC'and'NRFC'–'should'be'treated'as'OTHER'INCOME'subject'to'30%'
'
NRFC'(STU)'
'
'
' 100%'
'''RFC'(JKL)'
' Phil.'Branch'
'
'
' '''''''''DC'(ABC)'
'
Subsidiary'Corp.'
'
N Illustration:' Based' on' the' illustration' above,' what' is' the' relationship' between' DC' (ABC)' corporation' and' NRFC' (STU)?' ParentNsubsidiary'
relationship.'How'about'RFCNPhil.'branch'(JKL)'and'NRFC'(STU)?'HomeNoffice'branch'relationship.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''52'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
'
'
NRFC'(STU)'
'
'
SingleNentity'(15%'BPRT)'
'
60%'
' '''RFC'(JKL)'
Phil.'Branch'
'
20%'
' 20%' DC'(XYZ)'
'
''''''''DC'(ABC)'
' Subsidiary'Corp.'
' Profits'–'100M'
Declaration' of'
' Dividends'
'
N Another'illustration:'Based'on'the'illustration'above,'let’s'say'DC'(ABC)'is'not'100%'owned'by'RFC'(STU).'DC'(ABC)'was'setup'by'the'NRFC'
(STU).'There'is'also'a'RFC,'which'is'a'Phil.'branch'of'NRFC'(STU).'Such'NRFC'setup'a'Phil.'branch,'RFCNPhil.'branch'(JKL).'Afterwards,'both'
of'them'(the'NRFC'(STU)'and'RFCNPhil.'branch'(JKL))'invested'in'the'DC'(ABC).'DC'(ABC)'is'60%'owned'by'NRFC'(STU),'20%'owned'by'RFCN
Phil.'Branch'(JKL)OW'and'20%'owned'by'another'DC'(XYZ).'Now'DC'(ABC)'earned'profits'and'it'would'like'to'distribute'the'profits.'How'
will'it'distribute'the'profits?'Declaration'of'dividends'or'remittance'of'profits?'
o Declaration'of'dividends.'Dividends'will'have'to'be'declared'and'distributed'to'all'stockholders.'
o If'100M'will'be'distributed'as'the'total'dividends,'20M'will'go'to'XYZ.'Is'ABC'required'to'withhold'tax'on'the'dividends'to'XYZ?'
! NO,'since'it'is'exempted'from'tax'on'dividends'received'from'a'DC'(Sec.'27).'
! The'law'already'provides,'under'Sec.'27,'that'dividends'declared'by'a'DC'to'another'DC'is'not'subject'to'tax'as'yet.'Only'
when'the'dividends'would'be'ultimately'declared'to'individual'stockholders'will'the'tax'rates'apply'of'10%,'20%'or'25%'
applicable'to'individual'taxpayers''
o How'about'the'20M'dividends'to'JKL?'Will'it'be'subject'to'withholding'tax?''
! NO,'since'it'is'also'exempted'from'tax'on'dividends'received'from'a'DC'(Sec.'28(a)).'
! Sec.'28(a)'(7)'also'provides'that'the'dividends'declared'by'DC'to'a'RFC'is'as'well'exempt'from'tax.''
o How'about'the'60M'dividends'to'STU?'
! Liable'for'tax'at'30%'but'subject'to'the'tax'sparing'credit'rule'(Sec.'28(b)).''
! Here,' the' tax' sparing' credit' rule' can' be' applied.' If' the' foreign' government' of' STU' grants' or' allows' tax' credit,' the'
intercorporate'tax'of'15%'shall'be'imposed'on'the'dividends'received'by'STU'from'ABC.'
! No'actual'grant'is'necessary'so'long'as'it'can'be'seen'that'the'foreign'country'allows'a'tax'credit'to'Philippine'corporations'
in'such'country,'therefore,'it’s'automatic'that'we'can'apply'the'tax'sparing'credit'rule'–'instead'of'the'30%'general'rate'on'
NRFC,'we'can'actually'imposed'the'15%'intercorporate'tax'on'dividends'declared'by'a'DC'to'a'NRFC.'
! Sec.'28(b)'provides'that'the'dividends'declared'by'a'DC'to'a'NRFC,'subject'to'the'tax'sparing'credit'rule,'will'be'subject'to'
15%'tax.'
! Can'the'NRFC'raise'the'argument'that'under'the'singleNentity'concept,'it'will'also'be'exempt'just'like'a'RFC?'
o NO.'According'to'the'SC,'the'NRFC'cannot'use'the'singleNentity'concept'in'avoiding'the'tax'of'15%'on'dividends'
declared'to'it'in'comparison'to'the'dividends'declared'by'the'subsidiary'corporation'to'a'RFC'of'which'it'owns.'If'
we' pull' out' such' 15%' tax' just' so' to' equalize' the' exemption' granted' to' RFC,' there' will' be' no' tax' that' can' be'
collected' by' the' government.' The' reason' why' the' RFC' is' exempt' and' why' the' NRFC' is' taxable' is' because' the'
NRFC' is' already' a' given' state' –' it’s' direct' dividends.' Unlike' RFC,' it’s' still' exempt.' Once' the' RFC' receives' the'
dividends'from'a'DC,'it'will'still'remit'the'profits'abroad'subject'to'the'15%'BPRT.'And'the'SC'clearly'stated'that'
for'purposes'of'investing'in'a'corporation'in'the'Phils.,'the'singleNentity'concept'will'not'apply'wherein'a'NRFC'
and' its' Phil.' branch,' both' investing' in' the' same' corporation,' they' will' be' considered' as' separate' entities' for'
purposes'of'taxing'the'dividends.''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''53'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o And'BPRT'is'only'directed'to'a'RFC.'So'DC'is'not'subject'to'the'15%'BPRT.'With'more'reason'that'a'NRFC'is'not'
subject'to'BPRT'since'a'foreign'branch'is'not'within'our'jurisdiction.''
TAX'ON'IMROPERLY'ACCUMULATED'EARNINGS'
N IAET'–'Improperly'Accumulated'Earnings'Tax,'what'is'this'IAET?'
o It'is'a'10%'tax'imposed'for'each'taxable'year'on'the'improperly'accumulated'taxable'income'of'each'corporation.'
o There’s'a'principle'why'IAET'has'to'be'imposed.'
'
Assets' ' ' ' 100M'
' Liabilities'' ' ' ''80M'
Net'worth' ' ' ''20M'
'
'
' ' '''''''''''''''Capital'Stock'–'1M''''''''''''''''''''''''''''''''''1M'as'capital'stock''''''''''''''''''''
'
'
' ''''''''''''Profits'(retained'earnings)'–'19M'
' ' ' ' ' ' '''''''''''18M'for'future'expansion'

'
! Illustration:'The'net'worth'of'your'business'is'broken'down'into'capital'stock'and'profits'(earnings'that'you'retain'in'the'
business'or'in'the'corporation).'You'accumulate'earnings'improperly.'When'you'accumulate'the'earnings'of'your'business'
improperly,'you'might'be'imposed'of'the'10%'IAET.'If'your'asset'is'100M.'Liabilities'is'80M.'Your'net'worth'is'20M.'If'your'
capital' or' investment' from' the' start' of' your' business' is' only' 1M.' It' means' to' say' that' the' profits' that' you' have'
accumulated'is'19M.'Have'you'accumulated'profits'unreasonably?'Is'there'a'chance'that'the'BIR'will'impose'the'IAET?'
o What’s'the'principle'behind'imposing'the'IAET?'Why'is'the'BIR'taxing'a'profit'that'is'already'exempt'from'the'
tax?'Dba'class,'when'you'earn'income,'you'will'be'subject'to'the'income'tax.'Whatever'remains'is'the'profit'that'
you'will'accumulate'and'will'only'be'taxable'again'once'it'will'be'distributed'to'the'stockholders.'So'this'is'the'
current'state'–'you'did'not'distribute'the'19M'worth'of'profits'to'your'stockholders.'Why'is'the'BIR'taxing'the'
profits'that'you'have'accumulated?'
! The' reason' why' there' is' IAET' is' to' actually' penalized' corporations' that' have' been' unreasonably'
withholding' the' profits' from' being' distributed' to' the' stockholders.' Why?' Because' had' it' been'
distributed'to'the'stockholders,'at'what'rate'can'the'BIR'collect'the'tax'on'the'distribution'of'dividends'
to'stockholders?'Dba,'generally,'if'the'recipient'is'a'RC,'NRC'and'RA,'it'would'have'been'subjected'to'
10%' tax.' The' BIR' could' have' collected' tax' on' the' profits' had' this' profits' been' distributed.' Being'
unreasonably'accumulated'(the'profits),'the'BIR'is'going'to'penalize'the'corporation.'
! Case'scenario:'If'you'will'be'subjected'to'the'10%'IAET'for'unreasonably'withholding'of'profits'and'you'decide'later'on'to'
distribute' the' profits' as' dividends' to' all' of' your' stockholders,' who' are' all' RC,' would' you' still' be' required' to' withhold'
another'10%'tax'on'the'dividends'subsequently'declared'to'such'stockholders'after'being'penalized'of'the'10%'IAET?'
o YES.'There'is'no'double'taxation'here.'Even'if'your'profits'which'you'have'unreasonably'accumulated'have'been'
exposed' already' and' you' have' paid' the' 10%' IAET,' subsequent' distribution' as' dividends' would' still' entail'
withholding'of'the'regular'rates'of'10%'to'RC,'20%'to'NRANETB,'and'25%'to'NRANNETB.'It'doesn’t'means'that'if'
you' have' already' shouldered' the' 10%' IAET,' it' will' already' cover' for' the' normal' 10%' FWT' on' dividends.' These'
taxes'(IAET'and'FWT'on'dividends)'are'entirely'separate.'They'have'different'purposes.'One'(IAET)'is'imposed'as'
a'penalty'and'the'other'one'(FWT)'is'simply'a'tax'on'the'income'earned'by'the'stockholders.'''
! Average' for' the' dividends' or' accumulated' earnings' that' is' a' probable' area' for' imposing' the' 10%' IAET' would' only' start'
from'1998.'Your'dividends'or'accumulated'earnings'from'Dec.'31'down'would'still'be'free'from'the'IAET'because'this'kind'
of'tax'has'already'been'effective'Jan.'1,'1998.'And'if'you’re'operating'on'a'fiscal'year'basis,'which'means'that'you'start'at'
any'day'other'than'Jan.'1,'your'free'coverage'from'IAET'would'be'starting'from'the'last'month'in'1998'–'the'end'of'your'
fiscal'year.'So'if'your'fiscal'year'is'Nov.'1'ending'in'Oct.'31.'Oct.'31,'1998'down'would'still'be'free'from'IAET.'
N If' you’re' from' the' BIR,' do' you' have' the' figure' or' taxable' base' within' which' you' can' impose' the' IAET?' Is' it' readily' available' in' the' given'
illustration'above?'Where'do'you'have'to'pick'out'the'taxable'base'for'the'10%'IAET?'
o The'10%'IAET'will'be'computed'according'to'the'formula'given'in'Sec.'29'of'the'tax'code.'The'19M'accumulated'retained'earnings'
given'in'the'illustration'above'is'only'an'indicator,'a'red'light,'for'the'BIR'to'assess.'The'moment'that'the'retained'earnings'would'
exceed'100%'of'your'capital'stock,'it'will'try'to'compute'the'IAET.'But'it'is'not'a'guaranty'that'the'BIR'will'actually'collect'the'IAET.'
The'retained'earnings'is'not'the'base.'It'is'just'an'indicator'that'you'have'improperly'accumulated'your'earnings.'
o Under'Sec.'29,'computing'IAET'would'startNoff'from'your'taxable'income'for'the'year'that'the'BIR'is'considering'imposing'the'IAET.'
! FORMULA:'Taxable'income'adjusted'by:'ADD'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''54'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o Income'exempt'from'tax'
o Income'excluded'from'gross'income'
o Income'subject'to'final'tax'
o Amount'of'net'operating'loss'carryNover'deducted'(NOLCO)'
! And'reduced'by'the'sum'of:'MINUS'
o Dividends'actually'or'constructively'paid;'and'
o Income'tax'paid'for'the'taxable'year'
! TAX'BASE'(IAE'–'Improperly'Accumulated'Earnings)'='taxable'income'+'income'exempt'from'tax'+'income'excluded'from'
gross'income'+'income'subject'to'final'tax'+'NOLCO'–'[dividends'actually'or'constructively'paid'+'income'tax'paid'for'the'
taxable'year]'
! So'the'basis'of'the'10%'IAET'is'not'the'retained'earnings'given'from'the'formula'in'the'illustration'given'above'but'the'
formula'on'the'TAX'BASE'(IAE).'
! So'if'your'taxable'income'for'the'year'that'is'covered'by'the'assessment'of'the'IAET'is'0.'You'have'no'exempt'income,'0'as'
well.'And'you'have'not'paid'any'tax.'Therefore,'you'have'no'IAET,'even'if'you'have'retained'earnings'because'again,'such'
retained' earnings' is' only' an' indicator' for' audit' and' assessment,' not' necessarily' the' payment' of' 10%' IAET' because' 10%'
IAET'is'based'on'the'TAX'BASE'(IAE)'formula.'
! But'the'BIR'is'not'so'unreasonable'as'to'not'allow'you'to'accumulate'profits.'There'are'instances'when'you'are'allowed'to'
accumulate'profits'even'beyond'your'capital'stock.'What'are'the'instances'when'you'have'the'free'time'to'accumulate'the'
profits'more'than'100%'of'your'capital'stock?'What'are'the'instances'when'you'are'allowed'to'accumulate'profits'beyond'
100%'of'your'capital'stock?'
o If'it'is'justified'under'the'“reasonable'needs'of'the'business”.'How'do'you'justify'the'“reasonable'needs'of'the'
business”'according'to'Rev.'Reg.'2N01?'
! 1.'Allowance'for'the'increase'in'the'accumulation'of'earnings'up'to'100%'of'the'paidNup'capital'of'the'
corporation'as'of'Balance'Sheet'date,'inclusive'of'accumulations'taken'from'other'years;'
• So'you'can'retain'profits'up'to'100%'of'your'capital'stock.'
! 2.' Earnings' reserved' for' definite' corporate' expansion' projects' or' programs' requiring' considerable'
capital'expenditure'as'approved'by'the'Board'of'Directors'or'equivalent'body'
• So'for'definite'corporate'expansion'projects'
! 3.' Earnings' reserved' for' building,' plants' or' equipment' acquisition' as' approved' by' the' Board' of'
Directors'or'equivalent'body'
! 4.' Earnings' reserved' for' compliance' with' any' loan' covenant' or' preNexisting' obligation' established'
under'a'legitimate'business'agreement'
• This' only' means' that' if' you' have' an' existing' loan' agreement' with' any' national' banks' or'
domestic' banks' or' international' banks' wherein' it' is' required' that' you' have' to' maintain' a'
ratio'of'your'profits'against'capital'stock,'therefore,'you'have'to'comply'with'that'provision'
strictly,'and'so'therefore,'you'will'not'be'liable,'to'the'extent'of'the'compliance,'for'IAET.'It'
simply' means' that' if' the' bank' requires' you' to' maintain' –' not' disposing' of' your' retained'
earnings,'not'declaring'it'as'dividends'–'then'you'are'allowed'to'accumulate'profits'beyond'
100%'of'your'capital'stock.'
! 5.'Earnings'required'by'law'or'applicable'regulations'to'be'retained'by'the'corporation'or'in'respect'of'
which'there'is'legal'prohibition'against'its'distribution'
! 6.' In' the' case' of' subsidiaries' of' FCs' in' the' Phils.,' all' undistributed' earnings' intended' or' reserved' for'
investments' within' the' Phil.' as' can' be' proven' by' corporate' records' and/or' relevant' documentary'
evidence.'
N When'you'say'that'you'would'want'to'accumulate'profits'for'expansion'projects,'what'are'the'steps'that'you'need'to'make?'Is'it'enough'that'
you'will'tell'the'BIR'that'you'are'planning'to'expand'your'business?'How'will'you'prove?'What'if'for'10'years'already'you'have'been'placing'in'
your'financial'statements'that'this'is'for'future'expansion'projects,'etc….'but'it'never'really'took'place?'Can'you'now'be'imposed'on'the'IAET?'
o Proven' by' a' Board' resolution,' blue' prints,' etc…..' But' it' should' be' definite' expansion' projects' proven' by' sufficient' documentary'
evidence'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''55'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o If' at' the' end' of' this' year,' you' have' an' inkling' that' you' will' be' audited' or' assessed' by' the' BIR' so' you' decided' to' put' into' record,'
prepare'a'board'resolution'by'your'Board'of'Directors'that'18M'of'the'retained'earnings'will'be'declared'as'dividends,'within'how'
many'months'or'years'should'you'actually'pay'out'the'18M?'What'is'the'time'frame'that'is'given'you'by'the'tax'authorities'to'realize'
the'actual'distribution'of'dividends?''
! At'the'end'of'every'taxable'year,'you'are'given'the'leeway'on'how'to'distribute'your'accumulated'earnings.'If'you'want'to'
avoid' the' IAET,' maintain' 100%' of' your' capital' stock' and' the' excess,' either' for' future' expansion' projects' or' dividend'
distribution.'But'it'cannot'stay'forever'as'is.'It'should'actually'be'distributed'within'1'year'from'the'close'of'the'taxable'
year'wherein'you'declare'the'dividends.'So'it'should'be'paid'out'within'1'year,'otherwise,'you'will'pay'the'IAET.'
N What'corporations'or'entities'are'not'covered'by'the'IAET?'
o 1.'Publicly'held'corporations'
! What' is' a' publicly' held' corporation?' Is' that' the' same' as' a' publicly' listed' corporation?' NO,' because' a' publicly' held'
corporation'means'that'which'is'not'covered'by'the'definition'of'a'closely'held'corporation'
! What'is'a'publicly'listed'corporation?'It'is'a'publicly'listed'corporation'if'its'stocks'are'listed'in'the'stock'exchange.'Publicly'
listed' corporations' are' corporations' wherein' the' stocks' are' listed' and' offered' to' the' public.' So' automatically,' a' publicly'
listed'corporation'is'a'publicly'held'corporation'because'being'listed,'it'would'normally'have'numerous'stockholders.'It’s'
open'to'the'public.''
! But'a'publicly'held'corporation'is'different'because'publicly'held'corporations'are'corporations'which'are'not'closelyNheld.'
And' for' purposes' of' the' IAET,' you' have' to' know' the' definition' first' of' what' a' closelyNheld' corporation' is.' What' is' not'
covered'by'a'closelyNheld'corporation'becomes'a'publicly'held'corporation.'
! CloselyNheld'corporations'are'those'corporations'at'least'50%'in'value'of'the'outstanding'capital'stock'or'at'least'50%'of'
the'total'combined'voting'power'of'all'classes'of'stock'entitled'to'vote'is'owned'directly'or'indirectly'by'or'for'not'more'
than'20'individuals.'DCs'not'falling'under'the'aforesaid'definition'are,'therefore,'publicly'held'corporations.'
'
'
' '
'
'''''''50%' '''''''50%' CLOSELYNHELD'
' more' than''''''''' 1'individual' CORPORATION'
20'
'
individuals'
'
'
'
'
! Illustration:' A' DC,' 50%' of' its' capital' stock' is' owned' by' more' than' 20' individuals,' and' the' other' 50%' is' owned' by' 1'
individual.'
o By'your'definition'of'closelyNheld,'is'the'illustration'above'closelyNheld,'that'is'50%'of'the'voting'stock'is'owned'
by'not'more'than'20'individuals?'
! YES,'having'complied'the'definition'of'closelyNheld'that'50%'of'the'voting'stock'is'owned'by'not'more'
than'20'individuals,'then'it'is'closelyNheld'for'purposes'of'IAET.'Therefore,'the'illustration'above'is'not'
a' publicly' held' corporation.' Consequently,' whenever' such' corporation' in' the' illustration' above' will'
unreasonably'or'improperly'accumulate'its'earnings,'it'will'be'subject'to'the'10%'IAET.'
! Any' corporation,' which' does' not' fall' within' the' definition' of' a' closelyNheld' corporation,' will'
automatically'be'considered'as'publicly'held.'
! When'can'we'say'in'the'illustration'above'be'publicly'held?'
'
'
'
'
'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''56'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
'
'
'
'
'
'
' '''''''49%' '''''''51%'
1'individual' 21' PUBLICLY'HELD'
' individuals' CORPORATION'
'
'
'
'
• Example:'If'the'ownership'of'the'corporation'is'at'49%,'which'is'not'at'least'50%,'owned'by'1'
individual.'While'51%'is'owned'by'21'individuals.'This'is'already'a'publicly'held'corporation.'
Being'a'publicly'held'corporation,'this'is'not'covered'by'the'IAET.'
'
' '
' '''''''49%' '''''''51%'
CLOSELY' HELD'
21'individuals' 1'individual'
' CORPORATION'

'
'
! Another'illustration:'A'DC,'49%'of'its'capital'stock'is'owned'by'21'individuals'and'50%'of'its'capital'stock'is'owned'by'51%'
of'1'individual.''
o Is'the'illustration'above'publicly'held'or'closely'held?'
! CLOSELYNHELD'because'at'least'50%'is'owned'by'not'more'than'20'individuals.''
! Purpose'for'the'difference'between'a'publicly'held'and'a'closely'held'corporation:'
o Publicly'held'corporations'are'not'exposed'to'liability'for'IAET'while'closely'held'corporation'are'exposed'to'such'
liability.'
! Is'a'closely'held'corporation'a'family'corporation?'
o NO.'But'a'family'corporation'is'a'closely'held'corporation.'
o Would'all'closely'held'corporations'be'family'corporations?'
! NO.''
o Not'all'closely'held'corporations'are'family'corporations'because'so'long'as'a'corporation'satisfies'at'least'50%'
owned'by'not'more'than'20'individuals,'it'is'considered'a'closely'held'corporation.'
! RULES'–'(See'Mamalateo'on'p.'466)'
o 2.'Banks'and'other'nonNbank'financial'intermediaries'
! Why'is'it'not'covered'by'the'IAET?'
o Because'they’re'required'to'maintain'a'certain'level'of'cash'or'liquidity'
o 3.'Insurance'companies'
! Not'covered'by'IAET'because'they’re'required'to'maintain'some'reserves'and'regulated'with'the'Insurance'Commission'
o 4.'PEZANregistered'companies'
! Not'covered'by'IAET'because'they’re'liable,'instead'of'the'30%'corporate'tax,'to'a'special'rate'of'5%'tax'on'gross'income'in'
lieu'of'all'taxes,'whether'national'tax'or'local'tax,'which'includes'the'exemption'from'the'payment'of'IAET.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''57'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! As'a'rule,'PEZANregistered'companies'are'subject'to'the'5%'special'rate'or'preferential'rate'on'gross'income'in'lieu'of'all'
national'or'local'taxes.'Therefore,'these'companies'within'the'economic'zone'are'not'liable'to'pay'30%'on'their'taxable'
income.'But'the'option'is'still'given'to'them.'PEZANregistered'may'opt'to'be'liable'for'30%'on'taxable'income'instead'of'the'
5%'on'gross'income.'How'would'that'happen?'Or'why'would'it'happen?'Why'would'the'PEZA'company'choose'to'be'liable'
of'30%'instead'of'5%?'
o The'reason'is'simple.'The'5%'tax'is'based'on'the'gross'income'and'gross'income'for'companies'located'within'
the'economic'zone'is'heavily'regulated'wherein'they'can'only'deduct'9'types'of'expenses'or'costs'from'the'sales.'
[Gross'total'sales'–'costs'='gross'income].'For'PEZA,'the'costs'is'regulated'to'9'types'of'expenses'that'is'directly'
related.'Whereas'if'they'choose'to'be'liable'for'30%,'it’s'based'on'the'taxable'income'–'all'expenses'related'to'
the'trade,'business'or'profession'of'the'taxpayer'can'be'deducted.'
o If'the'PEZANregistered'company'opts'to'be'taxed'at'30%,'which'is'an'irrevocable'choice,'will'it'be'liable'for'IAET'
or'not?'
! YES.'Rev.'Reg.'2N01'on'IAET'provides'that'a'corporation'registered'with'the'PEZA'(Philippine'Economic'
Zone'Authority)'is'not'covered'by'the'IAET'if'it'enjoys'the'preferential'rate'or'special'rate'given'to'it.'
Now,'if'it'does'not'opt'to'be'subject'to'the'special'rate'of'5%'tax'in'lieu'of'all'taxes,'if'it'maintain'the'
30%'regular'rate,'then'the'IAET'will'still'apply.''
o 5.'Foreign'corporations'
! Is'a'RFC'covered'by'the'IAET?'Will'a'Phil.'branch'of'a'NRFC'be'liable'for'IAET?'
o NO,'because'a'Phil.'branch'does'not'have'a'capital'stock.'
o 6.'Taxable'business'partnerships'
! It’s'not'covered'by'the'IAET'because'it'does'not'have'a'capital'stock'
! Not' taxable' joint' ventures' are' as' well' not' covered' by' the' IAET' because' it' is' not' considered' as' a' corporation' for' tax'
purposes.''
o 7.'General'professional'partnerships'
! It’s'also'not'covered'by'the'IAET'because'it'is'not'considered'as'a'corporation'for'tax'purposes.'
CAPITAL'TRANSACTIONS'
N 2'types'of'assets:'
o Capital'asset'–'capital'income'
o Ordinary'asset'–'ordinary'business'income'or'trade'income'
N Capital' transactions' are' transactions' arising' from' the' use' of' capital' assets.' When' you' say' capital' loss,' it’s' the' loss' that' you' suffered' from'
transacting'using'capital'assets.''
N What’s'an'Ordinary'Asset'(OA)?'(Sec.'39'–'negative'definition'of'what'capital'assets'are)'
o 1.'Stock'in'trade'or'property'of'the'taxpayer'which'may'be'properly'included'in'the'inventory'at'the'end'of'the'taxable.'
o 2.'Property'primarily'held'for'sale'to'customers'in'the'ordinary'course'of'trade'or'business'
o 3.'Property'used'in'trade'or'business'subject'to'depreciation,'which'means'that'this'must'be'depreciable'property'
o 4.'Real'property'used'in'trade'or'business'
N What'are'Capital'Assets'(CA)?'
o 1.'Properties'not'considered'as'ordinary'assets.'
o 2.'Properties'used'in'trade'or'business'classified'as'capital'assets:'
! i.'accounts'receivable'
o Unless'you'are'in'a'business'of'selling'accounts'receivable,'it'is'considered'as'capital'asset.''
o If'you'have'an'accounts'receivable'or'collectible'from'your'customer'and'you'are'short'of'cash'and'would'like'to'
assign'that'receivable'or'collectible'to'another'corporation'by'selling'your'right'to'collect.'Even'if'it’s'part'of'your'
trade,'business'or'profession'but'because'you’re'not'into'selling'receivable'or'collectible,'it’s'still'considered'as'
capital'transaction.''
! ii.'property'for'investment'in'stock'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''58'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o If'you'have'a'business'and'you’d'like'to'invest'in'another'business,'so'long'as'you’re'not'a'holding'company'into'
investing'another'businesses,'that'particular'asset'–'the'investment'in'capital'stock'–'is'still'considered'as'capital'
asset'while'you'are'not'into'trading'shares.'But'if'you’re'a'broker'of'shares,'that’s'automatically'considered'as'
ordinary'assets.''
! iii.'subdivision'of'lots'to'tenants'at'the'instance'of'the'government'
! iv.'Interest'of'a'partner'in'a'partnership'
N Can'an'OA'be'converted'into'a'CA?'
o YES.'
o Example:'The'properties'of'a'taxpayer'engaged'in'real'estate'business'are'considered'as'OA.'If'the'taxpayer'dies,'these'properties'
will'be'transmitted'to'the'heirs.'Should'the'heirs'discontinue'the'real'estate'business'of'the'deceased'parent,'such'properties'which'
are'ordinarily'held'for'sale'to'customers'may'be'converted'into'CA.'
N Conversely,'can'a'CA'be'converted'into'an'OA?'
o YES.'
o Example:'Land'inherited'by'the'heirs'from'their'deceased'parents'is'considered'as'CA.'In'the'event'that'this'property'is'substantially'
improved'by'the'heirs'and'sold'at'profit,'said'CA'may'be'converted'into'an'OA.'The'profit'derived'from'the'sale'of'the'land'is'already'
considered'as'ordinary'gain.'
N Lets'say'for'example'you'got'interested'in'buying'a'certain'parcel'of'land'and'sold'it'to'your'seatmate.'After'a'month,'you'bought'a'house'and'
lot,'improved'it,'and'sold'it'again'to'your'other'seatmate.'This'went'on'monthly'during'the'year.'You’re'not'registered'in'any'business.'The'
first'sale'–'is'that'a'capital'transaction'or'ordinary'transaction?'Or'can'you'say'that'your'income'is'subject'to'the'6%'CGT'or'you’re'already'
covered' by' the' 5N32%' OT' (Ordinary' Taxes)?' Can' you' now' be' considered' at' the' end' of' the' year' that' you’re' now' already' into' ordinary'
transactions' of' buying' and' selling' real' properties?' Is' registration' of' a' real' estate' business' necessary' to' make' your' real' estate' transactions'
ordinary'transactions?'
o NO.' Therefore,' if' you' sold' house' and' lots' 12' times' last' year' every' month,' can' you' already' be' subject' to' the' OT' of' 5N32%' as' an'
individual'or'will'you'still'be'covered'6%'CGT?'
! Because' of' the' regularity' and' the' continuity' of' the' conduct' of' the' buying' and' selling' of' real' estate' properties,' you' will'
already'be'considered'into'engaging'ordinary'transactions'of'buying'and'selling'real'estate'properties.'CGT'of'6%'will'no'
longer'apply.'
! Registration'of'activities'is'not'necessary'for'you'to'be'covered'by'OT'rates.'
! Viewing'the'tax'rates'of'6%'and'5N32%'on'a'property,'which'is'more'favorable?'
o It'depends.'6%'is'based'on'the'GSP'(Gross'Selling'Price)'or'FMV'(Fair'Market'Value),'whichever'is'higher.'The'5N
32%'is'based'on'the'net'taxable'income.'The'difference'in'rates'would'actually'have'to'depend'on'how'much'
your'actual'cost'is'and'the'selling'price.'
o If'you’re'selling'a'property'that'you'acquired'50'years'ago'and'you'sell'it'today.'You'better'be'subjected'at'6%'
CGT'because'if'you'sell'that'property'you'purchased'50'years'ago,'the'difference'in'the'selling'price'and'the'cost'
is'very'wide'wherein'you'can'already'be'subject'to'the'highest'tax'bracket'in'the'individual'tax'table'of'5N32%.'
And'ordinary'transactions'are'liable'for'VAT'while'capital'transactions,'no'VAT.'
o It'is'really'better'to'stick'selling'pure'pieces'of'real'properties'every'year'in'order'to'be'still'covered'by'CGT.'
o BIR' has' already' set' the' limit.' If' you' are' able' to' sell' at' least' 6' real' properties' in' one' year' on' your' individual'
capacity' without' registration,' you' will' be' considered' as' in' the' regular' conduct' of' selling' real' properties' –'
ordinary' transactions.' If' you' sell' lower' than' 6' during' the' calendar' year,' still' capital' transactions,' without' BIR'
registration.'So'you'stop'at'5.'
N What'is'the'difference'between'wash'sale'and'short'sale?'
o Wash'sale'
! It’s'like'selling'the'shares'today'but'30'days'before,'you'acquired'the'same'or'substantially'similar'shares'or'30'days'after,'
you'acquired'the'same'or'substantially'similar'shares.'
! Your' reckoning' point' is' WON' 30' days' before' the' sale,' you' acquired' the' same' or' substantially' similar' shares' or' 30' days'
after.'It’s'a'wash'sale.'It’s'a'simulated'sale.'Is'the'gain'taxable'or'is'the'loss'deductible'in'this'kind'of'transaction?'
o In'all'cases,'the'question'whether'the'gain'is'taxable'or'not,'lifeblood'doctrine,'the'gain'is'taxable'and'the'loss,'
being'a'simulated'sale,'is'not'deductible.'
o Short'sale'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''59'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! It’s'just'like'advance'selling'but'just'make'sure'that'at'the'time'you'need'to'deliver'the'shares'that'you'have'sold'prior,'you'
already'have'the'ownership'of'such'shares'–'still'valid'basta'so'long'as'he'has'the'ownership'at'the'time'that'he'needs'to'
deliver.'
! It’s'a'transaction'wherein'a'person'sells'securities'which'he'does'not'own'yet,'provided,'however,'that'he'has'ownership'
of'the'securities'at'the'time'of'delivery'–'he'has'the'right'to'transfer'ownership.'
! Is'the'gain'taxable'and'is'the'loss'deductible?'
o YES.'The'gain'is'taxable'and'the'loss'is'deductible.'
o Is' there' an' instance' where' a' capital' loss' arising' from' a' sale' wherein' 30' days' prior,' you' acquire' the' same' or'
substantially' similar' shares,' be' deductible?' Is' there' an' instance' wherein' your' capital' loss' is' deductible' in' such'
case?'
! YES,' if' the' seller' is' a' dealer' in' securities' or' shares' of' stock,' in' which' case,' you’re' into' ordinary'
transactions'of'buying'and'selling'shares'whether'it’s'within'30'days,'within'1'day'or'within'2'days'that'
you'have'acquired'substantially'similar'shares'or'the'same'shares,'you'can'deduct'the'losses'and'offset'
it'with'your'other'capital'gains.'
! Basta'the'rule'is,'in'capital'transactions,'whenever'a'loss'is'deductible,'only'offset'it'against'the'capital'
gains.'Do'not'cross'the'border'of'offsetting'the'capital'losses'from'ordinary'income.'
N There'are'3'rules'governing'capital'transactions'which'are'not'applicable'to'ordinary'transactions,'what'are'these?'
o 1.'HoldingNperiod'rule'
! Applies'only'to'individual'taxpayers'–'because'the'capital'gain'derived'from'capital'transaction'of'corporate'taxpayers'is'
always' 100%' recognized' irrespective' of' the' number' of' months' during' which' the' property' was' in' the' possession' of' the'
corporate'taxpayer.'
! If'the'property'has'been'held'by'the'taxpayer'for'a'period'of'not'more'than'12'months,'the'gain'or'loss'is'100%'recognized.'
! If'the'property'has'been'held'for'more'than'12'months,'the'gain'or'loss'is'50%'recognized.'
'
' 2'Lands'' ' June'31,'2009'
' ' Cost'1M'
'
' ' ' ' ' ' ' Gain'
' 1)'December'31,'2009'
'''''Selling'price'1.5M' ' 100%'of'500K'' '''''''''''''''''500K'
'
2)'October'5,'2010'
' '''''Selling'price'2M' ' ' ''50%'of'1M' '''''''''''''''''500K'
'
' Change'of'facts:'
' 1)'Dec.'31,'2009'
'''''Selling'price'1.5M' ' 100%'of'500K' ' 500K'
' 2)'Oct.'5,'2010'
' '''''Selling'price'.5M'' ' '''50%'of'(500K)' '''''''''''''''''(250K)' Not'deductible'against'
500K' bec.' not' on' the'
'
same'year'
'
'
! Example:'You'have'2'parcels'of'land.'You’re'not'engaged'in'the'real'estate'business'or'in'any'other'businesses'wherein'the'
ST
land'is'used'in'trade'or'business.'You'purchased'such'lands'Jan.'31,'2009'for'a'cost'of'1M'each.'The'1 'parcel'of'land,'you'
nd
sold'it'at'Dec.'31,'2009'for'the'selling'price'of'1.5M.'The'2 'parcel'of'land,'you'sold'it'today,'Oct.'5,'2010'for'the'selling'
price'of'2M.'
o For'individual'taxpayers'holding'capital'assets'which'they'sell,'you'have'to'consider'the'period'within'which'the'
property'was'with'the'seller'–'the'holding'period'(for'how'many'months'was'it'with'the'taxpayer'who’s'selling'
it).'If'the'taxpayer'sold'it'within'a'few'months,'12'months'or'less,'everything'is'taxable'and'deductible'(100%).'If'
the' property' has' been' held' on' to' by' the' taxpayer' for' more' than' 12' months,' only' 50%' is' taxable' or' 50%' is'
deductible.'
st
o In'the'case'of'the'1 'parcel'of'land,'you'gained'500K'and'100%'of'500K,'which'is'500K,'is'taxable'because'such'
nd
land'was'held'on'to'for'12'months.'While'the'2 'parcel'of'land,'you'gained'1M'but'only'50%'of'1M,'which'is'
500K,'is'taxable'because'such'land'was'held'on'to'for'more'than'12'months.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''60'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o The'reason'for'such'rule'is'that'whenever'you'purchase'a'personal'property,'you'are'not'expected'to'dispose'of'
it'easily.'When'you'dispose'of'personal'property'more'often'within'1'year,'you'are'considered'to'be'in'trade'or'
business'but'not'necessarily.'So'gain'–'100%'is'taxable'or'50%'is'taxable.'It’s'the'same'way'that'the'loss'is'only'
50%'deductible'or'100%'deductible.'
nd
! Another' example:' Lets' change' the' facts.' The' 2 ' parcel' of' land' was' sold' for' .5M.' Other' facts' are' the' same' with' the'
preceding'example.'What'will'happen?'
nd
o In'this'case,'the'sale'of'the'2 'parcel'of'land'constitutes'a'loss'of'(500K).'50%'of'(500K)'is'(250K).'Is'the'(250K)'
st
recognized'loss'deductible'on'the'capital'gain'of'500K'from'the'sale'of'the'1 'parcel'of'land?'
! NO.'The'loss'is'deductible'but'not'against'such'500K.'The'loss'is'deductible'against'the'capital'gain'that'
has'been'earned'in'2010'but'not'against'the'500K'because'such'500K'was'earned'a'year'ago,'in'2009.''
! Assuming'that'you'had'no'other'transactions'in'2010,'no'other'sale,'you'have'a'loss'of'(250K),'can'you'
carry'forward'such'loss?'
• NO.'The'net'capital'loss'carryNover'rule'cannot'be'applied.'
• The' net' capital' loss' carryNover' rule' provides' that' if' any' individual' taxpayer' sustains' in' any'
taxable'year'a'net'capital'loss,'such'loss'(in'an'amount'not'in'excess'of'the'net'income'for'
such'year)'shall'be'treated'in'the'succeeding'taxable'year'as'a'loss'from-the-sale-or-exchange-
of-a-capital-asset-held-for-not-more-than-12-months.%
• In'this'case,'since'the'loss'of'(250K)'was'from'the'sale'of'a'capital'asset'held'for'more'than'12'
months,'the'net'capital'loss'carryNover'rule'cannot'be'applied.'
• In'net'capital'loss'carryNover'rule,'how'many'years'can'you'carry'forward'a'net'capital'loss?'
o In'the'succeeding'taxable'year'only.'So'1'year'only.'
• The'difference'between'NOLCO'and'net'capital'loss'carryNover'is'that'NOLCO'can'be'carried'
over'for'the'succeeding'3'consecutive'years'but'net'capital'loss'carryNover'can'be'carried'only'
to' the' next' year.' Another' distinction' is' that' NOLCO' involves' loss' arising' from' ordinary'
transactions' while' net' capital' loss' carryNover' involves' loss' arising' from' capital' transactions.'
Another'distinction'also'is'that'net'capital'loss'carryNover'can'only'be'availed'of'by'individual'
taxpayers'while'NOLCO'can'be'availed'of'both'by'individual'and'corporate'taxpayers'so'long'
as'they’re'registered'for'business.'
o 2.'Capital'loss'limitation'rule'
! Capital'losses'are'deductible'only'to'the'extent'of'capital'gains'during'the'year'–'on'a'yearly'basis.'
! Can'capital'loss'limitation'rule'apply'to'corporations'as'well?'
o YES.' Such' rule' applies' to' both' individual' and' corporate' taxpayers,' EXCEPT' on' banks' and' trust' companies'
(because'they'are'considered'as'dealer'in'securities)'
o 3.'Net'capital'loss'carryNover'rule'
! Net'capital'loss'carry'over'rule'is'very'complicated:'
o 1.'It’s'a'capital'loss.'It’s'the'excess'of'the'loss'over'the'capital'income'or'capital'gains.'
o 2.'It'can'be'carried'over'only'to'the'succeeding'next'year'by'an'individual.'If'it'remain'unutilized,'it'will'no'longer'
nd
be'usable'the'2 'year.'
o 3.'The'amount'that'can'be'carried'over'is'not'exactly'the'same'amount'that'you'will'see'as'the'net'capital'loss'
for'the'year'for'capital'assets'held'on'to'for'not'more'than'12'months.'You'have'to'consider'that'it'should'not'
exceed'the'net'income'from'the'ordinary'transactions'of'the'year'when'such'loss'is'incurred.'You'have'to'look'
into'how'much'is'the'net'income'from'ordinary'transactions.'
! Example:' Assuming' that' the' (250K)' net' loss' arose' from' the' sale' of' capital' assets' held' on' to' for' not'
more'than'12'months.'If'the'ordinary'net'income'is'250K,'you'can'carryNover'such'(250K)'loss'in'the'
succeeding' taxable' year.' If' the' ordinary' net' income' is' 200K,' you' can' carryNover' only' 200K.' If' the'
ordinary'net'income'is'500K,'you'can'carryNover'250K'–'it'should'not'exceed.''''
GAINS'DERIVED'FROM'DEALINGS'IN'PROPERTY'
N The'basic'formula'in'determining'the'gain'that'you'derived'from'selling'your'real'property'or'property,'in'general,'is'the'“amount'that'you'
received'as'consideration'for'the'property“.'This'is'basically'the'GSP'or'any'consideration.'It'may'be'exchange'of'property'or'may'be'sale'of'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''61'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
property.'But'as'to'how'much'is'subject'to'tax,'you'have'to'determine'what'is'the'cost'of'your'property.'The'cost'of'your'property'that'you’re'
selling'or'exchanging'would'differ'according'to'how'you'acquired'your'property.'So'how'do'you'determine'the'cost'of'the'property'that'you’re'selling?'
o 1.'If'it'was'acquired'through'purchases'–'the'cost'of'the'property'
o 2.'If'the'property'sold'was'previously'acquired'through'inheritance'–'the'FMV'of'the'property'at'the'time'of'the'acquisition'(the'time'you’ve'
inherited'such'property).'
o 3.'If'the'property'sold'was'acquired'through'donation'–'the'same'as'if'it'would'be'in'the'hands'of'the'donor'(so,'it’s'the'same'amount'at'the'
time'the'donation'was'made)'BUT:'
! Exception:' If' the' basis' is' greater' than' the' FMV' of' the' property' at' the' time' of' the' donation/gift' then,' for' the' purpose' of'
determining'loss,'the'basis'shall'be'such'FMV.'

o It'simply'means'that'if'you’re'selling'a'property'today,'Oct.'5,'2010.'You’re'selling'it'at'1M.'The'property'that'you’re'
selling' has' been' donated' to' you.' The' law' says' that' the' amount' that' you' have' to' deduct' as' cost' in' determining' your'
income'subject'to'tax'would'be'the'amount'as'if'it'is'in'the'hands'of'the'donor.'It'means'at'the'time'it'was'donated.'If'
at' the' time' it' was' donated,' its' value' was' 500K.' Then' you' deduct' it' from' the' 1M,' so' you' get' an' income' of' 500K' –'
taxable.''

o But'there’s'an'exception'to'the'rule.'If'the'500K'that'you’re'deducting'(FMV'at'the'time'of'donation)'is'greater'than'the'
FMV'today,'Oct.'5,'2010,'say'for'example,'the'FMV'of'the'property'today'is'200K'–'so'you'use'such'200K.'Lifeblood'
doctrine.'Why?'If'you'use'200K,'the'taxable'income'is'800K.''
o What'type'of'property'do'you'think'that'the'FMV'is'lower'today'than'the'time'it'was'donated?'
! Depreciable'assets.'
• Example:'Motor'vehicles.''
o 4.'If'the'property'sold'was'acquired'for'less'than'an'adequate'consideration'in'money'or'money’s'worth'–'the'amount'paid'by'the'transferee'
for'the'property'
! Example:'If'you'purchase'it'at'an'amount'that'is'inconsiderably'low'as'compared'to'the'FMV,'lifeblood'doctrine'states'that'the'
cost'in'determining'your'income'for'tax'purposes'would'have'to'be'the'amount'that'you’ve'given'up.'So'if'you'bought'a'1M'car'
for'1'peso'and'you'sold'it'for'1M,'you'can'only'deduct'as'cost'1'peso.'''
N The'general'rule'is'that'for'every'sale'of'property,'you'have'to'be'taxed'if'there'is'an'income'after'costs'has'been'deducted'from'the'selling'price'or'
consideration'for'all'types'of'exchanges'in'property.'
o Example:' You' have' a' parcel' of' land' in' Alabang.' The' other' person' has' a' parcel' of' land' in' Muntinlupa.' Both' lands' have' the' same' square'
meters'–'1'ha'or'10K'sq.'m.'There'is'an'exchange'of'property'without'any'cash'involved.'Will'there'be'tax?'
! YES,'subject'to'CGT'or'OT,'as'the'case'may'be.''
! Both'properties'do'not'actually'have'the'same'value'in'so'far'as'the'owners'are'concerned.''
N There'are'instances'wherein'no'gain'and'no'loss'is'recognized'for'certain'types'of'exchange.'What'are'these?'
o 1.'Transactions'made'pursuant'to'plan'of'merger'or'consolidation'
! This'happens'when'you'gave'out'your'properties'in'exchange'for'the'shares'of'the'surviving/absorbing'corporation'or'when'you'
exchange'shares'for'the'shares'of'the'other'corporation.'
o 2.'If'a'person'alone'or'together'with'other,'not'exceeding'4'(so'total'of'5),'exchanges'his'property'for'stock'in'a'corporation'and'this'person'
or'persons,'after'this'exchange,'acquired'controlling'interest'over'that'corporation.'This'means'to'say'that'they'acquired'at'least'51%'of'the'
shares'of'stock'of'such'corporation.'(Sec.'40(c)(2))'
! This'is'also'a'transaction'solely'in'kind.'

'
'''''ABC'
' ''''Corp.' 46M'
''5M'
'
51M'
' '
46'people'
' ''''''46'
''1'person'
''U'&'45'
' 51'people'

'
' ''''LAND'
' '''''46M'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''62'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
'
! Example:'Lets'say'there'is'ABC'Corp.'It'has'existing'capitalization'of'5M'owned'by'5'people'at'1M'shares'each.'You'and'
your'classmates,'46'of'you,'want'to'invest'in'such'corporation.'So'the'46'of'you'invested'46M'worth'of'land'coNowned'by'
46'of'you.'If'you'put'such'land'as'an'investment'in'ABC'Corp.,'the'total'capitalization'would'now'be'51M'(5M'+'46M)'and'
the'total'owners'would'be'51'people.'(5'+'46).'This'is'a'case'of'an'exchange'of'property.'You'gave'out'land'to'ABC'Corp.'in'
exchange'of'46M'shares.'Land'for'shares'–'shares'for'land.'Is'the'46M'parcel'of'land'subject'to'6%'CGT?'
o YES'(apply'the'“firstNhighestN5Nrule”,'which'will'be'discussed'later;'in'this'case,'applying'the'firstNhighestN5Nrule,'
the'interest'of'the'first'5'would'only'be'10.87%,'thus,'they'did'not'acquire'controlling'interest,'so'therefore,'all'
the'gains'of'the'46'people'from'the'exchange'of'property'will'be'subject'to'6%'CGT)'
! NOTE:'[the'“firstNhighestN5Nrule”'kay'gNhimoNhimo'ra'nko'na'rule..'wala'jud'na'na'term'actually…'hehe..'
para'shortNcut'lng'sa'transcription….'Anyways'mkasabot'ramo'later'as'you'go'on'reading…'I'hope…]'
o So,'how'do'we'make'the'facts'nonNtaxable?'
'
' '''''ABC'
' ''''Corp.' 46M'
''5M'
' 51M'
' '
''5'people'
' ''''''5'
''1'person'
''U'&'4'
' ''6'people'

'
' ''''LAND'
'''''46M'
'
'
! So'that'the'facts'would'be'that'there'are'5'people'who'invested'46M'parcel'of'land'in'exchange'for'the'
46M'shares'in'ABC'Corp.'So'the'total'capitalization'is'51M'and'there'are'already'6'people'owning'ABC'
Corp.'
! In'this'case,'the'5'people'acquired'controlling'interest'over'ABC'Corp.'because'they'own'46M'shares'
out'of'the'total'51M'shares'from'the'exchange'of'property'(more'than'51%),'so'therefore,'this'case'is'
covered' by' the' exception,' and' as' such,' the' 46M' parcel' of' land' is' exempted' from' the' 6%' CGT' and'
documentary'stamp'tax.''
'
'
'
'
'''''ABC'
' '''''ABC'
''''Corp.' ''7M' ''''Corp.' ''7M'
' ''2M' ''2M'
' ''9M'
''9M' '
' ' ''7'people'
''''''7'
' ''''''7' ''5'people'
''7'people' ''U'&'6'
''12'people'
' ''U'&'6'
''1'person'
' ''8'people'
''''LAND'
'
'''''7M'
' ''''LAND'

' '''''7M'

'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''63'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! Change'of'facts:'ABC'Corp.'has'a'capitalization'of'2M'owned'equally'by'5'people/stockholders.'You'together'with'6'others'
have'a'7M'parcel'of'land.'You'want'to'invest'in'ABC'Corp.'So'you'want'to'put'in'the'parcel'of'land'so'you’ll'be'given'7M'
worth'of'shares'of'stock.'So'the'total'capitalization'of'ABC'Corp.'is'9M'[2M'+'7M]'owned'by'12'people'[5'+'7].'Is'the'gain'
from'the'exchange'of'property'subject'to'CGT?'Is'it'covered'under'the'taxNfree'exchange?'
o YES,'but'partially.'
o [Mao'nani'siya'ang'“firstNhighestN5Nrule”]''
o Consider'first'whether'the'first'5'transfers'acquired'controlling'interest'over'the'capital'stock'of'the'corporation.'
o In'this'case,'the'first'5'transfers'amounts'to'5M.'5M'over'9M'total'capital'stock'is'55.55%.'[5M/9M'='55.55%].'
Thus,'the'first'5'transfers'acquired'more'than'51%'so'that'they'have'acquired'controlling'interest'over'the'capital'
stock'of'ABC'Corp.'Therefore,'even'if'the'transfer'numbers'more'than'5'people,'so'long'as'the'first'highest'5,'
would'acquire'controlling'interest'over'the'new'capital'stock'of'the'corporation,'they'(the'first'highest'5)'will'be'
granted'exemption'from'the'6%'CGT.'Since'in'this'case,'the'7M'is'equally'owned'by'the'7'people,'so'you'know'
that' the' first' 5' would' have' 5M.' And' 5M/9M' is' more' than' 51%.' Therefore,' the' gains' from' the' exchange' of'
property'will'not'be'subject'to'the'6%'CGT'with'respect'only'to'the'first'5.'
o What'will'happen'is'if'of'the'many,'5'will'acquire'controlling'interest,'5'will'be'exempt,'the'rest'will'be'subject'to'
6%'CGT.'
! Consider'first'the'first'highest'5,'so'that'the'first'highest'5'will'be'exempted'from'CGT.'
! If'they'own'the'stocks'equally,'then,'there'would'be'a'problem.'It'depends'actually'on'their'agreement'
whether'they'will'share'the'burden'of'tax'or'whether'who'will'be'exempted'and'who'will'be'subjected'
to'CGT.'
N Instances'where'gain'is'recognized'and'loss'is'not'recognized:'
o 1.'Wash'sale'
o 2.'Illegal'transactions'
o 3.'Those'transactions'involving'related'taxpayers'
o 4.'Transactions'not'solely'in'kind'
! It'means'to'say'that'transactions'not'solely'in'kind'is'when'the'transfer'involves'cash.'If'cash,'in'addition'to'property,'is'
transferred,'in'exchange'for'shares,'it’s'no'longer'exchange'solely'in'kind,'therefore,'no'exemption'from'CGT.'
ACCOUNTING%PERIOD;%METHODS%OF%ACCOUNTING;%TAX%RETURNS%AND%PAYMENT%OF%TAX%
N Returns'and'Payment'of'tax'
o Individuals'required'to'file'returns'(General'Rule):'
! 1.'Every'Filipino'citizen'residing'in'the'Phils.'
! 2.'Every'Filipino'citizen'residing'outside'the'Phils.,'on'his'income'from'sources'within'the'Phils.'
! 3.'Every'alien'residing'in'the'Phils.,'on'income'derived'from'sources'within'the'Phils.'
! 4.'Every'NRANETB'or'in'the'exercise'of'a'profession'in'the'Phils.'
o Who'has'not'been'mentioned'here?'What'type'of'individual'taxpayer'is'not'required'to'file'ITR?'
! NRANNETB'
! Why?'Because'they’re'subject'to'a'FWT'rate'of'25%.'Thus,'every'payor'of'that'NRANNETB'is'required'to'
withhold' a' final' tax.' Withholding' of' a' final' tax' is' a' tax' with' finality.' There’s' no' requirement' for' that'
incomeNearner'to'report'the'income'already'subjected'to'final'tax'as'part'of'his'ITR.'
! So'in'all'instances,'a'NRANNETB'is'never'expected'to'file'an'ITR.'
N What'are'the'instances'when'individuals'are'not'required'to'file'an'ITR?'
o 1.'An'individual'whose'gross'income'does'not'exceed'his'total'personal'and'additional'exemptions'
! Example:' If' your' income' is' 1K' a' month,' you' have' 12K' in' a' year.' Your' personal' and' additional' exemption' is' 50K.' That’s'
below'minimum'wage.'You’re'not'required'to'file'an'ITR.'
o 2.'''An'individual'with'respect'to'pure'compensation'income'derived'from'sources'within'the'Phils.,'the'income'tax'on'which'has'
been'correctly'withheld.'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''64'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
! If'you'have'only'1'employer'and'your'tax'has'been'correctly'withheld'by'your'employer,'no'need'to'file'an'ITR.'How'do'you'
call'that?'What’s'the'correct'term'for'that?'
o Example:'You’re'the'president'of'ABC'Corp.'You'earn'100K'a'month.'Are'you'required'to'file'an'ITR'or'not?'
o NO,'if'the'income'tax'has'been'correctly'withheld'by'the'employer'and'your'only'income'is'the'
100K'you'earn'a'month'as'the'president'of'ABC'Corp.'
o This'is'called'the'SUBSTITUTED'FILING'OF'ITR.'
o 3.'An'individual'whose'sole'income'has'been'subjected'to'a'FWT'
o 4.'An'individual'who'is'exempt'from'income'tax'
N What'is'the'substituted'filing'of'ITR?'
o It' is' when' an' employee' is' no' longer' required' to' file' an' ITR' at' the' end' of' the' year' so' long' as' he' is' a' pureNcompensation' income'
earner,'regardless'of'the'amount'that'he’s'earning,'and'he'has'only'one'employer'who'has'been'correctly'withholding'the'tax.'
o When' you' say' pureNcompensation' income' earner,' he' does' not' have' any' other' income' from' any' source,' whether' from' trade,'
business'or'profession.'
! Example:'Once'this'is'violated,'meaning'to'say,'if'you’re'the'President'of'the'corporation,'you'have'100K'income'monthly.'
You' only' have' one' employer' who' has' been' correctly' withholding' you' but' during' break' time,' you' sell' siopao' to' your'
officemates,'that’s'already'other'income.'And'being'other'income,'you'have'to'combine'that'with'your'income'from'your'
employment.' Maybe' your' income' from' siopao' business' will' escalate' your' bracket' of' income.' The' reason' why' you’re'
required'to'combine'your'income'is'to'determine'what'bracket'you'really'belong'to.'That’s'why'every'income'should'be'
consolidated.'And'substituted'filing'is'very'strict'in'a'sense'that:'
o 1.'You'only'have'to'have'1'employer'
o 2.'PureNcompensation'income'earner'
o 3.'Correct'withholding'of'tax'
o 4.'No'other'income.'
! If'the'requirements'are'not'met,'all'of'them'are'not'met'or'one'of'them'is'not'met,'at'the'end'of'the'
year,'you'have'to'file'an'ITR.'
N Who'are'the'individuals'not'qualified'for'substituted'filing?'
o See'outline.'
o NOTE:'Letter'c'of'outline'is'no'longer'applicable'in'the'advent'of'RA'9504'–'individuals'who'are'minimumNwage'income'earners'are'
exempt'from'income'tax'so'they’re'no'longer'required'to'file'an'ITR.'
o Illustration:'You'were'employed'by'ABC'Corp.'from'Jan.'1,'2010NOct.'5,'2010.'By'November,'you'applied'and'got'hired'by'XYZ'Corp.'
There' was' no' overlapping' of' employment.' Both' employers,' according' to' their' own' records,' correctly' withheld' the' taxes.' Are' you'
qualified'for'substituted'filing?'
! NO,' because' the' requirement' must' have' to' be' only' 1' employer.' If' you' have' 2' employers' now,' whether' 2' employers'
employing' at' the' same' time' or' 2' employers' employing' successively,' you’re' not' qualified' for' substituted' filing' because'
they’re'may'be'a'chance'that'the'correct'tax'when'the'combined'income'is'computed'has'not'been'correctly'withheld'by'
those'employers.'
o Another' illustration:' You’re' the' President' of' a' multiNnational' corporation.' You' only' have' 1' employer.' Your' tax' has' been' correctly'
withheld'by'your'employer.'But'your'husband'is'selling'siomai.'Are'you'qualified'for'substituted'filing?'
! NO,'because'you'are'no'longer'required'for'substituted'filing'if'and'when'any'of'the'spouses'would'not'as'well'qualify'with'
the'full'requirements.'
! So'in'order'for'you'to'be'qualified'for'substituted'filing,'make'sure'that'your'spouse'is'also'qualified'for'substituted'filing.''
! If' you’re' qualified' for' substituted' filing' but' your' spouse' is' earning' business' income,' like' siomai' business,' no' substituted'
filing' for' you' both.' Why?' Because' at' the' end' of' the' year,' in' so' far' as' it' is' practicable' to' combine' both' your' income' –'
husband'and'wife'–'it'(the'filing'of'ITR)'has'to'be'done'for'purposes'of'determining'the'true'tax'bracket'that'you'belong'to.'
N SelfNemployed'individuals.'
o So'if'you'are'a'practicing'lawyer'with'no'law'firm,'etc.'You'are'required'to'file'your'ITR'(professional'or'trade'income)'on'a'quarterly'
basis'still.'
N Corporations.'When'are'corporations'required'to'file'an'ITR?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''65'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
th th
o Quarterly'–'3'times.'60'days'after'the'end'of'every'quarter'and'the'last'is'on'or'before'the'15 'day'of'the'4 'month'following'the'
close'of'the'taxable'year.'
o To'make'it'easy,'corporations'can'follow'the'calendar'year'or'the'fiscal'year.''
o What'is'fiscal'year?'
! Starts'on'any'day'other'than'Dec.'31'and'ends'365'days'after.'
o So'if'the'corporation'follows'the'calendar'year,'quarterly'ITR'has'to'be'filed'60'days'after'March'31,'after'June'30,'after'Sept.'30'and'
th th
the'final'ITR'has'to'be'filed'on'or'before'the'15 'day'of'the'4 'month'following'the'end'of'the'calendar'year,'which'is'April'15'–'the'
th
4 'month.'
o If'it’s'fiscal'year,'it’s'a'little'bit'complicated.'
o But'for'individual'taxpayers,'can'we'have'fiscal'year'basis?'
! NO.'Always'we'have'to'follow'calendar'year'basis'and'the'quarterly'ITR'is'45'days'after'the'end'of'every'quarter'except'
ND rd
first'quarter.'First'quarter'ITR'has'to'be'filed'April.'15,'2 'quarter'of'June'30'has'to'be'filed'45'days'after,'3 'quarter'of'
Sept.'30'has'to'be'filed'45'days'after,'and'the'final'ITR'has'to'be'filed'April'15'–'No'other'date.'Why?'Because'we'only'
follow'calendar'basis.'So'it'would'appear'that'on'April'15,'we'individuals'(individual'business'income'earners)'would'file'2'
st
ITRs'–'one'is'for'full'year'and'one'is'for'1 'quarter'of'the'new'year.''
N CGT'return'has'to'be'filed'within'30'days'after'the'transaction'and'paid'within'30'days'after'the'transaction.''
o Can'we'pay'on'installment'basis'on'income'taxes'due?'
! YES'for'individuals'and'if'their'income'tax'due'is'more'than'2K.''
! NO'for'corporations.'Corporations'have'to'pay'the'taxes'on'due'dates.''
o How'many'times'is'a'business'taxpayer'required'to'file'an'ITR?'
! 4'(3'quarterlys'and'1'final'ITR)'
'
'
'
'
'
'
'
'
BAR%EXAM%RESULTS:%
N Have'you'read'the'bar'exam'for'tax?'There'are'around'40'items.'So'for'those'who'have'read,'how'did'you'find'it?'Let’s'go'through'the'items'
that'we'have'discussed.'Let'us'see'how'you'will'fare'if'you'have'taken'the'bar'exam.'
N True'or'False.''
o A'.'Gains'realized'by'the'investor'upon'redemption'of'the'shares'of'stock'in'a'mutual'fund'company'are'exempt'from'income'tax.'
Are'they'exempt?'Exclusion'from'gross'income'class.'In'the'outline.''
o B.'A'corporation'can'claim'the'optional'standard'deduction'equivalent'to'40%'of'its'gross'sales'or'receipts'as'the'case'may'be.'='
FALSE.'
! Against'gross'sales'or'gross'income?'Gross'income.''What'is'stated'here'is'gross'sales'or'receipts.'What'is'the'difference?'
Remember'the'formula'that'we'have'had'before?'
! (Sales'–'Cost'='Gross'Income)'less'Expense'='Taxable'income'
! What'is'optional'standard'deduction'for?'It’s'in'lieu'of'–'Itemized'deductions.'So'since'this'is'what'you'don’t'want'to'claim,'
40%'OSD'is'applicable.'
o C.'premium'payments'for'health'insurance'of'an'individual'who'is'an'employee'in'an'amount'of'PhP2500'per'year'may'be'deducted'
from'gross'income'if'his'gross'salary'per'year'is'not'more'than'PhP250,000.'False.''PhP2400.'
o D.'The'tax'code'allows'an'individual'taxpayer'to'pay'in'two'equal'installments,'the'first'installmentN'we'will'discuss'that'towards'the'
end.'This'is'true.'
***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''66'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o An'individual'taxpayer'can'adopt'either'the'calendar'or'fiscal'year'period'for'purposes'of'filing'his'income'tax'return'='False.''
! Individual'taxpayer,'in'all'cases,'an'individual'can'never'chose'to'be'taxable'in'the'fiscal'year'basis.'Always'his'taxability'
begins'January'1'and'ends'December'31.'Only'corporate'taxpayers'have'the'option'to'be'taxable'on'a'taxable'year'which'
starts'on'any'day'other'than'January'1,'ending'365'days'thereafter.'
o The'Capitalization'rules'may'be'resorted'–'this'will'be'discussed,'I'think'next'week.''
o Informer’s'Reward'is'subject'to'final'withholding'tax'of'10%.'Yes'this'is'true.''
! If' you' report' someone' and' it' will' lead' to' collection' of' taxes,' you' will' be' given' informer’s' reward,' which' reward' is' still'
subject'to'10%'tax.''
o This'one,'interesting.'A'nonNresident'alien'who'stays'in'the'Philippines'for'less'than'180'days'during'the'calendar'year'will'be'entitled'
to'personal'exemption'not'to'exceed'the'amount'allowed'to'citizens'of'the'Philippines'in'the'country'of'which'he'is'a'citizen.'FALSE!'
! False,' because' only' ' nonNresident' aliens' engaged' in' trade' more' than' 180' days' in' the' Philippines' are' allowed' through'
reciprocity'rule'to'claim'personal'exemptions.'
N ABC,' a' domestic' corporation' entered' into' a' software' license' agreement' with' XYZ,' a' non' resident' foreign' corporation' based' in' the' United'
States.' Under' the' agreement,' which' the' parties' forged' in' the' US,' XYZ' ' the' nonresident' foreign' corporation' granted' ABC' the' domestic'
corporation'the'right'to'use'the'computer'system'program'and'to'avail'of'the'technical'knowNhow'relative'to'such'program.'In'consideration'
for'such'rights,'ABC'agreed'to'pay'5%'of'the'revenues'it'receives'from'the'customers'who'will'use'and'apply'the'program'in'the'Philippines.'
Discuss'the'tax'implication'of'the'transaction.'Is'the'payment'by'the'domestic'corporation'ABC'to'the'nonNresident'foreign'corporation'XYZ'
which'is'5'%'of'its'revenues'received'from'customers.''
o What'are'these'payments?'Royalty'payments'abroad.''
o Who'is'the'income'earner?'The'nonNresident'foreign'corporation.''
o Is'it'taxable'in'the'Philippines?'Yes.'Royalties'will'have'situs'in'the'country'where'it'is'used.''
o And'where'is'the'technical'knowledge'imparted'by'the'nonNresident'foreign'corporation.'Where'is'it'used?'In'the'Philippines,'where'
the'customers'of'the'domestic'corporation'are'using'it.''
N In'2009,'a'resident'Filipino'citizen'received'dividend'income'from'a'US'based'corporation'which'owns'a'chain'of'Filipino'restaurants'in'the'
West'Coast'US.'SO'who'is'the'income'earner?''
! The'resident'citizen'N'Filipino.''
! From' where' is' his' income?' From' a' nonNresident' foreign' corporation.' The' dividend' remitted' to' the' resident' citizen' is'
subject'to'US'withholding'tax'with'respect'to'the'United'States,'him'being'a'non'resident'alien'in'the'US.'
What'will'be'your'advice'to'him'in'order'to'lessen'the'income'and'possible'double'taxation'on'the'same'income?'
o Tax'credit'or'avail'of'the'tax'treaty'provisions'under'the'RPNUS'tax'treaty.''
Would'your'answer'in'letter'A'be'the'same'if'he'became'a'US'immigrant'in'2008'prior'to'receiving'the'dividends'and'had'become'a'non'
resident'Filipino'citizen.'
o It'would'be'different'because'if'he'becomes'a'non'resident'citizen,'he'is'only'taxable'on'income'within'and'the'dividends'given'by'
the'nonNresident'foreign'corporation'based'in'the'US'is'an'income'without'so'it'is'totally'subject'to'US'tax'only,'no'Philippine'tax.'No'
use'of'tax'credits,'no'use'in'availing'tax'treaty.'
N A'is'a'travelling'salesman'working'full'time'for'new'(NU)'skin'products.'(I'know'you'have'read'losses'na,'losses'is'a'deductible'expense).'He'
receives' a' monthly' salary' plus' 3%' commission' on' his' sales' in' the' Southern' province' where' he' is' based.' ' He' regularly' uses' his' own' car' to'
maximize'his'visits'even'to'farNflung'areas.'One'fine'day,'a'group'of'militants'seized'his'car.'He'was'notified'the'following'day'by'the'police'that'
the'marines'and'the'militants'had'a'bloody'encounter'in'his'car'and'his'car'was'completely'destroyed'after'a'grenade'hit'it.'A'wants'to'file'a'
claim'for'casualty'loss'(losses'from'theft,'robbery','embezzlement'etc).'Explain'the'legal'basis'for'your'tax'advice.''
o What’s'your'tax'advice'–'can'A'file'for'casualty'loss?'NO.''
o What'is'the'status'of'A?'A'is'a'salesman'working'fullNtime'as'an'employee'and'as'an'employee.''
o What'are'the'deductions'or'exemptions'that'he'can'claim?'Personal'exemptions,'additional'exemptions,'premiums'and'health'and'
hospitalization' insurance.' Unless' and' until' the' taxpayer' claiming' casualty' losses' has' a' business,' trade' or' profession' ,' he' wouldn’t'
have'that'expense'deductible'for'him.'''
N A'inherited'a'two'storey'building'in'Makati'from'his'father'a'real'estate'broker'in'the'60s'(?).'A'group'of'monks'approached'A'and'offered'to'
lease'the'building'in'order'to'use'it'as'a'venue'for'their'Buddhist'rituals'and'ceremonies.''A'accepted'the'rental'of'1M'for'the'whole'year.'The'
following'year'the'city'assessor'issued'assessment'against'A'for'non'payment'of'real'property'taxes.'Is'the'assessor'justified'in'assessing'A’s'
deficiency'real'property'taxes?'

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''67'|'P a g e '
 TAXATION'DISCUSSION'TRANSCRIPTIONS'OF'ATTY.'EMERY'TIU'–'FINALS'COMPILATION'
o The'question'here'is:'Is'it'correct'for'the'city'assessor'to'collect'real'property'tax?'Question'is'real'property'tax'–'if'a'real'property'is'
actually,'directly,'and'exclusively'used'for'religious'purposes,'it'will'be'exempt'from'real'property'tax?''
! But'–'the'assessment'is'for'real'property'tax,'not'income'tax.''
! Local'government'code'exemption'from'real'property'taxes'–'Yes,'this'is'exempt'from'real'property'tax'based'on'Use'and'
not'ownership.'Ownership'is'for'the'government'property.'''

***In'broken'line'borders'are'outline'notes.'''''''In'straight'line'borders'are'codal'provisions.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''68'|'P a g e '