2 Kinds of Taxpayers
1. Individual Taxpayer
2. Corporate Taxpayer
*Estate & Trust Section 60-66 (Seldom
asked in the BAR)
This is not considered as another type of
taxpayer because it was stated under the
NIRC the rules on the individual taxpayer
applies except under some conditions.
Section 63 was a surprise question in the
BAR 30 years ago.
What is a revocable trust?
RECIT PROPER
***Salient Features of the Philippine Taxing
System
1. Schedular Tax Treatment
- It is a system employed where the
income tax treatment varies and made to
depend on the kind or categories of taxable
income of the taxpayer.
What are the characteristics of a
schedular tax treatment?
1. Income is classified and
categorized.
Legal Basis: Section 32 provides
different classification of the income.
` 2. It has different tax rules and
treatment.
Legal Basis: Section 24 and 25
provides for different tax rules and treatment
to different taxpayers.
3. It has different tax base or tax
rate.
Legal Basis: Section 24 and 25
provides different tax rates whether it can
be progressive and final tax rate.
Does Schedular System Approach applies
to all types of taxpayers? Not all instances.
It only applies individual taxpayers.
Corporate Taxpayers uses the global
system of approach.
2. Global Tax Treatment
- It is a system where the tax
treatment view indifferently that tax
base and generally treats in
common all categories of taxable
income.
- It applies to corporate taxpayers.
3 Characteristics of Global Tax Treatment
1. It has uniform tax rules.
2. It does not generally classify or
categories of taxable income.
3. The tax base is the final tax.
Take Note: Train Law amended Section 35
of the NIRC which tackles about the
personal exemptions. (DELETED)
3. Gross Income Taxation
- It is a method or system that allows
no deductions and the tax base or
tax basis of the tax rate is Gross
Income.
3 Kinds of Corporate Taxpayers:
1. Domestic Corporation (Section 27)
2. Resident Foreign Corporation
(Section 28-A)
3. Non Resident Foreign Corporation
(Section 28-B)
- These corporate taxpayers also
provides for 30% Final Tax.
2 Characteristics of GIT:
1. There is no deductions.
2. The gross income is the tax base.
Kinds of Individual Taxpayers
1. Resident Citizen
2. Non Resident Citizen
3. Resident Alien
4. Non Resident Alien Engaged in
Trade or Business
5. Non Resident Alien Non Engaged in
Trade or Business
Section 22, E, F, G of the NIRC is
ambiguous.
Section 24 - RC, NRC, RA
Section 25(B) - NRA NETB
- GIT applies.
NRFC - GIT also applies.
4. Net Income Taxation
- It is method or system that allows
deduction and the tax base is the
taxable income.
2 Characteristics of NIT:
1. It allows deduction.
2. The tax base is the taxable income.
Is NIT applicable to all individual taxpayers?
No. It only applies to RC, NRC, NRA ETB.
Exclusion: NRA NETB.
How to determine whether an alien is
engaged or not engaged in trade or
business?
TEST: He must stay for a period of more
than 180 days. It is cumulative not
continuous.
Under the NIRC, what do you mean by the
word “deemed”? - Regardless.
Is there a difference between 6 months or
more than 180 days? Yes. Different.
- 6 x 30 = 180 days.
The law provides that it must be more than
180 days.
2010 BAR
- If there is specific dates, the Boxer
Rule will apply.
Who can claim deductions?
- DC and RFC (Taxable Income as tax
base)
No deductions in NRFC. (Gross Income as
tax base)
5. Creditable Withholding Tax System
- It is a system of collection of taxes
that operates as follows:
1. The employers is the
withholding agent, the
employee on the other hand
is the recipient of the Income.
The government as the payor
will remit the same to the
BIR.
2. The taxpayer can claim it as
a tax credit or may be
deducted from the income
provided that it must be
reported first to the BIR.
Therefore, he must report such
income before claiming such.
6. Final Withholding Tax System
- It is a system of collection of taxes
that operates as follows;
1. The taxpayer is legally
obliged to deduct. The
employer is the one legally
obliged to pay the tax.
2. The taxpayer cannot claim
the tax withheld as tax credit
because the tax withheld
constitutes as a final and full
 settlement of the tax liability
on that income.
Therefore, he is not required to
report the Final Tax Withheld.
Distinctions between CWTS and FWTS:
*As to the nature
- CWTS, the tax base is the creditable
tax.
- FWTS, the tax base is the final tax.
*As to the reporting requirement
- CWTS, the taxpayer is required to
report.
- FWTS, he is not required to report.
Classification of Gross Income (Section 32)
1. Compensation Income - CWTS
2. Business Income - CWTS
3. Property Income - CWTS
4. Interest - FWTS
5. Rents - CWTS
6. Royalties - FWTS
7. Dividend - FWTS
8. Annuities - CWTS
9. Prizes - FWTS
10. Pension - CWTS
11. Partner’s Share - CWTS
Theses are the items subject to Final Tax
Rate:
1. Shares of a Partner Business
Partnership or joint Venture
- FINAL TAX RATE, 10%, 20%, 25%
provided under Section 24 (B)(2),
Section 25 (A)(2)
- EXEMPTION, there is no such
provision.
2. Interest
- FINAL TAX RATE, 7.5%
- EXEMPTION, 1. Bond Deposit, if
the depositor is NRA. Section 24
(B)(1) 2. Long Term Deposit - more
than 5 years. 3. Section 32 (B)(7)(a)
3. Royalties
- FINAL TAX RATE, 20%, 10% if it is
books, literary, works, etc.
- EXEMPTION, There is no provision.
4. Prizes
- FINAL TAX RATE, 20% if more than
10,000. If less - graduated rates.
- EXEMPTION,1.Scientific, charitable,
religious, artistic, literary, education
and civic works. 2. Sports
Tournament Competition.
5. Winnings
- FINAL TAX RATE, 10%, 20% if NRA
ETB.
- EXEMPTION, Lotto, PSCO
6. Dividend
- FINAL TAX RATE, 1. IF individual,
2. If NRFC - 15% Section 28
(B)(5)(b)
- EXEMPTION, 1. DC - Section
27(D)(4) 2. RFC - Section
28(A)(7)(d) 3. Stock Dividends -
Section 73(B 4. Liquidating
dividends (Wise & Co. V. Meer &
Collector, 78 Phil 655)
Stock Dividends
- Just a transfer of surplus account to
capital account, there is no flow of
wealth, no gain to speak of.
Requisites of Taxable Income (PNR)
1. There must be profit of gain.
2. It must be not excluded by the Tax
Code or other special laws.
3. It must be realized. Either Actual or
Constructive.
Recit proper
Enumerate all the 19 items included under
the exclusions of gross income:
- Compensation for services in whatever 1. It is subject to donor’s tax.
form paid, including but not limited to fees, 2. Donee is not subjects to donor’s tax.
salaries, wages, commissions and similar 3. It is not subject to income tax.
items.
- Gross income derived from the conduct of Types of Donations under the NCC;
trade or business or the exercise of 1. Donation Mortis Causa
profession. 2. Donation Inter Vivos
- Gains derived from dealings in property.
- Interest Tax Implications of Donations Mortis Causa
- Rents 1. It is subject to estate tax.
- Royalties 2. The heirs is not subject to inheritance tax.
- Dividends 3. It is not subject to income tax.
- Annuities
- Prizes and Winnings 3. Compensation
- Pensions Are moral and exemplary damages taxable?
- Partner’s distributive share from the net No. You must correlate it with NCC.
income of the general professional It is not taxable because it is not qualify as
partnership. income. Moral and exemplary damages are
not taxable because the first requisites of
Which of the following does not qualify as taxability is absent. There is no gain or
an income? profit.

1. Life Insurance Proceeds, correlate it Grounds for moral damages (Article 2197)
with Section 85. Estate Tax. 1. Mental Anguish
Q: Whether or not life insurance proceeds 2. Serious Anxiety
should form part of the gross estate? 3. Wounded Feeling
It depends. 4. Besmirched Reputation
5. Physical Suffering
When is it excluded? 6. Social Humiliation
1. If the beneficiary is a 3rd person and the 7. Moral Schock
designation is irrevocable. 8. Fright
2. If the proceeds is based on a groups 9. Similar Injury
insurance policy.
Grounds for exemplary damages (Article
When it is included? 2229)
1. If the beneficiary is the 3rd person and 1. By way of example.
the designation is revocable. 2. As deterrent for the commission of similar
2. If the beneficiary is an heir, estate, offense.
executor, or administrator whether or not its
revocable or not. 4. Retirement Benefits
- Retirement benefits received by officials
2. Donations and employees duly approved by the BIR
What are the tax implications of Donations;
for exclusive benefit of the
member-employees.
- Retirement Benefits paid to employees
who have reached the age of 60 or more
than 60 but not beyond 65 years with at
least 5 years of credited service.
- Separation Benefits due to death, sickness
or any other physical disability of for any
cause beyond the control of the said official
or employee.
- Social Security Benefits, Retirement
Gratuities received by resident or non
resident citizens or resident aliens from
foreign government agencies and other
private or public institutions.
- Benefits received from US Veterans
Administration by veterans residing in the
Philippines.
- Payment of Benefits under the SSS.
- Benefits received from the GSIS under RA
8291 including retirement gratuity.
Take note of RA 7641 which amended the
age requirement to 60-65 years old with
service of 5 years.
Requisites for exemption:
1. There must be a retirement plan.
2. 50 years of age.
3. At least 10 years of service.
4. Availed only once.
HYPO. An employee who retired for his 1st
employment, then subsequently got
employed, and retires again and received
retirement benefits. Is the subsequent
retirement benefits taxable? Yes. It is now
taxable. Exception: Government Employee
When separation pay be exempt? It must be
based on these valid causes namely;
1. Beyond the control of the employer.
(Take note of the valid causes of dismissal
under the Labor Code)
2. Death
3. Sickness
4. Physical Disability
HYPO: There is an employee granted a
separation pay based on her resignation,
taxable? Yes.
Please take note of the case of Zialcita
Cases wherein the employee was
compulsory retired from services and
granted termination pay was considered an
event that is beyond the control of the
employer.
Separation Pay V. Retirement Benefits
As to the requirement,
- in Separation Pay, there is only one
requirement and that is the cause must be
beyond the control of the employer.
- Retirement Benefits, there are 4 requisites.
As to the length of service,
- In Separation Pay, there is no such
requirement.
- In Retirement Pay, it must be at least 10
years.
As to the Age Requirement,
- In Separation Pay, there is no such
requirement.
- In Retirement Benefits, it must be 50 years
of age.
CIR V. Mitsubishi Case
Is the entries of the loan taxable? Yes.
Reasons:
1. Upon the perfection of the contract of
loan, the borrower acquires ownership.
2. Japan was never made a party to the
contract of loan. There is no clear and
convincing evidence to prove that Japan
participated with the contract of loan.

5. Prizes and Awards
Distinction between Par. C and Par. D
Requisites of Paragraph C:
1. The price must be received in recognition
with SCRALEC.
2. There must be no action on his part to
enter the contest or proceedings.
3. There must be unconditional receipt of
such price. ( The recipient is not required to
render substantial future services as a
condition to receiving the prize or award.)
Requisite of Paragraph D:
- The recipient is exempt from income tax,
thus it is excluded from gross income.
6. Gains from the sale or exchange of
retirement of bonds, debentures or other
certificate of indebtedness with a
maturity of more than 5 years.
What are those items mentioned?
- Retirement of Bonds
- Debentures
- Other Certificate of Indebtedness
Interest on Income on bonds, exempted?
No. Taxable.
7. Redemption of Shares in Mutual fund
Company
- Section 24, 25.
Capital Gains 6%, when exempted?
Requisites:
1. The proceeds of the sale shall be
used for purchase or construction of a new
principal residences.
2. It must be for a period of 18
calendar months.
3. The BIR Notice must be given to
show the intent to be exempted.
4. The period of notice must be 30
days.
5. It shall be only availed once every
10 years.
What do you mean by WHATEVER
SOURCE DERIVED
- it means that the source is immaterial.
What does it connote?
- it connotes that the enumeration is not
exclusive.
-this is not only the sources of the income.
What are those not included under Section
32 A?
1. Treasure Found and punitive damages
representing profit lost.
2. Amount received by mistake.
3. Cancellation of the taxpayers
indebtedness.
4. Payment of usurious interest.
5. Illegal gains.
6. Tax Refund.
7. Bad Debt Recovery.
When an income is taxable in payment by
mistake?
As a general rule, it is not taxable. But as for
the exception, it can be taxable under the
control, test as the basis.
Javier V commissioner.
North American Case
Supposed it is received under trust, is such
receipt subject to tax?
As a general rule, it is not.
Exception: if the taxpayer received earnings
under the claim of right without restrictions
as to
It's disposition, he has received income
even though it may still be claimed that he is
m entitled to retain the money and even
though he may still be adjudged liable to
restore its equivalent.
When taxable? When will it arise? apply the
control test.
If there is such predisposition of such
amount.
Are illegal gains taxable? Yes.
What is your basis? Income derived from
whatever source.
Jurisprudential case: Rutkin V US
Claim of right doctrine - illegal acquired
income constitutes realized gain.
When will such cancellation forgiveness
amount to taxable income?
1. In the nature of compensation income in
consideration of the service rendered.
2. Taxable donation. When the obligation is
condoned, renounced by the employer
creditor and there is no consideration given.
3. Capital Transaction. When it considered
as an indirect dividends, which is subjected
to progressive tax rates.
When tax refund will amount to taxable
income? Apply the tax benefit rule.
Tax Benefit Rule
- it is a rule that recognized the taxability of
tax refund or bad debts provided that such
tax refund or bad debts are actually claimed
as a deduction in previous taxable year.
3 conditions for Tax refund:
1. Tax refund must be a deductible tax.
2. It must be claimed actually as a
deduction in previous taxable year.
3. The tax receiving must received taxable
benefit.
Requisites for Bad Debts Expense:
1. There must be an existence of a valid
debt and subsisting debt.
2. The debts. Use be actually ascertained to
be worthless.
3. The debt must be charged off within the
year to be worthless.
4. The debt arises from business or trade.
4 non deductible taxes:
1. Donor tax
2. Estate tax
3. Income Tax
4. Special Assessment Tax
Example of creditor taxpayer may possibly
recover tax:
When the debtors financial standing has
been improved.
CANCELLATION AS COMPENSATION
INCOME
Basis: Derived from whatever source
What is the test to determined won it falls
under this item?
- payment must be made under EE ER
relationship.
What is the other form of compensation
income?
- payment of life insurance premium.
Section 33 (B) 10
Stated the tax treatment of payment of life
insurance premium paid by employer.
- please do considered the employee won it
is rank and file or managerial or supervisory
as the case may be.
Distinction between Fringe Benefits and
Compensation Income:
As to the tax rate, FB is subject to Final Tax,
CI is subject to progressive rates.
As to the tax base, The tax base of FB is
the grossed monetary value, the tax base of
CI is the gross compensation income.
As to the method of collection, FB is FWTS,
in CI is the CWTS.
As to the taxpayers, FB it applies to
managerial or supervisory employees, in CI
is includes all employees and rank and file
employees.
As to the reporting requirement, FB is not
required to report because it constitutes
final and full settlement of tax liability, CI Is
subject to report it to the BIR.
As to the application of substituted filing of
ITR, FB is not allowed to file for such, in CI,
Compensation earned with only one
employers is allowed to do such.
GAINS DERIVED FROM DEALING IN
PROPERTY
Dealings - it refers to sale, exchange, or
barter.
Please take note the meaning of sale under
the NCC.
Is lease covered?
No. It falls under rents. correlate with
section 39, 40.
What are the 4 exempt sales or exchanges.
( No gain no loss recognized)
1. Between corporation which are parties to
the merger or consolidation.
2. Between stockholder of a corporation
party to a merger or consolidation and the
other party corporation.
3. Between a security holder of a
corporation party to a merger or
consolidation and other party corporation.
4. Transfer or exchange of poverty for stock
resulting in acquisition of corporate control.
Capital Asset (Section 39 A 1) - it is by way
of exclusion.
Ordinary Asset (Section 39 e 1) - It is by
way of enumeration.
Ordinary Asset - it refers to and is limited to
the following:
1. Stock in trade or business
2. Inventorial Asset such as raw materials,
work in process and finished goods.
3. Property primarily for trade or business.
4. Depreciable property in business such as
machinery.
5. Real property used in trade or business.
Common: It must be for trade or business. It
is EXCLUSIVE.
What is not ordinary is CAPITAL ASSET.
Capital Asset is the pores held by the
taxpayer whether or not connected with its
trade or business except other then these 5
items, stock in trade, inventorial asset,
property primarily for trade or business,
depreciable property used for trade or
business and real property used for trade or
business.
Examples of Capital Asset: 2 Intangible
assets
1. Discounting of Accounts Receivable
2. Gain in business or goodwill.
Ordinary gain V capital gain
Ordinary Gain is the gain derived fro. The
sale or exchange or barter of poetry from
the 5 items namely;
Capital Gain is the gains derived from the
sale exchange or barter or property held by
e taxpayer whether or not it is connected
with its trade or business except other than
the 5 items namely;

Reason for knowing such:
Capital gain is subject to special rules.
What are these rules?
1. Holding period rule
- 12 month period
50% - after the lapse of the 12 months
period.
100% - before the lapse of the 12 month
period.
Is there a difference between one year and
12 month period?
Yes. Under the NCC, Article 13 states that's
when the law speaks of year, it must be 365
days and of month, it is 30 days.
Short term capital gain - it is the gain
derived from sale or exchange of capital
asset if the period is not more than 12
months. The tax treatment is 100%.
Long term capital gain - it is the gain derived
from sale or exchange of capital asset terror
if more than 12 months. The tax treatment is
50%.
2. Capital Loss Limitation - It is when the
capital losses are allowed only to the tent of
capital gains.
RATIONALE: Capital losses cannot be
claimed as ordinary under the principle of
matching of costs against revenues.
Principle of matching costs against
revenues
- it is when the expense which may be
deducted must be in connection with the
business or trade.
Ordinary Loss can be claimed in capital
gain.
What is the reason?
Justice Vitug: There is no prohibition to it.
3. Net capital loss deducted from capital
gains.
- it shall be treated in the succeeding
taxable year as loss from the sale or
exchange of capital asset held not more
than 12 months.
Up to what extend?
It must not be in excess of the taxable
income in the preceding year or the lower
amount between the net income and the
capital loss.
Distinctions between NETCO V. NOLCO
NETCO is Section 39 D, NOLCO is Section
34 D 3.
As to the transaction, NETCO applies over
capital transactions which necessarily
involves capital assets, NOLCO applies
over ordinary transaction which necessarily
involves ordinary assets.
As to the taxpayer, NETCO only applies to
individual taxpayers, NOLCO applies to
individual taxpayers and corporate
taxpayers.
As to the number of years allowed, NETCO
only allows 1 year, NOLCO allows 3
succeeding years, or 5 years in case of
mining companies.
Real property not in trade or business, can
we apply NETCO or NOLCO? No. Apply
rather Section 34 D 1.
Shares of stock, can we apply NETCO or
NOLCO? No. it is subjected to 15% final tax
as based on net capital gains.
Net Capital Gain = excess of capital gain
over capital loss.
Fringe Benefit
What are those 10 items?
1. Housing
2. Expense Account
3. Vehicle of any kind.
4. Household Personnel
5. Interest on loan at less than the market
rate.
6. Membership fees, dues and other
expenses bored by Ed employer for the
employee in social and social clubs and
other similar organizations.
7. Holiday and vacation expenses.
8. Expenses for foreign travel
9. Educational Assistance to the Employee
or his dependents.
10. Life or health insurance and other non
life insurance premiums and Silas aunts in
excess of the law allows.
What are those TAX EXEMPT FRINGE
BENEFITS? ( RR 3-98)
1. Housing unit in convenient to the
employer.
- it must be situated within the premises.
- If situated outside the premises. It must
within the 50 meters perimeter.
2. Temporary Housing Units
- it must be for a period of 3 months or less.
3. Military Housing
Reason: In order that the military personnel
shale ready when they are in need.
Item 7: TRAVELING EXPENSES
- in case of business conventions or
meetings.
Item 9: EDUCATIONAL ASSISTANCE FOR
THE EE OR HIS DEPENDENTS
- Scholarship to the employees provided
that the employee shall remain in the
employ of the employer.
- Scholarship to the dependent provided
that the dependents of the employee must
passed the competitive exam.
Item 10: LIFE INSURANCE
3 Tax exempt Life premium
1. GSIS
2. SSS
3. Group Insurance Policy
Section 33 C (Additional Exemptions)
DE MINIMIS BENEFITS
- facilities or privileges furnished or offered
by an employer to his employees that are of
relatively small value and are offered or
furnished by the employer merely as a
means of promoting health, goodwill,
contentment or efficiency of his employees.
4 purposes of de MINIMIS benefits:
1. To promote health.
2. to promote goodwill.
3. to promote contentment.
4. To promote efficiency.
Medical Cash benefit/Allowance given to the
dependent - Php 125
Laundry Allowance - Php 300
Rice Subsidy - Php 1500
Uniform Allowance/ Christmas Gift/ Major
Anniversary - Php 5000 per annum
Medical benefit to the EE/ Employment
advertisement Award/ CBA Incentives - Php
10,000 per annum.
Meal Allowance for overtime work - 25% of
the basic minimum wage.
Monetized Vacation Leave or Sick Leave
(Qualification)
Private Employees: VL- exempt for a period
of 10 days only, SL - Always taxable.
Government Employees - always exempt.
Interest Income
What are those exempted?
1. Interest Income from bank deposit
provided that the receipts to must be the ff;
- Foreign Government
- Foreign Institutions controlled or finances
by the foreign government.
- Regional or international financial
institutions established by the foreign
government.
2. Interest Income on loan extended by any
of the three mentioned above.
3. Interest Income on Bonds, debentures,
and other certificates of indebtedness
received by any of the three.
4. Interest income on bond deposit
maintained under the expanded foreign
currency deposits system.
5. Interest income form the long term
investment or deposit.

Dividend Income
What are those exempted?
1. InterCorporate Dividends (Section 27 (D)
4)
- DC to DC
What if received by NRFC? It shall be
subjected to 15% final tax. (section 28)
Section 42 (A) 2 (b)
- 3 year and 50%
- It is received from a foreign corporation,
which does not categorically states whether
or not it is an Individual taxpayer or
corrected taxpayer, if income within the
Philippines - 15% worth of the income
coming from PH as long as it is with the 3
preceding taxable year.
2. InterCorporate Dividends (Section 28 (A)
7 (d) )
- Received by RFC from DC
3. Stock Dividends (Section 73 (B))