Taxation Reviewer 1

PART 1

A. INTRODUCTION

1. General Principles sources of tax laws

Sec. 21 Sources of Revenue the following taxes, fees and charges are deemed to be
national internal revenue taxes:
1. Income tax;
2. Estate and Donors taxes;
3. Value-added tax;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other Taxes as are or hereafter may be imposed and collected by the Bureau of
Internal Revenue

Other Sources in general:

1. Constitution
2. NIRC
3. Other Tax Statutes
4. Revenue Regulations implementing NIRC

2. Constitutional Limitations

SISON V. COMMISSIONER

BP 135 was enacted amending sec 21 of the NIRC[1]. Petitioner Sison assails the
amendment claiming it would unduly discriminate against him by the imposition of
higher tax rates upon his income from the exercise of his profession vis--vis against
those earning a fixed income. He claims that the measure is arbitrary and violative of
both the equal protection and due process clauses of the constitution.

Held: The power to tax is inherent in sovereignty. However, it is not limitless. The
constitution sets forth its limitations. Adversely affecting as it does property rights, both
the due process and the equal protection clauses may properly be invoked to invalidate
a revenue measure. However, there has to be sufficient basis to support such a claim.
The due process clause may be invoked if the measure is so arbitrary that it finds no
support in the Constitution, as when it amounts to a confiscation of property or where it
beyond the authority of the taxing authority, or is not for a public purpose. As for equal
protection, it is sufficient if the law operates equally and uniformly on all persons under
the same circumstances or that all persons must be treated in the same manner, the
conditions not being different, both in privileges conferred and liabilities imposed.
In the case of BP 135, there is ample distinction to adopt a gross system of income
taxation to compensation income. In such law, the basis for classification is the
susceptibility of the income to the application of generalized rules removing all
deductible items for all tax payers whithin the class and fixing a set of reduced tax rates
to be applied to all of them.

3. Classification of Income taxpayers

- Individual
- Corporations or others with separate juridical personality

D. TAX ON INDIVIDUALS

1. Kinds of Individual Taxpayers

i) Individual Citizens- Taxable on all sources of income, whether within or without the
Philippines
ii) Non-resident Citizen- Taxable only on income from within the Philippines
iii) Individual Resident Aliens- Taxable only on income from within the Philippines
iv) Non- Resident Aliens-taxable only on income from within the Philippines

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within and without the Philippines be every individual citizen of the
Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the
Philippines.
The tax shall be computed in accordance with and at the rates established in the
following schedule:
Not over P10,000....5%
Over P10,000 but not over P30,000P500+10% of the excess
over P10,000
Over P30,000 but not over P70,000P2,500+15% of the excess
over P30,000
Over P70,000 but not over P140,000..P8,500+20% of the excess
over P70,000
Over P140,000 but not over P250,000P22,500+25% of the
excess over P140,000
Over P250,000 but not over P500,000P50,000+30% of the
excess over P250,000
Over P500,000 ... P125,000+34% of the
excess over P500,000 in 1998.
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three
percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent
(32%).
For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based on their respective
total taxable income: Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses for the purpose of determining their
respective taxable income.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements; royalties, except on books, as well as other literary
works and musical compositions, which shall be imposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which
shall be subject to tax under Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the
Philippines: Provided, however, That interest income received by an individual taxpayer
(except a nonresident individual) from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income: Provided, further, That interest
income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided,
finally, That should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed
upon the cash and/or property dividends actually or constructively received by an
individual from a domestic corporation or from a joint stock company, insurance or
mutual fund companies and regional operating headquarters of multinational
companies, or on the share of an individual in the distributable net income after tax of a
partnership (except a general professional partnership) of which he is a partner, or on
the share of an individual in the net income after tax of an association, a joint account,
or a joint venture or consortium taxable as a corporation of which he is a member or co-
venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on income earned on or
after January 1, 1998. Income forming part of retained earnings as of December 31,
1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to
this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock exchange.
Not over P100,000........ 5%
On any amount in excess of P100,000 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as determined
in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed
upon capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales
or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall be
determined either under Section 24 (A) or under this Subsection, at the option of the
taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is fully
utilized in acquiring or constructing a new principal residence within eighteen (18)
calendar months from the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the Commissioner shall have been
duly notified by the taxpayer within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to the gross selling price in
order to determine the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters
or Multinational Company, or Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation, or from a joint stock company,
or from an insurance or mutual fund company or from a regional operating headquarters
of multinational company, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a nonresident alien individual in the
net income after tax of an association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer; interests; royalties (in any form);
and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which
shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings
(except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount thereof: Provided, however, that
royalties on books as well as other literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That interest income
from long-term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally,
that should the holder of the certificate pre-terminate the deposit or investment before
the fifth (5th) year, a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of
stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of
Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by every nonresident alien
individual not engaged in trade or business within the Philippines as interest, cash
and/or property dividends, rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of
such income. Capital gains realized by a nonresident alien individual not engaged in
trade or business in the Philippines from the sale of shares of stock in any domestic
corporation and real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. - There shall be levied, collected
and paid for each taxable year upon the gross income received by every alien individual
employed by regional or area headquarters and regional operating headquarters
established in the Philippines by multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances,
from such regional or area headquarters and regional operating headquarters, a tax
equal to fifteen percent (15%) of such gross income: Provided, however, That the same
tax treatment shall apply to Filipinos employed and occupying the same position as
those of aliens employed by these multinational companies. For purposes of this
Chapter, the term 'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien
individual employed by offshore banking units established in the Philippines as salaries,
wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances, from such off-shore banking units, a tax equal to fifteen
percent (15%) of such gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same positions as those of aliens
employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An
Alien individual who is a permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax
of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, received from such
contractor or subcontractor: Provided, however, That the same tax treatment shall apply
to a Filipino employed and occupying the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent
income tax, as the case may be, imposed under this Code.
2. Definition of each kind of taxpayer:

a. Resident Citizens and Resident Aliens

Sec. 5-6, RR-2

An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or
not is determined by his intentions with regard to the length and tenure of his stay. A
mere floating intention indefinite as to time, to return to another country is not sufficient
to constitute him a transient. If he lives in the Philippines and has no definite intention as
to his stay, he is a resident. One who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary for its accomplishment, and to
that end the alien makes his home temporarily in the Philippines, he becomes a
resident, though it may be his intention at all times to return to return to his domicile
abroad when the purpose for which he came has been consummated or abandoned.

RR 2-98

b. Non-Resident Citizens
i. Sec 22 (NIRC): the term non resident citizen means
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
(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.
(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.
(4) A citizen who has been previously considered as a 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.
(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 purposes of this section.

ii. Sec. 2 - RR 1-79 Who are considered as non-resident citizens the term non-
resident citizen means one who establishes to the satisfaction of the Commission of
Internal Revenue the fact of his physical presence abroad with the definite intention to
reside therein and shall include any Filipino who leaves the country during the taxable
year as:
(1) Immigrant one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa as such has been secured
(2) Permanent employee one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
(3) Contract worker one who leaves the Philippines on account of a contract of
employment which is renewed from time to time within or during the taxable year under
such circumstances as to require him to be physically present abroad most of the time
during the taxable year. To be considered physically present abroad most of the time
during the taxable year, a contract worker must have been outside the Philippines for
not less than 183 days during the taxable year.

Non-Resident Aliens Engaged in business in the Phil.

i. Sec. 25 (NIRC) - A nonresident alien individual who may either be:
(1) Engaged in trade or business (the term denotes habituality or sustained activity) and
he is deemed so engaged if the aggregate stay in the Philippines exceeds 180 days for
each calendar year; or
(2) Not engaged in trade or business

ii. Sec. 5, RR 2 A nonresident alien individual means an individual

(1) Whose residence is not within the Philippines; and
(2) Who is not a citizen of the Philippines

Sec. 25 - Tax on Nonresident Aliens

A nonresident alien engaged in trade or business in the Philippines shall be taxed in the
same manner as an individual citizen and a resident alien individual on taxable income
derived from sources within the Philippines. A nonresident alien is one who shall come
to the Philippines and stay herein for an aggregate period of more than 180 days during
a calendar year. Tax on their passive income is likewise the same.
The rate of tax on income from all sources within the Philippines of a non resident alien
NOT engaged in business here shall be 25%, except for gains from sale of real property
and sale or exchange of stocks not thru the stock market.

An alien individual employed by the regional or area headquarters and regional

operating headquarters established in the Philippines by multinational companies shall
be taxed 15% on his gross income PROVIDED the same tax treatment is given to
Filipinos employed in the same position by the same multinational companies.

Those aliens employed by off shore banking units[2] established in the Philippines shall
be taxed 15% on their gross income PROVIDED the same tax treatment is given to
Filipinos employed and occupying the same positions as aliens employed by these off
shore banking units.

Aliens who are permanent residents of a foreign country but are employed and
assigned in the Phil by a foreign service contractor or subcontractor engaged in
petroleum operations in the Philippines shall be taxed 15% on their gross income
PROVIDED that the same tax treatment is given to Filipinos occupying the same
position as aliens by the petroleum contractor or subcontractor.
3. Kind of income and income tax of individuals

a. Tax formula

b. Final income tax

Sec. 24 - Rates of Income Tax

A uniform tax rate schedule is used to determine tax liability of resident citizens, of non-
resident citizens, and of resident aliens, subject however to the rule set under no.1
above.
Not over P10,000.5%
Over P10,000 but not over P30,000.P500 plus 10% of the excess over
P10,000
Over P30,000 but not over P70.000.P2,500 plus 15% on the excess
Over P70,000 but not over P140,000...P8,500 plus 20% on excess
Over P140,000 but not over P250,000.P22,500plus 25% on excess
Over P250,000 but not over P500,000.P50,000plus 30% on excess
Over 500,000P125,000plus 32% of excess

For married individuals, both shall compute their individual income tax based on their
own taxable income, provided however that if they do not derive income purely from
compensation, they shall file a return for the taxable year to include the income of both
spouses. If is impractical to file just one return, each spouse may file a separate return
but such will be consolidated by the Bureau.[3]
The taxable income subject to the rates above do not include the income derived from
passive income, capital gains from sales of shares of stock not traded in the stock
exchange and capital gains from sale of real property, the tax rates of which are as
follows:

Passive income

Interest of Bank deposits, deposit substitutes, from trust funds

20%
Interest received by a resident under the expanded foreign Currency deposit system[4]
7.5%
Interest from a long-term deposit or investment
tax exempt
Interest from a pre-terminated long term deposit or investment
With a remaining maturity of 4 to less than 5 yrs
5%
3 to less than 4yrs
12%
less than 3 yrs
20%
Royalties except from books, etc
20%
Royalties from books, literary works and musical compositions
10%
Prizes up to P10,000
taxable as income
Prizes exceeding P10,000
20%
Winnings other than from sweepstakes or lotto
20%
Sweepstakes and lotto winnings
Exempt
Cash or property dividends, actually or constructively received from a domestic corp.,
joint stock co., insurance or mutual fund corp. and regional operating head-quarters of
multinationals or on the share in the distributable net income after tax of a partnership of
which he is a partner, or of an association, a joint account or a joint venture or
consortium taxable as a corporation of which he is a member or co-venturer

10%

Capital Gains from shares

Gains from shares of stocks sold, bartered or exchanged outside the

Stock market if not more than P100,000..5%
If over P100,000..10%

Capital Gains from the sale of Real Property

Tax rate is now 6% based on the gross selling price or current fair market value,
whichever is higher. However, if the sale is made to the government or any of its
subdivisions or to any GOCC, it may be taxed as part of the taxpayers income ( as set
forth in the fist paragraph of this part), at the option of the taxpayer. (RR 8-98)

EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and
the proceeds are used to purchase a new home, it shall be exempt provided:
a return is filed with the Bureau within 30 days from the sale stating the intention to
avail of the exemption
Proceeds are used within 18 months from sale to purchase a new residence
The historical costs of the residence sold is carried over to the new home
Exemption can only be availed of once every 10 years
If proceeds are not fully utilized, portion of the gain is taxable using this formula:
Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gsp
4. Personal, additional, and special exemptions; amounts

Resident Citizens and Resident Aliens

The following personal exemptions are allowed for the purpose of determining the tax to
be imposed upon resident citizens and resident aliens:

For single individual or married individual judicially decreed as

Legally separated w/ no qualified dependentsP20,000
For head of the family.P25,000
For each married individualP32,000

In the case of married individuals where only one spouse is deriving gross income, only
such spouse shall be allowed the personal exemption

An additional exemption of P8,000 is also allowed for each dependent not exceeding
four. However, only one spouse may claim such exemption and in case of married
individuals who are legally separated, the one who has custody of the child/ children
can claim such exemption.

Personal Exemptions and Optional Standard Deduction

A) Individual
1) Kinds of individual and amount of personal exemption:
Each married individual
P32,000
In case of married individuals where only one of the spouses is deriving gross income,
ONLY such spouse shall be allowed the personal exemption
Head of the family
P25,000
a) Single; or
b) Married individual judicially declared as legally separated with no qualified
dependents

P20,000

2) Dependents
Each dependent not exceeding 4
P8,000
The additional exemption for dependents shall be claimed by ONLY one spouse in
case of married individuals
In case of legally separated spouses, additional exemptions may be claimed ONLY by
the spouse who has custody of the child or children; PROVIDED that the total amount of
additional exemptions that may be claimed by both shall not exceed the maximum
additional exemptions herein allowed.

Non-resident citizen
RR 1-79
Non-resident citizens are allowed the following exemptions:

Personal exemptions:
Single or married but legally separated$2,000
Married or head of the family...$4,000

Also, the total amount of the national income tax actually paid to the national
government of the foreign country of his residence shall be deducted from his taxable
income.

Non-resident aliens engaged in business in the Philippines or in the exercise of a

profession

These persons are entitled to personal exemptions in the amount equal to the
exemptions allowed in the income tax law of the country of which he is a citizen, to
citizens of the Philippines not residing in that country. Such amount shall not exceed the
amount fixed in Sec 36 of the NIRC. However, such nonresident alien shall file a true
and accurate return of the total income received by him from all sources within the
Philippines.

5. definition of:

a. head of family
A head of the family is an unmarried or a legally separated man or woman with one or
both parents, or with one or more brothers and sisters, or with one or more legitimate,
recognized natural or legally adopted children living with and dependent upon him for
their chief support (more than 1/2 of the requirements for support), where such brothers
of sisters or children are not more than 21 years of age, unmarried and not gainfully
employed or where such children, brother or sister, regardless of age are incapable of
self-support because of mental or physical defect

b. dependent
Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer if such dependent is not more than 21 years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is not
capable of self-support because of mental or physical defect

6. change of status and personal exemptions

 If the taxpayer should change his or her status during the taxable year, he may claim
the corresponding additional exemptions in full for such year.
If the taxpayer dies during the taxable year, his estate may claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of his dependents dies or if any of such dependents marries,
become 21 or becomes gainfully employed during the taxable year, the taxpayer may
still claim the same exemptions as if no such change had occurred.

CHANGE OF STATUS
Change
Effect
If the taxpayer should marry or should have additional dependents during the taxable
year
He may claim the corresponding exemptions in full for such year
If the taxpayer should die during the taxable year
His estate may claim the personal exemptions as if he dies at the close of such year
If the spouse or any dependent
a) should die
b) should marry (refers to the dependent)
c) become 21 years old during the year
d) becomes gainfully employed
The taxpayer may claim the personal exemptions as if the spouse or dependent dies or
as if such dependent married, became 21 years old or became gainfully employed that
the close of such year

NOTE: For any other event that results in a change in the status of the taxpayer as it
affects his personal exemptions, and for which there are no specific rules applicable
from those abovementioned, the status of the taxpayer at the end of the year shall
determine his personal exemptions for such year.

7. premium payments on health and/or hospitalization insurance

Premium payments of such nature paid during the taxable year, not exceeding P2,400
per family OR P200 a month paid during the taxable year by the taxpayer for himself,
including his family, shall be allowed as deductions from his gross provided that the
gross income of the family does not exceed P250,000 for the taxable year. For married
couples, only the spouse claiming deductions for the dependents may avail of such
exemption. (Sec. 34 [m]).

Deduction from gross income of an amount not to exceed

a) P2,400 per family; or
b) P200 a month
Rules for application
a) Such deduction should have been paid during the taxable year for health and/or
hospitalization insurance
b) Said family has a gross income of not more than P250,000 for the taxable year
In case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to the deduction
PART 2

TAX ON CORPORATIONS

8. Definition of Corporations:

Sec. 22 NIRC the term corporation shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, 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 or consortium agreement under a service contact
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.

Commissioner v. Batangas Tayabas Bus Co. (102 P 822)

Issue: W/n the 2 transportation companies are liable to payment of income tax as a
corporation on the theory that the Joint Emergency Operation organized & operated by
them is a corporation w/in the meaning of the Revised Internal Revenue Code.

Held: Yes, liable as a corporation.

In the present case, the 2 companies contributed money to a common fund to pay the
sole gen. manager, the accounts & office personnel attached to the office of said
manager, as well as for maintenance & operation of a common maintenance & repair
shop. Said common fund was also used to buy spare parts, & equipment for both
companies, including tires. Said common fund was also used to pay all the salaries of
the personnel of both companies, & at the end of each year, the gross income receipts
of both companies were merged, & after deducting there from the gross expenses of the
2 companies, also merged, the net income was determined & divided equally between
them, wholly disregarding the expenses incurred in the maintenance & operation of
each company & of the individual income of said companies.
From the standpoint of income tax law, this procedure & practice of determining the net
income of each company was arbitrary & unwarranted, disregarding as it did the real
facts of the case. Considering that Batangas Transportation & the Laguna Bus operated
different lines, under different franchises, w/ different equipment & personnel, it cannot
possibly be true & correct to say that at the end of each year, the gross receipts &
income & the gross expenses of the 2 companies are exactly the same for purposes of
the payment of income tax. Therefore, the Joint Emergency Operation in this case is a
corporation under the Internal Revenue Code & is liable to income tax as a corporation.
Ona vs CIR (25 SCRA 74)

Ruling: For tax purposes, the co-ownership of inherited properties is automatically

converted into an unregistered partnership the moment the said common properties are
used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate & the incomes thereof,
for each of them to manage & dispose of as exclusively his own w/o intervention of the
heirs, & accordingly, he becomes liable individually for all taxes in connection therewith.
If after such partition, he allows his share to be held in common with his co-heirs under
a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that even if no document or instrument were executed
for the purpose, for tax purposes, at least, an unregistered partnership is formed.
For purposes of tax on corporations, the NIRC, includes partnerships-with the exception
of only duly registered gen. co-partnershipswithin the purview of the term corporation.

BIR Ruling No. 317-92

Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandum of
Agreement (MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA, they will
contribute equal amounts to the construction costs & ALI will own 60% of the building
while API will own 40%, while there is separate ownership, they will share common area
expenses, real estate taxes, etc in the same proportion. ALI & API now propose to enter
into a another agreement, a Joint Venture Agreement(JVA). Under the JVA, both ALI &
API will contribute money as additional working capital & ALI will be appointed as
manager & will be responsible for leasing the floors.

HELD: The MOA has not by itself created a taxable joint venture. However, the joint
venture to be subsequently entered into by & between ALI & API will create a joint
venture subject to tax.

Obillos vs. Commissioner (139 SCRA 436)

The Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing of gross
returns does not itself establish a joint partnership whether or the persons sharing them
have a joint or common right or interest in the property from which the returns are
derived. There must, instead, be an unmistakable intention to form that partnership or
joint venture. A sale of a co-ownership property at a profit does not necessarily establish
that intention.
This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which
they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land
from Ortigas & Co & transferred his rights to his 4 children to enable them to build their
residences. In 1974, the 4 children resold the lots to Walled City Securities Corp &
earned profit. CIR assessed the 4 children with corporate income tax.

HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered
partnership simply because they contributed in buying the lots, resold the same &
divided the profit among themselves. They are simply co-owners. They were not
engaged in any joint venture by reason of the isolated transaction. The original purpose
was to divide the lots for residential purposes. The division of the profit was merely
incidental to the dissolution of the co-ownership.

9. Classification of Corporation and the tax rules: (Sec. 27, NIRC)

a. In General

i. Domestic

Sec. 27, (A) In General. - Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived during
each taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal year
shall be deemed to have been earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of
Finance, may effective January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after the following conditions
have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A
ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax
effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the
Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five
percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the corporation is qualified under the
scheme.
For purposes of this Section, the term 'gross income' derived from business shall be
equivalent to gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods" sold shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.

ii. Resident Foreign

Sec. 28, (1) In General. - Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the preceding taxable year
from all sources within the Philippines: Provided, That effective January 1, 1998, the
rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate
shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the
rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be
taxed at fifteen percent (15%) on gross income under the same conditions, as provided
in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum
corporate income tax of two percent (2%) of gross income, as prescribed under Section
27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this Subsection.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in s similar business, industry, or
activity.

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax
at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. -
A final tax at the rates prescribed below shall be imposed on net capital gains realized
during the taxable year from the sale, exchange or other disposition of shares of stock
in a domestic corporation except shares sold or disposed of through the stock
exchange:
Not over P100,000..... 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency depository system units and other
depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from
another domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on
a corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when
the minimum income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the minimum
corporate income tax on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, the necessary rules and regulation that shall define the terms and
conditions under which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, That in the case of banks,
"cost of services" shall include interest expense.

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at the rate of twenty percent (20%)
of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units, including interest income from
foreign currency loans granted by such depository banks under said expanded foreign
currency deposit system to residents, shall be subject to a final income tax at the rate of
ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
depository banks under the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation except shares sold or disposed of through the
stock exchange:
Not over P100,000...... 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from
a domestic corporation liable to tax under this Code shall not be subject to tax under
this Title.

Applies to foreign corporation engaged in trade or business within the Philippines

Table II
Source of Income
Tax
(a) On sale of shares of stock of a domestic corporation not listed and traded thru a
local stock exchange, held as capital assets:
On the net capital gain -
Not over P100,000
On any amount in excess of P10,000
NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru
initial public offering pays the stock transaction tax of the Tax Code, and shall not be
subject to income tax

Final tax of 5%
Final tax of 10%
(b) From sources within the Philippines, on passive income of interest under the
expanded foreign currency deposit system

Final tax of 7 1/2%

(c) From sources within the Philippines, in passive income of:
i. Interest on any currency bank deposit, yield or other monetary benefits from deposit
substitutes, trust funds and similar arrangement;
ii. Royalties
Final tax of 20%
(d) Dividend received from a domestic corporation

Exempt
Take note of the "sources of income" of the corporation given in the problem if such
falls under (a) - (e) above, take it out and tax it accordingly. The income remaining may
now be subject to either the NORMAL TAX, or the MCIT:

THE NORMAL TAX:

Taxable income (net) from sources within the Philippines
i. Beginning January 1, 1998
ii. Beginning January 1, 1999
iii. Beginning January 1, 2000 and thereafter

Final tax of 34%

Final tax of 33%
Final tax of 32%
The normal tax is taxed on taxable income, which means that after taking out the
sources of income as enumerated in Table I (a) - (e) above, giving you the gross
income, deduct the allowable deductions for expenses.

THE MINIMUM CORPORATION INCOME TAX:

The MCIT is 2% of the MCIT gross income
Beginning with the 4th year from start of business operations, the company will be taxed
depending on which is higher, the NORMAL TAX or the MCIT gross income from
sources, within the Philippines. The MCIT is

2%
The same Rules with regard to the MCIT of a domestic corporation apply here
The Secretary of Finance may suspend the imposition of the MCIT on any corporation
which suffers losses:
a) due to prolonged labor dispute; or
b) due to force majeure; or
c) due to legitimate business reverses

REMEMBER: The difference between Table I (domestic corporations) and Table II

(resident foreign corporations) is that the latter is ONLY taxed on sources of income
within the Philippines.
THE GROSS CORPORATE TAX INCOME
Application: The President of the Philippines, upon the recommendation of the
Secretary of Finance, may, effective 2000, allow domestic corporations the option to be
taxed on gross income as follows:
a) the tax is 15%
b) available only to firms whose ration of cost of sales to gross sales or receipt from all
sources does not exceed 55%
c) shall be irrevocable for 3 consecutive years during which the corporation is qualified
under the scheme
To compute the gross income, consult the computation for gross income in the
NORMAL TAX (Caveat: Sir says that the IRR gives a different way to compute the
gross income for the GCIT. But the NIRC says they are all the same.)

REMEMBER: After (a) - (d) in Table I, the remaining income will be taxed either by the
NORMAL TAX, the MCIT or the GCIT. But take note of the applicability of each.
Moreover, the computation for gross income was included in this reviewer because you
have to take note that the NORMAL TAX is taxed on taxable income (Gross Income -
Expenses), while the MCIT and GCIT are taxed on gross income.

iii. Non-Resident (Sec. 28, NIRC)

(1) In General. - 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 thirty-five
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 thirty-four percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter,
the rate shall be thirty-two percent (32%).

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent
(20%) is hereby imposed on the amount of interest on foreign loans contracted on or
after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%)
is hereby imposed on the amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid as provided in Section 57 (A) of
this Code, subject to the condition that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in the Philippines equivalent to
twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent
(18%) for 1999, and seventeen percent (17%) thereafter, which represents the
difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four
percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as
provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through
the stock exchange:
Not over P100,000........5%
On any amount in excess of P100,000 10%

Applies to a foreign corporation NOT engaged in trade or business within the

Philippines
Table III
Sources of Income
Tax
(a) On sale of shares of stock of a domestic corporation not listed and traded thru a
local stock exchange, held as capital assets:
On the net capital gain -
Not over P100,000
On any amount in excess of P10,000
NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru
initial public offering pays the stock transaction tax of the Tax Code, and shall not be
subject to income tax

Final tax of 5%
Final tax of 10%
(b) Interest on foreign loans
Final tax of 20%
(c) Dividend from domestic corporations, under certain conditions (that the country in
which the nonresident foreign corporation is domiciled, shall credit against the tax due
from such corporation taxes deemed to have been paid in the Philippines equivalent to
20%)

Final tax of 15%

(d) Gross income from sources within the Philippines
i. Beginning January 1, 1998
ii. Beginning January 1, 1999
iii. Beginning January 1, 2000 and thereafter

Final tax of 34%

Final tax of 33%
Final tax of 32%

REMEMBER: Take note that unlike Table I and II, nonresident foreign corporations are
taxed on gross income. Also, the MCIT and GCIT do not apply to them.

iv. Special Corporations

1. Private Educational Institutions and Non-Profit Hospitals

Sec. 27, (B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: Provided, that if
the gross income from unrelated trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such educational institutions or hospitals
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A "Proprietary educational
institution" is any private school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the Technical
Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.

Proprietary Educational Institutions Taxable proprietary educational institutions shall

pay a tax of 10% on their taxable income except those subject to final taxes, provided,
however, that if the gross income from unrelated trade, business or other activity
exceeds 50% (predominance test) of the total gross income derived by any educational
institutions from all sources, the corporate tax rates mentioned above are imposed on
the entire taxable income of the educational institution. For this purpose, the term
unrelated trade, business or other activity means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by such
educational institution of its educational purpose or function. A proprietary educational
institution is any private school maintained and administered by private individuals or
groups and issued a permit to operate by the DECS or the CHED or the TESDA, as the
case may be. (Vitug, Acosta).

Sec. 4(3) Art. XIV 1987 Constitution: All revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes
shall be exempt from taxes and duties. Upon the dissolution and cessation of the
corporate existence of such institutions, their assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including those cooperatively owned, may likewise
be entitled to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions fore reinvestment.

Finance Department Order # 137-87

Taxpayer
Tax Base
Rate
Propriety educational institution and non-profit hospital
Taxable income from all sources
10%
Resident international carrier
Gross Philippine Billings
2 1/2%
Non-resident owner or lessor of vessel
Gross rentals, leases, and charter fees from the Philippines
4 1/2%
Non-resident cinematographic film owner, lessor or distributor
Gross income from the Philippines
25%
Non-resident lessor of aircraft, machinery and other equipment
Gross rentals, charter and other fees from Philippine sources
7 1/2%
Regional operating headquarters of multinational company
Philippines taxable income
10%
GOCCs (except: GSIS, SSS, PHIC, PCSO and PAGCOR)
N/A
The same as other corporations engaged in similar activities
There is no minimum corporate income tax for special corporations
All revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes shall be exempt from taxes
If the gross income of a proprietary educational institution or hospital from unrelated
trade, business or other activity exceeds 50% of the total gross income derived from all
sources, such educational institution or hospital shall be taxed as an ordinary
corporation
Non-resident owners of vessels are treated as special corporations only from charters
or leases of the vessels to Filipino citizens or corporations approved by the Maritime
Industry Authority
What are the income tax rules on regional headquarters of a multinational company?

Regional headquarters of a multinational company

Regional operating headquarters of a multinational company
A branch established in the Philippines by a multinational company and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for its affiliates, subsidiaries or
branches in the Asia-Pacific region and other foreign markets
A branch established in the Philippines by a multinational company which is engaged in
any of the following qualifying services: general administration and planning, business
planning and coordination, sourcing/procurement of raw materials and components,
corporate finance advisory, marketing control and sales promotion, training and
personnel management, logistics services, R&D development services and project
development, technical support and maintenance, data processing and communication,
and business development
Shall not be subject to income tax
Shall pay a tax of 10% of its net income

Non-Profit Non-Stock Educational Institution

Dept Order # 149-95

Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues
and assets used actually, directly, and exclusively for educational purposes. They shall,
however be subject to internal revenue taxes on income from trade, business or other
activity the conduct of which is not related to the exercise or performance by such
educational institution of its educational purpose or function.

2. Non-Resident Cinematographic Film Owner, Lessor, Or Distributor

Sec. 28, (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within the Philippines.

3. International Carriers

Sec. 28, (3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine
Billings" as defined hereunder:
(a) International Air Carrier. - "Gross Philippine Billings" 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: Provided,
That tickets revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates from the Philippines,
but transshipment of passenger takes place at any port outside the Philippines on
another airline, only the aliquot portion of the cost of the ticket corresponding to the leg
flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.

BOAC v. CIR

BOAC maintained a general sales agent in the Phil. The general sales agent was
engaged in selling & issuing tickets, breaking down the whole trip into series of trips,
receiving fare from the whole trip & allocating to the various airline companies the
services rendered. In fact, the regular sales of ticket, its main activity is the very
lifeblood of the airline business, the generation of sales being the paramount objective.
There should be no doubt that BOAC was engaged in business in the Phil thru a local
agent. It is a resident foreign corporation subject to tax upon its total net income from all
sources w/in the Phil.
Source of income is the property, activity or service that produced the income. For the
source of the income to be considered as coming from the Phil, it is sufficient that the
income is derived from activity within the Phil. In BOACs case, the sale of tickets in the
Phil is the activity that produces the income. The tickets exchanged hands here &
payments for fares were also made here in Phil currency. The situs of the source of
payment is the Phil. The absence of the flight operations to & from the Phil is not
determinative of the source of income or the situs of income taxation.

RR 15-2002
Continuous and Uninterrupted Flight shall refer to a flight in the carrier of the same
airline company from the moment a passenger, excess baggage, cargo and/or mail is
lifted from the Philippines up to the point of final destination of the passenger, excess
baggage, cargo and/or mail. The flight is not considered continuous and uninterrupted if
transshipment of passenger, excess baggage, cargo and / or mail takes place at any
port outside the Philippines on another aircraft belonging to a different airline company.

Tax on Foreign Airline Companies without flights starting from or passing through any
point in the Philippines An off-line airline having a branch office or a sales agent in the
Philippines which sells passage documents for compensation or commission to cover
off-line flights of its principal or head office, or for other airlines covering flights
originating from Philippine ports or offline flights, is not considered engaged in business
as an international air carrier NO TAX Imposed

Tax on International Air Carrier with Flights originating from Philippine ports ---
irrespective of the place where passage documents are sold or issued, 2 % unless
subject to a different tax rate under the applicable tax treaty to which the Philippines is a
signatory.

4. Non-Resident Owner Of Vessels

Sec. 28, (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals.
- A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half
percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime Industry Authority.

5. Non-Resident Lessor Or Aircraft, Machineries, And Other Equipment

Sec. 28, (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipment. - Rentals, charters and other fees derived by a nonresident lessor of
aircraft, machineries and other equipment shall be subject to a tax of seven and one-
half percent (7 1/2%) of gross rentals or fees.

6. Foreign Currency Deposit System/Offshore Banking Units

Sec. 28, (4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including
any interest income derived from foreign currency loans granted to residents, shall be
subject to a final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with
said offshore banking units shall be exempt from income tax.

RR 10-76

RR 14-77
Gross Onshore Income shall mean gross interest income arising from foreign currency
loans and advances to and/or investments with residents made by offshore banking
units or expanded foreign currency loan transactions. In the case of foreign currency
loan transactions, such gross interest income shall refer only to the stipulated interest
and shall not include all fees, commissions and other charges which are integral parts of
the income from the above transactions.
Tax on Gross Onshore Income shall be 10% thereof and shall be a final tax

RR 10-98
Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit
Individual Income Tax on Interest Income from a Depository Bank under the Foreign
Currency Deposit System
(1) Resident Citizen or Resident Alien 7.5% final withholding tax
(2) Non-Resident Citizen Exempt

If a bank account is jointly in the name of the non-resident citizen such as an overseas
contract worker and his spouse who is a resident in the Philippines, 50% of the interest
income from such bank deposit shall be exempt, while the other 50% subject to 7.5%
final withholding tax.

Sec. 2.27 and 2.28 Corporate Income Tax on Interest Income from a Depository Bank
under the Foreign Currency Deposit System
Taxation of Income of an FCDU or OBU from Foreign Currency Transactions In
general, income derived by an FCDU or an OBU from foreign currency transactions with
residents of the Philippines, including local commercial banks, local branches of foreign
banks, and other depository banks under the foreign currency deposit system, shall be
subject to final withholding tax of 10% based on gross income.

7. Petroleum Service Contractor And Subcontractor

PD 1354 Imposing final income tax on subcontractors and alien employees of service
contractors and subcontractors engaged in petroleum operations in the Philippines

1. Every subcontractor, whether domestic or foreign, entering into contract with a

service contractor engaged in petroleum operations in the Philippines derived from
contract8% of gross income in lieu of any and all taxes
2. Provided: Income received from all other sources subject to regular income tax under
NIRC
a. For domestic corporations sources from within and without the Philippines
b. For foreign corporations sources from within the Philippines
3. Aliens who are permanent residents of a foreign country but are employed and
assigned in the Philippines by service contractors or subcontractors engaged in
petroleum operations15%

PD 87 Amended Act to Promote the Discovery and Production of Indigenous

Petroleum and Appropriate Funds
Privileges of Contractor:
(1) Exempt from all taxes except income tax;
(2) Exemption from payment of tariff duties and compensating tax on the importation of
machinery and equipment, and spare parts and all materials required for petroleum
operations subject to the condition that:
a. Said machinery are not manufactured domestically
b. Directly and actually needed and will be used exclusively by the contractor /
subcontractor in its operations
c. Prior approval of the Petroleum Board was obtained by the contractor before
importation

8. enterprises registered under Bases conversion & Dev. Act of 1992 and PEZA Act of
1995
RR 20-2002
Tax treatment Income derived by an enterprise registered with the Subic Bay
Metropolitan Authority, Clark Development Authority, or the PEZA from its registered
activities shall be subject to such tax treatment as may be specified in its terms of
registration (i.e. the 5% preferential tax rate, the income tax holiday, or the regular
income tax rate, as the case may be.) Nonetheless, whatever the tax treatment of said
enterprise with respect to its registered activities, income realized by such registered
enterprise that is not related to its registered activities shall be subject to the regular
internal revenue taxes, such as the 20% final income tax on interest from Philippine
Currency bank deposits and yield or any other monetary benefit from deposit
substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign
currency deposits and 5% / 10% capital gains tax or % stock transaction tax, as the
case may be, on the sale of shares of stock.
Income payments made by a registered enterprise to an entity in the Customs Territory
shall not be subject to the preferential tax rates or tax exemption enjoyed by the
registered enterprise. Thus, dividends paid to the shareholders of a registered
enterprise, interest payments to creditors of such registered enterprise (regardless of
any tax provision for grossing up of taxes) , and other such payments shall be subject to
the appropriate rate of tax imposable on the recipient of such income.

10. Kinds of Taxes: (Domestic, Resident, Non-Resident Corporations)

a. Final income tax interest, royalties, capital gains on shares of stock dividends
b. Income tax at the end of the year / quarterly income tax

CIR v Procter & Gamble(including MR)

The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to 15% if the country of domicile of
the foreign stockholder corporation shall allow such foreign corporation a tax credit for
taxes deemed paid in the Philippines, applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. In other words, in the instant
case, the reduced 15% dividend tax rate is applicable if the USA shall allow to P&G-
USA a tax credit for taxes deemed paid in the Philippines applicable against the US
taxes of P&G-USA. The NIRC specifies that such tax credit for taxes deemed paid in
the Philippines must, as a minimum, reach an amount equivalent to 20% points which
represents the difference between the regular 35% dividend tax rate and the preferred
15% dividend tax rate. It is important to note that Sec. 24(b)1 of the NIRC does not
require that the US must give a deemed paid tax credit for the dividend tax (20%
points) waived by the Philippines in making applicable the preferred dividend tax rate of
15%. In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the 20% points of dividend tax waived by the Philippines. The
NIRC only requires that the US shall allow P&G-USA a deemed paid tax credit in an
amount equivalent to the 20% points waived by the Philippines.

CIR v Wander Phils. (160 SCRA 573)

Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A.

Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&1976, Wander
remitted to Glaro dividends on which 35% was withheld & paid to the BIR. In 1977,
Wander filed a claim for refund contending it is liable only to 15% withholding tax in
accordance with sec 24(b)(1) of the Tax Code.
Under the said provision, dividends received from a domestic corporation liable to tax
shall be 15% of the dividends received, subject to the condition that the country in which
the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20% w/c represents the difference between the regular tax of
35% on corporations & the tax of 15% on dividends.

HELD: In the instant case, Switzerland did not impose any tax on the dividends received
by Glaro. The fact that Switzerland did not impose any tax on the dividends received by
Glaro from the Philippines should be considered as a full satisfaction of the given
condition. Wander liable only to withholding tax rate of 15% & is therefore entitled to
refund.
As to the contention of the Commissioner that Wander is but a withholding agent of the
government & therefore can not claim reimbursement of the alleged overpaid taxes is
UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that it became a
withholding agent of the government, which was not by choice, cannot be considered as
an abdication of its responsibility to its mother company. As the Philippine counterpart,
Wander is the proper entity who should claim for the refund or credit of overpaid
withholding tax on dividends paid or remitted by Glaro.

11. Branch Profit Remittance Tax

Sec. 28, (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its
head office shall be subject to a tax of fifteen (15%) which shall be based on the total
profits applied or earmarked for remittance without any deduction for the tax component
thereof (except those activities which are registered with the Philippine Economic Zone
Authority). The tax shall be collected and paid in the same manner as provided in
Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties,
including remuneration for technical services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch profits unless the
same are effectively connected with the conduct of its trade or business in the
Philippines.

Rev. Memo Circ. 55-80

Addition of 2 non-deductible taxes under Sec. 30 (c) of the NIRC:
1. Taxes paid on articles imported by the taxpayer where such importation is not
connected with his trade or business
2. Excess electric energy consumption tax imposed by BP 36

Bank of America vs. Commissioner

Facts: Bank of America is a foreign corporation duly licensed to engage in business in
the Philippines. On July 20, 1982, it paid 15% branch profit remittance tax in the amount
of P7,538,460,.72 on profit from its regular banking unit operations and P44,790.25 on
profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The
tax base was based on net profits after income tax without deducting the amount
corresponding to the 15% tax.
Petitioner filed a claim with the BIR of that portion of the payment which corresponds to
the 15% branch profit remittance tax, on the ground that the tax should have been
computed on the basis of profits actually remitted, which is P45,244,088.85, and not on
the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without
awaiting respondents decision, petitioner filed a petition for review with the CTA for
recovery of the amount of P1,041,424.03. The court ruled in favor of the bank.

Issue: Whether or not the branch profit remittance tax paid or withheld should be
deducted from the tax base?

Held: In the 15% remittance tax, the law specifies its own tax base to be on the profit
remitted abroad. The tax is imposed on the amount sent abroad, and the law calls for
nothing further. The taxpayer is a single entity and it should be understandable if it is the
local branch of the corporation, using its own local funds, which remits the tax to the
Philippine Government.
The remittance tax was conceived in an attempt to equalize the income tax burden on
foreign corporations maintaining, on the one hand, local branch offices and organizing,
on the other hand, subsidiary domestic corporations where at least a majority of all the
latters shares of stock are owned by such foreign corporations. Prior to the amendatory
provisions of the Revenue Code, local branches were made to pay only the usual
corporate income tax of 25%-35% on net income applicable to resident foreign
corporation. While Philippine subsidiaries of foreign corporations subject to the same
rate of 25%-35% on their net income, dividend payments, however, were additionally
subjected to a 15% withholding tax. In order to avert what would otherwise appear to be
an unequal tax treatment on such subsidiaries vis--vis local branch offices, a 20%,
later reduced to 15%, profit remittance tax was imposed on local branches on their
remittances of profits abroad. But this is where the tax pari-passu ends between
domestic branches and subsidiaries of foreign corporations.

12. Minimum Corporate Income Tax

Sec. 27, (E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on
a corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when
the minimum income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the minimum
corporate income tax on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, the necessary rules and regulation that shall define the terms and
conditions under which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, That in the case of banks,
"cost of services" shall include interest expense.

Sec. 28 [A][2] NIRC Foreign corps.

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum
corporate income tax of two percent (2%) of gross income, as prescribed under Section
27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this Subsection.

RR 9-98
Imposition of the tax A minimum corporate income tax of 2% of the gross income as of
the end of the taxable year is hereby imposed upon any domestic corporation beginning
the 4th taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of minimum
corporate income tax is greater than the normal income tax due from such corporation.
Carry forward of excess minimum corporate income tax Any excess of the minimum
corporate income tax over the normal income tax as computed shall be carried against
the normal income tax for the 3 immediately succeeding years.

Relief from the MCIT The Secretary of Finance, upon recommendation of the
Commissioner, may suspend imposition of the MCIT upon submission of proof by the
applicant-corporation, duly verified by the Commissioners authorized representative,
that the corporation sustained substantial losses on account of a prolonged labor
dispute or because of force majeure or because of legitimate business reverses.

The MCIT on Resident Foreign Corporations The MCIT shall only apply to resident
foreign corporations which are subject to normal income tax. Accordingly, the MCIT
shall not apply to the following resident foreign corporations:
1. international carrier
2. offshore banking units
3. regional operating headquarters
4. firms that are taxed under special income tax regime (such as those enterprises
registered with PEZA and enterprises registered pursuant to the Bases Conversion and
Development Act

6. Improperly Accumulated Earnings Tax

SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -

(A) In General. - In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of each
corporation described in Subsection B hereof, an improperly accumulated earnings tax
equal to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided or
distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this
Section shall not apply to:
(a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries;
and (c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or
investment company shall be prima facie evidence of a purpose to avoid the tax upon
its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence, shall prove to the
contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term
'improperly accumulated taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income as
of December 31, 1997. In the case of corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to this tax, shall be reckoned, as
of the end of the month comprising the twelve (12)-month period of fiscal year 1997-
1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term
'reasonable needs of the business' includes the reasonably anticipated needs of the
business.

RR 2-2001
Sec. 2 There is imposed a tax equal to 10% of the improperly accumulated taxable
income of corporations formed or availed of for the purpose of avoiding the income tax
with respect to its shareholders by permitting the earnings and profits of the corporation
to accumulate instead of dividing them among or distributing them to the shareholders.
The rationale is that if the earnings and profits were distributed, the shareholders would
then be liable to income tax thereon, whereas if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the
corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation
for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividend tax on earnings
distributed to them by the corporation.
The touchstone of the liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation. Thus, if the failure to pay dividends is due to
some other causes, such as the use of undistributed earnings and profits for the
reasonable needs of the business, such purpose would not generally make the
accumulated or undistributed earnings subject to the tax. However, if there is a
determination that a corporation has accumulated income beyond the reasonable needs
of the business, the 10% improperly accumulated earnings tax shall be imposed.

Sec. 4 Coverage
The Improperly Accumulated Earnings Tax do not apply to the followings corporations:
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-Held corporations;
4. Taxable partnerships;
5. General Professional Partnerships;
6. Non-Taxable joint ventures; and
7. Enterprises registered with PEZA and enterprises registered pursuant to the Bases
Conversion and Development Act

Cyanamid Phil. vs. CA

Facts: Cyanamid Philippines is a wholly owned subsidiary of American Cyanamid Co.,

based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods, and an importer / indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency income tax. Petitioner protested the assessments particularly the
25% Surtax Assessment. Petitioner claimed that the surtax for the undue accumulation
of earnings was not proper because the said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs of the
company. Petitioner contended that it availed of the tax amnesty under Executive Order
no. 41, hence enjoyed amnesty from civil and criminal prosecution granted by law.

Held: The provision imposing additional tax on corporation improperly accumulating

profits or surplus (Sec. 25 NIRC) discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes are not paid
on the undeclared dividends received by the shareholders. The tax on the improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in turn, be taxed.
If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the
burden of proving the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies even if the corporation
is not a mere holding or investment company and does not have an unreasonable
accumulation of earnings or profits.
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of accumulation, not intentions
declared subsequently, which are mere afterthoughts. Furthermore, the accumulated
profits must be used within the reasonable time after the close of the taxable year. In
the instant case, petitioner did not establish, by clear and convincing evidence that such
accumulation of profit was for the immediate needs of the business.
In the present case, the Tax Court opted to determine the working capital sufficiency by
using the ratio between current assets to current liabilities. The working capital needs of
a business depend upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate,
the availability of credit to the business, and similar factors. Petitioner, by adhering to
the Bardahl formula,[5] failed to impress the tax court with the required definiteness
envisioned by the statute.
7. Fringe Benefits Tax

SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998;
thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%)
effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up
monetary value of fringe benefit furnished or granted to the employee (except rank and
file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax herein imposed is payable by the
employer which tax shall be paid in the same manner as provided for under Section 57
(A) of this Code. The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by sixty-six
percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1,
1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided,
however, That fringe benefit furnished to employees and taxable under Subsections (B),
(C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat:
Provided, further, That the grossed -Up value of the fringe benefit shall be determined
by dividing the actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under Subsections (B),
(C), (D), and (E) of Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit"
means any good, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank and file employees as defined herein)
such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for he employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under
this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, such rules and regulations as are necessary to carry out efficiently
and fairly the provisions of this Section, taking into account the peculiar nature and
special need of the trade, business or profession of the employer.

RR 3-98
Valuation of Fringe Benefits:
1. if the fringe benefit is granted in money, or is directly paid for by the employer, then
the value is the amount granted or paid for;
2. if the fringe benefit is granted or furnished by the employer in property other than
money and ownership is transferred to the employee, then the value of the fringe benefit
shall be equal to the fair market value of the property
3. if the fringe benefit is granted or furnished by the employer in property other than
money but ownership is not transferred to the employee, the value of the fringe benefit
is equal to the depreciation value of the property.
[1] Case did not state what the law says or how it amends the NIRC
[2] a branch, subsidiary or affiliate of a foreign banking corporation which is duly
authorized by the Bangko Sentral Ng Pilipinas to transact offshore banking business in
the Philippines in accordance with PD 1034
(RR 10-98)
[3] SEC. 51(D) of the NIRC
[4] Foreign currency deposit system- the conduct of banking transactions whereby any
person whether natural or juridical may deposit foreign currencies forming part of the
Philippine international reserves , in accordance with RA 6462 ( RR 10-98)
[5] The Bardahl formula was developed to measure corporate liquidity. The formula
requires an examination of whether the taxpayer has sufficient liquid assets to pay all of
its current liabilities and any extraordinary expenses reasonably anticipated, plus
enough to operate the business during one operating cycle. Operating cycle is the
period of time it takes to convert cash into raw materials, raw materials into inventory,
and inventory into sales, including the time it takes to collect payment for sales.