Business Law Prac Module 2

Business Law Practice Noel | Pangcog
Atty. Jose Cochingyan III AY 2011-2012

MODULE 2: THE CORPORATION AND TAXES
1. STATE POLICY & GENERAL PRINCIPLES OF INCOME TAXATION
RA 8424
Section 2. State Policy. - It is hereby declared the policy of
the State to promote sustainable economic growth through
the rationaliation of the Philippine internal re!enue ta"
system# including ta" administration$ to pro!ide# as much as
possible# an e%uitable relief to a greater number of ta"payers
in order to impro!e le!els of disposable income and increase
economic acti!ity$ and to create a robust en!ironment for
business to enable firms to compete better in the regional as
well as the global mar&et# at the same time that the State
ensures that 'o!ernment is able to pro!ide for the needs of
those under its (urisdiction and care.
)IR* +2,
S-*. 2,. 'eneral Principles of Income .a"ation in the
Philippines. - -"cept when otherwise pro!ided in this *ode/
0A1 A citien of the Philippines residing therein is ta"able on
all income deri!ed from sources within and without the
Philippines$
021 A nonresident citien is ta"able only on income deri!ed
from sources within the Philippines$
0*1 An indi!idual citien of the Philippines who is wor&ing
and deri!ing income from abroad as an o!erseas
contract wor&er is ta"able only on income deri!ed from
sources within the Philippines/ Pro!ided# .hat a seaman
who is a citien of the Philippines and who recei!es
compensation for ser!ices rendered abroad as a
member of the complement of a !essel engaged
e"clusi!ely in international trade shall be treated as an
o!erseas contract wor&er$
031 An alien indi!idual# whether a resident or not of the
Philippines# is ta"able only on income deri!ed from
sources within the Philippines$
0-1 A domestic corporation is ta"able on all income deri!ed
from sources within and without the Philippines$ and
041 A foreign corporation# whether engaged or not in trade or
business in the Philippines# is ta"able only on income
deri!ed from sources within the Philippines.
"------------------------------------"
2. IMPORTANT BASIC TERMS IN GENERAL (NIRC 22)
2.1 Taxa!" Y"a#
0P1 .he term 5ta"able year5 means the calendar year# or the
fiscal year ending during such calendar year# upon the
basis of which the net income is computed under this
.itle. 6.a"able year6 includes# in the case of a return
made for a fractional part of a year under the pro!isions
of this .itle or under rules and regulations prescribed by
the Secretary of 4inance# upon recommendation of the
commissioner# the period for which such return is made.
2.2 F$%&a! Y"a#
071 .he term 5fiscal year5 means an accounting period of
twel!e 0821 months ending on the last day of any month
other than 3ecember.
2.' S"&(#$)$"%
0.1 .he term 5securities5 means shares of stoc& in a
corporation and rights to subscribe for or to recei!e such
shares. .he term includes bonds# debentures# notes or
certificates# or other e!idence or indebtedness# issued
by any corporation# including those issued by a
go!ernment or political subdi!ision thereof# with interest
coupons or in registered form.
2.* O#+$,a#- I,&./"
091 .he term 5ordinary income5 includes any gain from the
sale or e"change of property which is not a capital asset
or property described in Section ,:0A1081. Any gain from
the sale or e"change of property which is treated or
considered# under other pro!isions of this .itle# as
6ordinary income6 shall be treated as gain from the sale
or e"change of property which is not a capital asset as
defined in Section ,:0A1081.
1
2.0 G#.%% I,&./" 1 22(A) & (E)(*)
S-*. 2;. Rates of Income ta" on 3omestic *orporations. -
0A1 In 'eneral. - -"cept as otherwise pro!ided in this *ode#
an income ta" of thirty-fi!e percent 0,<=1 is hereby
imposed upon the ta"able income deri!ed during each
ta"able year from all sources within and without the
Philippines by e!ery corporation# as defined in Section
22021 of this *ode and ta"able under this .itle as a
corporation# organied in# or e"isting under the laws of
the Philippines/ Pro!ided# .hat effecti!e >anuary 8#
8::8# the rate of income ta" shall be thirty-four percent
0,4=1$ effecti!e >anuary 8# 8:::# the rate shall be thirty-
three percent 0,,=1$ and effecti!e >anuary 8# 2??? and
thereafter# the rate shall be thirty-two percent 0,2=1.
In the case of corporations adopting the fiscal-year
accounting period# the ta"able income shall be
computed without regard to the specific date when
specific sales# purchases and other transactions occur.
.heir income and e"penses for the fiscal year shall be
deemed to ha!e been earned and spent e%ually for each
month of the period.
.he reduced corporate income ta" rates shall be applied
on the amount computed by multiplying the number of
months co!ered by the new rates within the fiscal year
by the ta"able income of the corporation for the period#
di!ided by twel!e.
Pro!ided# further# .hat the President# upon the
recommendation of the Secretary of 4inance# may
effecti!e >anuary 8# 2???# allow corporations the option
to be ta"ed at fifteen percent 08<=1 of gross income as
defined herein# after the following conditions ha!e been
satisfied/
081 A ta" effort ratio of twenty percent 02?=1 of 'ross
)ational Product 0')P1$
021 A ratio of forty percent 04?=1 of income ta" collection
to total ta" re!enues$
0,1 A @A. ta" effort of four percent 04=1 of ')P$ and
041 A ?.: percent 0?.:=1 ratio of the *onsolidated Public
Sector 4inancial Position 0*PS4P1 to ')P.
.he option to be ta"ed based on gross income shall be
a!ailable only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not e"ceed
fifty-fi!e percent 0<<=1.
.he election of the gross income ta" option by the
corporation shall be irre!ocable for three 0,1 consecuti!e
ta"able years during which the corporation is %ualified
under the scheme.
4or purposes of this Section# the term 6gross income6
deri!ed from business shall be e%ui!alent to gross sales
less sales returns# discounts and allowances and cost of
goods sold. 5*ost of goods sold5 shall include all
business e"penses directly incurred to produce the
merchandise to bring them to their present location and
use.
4or a trading or merchandising concern# 5cost of goods5
sold shall include the in!oice 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.
4or a manufacturing concern# 5cost of goods
manufactured and sold5 shall include all costs of
production of finished goods# such as raw materials
used# direct labor and manufacturing o!erhead# freight
cost# insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of ta"payers engaged in the sale of ser!ice#
6gross income6 means gross receipts less sales returns#
allowances and discounts.
A A A
2
0-1 Binimum *orporate Income .a" on 3omestic
*orporations. C
A A A
041 'ross Income 3efined. - 4or purposes of applying
the minimum corporate income ta" pro!ided under
Subsection 0-1 hereof# the term 6gross income6 shall
mean gross sales less sales returns# discounts and
allowances and cost of goods sold. 5*ost of goods sold6
shall include all business e"penses directly incurred to
produce the merchandise to bring them to their present
location and use.
4or a trading or merchandising concern# 5cost of goods
sold6 shall include the in!oice cost of the goods sold#
plus import duties# freight in transporting the goods to
the place where the goods are actually sold including
4or a manufacturing concern# cost of 5goods
allowances# discounts and cost of ser!ices. 5*ost of
ser!ices5 shall mean all direct costs and e"penses
necessarily incurred to pro!ide the ser!ices re%uired by
the customers and clients including 0A1 salaries and
employee benefits of personnel# consultants and
specialists directly rendering the ser!ice and 021 cost of
facilities directly utilied in pro!iding the ser!ice such as
depreciation or rental of e%uipment used and cost of
supplies/ Pro!ided# howe!er# .hat in the case of ban&s#
5cost of ser!ices5 shall include interest e"pense.
2.3 O#+$,a#- L.%%
091 D.he term 6ordinary loss6 includes any loss from the sale
or e"change of property which is not a capital asset. Any
loss from the sale or e"change of property which is
treated or considered# under other pro!isions of this
.itle# as 6ordinary loss6 shall be treated as loss from the
sale or e"change of property which is not a capital asset.
2.2 Ca4$)a! A%%")% 1 '5(A)(1)
S-*. ,:. *apital 'ains and Eosses. -
0A1 3efinitions. - As used in this .itle -
081 *apital Assets. - .he term 5capital assets5 means
property held by the ta"payer 0whether or not
connected with his trade or business1# but does not
include stoc& in trade of the ta"payer or other
property of a &ind which would properly be included
in the in!entory of the ta"payer if on hand at the
close of the ta"able year# or property held by the
ta"payer primarily for sale to customers in the
ordinary course of his trade or business# or property
used in the trade or business# of a character which is
sub(ect to the allowance for depreciation pro!ided in
Subsection 041 of Section ,4$ or real property used
in trade or business of the ta"payer.
2.6 Taxa!" I,&./" 1 '1
S-*. ,8. .a"able Income 3efined. - .he term ta"able
income means the pertinent items of gross income specified
in this *ode# less the deductions andFor personal and
additional e"emptions# if any# authoried for such types of
income by this *ode or other special laws.
2.5 7$)88.!+$,9 A9",)
0G1 .he term 5withholding agent5 means any person
re%uired to deduct and withhold any ta" under the
pro!isions of Section <;.

2.1: D$;;"#",)$a)" ")<"", Ca4$)a! A%%"% a,+ a, O#+$,a#-
A%%")
RR )o. ?;-?, 03ec. 2;# 2??21
S-*. ,. 'HI3-EI)-S I) 3-.-RBI)I)' IJ-.J-R A
PAR.I*HEAR R-AE PRKP-R.L IS A *API.AE ASS-. KR
KR3I)ARL ASS-.. C
a. .a"payers engaged in the real estate business. C Real
property shall be classified with respect to ta"payers
engaged in the real estate business as follows/
8. Real -state 3ealer. - All real properties ac%uired by
the real estate dealer shall be considered as
ordinary assets.
2. Real -state 3e!eloper. C All real properties ac%uired
by the real estate de!eloper# whether de!eloped or
unde!eloped as of the time of ac%uisition# and all
real properties which are held by the real estate
de!eloper primarily for sale or for lease to customers
in the ordinary course of his trade or business or
which would properly be included in the in!entory of
the ta"payer if on hand at the close of the ta"able
year and all real properties used in the trade or
business# whether in the form of land# building# or
other impro!ements# shall be considered as ordinary
assets.
,. Real -state Eessor. C All real properties of the real
estate lessor# whether land andFor impro!ements#
which are for leaseFrent or being offered for
leaseFrent# or otherwise for use or being used in the
trade or business shall li&ewise be considered as
ordinary assets.
4. .a"payers habitually engaged in the real estate
business. - All real properties ac%uired in the course
of trade or business by a ta"payer habitually
engaged in the sale of real estate shall be
considered as ordinary assets. Registration with the
JEHR2 or JH3** as a real estate dealer or
de!eloper shall be sufficient for a ta"payer to be
considered as habitually engaged in the sale of real
estate. If the ta"payer is not registered with the
JEHR2 or JH3** as a real estate dealer or
de!eloper# heFit may ne!ertheless be deemed to be
engaged in the real estate business through the
establishment of substantial rele!ant e!idence 0such
as consummation during the preceding year of at
least si" 0M1 ta"able real estate sale transactions#
regardless of amount$ registration as habitually
engaged in real estate business with the Eocal
'o!ernment Hnit or the 2ureau of Internal Re!enue#
etc.#1.
A property purchased for future use in the business#
e!en though this purpose is later thwarted by
circumstances beyond the ta"payerNs control# does not
lose its character as an ordinary asset. )or does a mere
discontinuance of the acti!e use of the property change
its character pre!iously established as a business
property.
b. .a"payer not engaged in the real estate business. - In
the case of a ta"payer not engaged in the real estate
business# real properties# whether land# building# or other
impro!ements# which are used or being used or ha!e
been pre!iously used in the trade or business of the
ta"payer shall be considered as ordinary assets. .hese
include buildings andFor impro!ements sub(ect to
depreciation and lands used in the trade or business of
the ta"payer.
A depreciable asset does not lose its character as an
ordinary asset# for purposes of the instant pro!ision#
e!en if it becomes fully depreciated# or there is failure to
ta&e depreciation during the period of ownership.
Bonetary consideration or the presence or absence of
profit in the operation of the property is not significant in
the characteriation of the property. So long as the
property is or has been used for business purposes#
whether for the benefit of the owner or any of its
members or stoc&holders# it shall still be considered as
an ordinary asset. Real property used by an e"empt
!
corporation in its e"empt operations# such as a
corporation included in the enumeration of Section ,? of
the *ode# shall not be considered used for business
purposes# and therefore# considered as capital asset
under these Regulations.
Real property# whether single detached$ townhouse$ or
condominium unit# not used in trade or business as
e!idenced by a certification from the 2arangay *hairman
or from the head of administration# in case of
condominium unit# townhouse or apartment# and as
!alidated from the e"isting a!ailable records of the
2ureau of Internal Re!enue# owned by an indi!idual
engaged in business# shall be treated as capital asset.
c. .a"payers changing business from real estate business
to non-real estate business. C In the case of a ta"payer
who changed its real estate business to a non-real
estate business# or who amended its Articles of
Incorporation from a real estate business to a non-real
estate business# such as a holding company#
manufacturing company# trading company# etc.# the
change of business or amendment of the primary
purpose of the business shall not result in the re-
classification of real property held by it from ordinary
asset to capital asset. 4or purposes of issuing the
certificate authoriing registration 0*AR1 or ta" clearance
certificate 0.*E1# as the case may be# the appropriate
officer of the 2IR shall at all times determine whether a
corporation purporting to be not engaged in the real
estate business has at any time amended its primary
purpose from a real estate business to a non-real estate
business.
d. .a"payers originally registered to be engaged in the real
estate business but failed to subse%uently operate. C In
the case of subse%uent non- operation by ta"payers
originally registered to be engaged in the real estate
business# all real properties originally ac%uired by it shall
continue to be treated as ordinary assets.
e. .reatment of abandoned and idle real properties. - Real
properties formerly forming part of the stoc& in trade of a
ta"payer engaged in the real estate business# or
formerly being used in the trade or business of a
ta"payer engaged or not engaged in the real estate
business# which were later on abandoned and became
idle# shall continue to be treated as ordinary assets. Real
property initially ac%uired by a ta"payer engaged in the
real estate business shall not result in its con!ersion into
a capital asset e!en if the same is subse%uently
abandoned or becomes idle.
Pro!ided howe!er# that properties classified as ordinary
assets for being used in business by a ta"payer
engaged in business other than real estate business as
defined in Section 2 0g1 hereof are automatically
con!erted into capital assets upon showing of proof that
the same ha!e not been used in business for more than
two 021 years prior to the consummation of the ta"able
transactions in!ol!ing said properties.
f. .reatment of real properties that ha!e been transferred
to a buyerFtransferee# whether the transfer is through
sale# barter or e"change# inheritance# donation or
declaration of property di!idends.
Real properties classified as capital or ordinary asset in
the hands of the sellerFtransferor may change their
character in the hands of the buyerFtransferee. .he
classification of such property in the hands of the
buyerFtransferee shall be determined in accordance with
the following rules/
8. Real property transferred through succession or
donation to the heir or donee who is not engaged in
the real estate business with respect to the real
property inherited or donated# and who does not
subse%uently use such property in trade or business#
shall be considered as a capital asset in the hands
of the heir or donee.
2. Real property recei!ed as di!idend by the
stoc&holders who are not engaged in the real estate
business and who do not subse%uently use such
real property in trade or business shall be treated as
"
capital assets in the hands of the recipients e!en if
the corporation which declared the real property
di!idend is engaged in real estate business.
,. .he real property recei!ed in an e"change shall be
treated as ordinary asset in the hands of the
transferee in the case of a ta"- free e"change by
ta"payer not engaged in real estate business to a
ta"payer who is engaged in real estate business# or
to a ta"payer who# e!en if not engaged in real estate
business# will use in business the property recei!ed
in the e"change.
g. .reatment of real property sub(ect of in!oluntary transfer.
- In the case of in!oluntary transfers of real properties#
including e"propriation or foreclosure sale# the
in!oluntariness of such sale shall ha!e no effect on the
classification of such real property in the hands of the
in!oluntary seller# either as capital asset or ordinary
asset# as the case may be.
4or e"ample# real properties forming part of the
in!entory of a real estate dealer# which are foreclosed#
shall# for purposes of determining the applicable ta" on
such foreclosure sale# be treated as ordinary assets. Kn
the other hand# the nature of such real property in the
hands of the foreclosure buyer shall be determined in
accordance with the rules stated in sub-paragraph 0f1
hereof.
"------------------------------------"
'. CORPORATIONS AND FOREIGN CORPORATIONS (NIRC 22)
'.1 P"#%.,
0A1 .he term 5person5 means an indi!idual# a trust# estate or
corporation.
'.2 C.#4.#a)$.,
021 .he term 5corporation5 shall include partnerships# no
matter how created or organied# (oint-stoc& companies#
(oint accounts 0cuentas en participacion1# association# or
insurance companies# but does not include general
professional partnerships and a (oint !enture or
consortium formed for the purpose of underta&ing
construction pro(ects or engaging in petroleum# coal#
geothermal and other energy operations pursuant to an
operating consortium agreement under a ser!ice
contract with the 'o!ernment. 5'eneral professional
partnerships5 are partnerships formed by persons for the
sole purpose of e"ercising their common profession# no
part of the income of which is deri!ed from engaging in
any trade or business.
'.' D./"%)$&
0*1 .he term 5domestic5# when applied to a corporation#
means created or organied in the Philippines or under
its laws.
'.* F.#"$9,
031 .he term 5foreign5# when applied to a corporation#
means a corporation which is not domestic.
'.0 R"%$+",) F.#"$9, C.#4.#a)$.,
0J1 .he term 5resident foreign corporation5 applies to a
foreign corporation engaged in trade or business within
the Philippines.
'.3 N.,1#"%$+",) F.#"$9, C.#4.#a)$.,
0I1 .he term 6nonresident foreign corporation6 applies to a
foreign corporation not engaged in trade or business
within the Philippines.
'.2 S8a#"8.!+"#
0B1 .he term 5shareholder5 shall include holders of a shareFs
of stoc&# warrantFs andFor optionFs to purchase shares of
#
stoc& of a corporation# as well as a holder of a unit of
participation in a partnership 0e"cept general
professional partnerships1 in a (oint stoc& company# a
(oint account# a ta"able (oint !enture# a member of an
association# recreation or amusement club 0such as golf#
polo or similar clubs1 and a holder of a mutual fund
certificate# a member in an association# (oint-stoc&
company# or insurance company.
'.6 Tax4a-"#
0)1 .he term 5ta"payer5 means any person sub(ect to ta"
imposed by this .itle.
'.5 R"9$.,a! .# A#"a H"a+=(a#)"#%
0331 .he term 5regional or area head%uarters5 shall mean a
branch established in the Philippines by multinational
companies and which head%uarters do not earn or
deri!e income from the Philippines and which act as
super!isory# communications and coordinating center for
their affiliates# subsidiaries# or branches in the Asia-
Pacific Region and other foreign mar&ets.
'.1: R"9$.,a! O4"#a)$., H"a+=(a#)"#%
0--1 .he term 5regional operating head%uarters5 shall mean
a branch established in the Philippines by multinational
companies which are engaged in any of the following
ser!ices/ general administration and planning$ business
planning and coordination$ sourcing and procurement of
raw materials and components$ corporate finance
ad!isory ser!ices$ mar&eting control and sales
promotion$ training and personnel management$ logistic
ser!ices$ research and de!elopment ser!ices and
product de!elopment$ technical support and
maintenance$ data processing and communications$ and
business de!elopment.
'.11 C./4a#" <$)8 >P8$!$44$," Na)$.,a!?
Foreign Investments Act of 1991 3(a)
.he term 5Philippine national5 shall mean a citien of the
Philippines$ of a domestic partnership or association wholly
owned by citiens of the Philippines$ or a corporation
organied under the laws of the Philippines of which at least
si"ty percent 0M?=1 of the capital stoc& outstanding and
entitled to !ote is owned and held by citiens of the
Philippines$ or a corporation organied abroad and
registered as doing business in the Philippines under the
*orporation *ode of which one hundred percent 08??=1 of
the capital stoc& outstanding and entitled to !ote is wholly
owned by 4ilipinos or a trustee of funds for pension or other
employee retirement or separation benefits# where the
trustee is a Philippine national and at least si"ty percent
0M?=1 of the fund will accrue to the benefit of Philippine
nationals/ Pro!ided# .hat where a corporation and its non-
4ilipino stoc&holders own stoc&s in a Securities and
-"change *ommission 0S-*1 registered enterprise# at least
entitled to !ote of each of both corporations must be owned
and held by citiens of the Philippines and at least si"ty
percent 0M?=1 of the members of the 2oard of 3irectors of
each of both corporations must be citiens of the Philippines#
in order that the corporation# shall be considered a
5Philippine national.5
Implementing Rules and Regulations, Rule 1, 1(b)
5Philippine national5 shall mean a citien of the Philippines or
a domestic partnership or association wholly owned by the
citiens of the Philippines$ or a corporation organied under
the laws of the Philippines of which at least si"ty percent
OM?=P of the capital stoc& outstanding and entitled to !ote is
owned and held by citiens of the Philippines$ or a trustee of
funds for pension or other employee retirement or separation
benefits# where the trustee is a Philippine national and at
least si"ty percent OM?=P of the fund will accrue to the benefit
of the Philippine nationals$ Pro!ided# that where a
corporation its non-4ilipino stoc&holders own stoc&s in a
Securities and -"change *ommission OS-*P registered
enterprise# at least si"ty percent OM?=P of the capital stoc&
outstanding and entitled to !ote of both corporations must be
$
owned and held by citiens of the Philippines and at least
si"ty percent OM?=P of the members of the 2oard of 3irectors
of each of both corporation must be citiens of the
Philippines# in order that the corporation shall be considered
a Philippine national. .he control test shall be applied for this
purpose.
S! "pinion dated April 1#, 19$% (Supreme &ec'netronic !orp)
Are non-!oting shares e"cluded in the computation of the
M?F4?= 4ilipino-alien e%uity re%uirement under Section 2#
Article AII of the *onstitution of the PhilippinesQ Ihat is the
effect should non-!oting preferred shares issued to
foreigners e"ceed 4?= of the e%uity of the corporation.
Apropos of said issue# please be informed that the term
5capital5 is used synonymously with the term 5capital stoc&5
as meaning the amount subscribed and paid-in by the
shareholders# or secured to be paid in# and upon which the
corporation is to conduct its operation. 088 4letcher# *yc.
*orps.# 8:<8 Re!. @ol.# sec. <?8?# pp. 2?-281. Eegal
(urisprudence is replete with authorities to the effect that the
capital of a corporation is the fund or other property# actually
or potentially in its possession# deri!ed or to be deri!ed from
the sale by it of shares of its stoc& or his e"change by it for
property other than money. .hese funds comprise not only
money or other property recei!ed by the corporation for
shares of stoc& but all balances of purchases# money# or
installments# due the corporation for shares of stoc& sold by
it# and all unpaid subscriptions for shares. 0Iilliams !.
2rounstein# 8 42d 4;?# cited in 4letcher# Supra.1. .he capital
stoc& of a corporation is the amount paid in by its
stoc&holders in money# property# or ser!ices with which it is
to conduct its business# 5and it is immaterial how the stoc& is
classified5 0Jaggard !. Ee"ington Htilities *o.# 2M Gy 2<8# 84
SI 2d 84# citing 4letcher# *yc. *orps.# perm. ed.# sec.
<?:?1.
In !iew of the foregoing# it is opined that the term 5capital5
denotes the sum total of the shares subscribed and paid by
the shareholders# or secured to be paid# irrespecti!e of their
nomenclature to be issued by the corporation in the conduct
of its operation. Jence# non-!oting preferred shares are
considered in the computation of the M?-4?= 4ilipino-alien
e%uity re%uirement of certain economic acti!ities under the
*onstitution.
S! "pinion (o) 3*+,* (-"& .ease Finance /'ilippines)
.he term 5Philippine national5 shall mean a citien of the
Philippines$ of a domestic partnership or association wholly
owned by citiens of the Philippines$ or a corporation
organied under the laws of the Philippines of which at least
entitled to !ote is owned and held by citiens of the
Philippines$ or a corporation organied abroad and
registered as doing business in the Philippines under the
*orporation *ode of which one hundred percent 08??=1 of
the capital stoc& outstanding and entitled to !ote is wholly
owned by 4ilipinos or a trustee of funds for pension or other
employee retirement or separation benefits# where the
trustee is a Philippine national and at least si"ty percent
0M?=1 of the fund will accrue to the benefit of Philippine
nationals/ Pro!ided# .hat where a corporation and its non-
4ilipino stoc&holders own stoc&s in a Securities and
-"change *ommission 0S-*1 registered enterprise# at least
entitled to !ote of each of both corporations must be owned
and held by citiens of the Philippines and at least si"ty
percent 0M?=1 of the members of the 2oard of 3irectors of
each of both corporations must be citiens of the Philippines#
in order that the corporation# shall be considered a
5Philippine national.5
Applying the foregoing definition# a corporation with si"ty
percent 0M?=1 4ilipino and forty percent 04?=1 foreign e%uity
ownership is considered a Philippine national# for purposes
of in!estment. 4or as long as the percentage of 4ilipino
e%uity o!er the capital stoc& of all the corporate stoc&holders
is at least si"ty percent 0M?=1 thereof# the entire
stoc&holdings of the corporation shall be considered as of
Philippine nationality. *on!ersely# once the foreign e%uity
percentage participation increases beyond 04?=1# the
corporation shall no longer be a Philippine national under the
%
control test# but a foreign corporation co!ered by the 4oreign
In!estments Act 04IA1.
.he computation of the si"ty percent 0M?=1 4ilipino
ownership for purposes of determining whether or not a
corporation is a Philippine national is based on the total
number of outstanding capital stoc& entitled to !ote R
irrespecti!e of amount of the par !alue of the shares# < and
li&ewise regardless of whether or not such shares ha!e been
fully or partially paid
S! "pinion (o) ,9+1, (!redit 0# Finance !ompan1, Inc))
.o compute the re%uired percentage of 4ilipino ownership of
a corporation engaged in a particular industry# resort must
be had to the 8:8; *onstitution andFor the statutes enacted
by *ongress pursuant to its power to determine which areas
of in!estment may be opened to foreign participation and
which ones which should be completely reser!ed to 4ilipino
citiens# such as Republic Act )o. ;?42 or the 4oreign
In!estments Act 054IA51 including the applicable 4oreign
In!estment )egati!e Eist 054I)E51.
It is now well settled in this (urisdiction that the ownership of
the shares of stoc& of a corporation is based on the total
outstanding or subscribedFissued capital stoc& regardless of
whether they are classified as common !oting shares or
preferred shares without !oting rights. It is further said that
the test for compliance with the nationality re%uirement is
based on the total outstanding capital stoc& irrespecti!e of
the amount of the par !alue of shares# and li&ewise without
regard to whether or not such shares ha!e been fully or
partially paid. .his rule was applied in a )o!ember 2??;
opinion which e"plained that the term 5capital5 mentioned
without %ualification in Section 88# Article AII of the 8:8;
*onstitution 0which prescribes a specific e%uity
participationFstructure in a public utility1 should be interpreted
to refer to the sum total of the outstanding capital stoc&#
irrespecti!e of the nomenclature or classification as
common# preferred# !oting or non-!oting.
.he abo!e# howe!er# appears to be the general rule and is
not applicable to financing companies which are go!erned
by a more specific or special# if not stringent# re%uirement
under the 4*A. .he 4*A e"pressly mandates that the
nationality re%uirement applies only to !oting stoc&s# to wit/
5Sec. M. 4orm of organiation and capital re%uirements. R
4inancing companies shall be organied in the form of stoc&
corporations at least forty percent 04?=1 of the !oting stoc&
of which is owned by citiens of the Philippines and shall
ha!e a paid-up capital of not less than .en million pesos
0P8?#???#???1 in case the financing company is located in
Betro Banila and other first class cities# 4i!e million pesos
0P<#???#???1 in other classes of cities and .wo million fi!e
hundred thousand pesos 0P2#<??#???1 in municipalities$
Pro!ided# howe!er# .hat no foreign national may be allowed
to own stoc& in any financing company unless the country of
which he is a national accords the same reciprocal rights to
4ilipinos in the ownership of financing companies or their
counterpart entities in such a country. . . . .5
Hnder the doctrine of e%uality of shares# in the absence of
any pro!ision in the articles of incorporation and in the
certificates of stoc& to the contrary# all stoc&s# regardless of
their nomenclature# en(oy the same rights and pri!ileges#
including general !oting rights# and sub(ect to the same
liabilities. .hus# since you did not state the specific rights#
pri!ileges and liabilities# if any# that would attach to a
common share and to a preferred share under the proposed
reclassification# both classes of shares shall be considered
herein as !oting stoc&s.
S! "pinion (o) 3,+,# (2inos'ita /earls /'ilippines, Inc))
It is well-settled in this (urisdiction that the ownership of the
shares of a stoc& corporation is based on the total
outstanding or subscribedFissued capital stoc& regardless of
whether they are classified as common !oting shares or
preferred shares without !oting rights.
Kutstanding capital stoc& is defined as 5the total shares of
stoc& issued to subscribers or stoc&holders# whether or not
fully or partially paid 0as long as there is a binding
subscription agreement1 e"cept treasury shares. 0Sec. 8,;
&
of the *orporation *ode of the Philippines.1
Hnder the principle of e%uality of shares# regardless of the
classification of shares# each share is e%ual in all respects to
e!ery other share e"cept when otherwise pro!ided under the
articles of incorporation# and certificate of stoc&. .hus# the
total number of shares issued# whether !oting or non-!oting
which comprises the outstanding capital stoc& and accorded
e%ual stoc&holders rights# shall be considered in the
determination of the ownership of a corporation.
Accordingly# under the proposed increase GPPI cannot
maintain its current e%uity participation# if P;?B worth of
shares representing ;?= of the outstanding capital# as
increased# shall be subscribed by GP*E. Simply stated# the
foreign e%uity percentage participation shall be increased
from 4?= to ;?= rendering GPPI no longer a Philippine
national under the control test but a foreign corporation
co!ered by the 4oreign In!estment Act 04IA1.
S! "pinion (o) #9+,# (a 3Foundation4)
.he test for compliance with the nationality re%uirement is
the amount of the par !alue of shares.
In determining the nationality of a non-stoc& corporation# the
*ommission said/
5. . . please be informed that the nationality of non-stoc&
corporation is computed on the basis of the nationality of its
members and not premised on the membership contribution.
0As aptly held in the case of Register of 3eeds !s. Hng Sui
.emple# :; Phil. p. M81
.he fact that the appellant religious corporation has no
capital stoc& does not suffice to escape the constitutional
inhibition# since it is admitted that the members are of foreign
nationality. .he purpose of the si"ty per centum re%uirement
is ob!iously to ensure that corporations or associations
allowed to ac%uire agricultural land to e"ploit natural
resources shall be controlled by 4ilipinos$ and the spirit of
the *onstitution demands that in absence of capital stoc&#
the controlling membership should be composed of 4ilipino
citiens.
Applying the afore%uoted ruling to the instant %uery# it may
be safely said that since *a!alry *hapel .raining *enter#
Inc.# is composed of fi!e members with 2 foreign and ,
4ilipino nationals# the M?= 4ilipino R 4?= foreign
membership re%uirement for ac%uisition of land in the
Philippines by a non-stoc& corporation is complied with. .he
rule therefore in this (urisdiction is that the nationality of a
non-stoc& corporation is determinable on the basis of its
membership and not on members6 contribution.5
S!+"5! "pinion (o) 1$+,% (A !onsortium for /SA.6)
.he legal capacity of the corporation to ac%uire franchise#
certificate or authority for the operation of a public utility is
regulated by the afore%uoted *onstitutional pro!ision# which
re%uires that at least si"ty per centum 0M?=1 of the capital of
such corporation be owned by citiens of the Philippines.
Jowe!er# such pro!ision does not %ualify whether the
re%uired ownership of 5capital5 shall be that of the !oting or
non-!oting# common or preferred. Jence# it should be
interpreted to refer to the sum total of the outstanding capital
stoc&# irrespecti!e of the nomenclature or classification as
common# preferred# !oting or non-!oting.
.he test for compliance with the nationality re%uirement is
the amount of the par !alue of shares. 2 Stated otherwise#
once it is established that a company is at least M?= owned
by Philippine nationals# it is no longer necessary to conduct
any further in%uiry as to the owners of the shareholders
since the entire company is already considered a 4ilipino
entity.
S!+"5! "pinion (o) 1#+,$ (!ooperative for Assistance and
Relief)
.he instant %uery now centers on whether both !oting and
non-!oting shares are included in the computation of the
10
re%uired percentage of 4ilipino e%uity. As a rule# the 8:8;
*onstitution does not distinguish between !oting and non-
!oting shares with regard to the computation of the
percentage of interest by 4ilipinos and non-4ilipinos in a
company. In other words# non-!oting shares should be
included in the computation of the foreign ownership limit for
domestic corporations. .his was the rule that was applied
when this *ommission issued its opinion addressed to Bs.
Barlene *aluya of Ginoshita Pearls Philippines# Inc. It was
opined therein that the ownership of the shares of stoc& of a
corporation is based on the total outstanding or
subscribedFissued capital stoc& regardless of whether they
are classified as common !oting shares or preferred shares
without !oting rights. .his is in line with the policy of the
State to de!elop an independent national economy
effecti!ely controlled by 4ilipinos. .he *onstitution
encourages an independent and nationalist approach to
economic de!elopment. .hus# there is a need to stri&e a
balance between the encouragement of foreign in!estment
in the country and the 4ilipiniation of enterprises. .he said
rule# howe!er# is not applicable to financing companies
which are specifically go!erned by R.A. )o. <:8? as
amended. Hnder the said statute# it is e"pressly stated that
the nationality re%uirement applies only to !oting stoc&s# to
wit/
5Sec. M. 4orm of organiation and capital re%uirements. R
4inancing companies shall be organied in the form of stoc&
corporations at least forty percent 04?=1 of the !oting stoc&
of which is owned by citiens of the Philippines and shall
ha!e a paid-up capital of not less than .en million pesos
0P8?#???#???1 in case the financing company is located in
Betro Banila and other first class cities# 4i!e million pesos
0P<#???#???1 in other classes of cities and .wo million fi!e
hundred thousand pesos 0P2#<??#???1 in municipalities/
Pro!ided# howe!er# .hat no foreign national may be allowed
to own stoc& in any financing company unless the country of
which he is a national accords the same reciprocal rights to
4ilipinos in the ownership of financing companies or their
counterpart entities in such country . . .5
2ased on that# it can be said that the *ongress intends to
gi!e leeway for financing companies to increase or decrease
foreign ownership of shares for as long as the minimum
4ilipino ownership of !oting shares is complied with. .his
Kffice# thus# sees no legal obstacle in issuing all non-!oting
shares of a financing company to non-Philippine nationals
for as long as the minimum re%uirements enumerated in
Section M of R.A. )o. <:8? as amended are complied with.
In the case of *AR- Inc.# it is the opinion of this Kffice that it
can own one hundred percent 08??=1 of the non-!oting
shares of *AR- Philippines without !iolating the nationality
re%uirement as pro!ided for in the *onstitution and R.A. )o.
<:8? as amended.
S!+"5! "pinion (o) 31+1, (!o+" Small Scale 6iners
Association)
*ompliance with the re%uired 4ilipino ownership of a
corporation shall be determined on the basis of outstanding
capital stoc& whether fully paid or not# but only such stoc&s
which are generally entitled to !ote are considered.
4or stoc&s to be deemed owned and held by Philippine
citiens or Philippine nationals# mere legal title is not enough
to meet the re%uired 4ilipino e%uity. 4ull beneficial ownership
of the stoc&s# coupled with appropriate !oting rights is
essential. .hus# stoc&s# the !oting rights of which ha!e been
assigned or transferred to aliens cannot be considered held
by Philippine citiens or Philippine nationals.
Indi!iduals or (uridical entities not meeting the
aforementioned %ualifications are considered as non-
Philippine nationals.
Jowe!er# we now opine that the control test must not be
applied in determining if a corporation satisfies the
*onstitution6s citienship re%uirements in certain areas of
acti!ities. .he control test creates a legal fiction where if
M?= of the shares of an in!esting corporation are owned by
Philippine citiens then all of the shares or 8??= of that
corporation6s shares are considered 4ilipino owned for
purposes of determining the e"tent of foreign e%uity in an
in!estee corporation engaging in an acti!ity restricted to
11
Philippine citiens. In other words# Philippine citienship is
being unduly attributed to foreign indi!iduals who own the
rest of the shares in a M?= 4ilipino e%uity corporation
in!esting in another corporation. .hus# applying the control
test effecti!ely circum!ents the *onstitutional mandate that
corporations engaging in certain acti!ities must be M?=
owned by 4ilipino citiens. .he words of the *onstitution
clearly pro!ide that we must loo& at the citienship of the
indi!idualFnatural person who ultimately owns and controls
the shares of stoc&s of the corporation engaging in the
nationaliedFpartly-nationalied acti!ity. .his is what the
framers of the constitution intended. In fact# the Bining Act
strictly adheres to the te"t of the *onstitution and does not
pro!ide for the application of the control test. Indeed# the
application of the control test has no constitutional or
statutory basis. Its application is only by mere administrati!e
fiat.
Administrati!e interpretations can ne!er be allowed to
derogate from the te"t and clear intent of the *onstitution or
the statutes. An administrati!e practice that is contrary to the
constitutional and statutory pro!isions it implements does not
!est any right# and must be discontinued no matter how long
such practice has been pre!alent. .he practice of applying
the control test in determining the e"tent of foreign
participation in nationalied areas of acti!ities must be
discontinued since it actually allows corporations where the
le!el of 4ilipino ownership and control is effecti!ely less than
M?= to engage in acti!ities reser!ed by the *onstitution to
Philippine citiens or corporation that are M?= owned by
Philippine citiens. In other words# the control test effecti!ely
sanctions the circum!ention of the *onstitutional restriction.
In any case# we opine further that the *onstitution and the
statute re%uire that si"ty per cent 0M?=1 of the capital of a
mining corporation must be owned by Philippine 5citiens5
and not (ust Philippine 5nationals5 as used in other statutes
such as the 4IA. 82 In other words# the term 5Philippine
national5 as used in the 4IA is not synonymous or e%ui!alent
to the concept of 5Philippine citien5 as used in the
*onstitution and the Bining Act. .he term 5Philippine
national5 as defined under the 4IA and its implementing rules
is only applicable to entities that want to register and deri!e
benefits under the 4IA. It does not apply to entities engaging
in nationalied acti!ities or acti!ities in the so called
5negati!e lists.5
Ja!ing established that the application of the grandfather
rule# instead of the control test# is the standard consistent
with the pro!isions of the *onstitutional and the Bining Act
restricting foreign participation in a mineral production
sharing agreement# we now apply the grandfather rule to the
(oint mining !enture.
5amboa v) Finance Secretar1
'.12 C.#4.#a)$., @ C.#4.#a)$., C.+" 2
A corporation is an artificial being created by operation of
law# ha!ing the right of succession and the powers#
attributes and properties e"pressly authoried by law or
incident to its e"istence.
'.1' S).&A C.#4.#a)$., @ C.#4.#a)$., C.+" 12B 1'B 1*(6)
Stoc& corporations incorporated under this *ode shall not be
re%uired to ha!e any minimum authoried capital stoc&
e"cept as otherwise specifically pro!ided for by special law#
and sub(ect to the pro!isions of the following section.
At least twenty-fi!e percent 02<=1 of the authoried capital
stoc& as stated in the articles of incorporation must be
subscribed at the time of incorporation# and at least twenty-
fi!e 02<=1 per cent of the total subscription must be paid
upon subscription# the balance to be payable on a date or
dates fi"ed in the contract of subscription without need of
call# or in the absence of a fi"ed date or dates# upon call for
payment by the board of directors/ Pro!ided# howe!er# .hat
in no case shall the paid-up capital be less than fi!e
.housand 0P<#???.??1 pesos.
A A A
12
If it be a stoc& corporation# the amount of its authoried
capital stoc& in lawful money of the Philippines# the number
of shares into which it is di!ided# and in case the share are
par !alue shares# the par !alue of each# the names#
nationalities and residences of the original subscribers# and
the amount subscribed and paid by each on his subscription#
and if some or all of the shares are without par !alue# such
fact must be stated$
A A A
'.1* F.#"$9, C.#4.#a)$.,
!orporation !ode 103
4or the purposes of this *ode# a foreign corporation is one
formed# organied or e"isting under any laws other than
those of the Philippines and whose laws allow 4ilipino
citiens and corporations to do business in its own country or
state. It shall ha!e the right to transact business in the
Philippines after it shall ha!e obtained a license to transact
business in this country in accordance with this *ode and a
certificate of authority from the appropriate go!ernment
agency.
Implementing Rules and Regulations, Rule 1, 1(c), 1
st
7
54oreign corporation5 shall mean one which is formed#
organied or e"isting under laws other than those of the
Philippines.
'.10 B#a,&8 O;;$&"
nd
7
2ranch office of a foreign company carries out the business
acti!ities of the head office and deri!es income from the host
country.
'.13 R"4#"%",)a)$C"DL$a$%., O;;$&"
nd
7
Representati!e or liaison office deals directly# with the clients
of the parent company but does not deri!e income from the
host country and is fully subsidied by its head office. It
underta&es acti!ities such as but not limited to information
dissemination and promotion of the company6s products as
well as %uality control of products.
-IR Ruling 8A+393+,3 (International .egal Advocates)
It is represented that your client# Kbtech Asia Pacific Pte.
Etd. 05Kbtech51 is a foreign corporation organied and
e"isting under the laws of Singapore$ that by !irtue of S-*
Reg. )o. A 2??8;82?# the Securities and -"change
*ommission granted to your client a EI*-)S- .K
.RA)SA*. 2HSI)-SS in the Philippines in accordance
with the *orporation *ode 02atas Pambansa )o. M81 and
the 4oreign In!estment Act of 8::8 0Republic Act )o. ;?42$
that conse%uently# your client established a representati!e
office in the Philippines with address at 24th 4loor# Pacific
Star 2uilding# Ba&ati A!enue# Ba&ati *ity$ that said office
shall perform in particular acti!ities# which promote the
interests of its parent company$ that your client conducts/
81 conferences and dialogues for the purpose
disseminating information regarding the company
and its products$
21 promotion of the products and ser!ices of the
company# through the process of demonstrations$
and
,1 referral of orders and technical assistance to
persons or personnel who ha!e the re%uisite#
e"pertise and &nowledge of the products and
ser!ices.
In reply# please be informed that a representati!e office is a
non-resident foreign corporation not engaged in any income
generation business in the Philippines. As can be !iewed by
its licensed acti!ities# Kbtech is a representati!e office.
Accordingly# your client# Kbtech is not sub(ect to income ta".
1
Jence# it is e"empt from filing of the corporate income ta"
return.
A person is sub(ect to @A. if it renders ser!ice 5in the course
of trade or business5 0Section 8?<# 8::; .a" *ode1.
Inasmuch as the operation of the representati!e office is
similar to regional or area head%uarters of multinational
corporations which are e"empt from @A. under Section
8?:0p1 of the 8::; .a" *ode# representati!e offices are also
e"empt from @A.. Boreo!er# since Kbtech Banila Kffice
merely enables the o!erseas head office to maintain some
presence in the country# and is not engaged in any income-
generating acti!ity in the Philippines further %ualifies said
office for e"emption from @A.. Jowe!er# this e"emption
applies only to @A. directly due from representati!e offices.
Kn the other hand# please be ad!ised that if you will remit
technical ser!ice fees to your parent company# the said fees
are considered royalties 0Section 420A10410f1# 8::; .a"
*ode1. 2eing Philippine source income of a representati!e
office# the technical ser!ice fees are sub(ect to Philippine
corporate income ta" at the rate of ,2= 0Section 28021081#
Ibid1 which you will withhold as the payor-corporation and
paid in the same manner and sub(ect to the same conditions
as pro!ided in Section <: of the 8::; .a" *ode 0Section <8#
Ibid1 02IR Ruling )o. 8,M-8: dated >uly 4# 8:8:1.
'.12 M(!)$,a)$.,a! C./4a,- @ RA 6203 2(1)
Bultinational *ompany shall mean a foreign company or a
group of foreign companies with business establishments in
two or more countries.
'.16 R"9$.,a! .# A#"a H"a+=(a#)"#%
RA $%9* 0(0)
Regional or Area Jead%uarters 0RJ71 shall mean an office
whose purpose is to act as an administrati!e branch of a
multinational company engaged in international trade which
principally ser!es as a super!ision# communications and
coordination center for its subsidiaries# branches or affiliates
in the Asia-Pacific Region and other foreign mar&ets and
which does not earn or deri!e income in the Philippines.
(IR! 00(88)
.he term 5regional or area head%uarters5 shall mean a
companies and which head%uarters do not earn or deri!e
income from the Philippines and which act as super!isory#
communications and coordinating center for their affiliates#
subsidiaries# or branches in the Asia-Pacific Region and
other foreign mar&ets.
'.15 R"9$.,a! O4"#a)$,9 H"a+=(a#)"#%
RA $%9* 0(3), #
Regional Kperating Jead%uarters 0RKJ71 shall mean a
foreign business entity which is allowed to deri!e income in
the Philippines by performing %ualifying ser!ices to its
affiliates# subsidiaries or branches in the Philippines# in the
Asia-Pacific Region and in other foreign mar&ets.
Any foreign business entity formed# organied and e"isting
under any laws other than those of the Philippines may
establish a regional operating head%uarters in the
Philippines to ser!ice its own affiliates# subsidiaries or
branches in the Philippines# in the Asia-Pacific Region and
other foreign mar&ets. RKJ7s will be allowed to deri!e
income by performing the %ualifying ser!ices enumerated
under paragraph 0b1 8 hereunder. RKJ7s of non-ban&ing
and non-financial institutions are re%uired to secure a license
from the Securities and -"change *ommission# upon the
fa!orable recommendation of the 2oard of In!estments.
RKJ7s of ban&ing and financial institutions# on the other
hand# are re%uired to secure licenses from the Securities
and -"change *ommission and the 2ang&o Sentral ng
Pilipinas# upon the fa!orable recommendation of the 2oard
of In!estments.
.he following minimum re%uirements shall be complied with
by the said foreign entity/
1!
0a1 A certification from the Philippine *onsulateF -mbassy#
or a duly authenticated certification from the 3epartment
of .rade and Industry or its e%ui!alent in the foreign
firm6s home country that said foreign firm is an entity
engaged in international trade with affiliates# subsidiaries
or branch offices in the Asia-Pacific Region and other
foreign mar&ets.
0b1 A duly authenticated certification from the principal
officer of the foreign entity to the effect that the said
foreign entity has been authoried by its 2oard of
3irectors or go!erning body to establish its regional
operating head%uarters in the Philippines# specifying
that/
081 .he regional operating head%uarters may engage in
any of the following %ualifying ser!ices/
- 'eneral administration and planning$
- 2usiness planning and coordination$
- SourcingFprocurement of raw materials and
components$
- *orporate finance ad!isory ser!ices$
- Bar&eting control and sales promotion$
- .raining and personnel management$
- Eogistics ser!ices$
- Research and de!elopment ser!ices# and
product de!elopment$
- .echnical support and maintenance$
- 3ata processing and communication$ and
- 2usiness de!elopment.
RKJ7s are prohibited from offering %ualifying
ser!ices to entities other than their affiliates#
branches or subsidiaries# as declared in their
registration with the Securities and -"change
*ommission nor shall they be allowed to directly and
indirectly solicit or mar&et goods and ser!ices
whether on behalf of their mother company#
branches# affiliates# subsidiaries or any other
company.
021 .he regional operating head%uarters shall notify the
2oard of In!estments# the Securities and -"change
*ommission and the 2ang&o Sentral ng Pilipinas# as
the case may be# of any decision to close down or
suspend operations of its head%uarters at least
fifteen 08<1 days before the same is effected.
0c1 An underta&ing that the multinational company will
initially remit into the country such amount as may be
necessary to co!er its operations in the Philippines but
which amount will not be less than .wo hundred
thousand Hnited States dollars 0S2??#???1 or its
e%ui!alent in other foreign currencies.
Iithin thirty 0,?1 days from receipt of certificate of
registration# the multinational company will submit to the
Securities and -"change *ommission a certificate of
inward remittance from a local ban& showing that it has
remitted to the Philippines the amount of at least .wo
hundred thousand Hnited States dollars 0S2??#???1 or its
e%ui!alent in other foreign currencies and con!erted the
same to Philippine currency.
0d1 Any !iolation by the regional operating head%uarters of a
multinational company of the pro!isions of this *ode# or
its implementing rules and regulations# or other terms
and conditions of its registration# or any pro!ision of
e"isting laws# shall constitute a sufficient cause for the
cancellation of its license or registration.
(IR! 00()
.he term 5regional operating head%uarters5 shall mean a
companies which are engaged in any of the following
ser!ices/ general administration and planning$ business
planning and coordination$ sourcing and procurement of raw
materials and components$ corporate finance ad!isory
ser!ices$ mar&eting control and sales promotion$ training and
personnel management$ logistic ser!ices$ research and
de!elopment ser!ices and product de!elopment$ technical
1"
support and maintenance$ data processing and
communications$ and business de!elopment.
'.2: R"9$.,a! 7a#"8.(%" @ RA6203 2
Art. M8. 7ualifications. - A multinational company organied
and e"isting under any laws other than those of the
Philippines which is engaged in international trade and
supplies spare parts# components# semi-finished products
and raw materials to its distributors or mar&ets in the Asia-
Pacific area and other foreign areas and which has
established or will simultaneously establish a regional or
area head%uarters andFor regional operating head%uarters in
the Philippines in accordance with the pro!isions of 2oo& III
of this *ode and the rules and regulations implementing the
same may also establish a regional warehouse or
warehouses in ecoones in the Philippines# after securing a
license therefor from the Philippine -conomic 9one Authority
0P-9A1. Iith respect to regional warehouses located or will
locate in ecoones with special charters# such license shall
be secured from the concerned ecoone authorities. 4or
e"isting regional warehouses# said license shall be secured
from the 2oard of In!estments unless they choose to
relocate inside ecoones/ Pro!ided# .hat/
081 .he acti!ities of the regional warehouse shall be limited
to ser!ing as a supply depot for the storage# deposit#
safe&eeping of its spare parts# components# semi-
finished products and raw materials including the
pac&ing# co!ering# putting up# mar&ing# labelling and
cutting or altering to customer6s specification# mounting
andFor pac&aging into &its or mar&etable lots thereof# to
fill up transactions and sales made by its head offices or
parent companies and to ser!ing as a storage or
warehouse of goods purchased locally by the home
office of the multinational for e"port abroad. .he regional
warehouse shall not directly engage in trade nor directly
solicit business# promote any sale# nor enter into any
contract for the sale or disposition of goods in the
Philippines/ Pro!ided# .hat a regional warehouse may
be allowed to withdraw imported goods from said
warehouseFs for deli!ery to an authoried distributor in
the Philippines/ Pro!ided# howe!er# .hat the
corresponding ta"es# customs duties and charges under
the .ariff and *ustoms *ode ha!e been paid by the
head%uarters of the said multinational upon arri!al of
such goods/ Pro!ided# further# .hat the deli!ery of said
goods to the aforesaid distributor in the Philippines shall
be treated as a sale made by the head%uarters rather
than that of its head office# and shall be reflected in a
separate boo& of accounts# any representation as to who
is the seller to the contrary notwithstanding/ Pro!ided#
furthermore# .hat the aforementioned sale shall be
go!erned by the pro!isions on !alue-added ta" in
accordance with the )ational Internal Re!enue *ode# as
amended by Republic Act )o. 8424/ Pro!ided# finally#
.hat the income from the aforementioned sale to said
distributor shall be treated as income deri!ed by the said
head%uarters from sources within the Philippines and
shall be sub(ect to the corporate income ta" of a resident
foreign corporation under the )ational Internal Re!enue
*ode# as amended# the pro!ision of any law to the
contrary notwithstanding.
021 .he personnel of a regional warehouse will not
participate in any manner in the management of any
subsidiary# affiliate or branch office it might ha!e in the
Philippines other than the acti!ities allowed under this
Act.
0,1 .he personnel of the regional or area head%uarters or
regional operating head%uarters shall be responsible for
the operation of the regional warehouse sub(ect to the
pro!isions of this *ode.
041 .he multinational company shall pay the 2oard of
In!estments# the P-9A or concerned ecoone
authorities# as the case may be# and the appropriate
*ollector of *ustoms concerned the corresponding
license fees and storage fees to be determined by said
offices.
0<1 An application for the establishment of a regional
warehouse located outside an ecoone shall be made in
1#
writing to the 2oard of In!estments# to the P-9A# or to
concerned ecoone authorities in the case of regional
warehouses located in ecoones. .he application shall
describe the premises# the location and capacity of the
regional warehouse and the purpose for which the
building is to be used.
.he (urisdiction and responsibility of super!ising the regional
warehouses located outside ecoones shall be !ested on the
2ureau of *ustoms# and the 2oard of In!estments# or the
P-9A or concerned ecoone authorities for warehouses
within ecoones.
.he 2oard of In!estments# the P-9A or concerned ecoone
authorities# in consultation with the Regional 3irector of
*ustoms of the district where the warehouse will be situated
shall cause an e"amination of the premises to be made and
if found satisfactory# it may authorie its establishment
without complying with the re%uirements of any other
go!ernment body# sub(ect to the following conditions/
081 .hat the articles to be stored in the warehouse are spare
parts# components# semi-finished products and raw
materials of the multinational company operator for
distribution and supply to its Asia-Pacific and other
foreign mar&ets including pac&aging# co!erings# brands#
labels and warehouse e%uipment as pro!ided in Article
M:0a1 hereof$
021 .hat the entry or importation# storage or re-e"port of the
goods destined for or to be stored in the regional
warehouse will not in!ol!e any dollar outlay from
Philippine sources$
0,1 .hat they are of such character as to be readily
identifiable for re-e"port$ and in case of local distribution
they shall be sub(ect to Article M8081# Article M:
paragraph 0b1 and the guidelines implementing 2oo& I@
of this *ode$
041 .hat it shall file an ordinary warehousing bond in an
amount e%ual to one hundred percent 08??=1 of the
ascertained customs duties on the articles imported
without pre(udice to its filing a general warehousing bond
in lieu of the ordinary warehousing bond$
0<1 .he percentage of annual allowable withdrawal from
warehouses located outside ecoones for domestic use
shall be sub(ect to the appro!al of the 2oard of
In!estments# or of the P-9A or concerned ecoone
authorities with respect to warehouses located within the
ecoones of their (urisdiction/ Pro!ided# howe!er# .hat in
the case of e"isting warehouses# in no case shall their
withdrawals e"ceed thirty percent 0,?=1 of the !alue of
goods they ha!e brought in for any gi!en year and the
payment of the corresponding ta"es and duties shall
ha!e been made upon the arri!al of such goods
imported/ Pro!ided# further# .hat the P-9A or concerned
ecoone authorities may allow withdrawal e"ceeding
thirty percent 0,?=1 of the !alue of goods under such
terms and conditions the P-9A or concerned ecoone
authorities may impose.
Art. M:. .a" .reatment of Imported Articles in the Regional
Iarehouse. -
0a1 .a" Incenti!es for 7ualified 'oods 3estined for
Ree"portation to the Asia-Pacific and Kther 4oreign
Bar&ets. - -"cept as otherwise pro!ided in this *ode#
imported spare parts# components# semi-finished
products# raw materials and other items including any
pac&ages# co!erings# brands and labels and warehouse
e%uipment as may be allowed by the 2oard of
In!estments# the P-9A or concerned ecoone
authorities# as the case may be# for use e"clusi!ely on
the goods stored# e"cept those prohibited by law#
brought into the regional warehouse from abroad to be
&ept# stored andFor deposited or used therein and re-
e"ported directly therefrom under the super!ision of the
*ollector of *ustoms concerned for distribution to its
Asia-Pacific and other foreign mar&ets in accordance
with the guidelines implementing 2oo& I@ of this *ode
including to a bonded manufacturing warehouse in the
Philippines and e!entually re-e"ported shall not be
1$
sub(ect to customs duty# internal re!enue ta"# e"port ta"
nor to local ta"es# the pro!isions of law to the contrary
notwithstanding.
0b1 Payment of Applicable 3uties and .a"es on 7ualified
'oods Sub(ect to Eaws and Regulations *o!ering
Imported Berchandise if 3estined for the Eocal Bar&et. -
Any spare parts# components# semi-finished products#
raw materials and other items sent# deli!ered# released
or ta&en from the regional warehouse to the local mar&et
in accordance with the guidelines implementing 2oo& I@
of this *ode shall be sub(ect to the payment of income
ta"es# customs duties# ta"es and other charges pro!ided
for under Section M8 hereof and for which purpose# the
proper commercial in!oice of the head offices or parent
companies shall be submitted to the *ollector of
*ustoms concerned$ and shall be sub(ect to laws and
regulations go!erning imported merchandise/ Pro!ided#
.hat in case any of the foregoing items are sold#
bartered# hired or used for purposes other than they
were intended for without prior compliance with the
guidelines implementing 2oo& I@ of this *ode and
without prior payment of the duty# ta" or other charges
which would ha!e been due and payable at the time of
entry if the articles had been entered without the benefit
of this Krder# shall be sub(ect to forfeiture and the
importation shall constitute a fraudulent practice against
customs re!enue punishable under Section ,M?2# as
amended# of the .ariff and *ustoms *ode of the
Philippines/ Pro!ided# further# .hat a sale pursuant to a
(udicial order shall not be sub(ect to the preceding
pro!iso without pre(udice to the payment of duties# ta"es
and other charges.
Art. ;?. -"emption 4rom the Ba"imum Storage Period
Hnder the .ariff and *ustoms *ode$ Period of Storage in the
Regional Iarehouse. - .he pro!ision of the law in Section
8:?8 of the .ariff and *ustoms *ode of the Philippines# as
amended# to the contrary notwithstanding# articles duly
entered for warehousing may remain in the regional
warehouses for a period of two 021 years from the time of
their transfer to the regional warehouse# which period may
be e"tended with the appro!al of the 2oard of In!estments
for an additional period of one 081 year upon payment of the
corresponding storage fee on the une"ported articles# as
pro!ided for under Article M8041 for each e"tension until they
are re-e"ported in accordance with the guidelines
implementing 2oo& I@ of this *ode. Any articles withdrawn#
released or remo!ed contrary to the pro!isions of said
guidelines shall be forfeited pursuant to the pro!isions of
Article M:# paragraph 0b1 hereof.
Art. ;8. Rules and Regulations on the >urisdiction# Kperation
and *ontrol K!er 7ualified 'oods in the Regional
Iarehouse. - .he 2oard of In!estments# the P-9A#
concerned ecoone authorities and the 2ureau of *ustoms
shall (ointly issue special rules and regulations on the
recei!ing# handling# custody# entry# e"amination#
classifications# deli!ery# storage# warehousing# manipulation
and pac&aging# release for ree"portation or for importation
and deli!ery to a Philippine distributor and for the
safe&eeping# recording# in!entory and li%uidation of said
%ualified goods# any e"isting law notwithstanding. Such rules
and regulations shall be formulated in consultation with the
applicantsFoperators of regional warehouses.
Art. ;2. *ancellation of Eicense or Registration. - Any willful
!iolation by the regional or area head%uarters or regional
operating head%uarters of a multinational company which
has established a regional warehouse or warehouses
contrary to or in !iolation of the pro!isions of e"isting laws
and the implementing guidelines of 2oo& I@ of this *ode
shall constitute a sufficient cause for the cancellation of its
license or registration in addition to the penalties
hereinabo!e pro!ided in Article M:# paragraph 0b1 hereof.
.he 2oard# the P-9A or concerned ecoone authorities# as
the case may be# shall ha!e the authority to impose such
fines in amounts that are (ust and reasonable in cases of late
submission or non-compliance on the part of registered
enterprises# with reporting and other re%uirements under this
*ode and its implementing rules and regulations.
'.21 D./"%)$& Ma#A") E,)"#4#$%"
1%
Foreign Investments Act 3(f)
.he term 5domestic mar&et enterprise5 shall mean an
enterprise which produces goods for sale# or renders
ser!ices to the domestic mar&et entirely or if e"porting a
portion of its output fails to consistency e"port at least si"ty
percent 0M?=1 thereof.
'.22 I,C"%)/",)
Foreign Investments Act 3(b)
.he term 5in!estment5 shall mean e%uity participation in any
enterprise organied or e"isting under the laws of the
Philippines.
Implementing Rules and Regulations, Rule 1, 1(d)
In!estment shall mean e%uity participation in any enterprise
organied or e"isting under the laws of the Philippines. It
includes both original and additional in!estments# whether
made directly as in stoc& subscription# or indirectly through
the transfer of e%uity from one in!estor to another as in stoc&
purchase. Kwnership of bonds Oincluding income bondsP#
debentures# notes or other e!idences of indebtedness does
not %ualify as in!estments.
.he purchase of stoc& options or stoc& warrants is not an
in!estment until the holder thereof e"ercises his option and
actually ac%uires stoc& from the corporation.
'.2' F.#"$9, I,C"%)/",)
Foreign Investments Act 3(c)
.he term 5foreign in!estment5 shall mean an e%uity
in!estment made by non-Philippine national in the form of
foreign e"change andFor other assets actually transferred to
the Philippines and duly registered with the *entral 2an&
which shall assess and appraise the !alue of such assets
other than foreign e"change.
Implementing Rules and Regulations, Rule 1, 1 (e)
54oreign in!estment5 shall mean an e%uity in!estment made
by a non-Philippine national$ Pro!ided# howe!er# .hat for
purposes of determining foreign ownership# peso
in!estments made by non-Philippine nationals shall be
considered$ Pro!ided# further# .hat only foreign in!estments
in the form of foreign e"change andFor other assets actually
transferred to the Philippines and duly registered with the
*entral 2an& 0*21 and profits deri!ed therefrom can be
repatriated$ and Pro!ided# finally# .hat# for purposes of
Section 8 of the Act# and Rule @III# Section M of these Rules
and Regulations# 5-"isting 4oreign In!estments5 shall mean
an e%uity in!estments made by a non-Philippine national
duly registered with the S-* or the 2ureau of .rade
Regulation and *onsumer Protection 02.R*P1 in the form of
foreign e"change andFor other assets transferred to the
Philippines.
'.2* D.$,9 B(%$,"%%
Foreign Investments Act 3(c)
.he phrase 5doing business5 shall include soliciting orders#
ser!ice contracts# opening offices# whether called 5liaison5
offices or branches$ appointing representati!es or
distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods
totaling one hundred eighty O88?P days or more$ participating
in the management# super!ision or control of any domestic
business# firm# entity or corporation in the Philippines$ and
any other act or acts that imply a continuity of commercial
dealings or arrangements and contemplate to that e"tent the
performance of acts or wor&s# or the e"ercise of some of the
functions normally incident to# and in progressi!e
prosecution of commercial gain or of the purpose and ob(ect
of the business organiation/ Pro!ided# howe!er# .hat the
phrase 5doing business5 shall not be deemed to include
mere in!estment as a shareholder by a foreign entity in
1&
domestic corporations duly registered to do business# andFor
the e"ercise of rights as such in!estor$ nor ha!ing a nominee
director or officer to represent its interests in such
corporation$ nor appointing a representati!e or distributor
domiciled in the Philippines which transacts business in its
own name and for its own account$
Implementing Rules and Regulations, Rule 1, 1 (f)
53oing business5 shall include soliciting orders# ser!ice
contracts# opening offices# whether liaison offices or
branches$ appointing representati!es or distributors#
operating under full control of the foreign corporation#
domiciled in the Philippines or who in any calendar year stay
in the country for a period totaling one hundred eighty O88?P
days or more$ participating in the management# super!ision
or control of any domestic business# firm# entity or
corporation in the Philippines$ and any other act or acts that
imply a continuity of commercial dealings or arrangements#
and contemplate to that e"tent the performance of acts or
wor&s# or the e"ercise of some of the functions normally
incident to and in progressi!e prosecution of commercial
gain or of the purpose and ob(ect of the business
organiation.
.he following acts shall not be deemed 5doing business5 in
the Philippines/
8. Bere in!estment as a shareholder by a foreign entity in
domestic corporations duly registered to do business#
andFor the e"ercise of rights as such in!estor$
2. Ja!ing a nominee director or officer to represent its
interest in such corporation$
,. Appointing a representati!e or distributor domiciled in
the Philippines which transacts business in the
representati!e6s or distributor6s own name and account$
4. .he publication of a general ad!ertisement through any
print or broadcast media$
<. Baintaining a stoc& of goods in the Philippines solely for
the purpose of ha!ing the same processed by another
entity in the Philippines$
M. *onsignment by a foreign entity of e%uipment with a
local company to be used in the processing of products
for e"port$
;. *ollecting information in the Philippines$ and
8. Performing ser!ices au"iliary to an e"isting isolated
contract of sale which are not on a continuing basis#
such as installing in the Philippines machinery it has
manufactured or e"ported to the Philippines# ser!icing
the same# training domestic wor&ers to operate it# and
similar incidental ser!ices.
-) :an ;uiden -ros v 5&:. 6anufacturing
Agilent &ec'nologies v Integrated Silicon &ec'nolog1
!ommunication 6aterials v !A
&op <eld 6anufacturing v !8
'.20 Ex4.#) E,)"#4#$%"
Foreign Investments Act 3(e)
.he term 5e"port enterprise5 shall mean an enterprise
wherein a manufacturer# processor or ser!ice Oincluding
tourismP enterprise e"ports si"ty percent 0M?=1 or more of its
output# or wherein a trader purchases products domestically
and e"ports si"ty per cent 0M?=1 or more of such purchases.
20
Implementing Rules and Regulations, Rule 1, 1 (g)
5-"port enterprise5 shall mean an enterprise wherein a
manufacturer# processor or ser!ice Oincluding tourismP
enterprise e"ports si"ty percent OM?=P or more of its output#
or wherein a trader purchases products domestically and
e"ports si"ty percent OM?=P or more of such purchases.
'.23 A+Ca,&"+ T"&8,.!.9-
Implementing Rules and Regulations, Rule 1, 1 (o)
5Ad!anced technology5 refers to a higher degree or form of
technology than what is domestically a!ailable and needed
for the de!elopment of certain industries as sub(ect to
guidelines of the 3epartment of Science and .echnology
O3KS.P. Its introduction into the country through foreign
in!estments under the terms and conditions of the Act must
be lin&ed to its appropriateness and adaptability to local
conditions with a !iew towards e!entual transfer and
applicability including the upgrading of the indigenous
technology a!ailable.
'.22 Pa$+1$, E=($)- Ca4$)a!
Implementing Rules and Regulations, Rule 1, 1 (p)
5Paid-in e%uity capital5 shall mean the total in!estment in a
business that has been paid-in in a corporation or
partnership or in!ested in a single proprietorship# which may
be in cash or in property. It shall also refer to inward
remittance or assigned capital in the case of foreign
corporations.
'.26 D$#"&) E/4!.-""%
Implementing Rules and Regulations, Rule 1, 1 (=)
53irect employees5 shall mean 4ilipino personnel hired and
engaged under the control and super!ision of the applicant
in!estorFemployer in the production of goods or performance
of ser!ices. -"cluded from this definition are personnel hired
as casual# seasonal# learner# apprentice or any employee of
subcontractor or those under fi"ed term employment.
'.25 F.#/"# Na)(#a! B.#, F$!$4$,.%
Implementing Rules and Regulations, Rule 1, 1 (>)
54ormer natural born 4ilipino5 shall mean those who ha!e
lost Philippine citienship but were pre!iously citiens of the
Philippines falling in either of the following categories/
OaP from birth without ha!ing to perform any act to
ac%uire or perfect their Philippine citienship$ or
ObP by ha!ing elected Philippine citienship upon
reaching the age of ma(ority# if born before >anuary
8;# 8:;,# of 4ilipino mothers.
'.': F.#"$9, I,C"%)/",)% N"9a)$C" L$%)
Foreign Investments Act 3(g)
.he term 54oreign In!estments )egati!e Eist5 or 5)egati!e
Eist5 shall mean a list of areas of economic acti!ity whose
foreign ownership is limited to a ma"imum of forty percent
04?=1 of the e%uity capital of the enterprises engaged
therein.
" (o) 9$# (8ecember 0,,*)
S-*.IK) 8. Knly the in!estment areas andFor acti!ities
listed in Anne" A hereof shall be reser!ed to Philippine
nationals# and hereafter shall be referred to as the Se!enth
Regular 4oreign In!estment )egati!e Eist. .he e"tent of
foreign e%uity in these areas shall be limited to the
percentages indicated in the Eist.
S-*.IK) 2. Any amendment to Eist A may be made at any
time to reflect changes instituted in specific laws while
amendments to Eist 2 shall not be made more often than
once e!ery two years# pursuant to Section 8 of RA ;?42 0as
amended1 and its re!ised Implementing Rules and
21
Regulations.
EIS. A/ 4KR-I') KI)-RSJIP IS EIBI.-3 2L BA)3A.-
K4 .J- *K)S.I.H.IK) A)3 SP-*I4I* EAIS
)o 4oreign -%uity
8. Bass Bedia e"cept recording 0Art. A@I# Sec. 88 of
the *onstitution$ Presidential Bemorandum dated ?4
Bay 8::41
2. Practice of all professions
8
a1 -ngineering
i. Aeronautical
ii. Agricultural
iii. *hemical
i!. *i!il
!. -lectrical
!i. -lectronics and *ommunication
!ii. 'eodetic
!iii. Bechanical
i". Betallurgical
". Bining
"i. )a!al Architecture and Barine
"ii. Sanitary
b1 Bedicine and Allied Professions
i. Bedicine
ii. Bedical .echnology
iii. 3entistry
i!. Bidwifery
!. )ursing
!i. )utrition and 3ietetics
!ii. Kptometry
!iii. Pharmacy
i". Physicaland Kccupational .herapy
". Radiologic and A-ray .echnology
"i. @eterinary Bedicine
c1 Accountancy
d1 Architecture
e1 *riminology
f1 *hemistry
g1 *ustoms 2ro&erage
1
.his is limited to 4ilipino citiens sa!e in cases prescribed by law
h1 -n!ironmental Planning
i1 4orestry
(1 'eology
&1 Interior 3esign
l1 Eandscape Architecture
m1 Eaw
n1 Eibrarianship
o1 Barine3ec&Kfficers
p1 Barine-ngineKfficers
%1 Baster Plumbing
r1 Sugar .echnology
s1 Social Ior&
t1 .eaching
u1 Agriculture
!1 4isheries
0Art. AII# Sec. 84 of the *onstitution$ Sec. 8 of RA
<8881
,. Retail trade enterprises with paid-up capital of less
than HSS2#<??#???0Sec. < of RA 8;M21
2
4. *ooperati!es 0*h.III#Art.2MofRAM:,81
<. Pri!ate Security Agencies 0Sec. 4 of RA <48;1
M. Small-scale Bining 0Sec.,ofRA;?;M1
;. Htiliation of Barine Resources in archipelagic
waters# territorial sea# and e"clusi!e economic one
as well as small-scale utiliation of natural resources
in ri!ers# la&es# bays# and lagoons 0Art. AII# Sec. 2 of
the *onstitution1
8. Kwnership# operation and management of coc&pits
0Sec. < of P3 44:1
:. Banufacture# repair# stoc&piling andFor distribution of
nuclear weapons 0Art.II#Sec.8 of the *onstitution1
8?. Banufacture# repair# stoc&piling andFor distribution of
biological# chemical and radiological weapons and
anti-personnel mines 0@arious treaties to which the
Philippines is a signatory and con!entions supported
by the Philippines1
,
2
4ull foreign participation is allowed for retail trade enterprises/ 0a1 with paid-up capital of
HSS2#<??#??? or more pro!ided that in!estments for establishing a store is not less than
HSS8,?#???$ or 0b1 specialiing in high end or lu"ury products# pro!ided that the paid-up
capital per store is not less than HSS2<?#???
3omestic in!estments are also prohibited

22
88. Banufacture of firecrac&ers and other pyrotechnic
de!ices 0Sec. < of RA ;88,1
Hp to .wenty Percent 02?=1 4oreign -%uity
82. Pri!ate radio communications networ& 0RA ,84M1
Hp to .wenty-4i!e Percent 02<=1 4oreign -%uity
8,. Pri!ate recruitment# whether for local or o!erseas
employment 0Art. 2; of P3 4421
84. *ontracts for the construction and repair of locally-
funded public wor&s 0Sec. 8 of *A <48# EKI M,?1
e"cept/
a1 infrastructureFde!elopment pro(ects co!ered in
RA;;88$ and
b1 pro(ects which are foreign funded or assisted
and re%uired to undergo international
competiti!e bidding 0Sec. 2a of RA ;;881
8<. *ontracts for the construction of defense-related
structures 0Sec. 8 of *A <481
Hp to .hirty Percent 0,?=1 4oreign -%uity
8M. Ad!ertising 0Art. A@I# Sec. 88 of the *onstitution1
Hp to 4orty Percent 04?=1 4oreign -%uity
8;. -"ploration# de!elopment and utiliation of natural
resources 0Art. AII# Sec. 2 of the *onstitution1
4
88. Kwnership of pri!ate lands 0Art. AII# Sec. ; of the
*onstitution$ *h. <# Sec. 22 of *A 848$ Sec. 4 of RA
:8821
8:. Kperation and management of public utilities 0Art.
AII# Sec. 88 of the *onstitution$ Sec. 8M of *A 84M1
2?. KwnershipFestablishment and administration of
educational institutions 0Art. AI@# Sec. 4 of the
*onstitution1
28. *ulture# production# milling# processing# trading
!
4ull foreign participation is allowed through financial or technical assistance agreement with
the President
e"cepting retailing# of rice and corn and ac%uiring# by
barter# purchase or otherwise# rice and corn and the
by-products thereof 0Sec. < of P3 8:4$Sec. 8< of RA
8;M21
<
22. *ontracts for the supply of materials# goods and
commodities to go!ernment-owned or controlled
corporation# company# agency or municipal
corporation 0Sec. 8 of RA <88,1
2,. Pro(ect Proponent and 4acility Kperator of a 2K.
pro(ect re%uiring a public utilities franchise 0Art. AII#
Sec. 88 of the *onstitution$ Sec. 2a of RA ;;881
24. Kperation of deep sea commercial fishing !essels
0Sec. 2; of RA 8<<?1
2<. Ad(ustment *ompanies 0Sec. ,2, of P3 M82 as
amended by P3 88841
2M. Kwnership of condominium units where the common
areas in the condominium pro(ect are co-owned by
the owners of the separate units or owned by a
corporation 0Sec. < of RA 4;2M1
Hp to Si"ty Percent 0M?=1 4oreign -%uity
2;. 4inancing companies regulated by the Securities
and -"change *ommission 0Sec. M of RA <:8? as
amended by RA 8<<M1M
28. In!estment houses regulated by the S-* 0Sec. < of
P3 82: as amended by RA 8,MM1
M
EIS. 2/ 4KR-I') KI)-RSJIP IS EIBI.-3 4KR
R-ASK)S K4 S-*HRI.L# 3-4-)S-# RISG .K J-AE.J
A)3 BKRAES A)3 PRK.-*.IK) K4 SBAEE- A)3
B-3IHB-S*AE- -).-RPRIS-S
5
4ull foreign participation is allowed pro!ided that within the ,?-year period from start of
operation# the foreign in!estor shall di!est a minimum of M? percent of their e%uity to 4ilipino
citiens
6
)o foreign national may be allowed to own stoc& in financing companies or in!estment
houses unless the country of which he is a national accords the same reciprocal rights to
4ilipinos 0Sec. M of RA <:8? as amended by RA 8<<M$ P3 82: as amended by RA 8,MM1
2
Hp to 4orty Percent 04? =1 4oreign -%uity
8. Banufacture# repair# storage# andFor distribution of
products andFor ingredients re%uiring Philippine
)ational Police 0P)P1 clearance/
a1 4irearms 0handguns to shotguns1# parts of
firearms and ammunition therefor# instruments
or implements used or intended to be used in
the manufacture of firearms
b1 'unpowder
c1 3ynamite
d1 2lasting supplies
e1 Ingredients used in ma&ing e"plosi!es/
i. *hlorates of potassium and sodium
ii. )itrates of ammonium# potassium# sodium#
barium# copper 0881# lead 0881# calcium and
cuprite
iii. )itricacid
i!. )itrocellulose
!. Perchlorates of ammonium# potassium and
sodium
!i. 3initrocellulose
!ii. 'lycerol
!iii. Amorphous phosphorus
i". Jydrogen pero"ide
". Strontium nitrate powder
"i. .oluene
f1 .elescopic sights# sniper scope and other similar
de!ices
Jowe!er# the manufacture or repair of these items may
be authoried by the *hief of the P)P to non-Philippine
nationals$ Pro!ided that a substantial percentage of
output# as determined by the said agency# is e"ported.
Pro!ided further that the e"tent of foreign e%uity
ownership allowed shall be specified in the said
authorityFclearance 0RA ;?42 as amended by RA 88;:1.
2. Banufacture# repair# storage andFor distribution of
products re%uiring 3epartment of )ational 3efense
03)31 clearance/
a1 'uns and ammunition for warfare
b1 Bilitary ordinance and parts thereof 0e.g.# torpedoes#
depth charges# bombs# grenades# missiles1
c1 'unnery# bombing and fire control systems and
components
d1 'uided missilesFmissile systems and components
e1 .actical aircraft 0fi"ed and rotary-winged1# parts and
components thereof
f1 Space !ehicles and component systems
g1 *ombat !essels 0air# land and na!al1 and au"iliaries
h1 Ieapons repair and maintenance e%uipment
i1 Bilitary communications e%uipment
(1 )ight !ision e%uipment
&1 Stimulated coherent radiation de!ices# components
and accessories
l1 Armament training de!ices
m1 Kther as may be determined by the Secretary of the
3)3
Jowe!er# the manufacture or repair of these items may
be authoried by the Secretary of the 3)3 to non-
Philippine nationals$ Pro!ided that a substantial
percentage of output# as determined by the said agency#
is e"ported. Pro!ided further that the e"tent of foreign
e%uity ownership allowed shall be specified in the said
authorityFclearance 0RA ;?42 as amended by RA 88;:1.
,. Banufacture and distribution of dangerous drugs
4. Sauna and steam bathhouses# massage clinics and
other li&e acti!ities regulated by law because of ris&s
posed to public health and morals
<. All forms of gambling# e.g. race trac& operation
M. 3omestic mar&et enterprises with paid-in e%uity capital
of less than the e%ui!alent of HSS2??#???
;. 3omestic mar&et enterprises which in!ol!e ad!anced
technology or employ at least fifty 0<?1 direct employees
with paid-in-e%uity capital of less than the e%ui!alent of
HSS8??#???
'.'1 A44!$&a!" La<% ). F.#"$9, C.#4.#a)$.,%
2!
Any foreign corporation lawfully doing business in the
Philippines shall be bound by all laws# rules and regulations
applicable to domestic corporations of the same class#
e"cept such only as pro!ide for the creation# formation#
organiation or dissolution of corporations or those which fi"
the relations# liabilities# responsibilities# or duties of
stoc&holders# members# or officers of corporations to each
other or to the corporation.
'.'2 D.$,9 B(%$,"%% <$)8.() a L$&",%"
)o foreign corporation transacting business in the
Philippines without a license# or its successors or assigns#
shall be permitted to maintain or inter!ene in any action# suit
or proceeding in any court or administrati!e agency of the
Philippines$ but such corporation may be sued or proceeded
against before Philippine courts or administrati!e tribunals
on any !alid cause of action recognied under Philippine
laws.
'.'' Ex4.#) E,)"#4#$%"%
Foreign Investments Act *, % 0
nd
7
4oreign in!estment in e"port enterprises whose products
and ser!ices do not fall within Eists A and 2 of the 4oreign
In!estment )egati!e Eist pro!ided under Section 8 hereof is
allowed up to one hundred percent O8??=P ownership.
-"port enterprises which are non-Philippine nationals shall
register with 2KI and submit the reports that may be
re%uired to ensure continuing compliance of the e"port
enterprise with its e"port re%uirement. 2KI shall ad!ise S-*
or 2.R*P# as the case may be# of any e"port enterprise that
fails to meet the e"port ratio re%uirement. .he S-* or
2.R*P shall thereupon order the non-complying e"port
enterprise to reduce its sales to the domestic mar&et to not
more than forty percent O4?=P of its total production$ failure
to comply with such S-* or 2.R*P order# without (ustifiable
reason# shall sub(ect the enterprise to cancellation of S-* or
2.R*P registration# andFor the penalties pro!ided in Section
84 hereof.
'.'* F.#"$9, I,C"%)/",)% $, a D./"%)$& Ma#A") E,)"#4#$%"
Foreign Investments Act %
)on-Philippine nationals may own up to one hundred
percent O8??=P of domestic mar&et enterprises unless
foreign ownership therein is prohibited or limited by the
*onstitution and e"isting law or the 4oreign In!estment
)egati!e Eist under Section 8 hereof.
'.'0 R$98)% .; F.#/"# Na)(#a! B.#, F$!$4$,.%
Foreign Investments Act 1,
Any natural-born citien who has lost his Philippine
citienship and who has the legal capacity to enter into a
contract under Philippine laws may be a transferee of a
pri!ate land up to a ma"imum area of fi!e thousand O<#???P
s%uare meters in the case of urban land or three O,P hectares
in the case of rural land to be used by him for business or
other purposes. In the case of married couples# one of them
may a!ail of the pri!ilege herein granted/ Pro!ided# .hat if
both shall a!ail of the same# the total area ac%uired shall not
e"ceed the ma"imum herein fi"ed.
In case the transferee already owns urban or rural land for
business or other purposes# he shall still be entitled to be a
transferee of additional urban or rural land for business or
other purposes which when added to those already owned
by him shall not e"ceed the ma"imum areas herein
authoried.
A transferee under this Act may ac%uire not more than two
O2P lots which should be situated in different municipalities or
cities anywhere in the Philippines/ Pro!ided# .hat the total
land area thereof shall not e"ceed fi!e thousand O<#???P
s%uare meters in the case of urban land or three O,P hectares
2"
in the case of rural land for use by him for business or other
purposes. A transferee who has already ac%uired urban land
shall be dis%ualified from ac%uiring rural land and !ice !ersa.
'.'3 P"#/a,",) E%)a!$%8/",)
-IR <ebsite
P- is defined as a fi"ed place of business through which the
business of the enterprise is wholly or partly carried on. .he
concept of permanent establishment is used to determine
the rights of a *ontracting State to ta" the business profits of
enterprises of the other *ontracting State. Hnder this
concept# profits of an enterprise of a *ontracting State are
not ta"able by the other *ontracting State# unless the
enterprise carries on business through a permanent
establishment situated in the other *ontracting State.
R/+?S &a> &reat1 (19$3)
AR.I*E- < Permanent -stablishment
081 4or the purposes of this *on!ention# the term
Tpermanent establishmentU means a fi"ed place of
business through which a resident of one of the
*ontracting States engages in a trade or business.
021 .he term 5fi"ed place of business66 includes but is not
limited to/
0a1 A seat of management$
0b1 A branch$
0c1 An office$
0d1 A store or other sales outlet$
0e1 A factory$
0f1 A wor&shop$
0g1 A warehouse$
0h1 A mine# %uarry# or other place of e"traction of natural
resources$
0i1 A building site or construction or assembly pro(ect or
super!isory acti!ities in connection therewith#
pro!ided such site# pro(ect or acti!ity continues for a
period of more than 88, days$ and
0(1 .he furnishing of ser!ices# including consultancy
ser!ices# by a resident of one of the *ontracting
States through employees or other personnel#
pro!ided acti!ities of that nature continue 0for the
same or a connected pro(ect1 within the other
*ontracting State for a period or periods aggregating
more than 88, days.
0,1 )otwithstanding paragraphs 081# 021# and 041# a
permanent establishment shall be deemed not to include
any one or more of the following/
0a1 .he use of facilities solely for the purpose of storage#
display# or occasional deli!ery of goods or
merchandise belonging to the resident$
0b1 .he maintenance of a stoc& of goods or
merchandise belonging to the resident solely for the
purpose of storage# display# or occasional deli!ery$
0c1 .he maintenance of a stoc& of goods or
merchandise belonging to the resident solely for the
purpose of processing by another person$
0d1 .he maintenance of a fi"ed place of business solely
for the purpose of purchasing goods or
merchandise# or for collecting information# for the
resident$
0e1 .he maintenance of a fi"ed place of business solely
for the purpose of ad!ertising# for the supply of
information# for scientific research# or for similar
acti!ities which ha!e a preparatory or au"iliary
character# for the resident$ or
0f1 .he furnishing of ser!ices# including the pro!ision of
e%uipment# in one of the *ontracting States by a
resident of the other *ontracting State# including
consultancy firms# in accordance with# or in the
implementation of# an agreement between the
*ontracting States regarding technical cooperation.
041 A person acting in one of the *ontracting States on
behalf of a resident of the other *ontracting State# other
than an agent of an independent status to whom
paragraph 0<1 applies# shall be deemed to gi!e rise to a
permanent establishment in the first-mentioned
*ontracting State if-
0a1 Such person has# and habitually e"ercises in the
first-mentioned *ontracting State# an authority to
conclude contracts in the name of that resident#
2#
unless the e"ercise of such authority is limited to the
purchase of goods or merchandise for that resident$
or
0b1 Je has no such authority# but habitually maintains in
the first-mentioned State a stoc& of goods or
merchandise from which he regularly deli!ers goods
and merchandise on behalf of the resident.
0<1 A resident of one of the *ontracting States shall not be
deemed to ha!e a permanent establishment in the other
*ontracting State merely because such resident carries
on business in that other *ontracting State through a
bro&er# general commission agent# or any other agent of
an independent status# where such bro&er or agent is
acting in the ordinary course of his business. Jowe!er#
when the acti!ities of such an agent are de!oted wholly
or almost wholly on behalf of that resident# he shall not
be considered an agent of independent status within the
meaning of this paragraph if the transactions between
the agent and the resident were not made under arm6s
length conditions.
0M1 -"cept with respect to reinsurance# a resident of a
*ontracting State shall be deemed to ha!e a permanent
establishment in the other *ontracting State if it collects
premiums in that other State# or insures ris&s situated
therein# through an employee or representati!e situated
therein who is not an agent of independent status to
whom paragraph 0<1 applies.
0;1 A resident of one of the *ontracting States shall not be
*ontracting State merely because such resident sells at
the termination of a trade fair or con!ention in such other
*ontracting State goods or merchandise which such
resident displayed at such trade fair or con!ention.
081 .he fact that a corporation of one of the *ontracting
States controls or is controlled by or is under common
control with-
0a1 A corporation of the other *ontracting State# or
0b1 A corporation which carries on business in that other
*ontracting State
0whether through a permanent establishment or
otherwise1.
shall not be ta&en into account in determining whether
the acti!ities or fi"ed place of business of either
corporation constitutes a permanent establishment of the
other corporation.
0:1 .he principles set forth in paragraphs 081 through 081
shall be applied in determining for purposes of this
*on!ention whether there is a permanent establishment
in a State other than one of the *ontracting States or
whether a person other than a resident of one of the
*ontracting States has a permanent establishment in
one of the *ontracting States.
R/+?2 &a> &reat1 (19%$)
081 4or the purposes of this *on!ention# the term
Vpermanent establishmentV means a fi"ed place of
business in which the business of the enterprise is
wholly or partly carried on.
021 the term Vpermanent establishmentV shall include
especially/
a place of management$
a branch$
an office$
a factory$
a wor&shop$
a mine# oil well# %uarry or other place of e"traction of
natural resources$
an installation or structure used for the e"ploration of
natural resources$
a building site or construction or assembly pro(ect which
e"ists for more than 88, days.
0,1 An enterprise of a *ontracting State shall li&ewise be
*ontracting State if/
a. it carries on super!isory acti!ities within that other
*ontracting State for more than 88, days in
connection with a building site# or a construction or
assembly pro(ect which is being underta&en. in that
other *ontracting State$ or
2$
b. it furnishes ser!ices# including consultancy ser!ices#
in that other *ontracting State through its employees
or other personnel 0other than agents of an
independent status within the meaning of paragraph
0;1 of this Article1 for a period e"ceeding in the
aggregate 88, days within any twel!e-month period.
041 .he term Vpermanent establishmentV shall not be deemed
to include/
a. the use of facilities solely for the purpose of storage#
display or deli!ery of goods or merchandise
belonging to the enterprise$
b. the maintenance of a stoc& of goods or merchandise
belonging to the enterprise solely for the purpose of
storage# display or deli!ery$
c. the maintenance of a stoc& of goods or merchandise
processing by another enterprise$
d. the maintenance of a fi"ed place of business solely
enterprise$
e. the maintenance of a fi"ed place of business solely
information# for scientific research or for similar
character# for the enterprise.
0<1 A person acting in a *ontracting State on behalf of an
enterprise of the other *ontracting State--other than an
agent of an independent status to whom the pro!isions
of paragraph 0;1 of this Article apply shall be deemed to
be a permanent establishment in the first-mentioned
State if/
a. he has# and habitually e"ercises in that first-
mentioned State# an authority to conclude contracts
in the name of the enterprise# unless his acti!ities
are limited to the purchase of goods or merchandise
for the enterprise$ or
b. he has no such authority but habitually maintains in
that first-mentioned State a stoc& of goods or
merchandise belonging to the enterprise from which
he regularly deli!ers goods or merchandise on
behalf of that enterprise.
0M1 An insurance enterprise of a *ontracting State shall#
e"cept with regard to reinsurance# be deemed to ha!e a
permanent establishment in the other *ontracting State
if it collects premiums in the territory of that other State
or insures ris&s situated there through an employee or
representati!e established therein who is not an agent of
an independent status within the meaning of paragraph
0;1 of this Article.
0;1 An enterprise of a *ontracting State shall not be deemed
to ha!e a permanent establishment in the other
*ontracting State merely because it carries on business
in that other State through a bro&er# general commission
agent or any other agent of an independent status#
where such persons are acting in the ordinary course of
their business. Jowe!er# when the acti!ities of such an
agent are de!oted wholly or almost wholly on behalf of
that enterprise# he shall not be considered an agent of
an independent status within the meaning of this
paragraph.
081 .he fact that a company which is a resident of a
*ontracting State controls or is controlled by a company
which is a resident of the other *ontracting State# or
which carries on business in that other State 0whether
through a permanent establishment or otherwise1# shall
not of itself constitute either company a permanent
establishment of the other.
R/+-ra=il &a> &reat1
8. 4or the purpose of this *on!ention# the term Tpermanent
establishmentU means a fi"ed place of business in which
the business of the enterprise is wholly or partly carried
on.
2. .he term Tpermanent establishmentU shall include
2%
especially/
a1 a place of management$
b1 a branch$
c1 an office$
d1 a factory$
e1 a wor&shop
f1 a mine# %uarry or other place of e"ploration or
e"traction of natural resources$
g1 a building site or construction or assembly pro(ect#
which e"ists for more than M months$
h1 a warehouse# in relation to a person pro!iding
storage facilities for others.
,. .he term Tpermanent establishmentU shall not be
deemed to include/
a1 the use of facilities solely for the purpose of storage
or display of goods or merchandise belonging to the
enterprise$
b1 the maintenance of a stoc& of goods or merchandise
storage or display$
c1 the maintenance of a stoc& of goods or merchandise
processing by another enterprise$
d1 the maintenance of a fi"ed place of business solely
enterprise$
e1 the maintenance of a fi"ed place of business solely
information# for scientific research or for similar
character# for the enterprise.
4. A person acting in a *ontracting State on behalf of an
enterprise of the other *ontracting State C other than an
agent of independent status to whom paragraph <
applies C shall be deemed to be a permanent
establishment in the first-mentioned State if he has# and
habitually e"ercises in that State# an authority to
conclude contracts in the name of the enterprise# unless
his acti!ities are limited to the purchase of goods or
merchandise for the enterprise.
Jowe!er# an insurance company of a *ontracting State
shall# e"cept in regard to reinsurance# be deemed to
ha!e a permanent establishment in the other *ontracting
State pro!ided that it recei!es premium or insures ris&s
in the other State.
<. An enterprise of a *ontracting State shall not be deemed
to ha!e a permanent establishment in the other
*ontracting State merely because it carries on business
in that other State through a bro&er# general commission
agent or any other agent of independent status# where
such persons are acting in the ordinary course of their
business.
M. .he fact that a company which is a resident of a
*ontracting State controls or is controlled by a company
which is a resident of the other *ontracting State# or
which carries on business in that other State 0whether
through a permanent establishment or otherwise1# shall
not of itself constitute either company a permanent
establishment of the other.
R/+&'ailand &a> &reat1
In determining the e"istence of a permanent establishment
0P-1 under the RP- .hailand .a" .reaty# the 88,-day period
should be counted based on the total number of days that
ser!ices are rendered in the Philippines# including all periods
resulting from the automatic renewal of a ser!ice contract#
which renewal shall be deemed the Tsame or a connected
pro(ect.U
R/+6ala1sia &a> &reat1
.he term Tpermanent establishmentU is defined as a fi"ed
place of business where the enterprise is wholly or partly
carried on. Jowe!er# e!en if there is no fi"ed place of
business# an enterprise of a *ontracting State is deemed to
ha!e a permanent establishment in the other *ontracting
State if it carries on super!isory acti!ities in that other State
2&
for more than M months in connection with a construction#
installation or assembly pro(ect which is being underta&en in
that other State.
"------------------------------------"
*. NON1STOCE CORPORATIONS
*.1 D";$,$)$., (C.#4.#a)$., C.+" 62)
4or the purposes of this *ode# a non-stoc& corporation is
one where no part of its income is distributable as di!idends
to its members# trustees# or officers# sub(ect to the pro!isions
of this *ode on dissolution/ Pro!ided# .hat any profit which a
non-stoc& corporation may obtain as an incident to its
operations shall# whene!er necessary or proper# be used for
the furtherance of the purpose or purposes for which the
corporation was organied# sub(ect to the pro!isions of this
.itle.
.he pro!isions go!erning stoc& corporation# when pertinent#
shall be applicable to non-stoc& corporations# e"cept as may
be co!ered by specific pro!isions of this .itle.
*.2 P(#4.%"% (C.#4.#a)$., C.+" 66)
)on-stoc& corporations may be formed or organied for
charitable# religious# educational# professional# cultural#
fraternal# literary# scientific# social# ci!ic ser!ice# or similar
purposes# li&e trade# industry# agricultural and li&e chambers#
or any combination thereof# sub(ect to the special pro!isions
of this .itle go!erning particular classes of non-stoc&
corporations.
*.' F(,+$,9 R"=($#"/",)
S! 6! (o) ,$+,*
S-*.IK) 8. A 54oundation5 is a non-stoc&# non-profit
corporation established for the purpose of e"tending grants
or endowments to support its goals or raising funds to
accomplish charitable# religious# educational# athletic#
cultural# literary# scientific# social welfare or other similar
ob(ecti!es.
S-*.IK) 2. A 4oundation applying for registration with
the *ommission shall# in addition to the re%uirements for
non-stoc&# non-profit corporations# submit the following
documents/
a. )otaried *ertification of 2an& 3eposit of the
amount of not less than Kne Billion Pesos
0P8#???#???.??1$ and
b. Statement of willingness to allow the *ommission to
conduct an audit.
S-*.IK) ,. .he applicant6s corporate name shall
contain the word 54oundation5.
S-*.IK) 4. Hpon the effecti!ity of this *ircular# all
registered 4oundations shall submit# in addition to the
'eneral Information Sheet# its Audited 4inancial Statement
which shall include a sworn Statement of its President and
.reasurer on the following information that relates to the
preceding fiscal year/
a. Source and Amount of 4unds$
b. ProgramFActi!ity planned# ongoing and
accomplished$
i. *omplete name# address and contact number of
pro(ect officer-in-charge$
ii. *omplete address and contact number of
pro(ect office$ and
c. Application of 4unds.
S-*.IK) <. A registered 4oundation shall attach to the
sworn statement mentioned in the immediately preceding
paragraph a *ertification from the Kffice of the Bayor# or the
Kffice of the 2arangay *aptain# or the Jead of either the
3epartment of Social Ielfare and 3e!elopment or
3epartment of Jealth# on the e"istence of the sub(ect
ProgramFActi!ity in the locality on which it e"ercises
(urisdiction.
0
S-*.IK) M. In case a registered 4oundation has not yet
submitted to the *ommission a statement of willingness to
allow the conduct of an audit# it shall attach such statement
when it submits the documents re%uired in Sections 4 and <.
S-*.IK) ;. 4or purposes of the audit to be conducted# a
registered 4oundation shall allow the *ommission6s
representati!es access to its corporate and accounting
boo&s# records# names of beneficiaries# agreements entered
into# correspondences and all pertinent documents for the
preceding fi!e 0<1 years.
S-*.IK) 8. All funds of the 4oundation shall be
deposited in a ban&ing institution regulated by the 2ang&o
Sentral ng Pilipinas.
S-*.IK) :. 4ailure to comply with any of these rules or
any !iolation of the pro!isions hereof shall render the
4oundation liable to pay a fine in an amount that shall be
determined by the *ommission which shall not be less than
.en .housand Pesos 0P8?#???.??1. In case the 4oundation
fails to submit the re%uired documents for two 021
consecuti!e years# the *ommission may# after due notice
and hearing# re!o&e the registration of the 4oundation. .he
penalties enumerated herein shall be without pre(udice to
whate!er other legal action may be a!ailable under e"isting
laws.
*.* Ex"/4)$.,% ;#./ )ax ., C.#4.#a)$.,% $, G","#a!
(IR! 3,
.he following organiations shall not be ta"ed under this
.itle in respect to income recei!ed by them as such/
0A1 Eabor# agricultural or horticultural organiation not
organied principally for profit$
021 Butual sa!ings ban& not ha!ing a capital stoc&
represented by shares# and cooperati!e ban& without
capital stoc& organied and operated for mutual
purposes and without profit$
0*1 A beneficiary society# order or association# operating fort
he e"clusi!e benefit of the members such as a fraternal
organiation operating under the lodge system# or
mutual aid association or a nonstoc& corporation
organied by employees pro!iding for the payment of
life# sic&ness# accident# or other benefits e"clusi!ely to
the members of such society# order# or association# or
nonstoc& corporation or their dependents$
031 *emetery company owned and operated e"clusi!ely for
the benefit of its members$
0-1 )onstoc& corporation or association organied and
operated e"clusi!ely for religious# charitable# scientific#
athletic# or cultural purposes# or for the rehabilitation of
!eterans# no part of its net income or asset shall belong
to or inures to the benefit of any member# organier#
officer or any specific person$
041 2usiness league chamber of commerce# or board of
trade# not organied for profit and no part of the net
income of which inures to the benefit of any pri!ate
stoc&-holder# or indi!idual$
0'1 *i!ic league or organiation not organied for profit but
operated e"clusi!ely for the promotion of social welfare$
0J1 A nonstoc& and nonprofit educational institution$
0I1 'o!ernment educational institution$
0>1 4armers6 or other mutual typhoon or fire insurance
company# mutual ditch or irrigation company# mutual or
cooperati!e telephone company# or li&e organiation of a
purely local character# the income of which consists
solely of assessments# dues# and fees collected from
members for the sole purpose of meeting its e"penses$
and
0G1 4armers6# fruit growers6# or li&e association organied
1
and operated as a sales agent for the purpose of
mar&eting the products of its members and turning bac&
to them the proceeds of sales# less the necessary selling
e"penses on the basis of the %uantity of produce
finished by them$
)otwithstanding the pro!isions in the preceding paragraphs#
the income of whate!er &ind and character of the foregoing
organiations from any of their properties# real or personal#
or from any of their acti!ities conducted for profit regardless
of the disposition made of such income# shall be sub(ect to
ta" imposed under this *ode.
*.0 N.,1%).&A ,.,14#.;$) C.#4.#a)$., .# O#9a,$Fa)$.,
(IR! 3,() @ (5)A 3#(B)(0)(c)
0-1 )onstoc& corporation or association organied and
operated e"clusi!ely for religious# charitable# scientific#
athletic# or cultural purposes# or for the rehabilitation of
!eterans# no part of its net income or asset shall belong
to or inures to the benefit of any member# organier#
officer or any specific person$
0'1 *i!ic league or organiation not organied for profit but
operated e"clusi!ely for the promotion of social welfare$
021 *ontributions 3eductible in 4ull. - )otwithstanding the
pro!isions of the preceding subparagraph# donations to
the following institutions or entities shall be deductible in
full$
A A A
0c1 3onations to Accredited )ongo!ernment
Krganiations. - .he term 5nongo!ernment
organiation5 means a non profit domestic
corporation/
081 Krganied and operated e"clusi!ely for
scientific# research# educational# character-
building and youth and sports de!elopment#
health# social welfare# cultural or charitable
purposes# or a combination thereof# no part of
the net income of which inures to the benefit of
any pri!ate indi!idual$
021 Ihich# not later than the 8<th day of the third
month after the close of the accredited
nongo!ernment organiations ta"able year in
which contributions are recei!ed# ma&es
utiliation directly for the acti!e conduct of the
acti!ities constituting the purpose or function for
which it is organied and operated# unless an
e"tended period is granted by the Secretary of
4inance in accordance with the rules and
regulations to be promulgated# upon
recommendation of the *ommissioner$
0,1 .he le!el of administrati!e e"pense of which
shall# on an annual basis# conform with the rules
and regulations to be prescribed by the
Secretary of 4inance# upon recommendation of
the *ommissioner# but in no case to e"ceed
thirty percent 0,?=1 of the total e"penses$ and
041 .he assets of which# in the e!en of dissolution#
would be distributed to another nonprofit
domestic corporation organied for similar
purpose or purposes# or to the state for public
purpose# or would be distributed by a court to
another organiation to be used in such manner
as in the (udgment of said court shall best
accomplish the general purpose for which the
dissol!ed organiation was organied.
Sub(ect to such terms and conditions as may be
prescribed by the Secretary of 4inance# the term
5utiliation5 means/
0i1 Any amount in cash or in &ind 0including
administrati!e e"penses1 paid or utilied to
accomplish one or more purposes for which the
accredited nongo!ernment organiation was
2
created or organied.
0ii1 Any amount paid to ac%uire an asset used 0or
held for use1 directly in carrying out one or more
purposes for which the accredited
nongo!ernment organiation was created or
organied.
An amount set aside for a specific pro(ect which
comes within one or more purposes of the
accredited nongo!ernment organiation may be
treated as a utiliation# but only if at the time such
amount is set aside# the accredited nongo!ernment
organiation has established to the satisfaction of
the *ommissioner that the amount will be paid for
the specific pro(ect within a period to be prescribed
in rules and regulations to be promulgated by the
Secretary of 4inance# upon recommendation of the
*ommissioner# but not to e"ceed fi!e 0<1 years# and
the pro(ect is one which can be better accomplished
by setting aside such amount than by immediate
payment of funds.
*.3 R"=($#"/",) ., U)$!$Fa)$., .; D.,a)$.,%
(IR! 3#(B)(0)(c)(0)
021 Ihich# not later than the 8<th day of the third month
after the close of the accredited nongo!ernment
organiations ta"able year in which contributions are
recei!ed# ma&es utiliation directly for the acti!e conduct
of the acti!ities constituting the purpose or function for
which it is organied and operated# unless an e"tended
period is granted by the Secretary of 4inance in
accordance with the rules and regulations to be
promulgated# upon recommendation of the
*ommissioner$
Sub(ect to such terms and conditions as may be prescribed
by the Secretary of 4inance# the term 5utiliation5 means/
0i1 Any amount in cash or in &ind 0including administrati!e
e"penses1 paid or utilied to accomplish one or more
purposes for which the accredited nongo!ernment
organiation was created or organied.
0ii1 Any amount paid to ac%uire an asset used 0or held for
use1 directly in carrying out one or more purposes for
which the accredited nongo!ernment organiation was
An amount set aside for a specific pro(ect which comes
within one or more purposes of the accredited
nongo!ernment organiation may be treated as a utiliation#
but only if at the time such amount is set aside# the
accredited nongo!ernment organiation has established to
the satisfaction of the *ommissioner that the amount will be
paid for the specific pro(ect within a period to be prescribed
in rules and regulations to be promulgated by the Secretary
of 4inance# upon recommendation of the *ommissioner# but
not to e"ceed fi!e 0<1 years# and the pro(ect is one which can
be better accomplished by setting aside such amount than
by immediate payment of funds.
*.2 B",";$) .; R"9$%)#a)$.,: +"+(&)$., & $)% !$/$)%
(IR! 3#(B) (1) @ (0)
081 In 'eneral. - *ontributions or gifts actually paid or made
within the ta"able year to# or for the use of the
'o!ernment of the Philippines or any of its agencies or
any political subdi!ision thereof e"clusi!ely for public
purposes# or to accredited domestic corporation or
associations organied and operated e"clusi!ely for
religious# charitable# scientific# youth and sports
de!elopment# cultural or educational purposes or for the
rehabilitation of !eterans# or to social welfare institutions#
or to non-go!ernment organiations# in accordance with
rules and regulations promulgated by the Secretary of
finance# upon recommendation of the *ommissioner# no
part of the net income of which inures to the benefit of
any pri!ate stoc&holder or indi!idual in an amount not in
e"cess of ten percent 08?=1 in the case of an indi!idual#
and fi!e percent 0=1 in the case of a corporation# of the

ta"payer6s ta"able income deri!ed from trade# business
or profession as computed without the benefit of this and
the following subparagraphs.
021 *ontributions 3eductible in 4ull. - )otwithstanding the
pro!isions of the preceding subparagraph# donations to
the following institutions or entities shall be deductible in
full$
0a1 3onations to the 'o!ernment. - 3onations to the
'o!ernment of the Philippines or to any of its
agencies or political subdi!isions# including fully-
owned go!ernment corporations# e"clusi!ely to
finance# to pro!ide for# or to be used in underta&ing
priority acti!ities in education# health# youth and
sports de!elopment# human settlements# science
and culture# and in economic de!elopment according
to a )ational Priority Plan determined by the
)ational -conomic and 3e!elopment Authority
0)-3A1# In consultation with appropriate go!ernment
agencies# including its regional de!elopment
councils and pri!ate philantrophic persons and
institutions/ Pro!ided# .hat any donation which is
made to the 'o!ernment or to any of its agencies or
political subdi!isions not in accordance with the said
annual priority plan shall be sub(ect to the limitations
prescribed in paragraph 081 of this Subsection$
0b1 3onations to *ertain 4oreign Institutions or
International Krganiations. - 3onations to foreign
institutions or international organiations which are
fully deductible in pursuance of or in compliance with
agreements# treaties# or commitments entered into
by the 'o!ernment of the Philippines and the foreign
institutions or international organiations or in
pursuance of special laws$
corporation/
081 Krganied and operated e"clusi!ely for
scientific# research# educational# character-
building and youth and sports de!elopment#
health# social welfare# cultural or charitable
purposes# or a combination thereof# no part of
the net income of which inures to the benefit of
any pri!ate indi!idual$
021 Ihich# not later than the 8<th day of the third
month after the close of the accredited
nongo!ernment organiations ta"able year in
which contributions are recei!ed# ma&es
utiliation directly for the acti!e conduct of the
acti!ities constituting the purpose or function for
which it is organied and operated# unless an
e"tended period is granted by the Secretary of
4inance in accordance with the rules and
regulations to be promulgated# upon
0,1 .he le!el of administrati!e e"pense of which
shall# on an annual basis# conform with the rules
and regulations to be prescribed by the
Secretary of 4inance# upon recommendation of
the *ommissioner# but in no case to e"ceed
thirty percent 0,?=1 of the total e"penses$ and
would be distributed to another nonprofit
domestic corporation organied for similar
purpose or purposes# or to the state for public
purpose# or would be distributed by a court to
another organiation to be used in such manner
as in the (udgment of said court shall best
accomplish the general purpose for which the
dissol!ed organiation was organied.
5utiliation5 means/
!
organied.
treated as a utiliation# but only if at the time such
amount is set aside# the accredited nongo!ernment
organiation has established to the satisfaction of
the *ommissioner that the amount will be paid for
the specific pro(ect within a period to be prescribed
in rules and regulations to be promulgated by the
*ommissioner# but not to e"ceed fi!e 0<1 years# and
the pro(ect is one which can be better accomplished
by setting aside such amount than by immediate
payment of funds.
*.6 R"=($#"/",) .; R"9$%)#a)$., .; D.,"" I,%)$)()$.,%
RR (o) 13+9$
S-*.IK) 2. Accreditation of non-stoc&# non-profit
corporationsF)'Ks by the Accrediting -ntity. R
a1 .he Accrediting -ntity shall e"amine# e!aluate and
accredit non-stoc&# non-profit corporations and )'Ks as
a pre-re%uisite for their registration with the 2IR as
%ualified-donee institutions under Section ,4 0J1081 and
0210c1 of the .a" *ode.
0b1 )ewly-organied and e"isting non-stoc&# non-profit
corporations and )'Ks shall apply with the Accrediting
-ntity for accreditation and submit to a process of
e"amination and e!aluation. .he application for
accreditation shall be accompanied by the following
documents/
0i1 Articles of Incorporation and 2y-laws$
0ii1 *ertificate of Registration with the Securities and
-"change *ommission$
0iii1 Affida!it of Bodus Kperandi showing/
8. the character of the organiation$
2. the purpose for which it is organied$
,. the lists of pro(ectsFacti!ities for the past two 021
years# or list of proposed pro(ectsFacti!ities for
the first two 021 years of operations for newly-
organied non-stoc&# non-profit corporationsF
)'Ks$
4. the source of income and the utiliation thereof#
or target fund sources for newly-organied non-
stoc&# non-profit corporationsF)'Ks$ and
<. other facts relating to their operations which are
rele!ant to their %ualification as donee institutions$
0i!1 3uly audited financial statements for the past two 021
years showing the assets# liabilities# receipts and
disbursements of e"isting organiations# or financial
pro(ections for the first two 021 years for newly-
organied non-stoc&# non-profit corporationsF)'Ks.
0c1 .he Accrediting -ntity shall e!aluate and accredit non-
stoc&# non-profit corporationsF)'Ks using the following
ma(or criteria/
0i1 Bission and 'oals
.he mission and goals of the non-stoc&# non-profit
corporationF)'K should (ustify its e"istence.
Statements of mission and goals shall ser!e as
guideposts for its planning and operations and a
framewor& for decision-ma&ing.
0ii1 Resources
.he criterion focuses on the ade%uacy of the
resources and the effecti!eness of the structure and
systems of the non-stoc&# non-profit
corporationF)'K. Areas that should be e!aluated
"
under this criterion include the organiation
structure# human# financial and physical resources.
-!aluation shall ta&e into account the names#
positions and %ualifications of the indi!iduals or
committee members who manage and ma&e
decisions for the non-stoc&# non-profit
corporationF)'K# its sources of funds and
distribution of financial resources# and the following
e"hibits at the time of e"amination# among others/
8. Binutes of the 2oard meetings
2. .able of organiation$
,. Policy Banual# if any$
4. Personnel Banual# if any$
<. 2udget for the past two 021 years# or proposed
pro(ects for the first two 021 years of operations
for newly-organied non-stoc&# non-profit
corporationsF)'Ks$ and
M. Audited financial statements for the past two
years for e"isting non-stoc&# non-profit
corporationsF)'Ks.
0iii1 Program Implementation and -!aluation
.he non-stoc&# non-profit corporationF)'K must
demonstrate that it is effecti!ely using its resources
to accomplish the purposes for which it was created.
.here should be clearly defined policies# priorities
and guidelines for implementing the !arious
programs and pro(ects. -!aluation shall consider
programs and pro(ects implemented within the last
two years$ description of how its
programsFpro(ectsFser!ices are managed$ how the
following procedures are carried out$ record &eeping#
monitoring# e!aluating and contingency planning$
programsFpro(ects !is-a-!is the needs and priorities
of its beneficiaries$ the present documentation or
results of e!aluation and pro!isions for ade%uate
training# people participation# de!elopment of
leaders and e!entual self-sufficiency.
0i!1 Planning for the 4uture
.he non-stoc&# non-profit corporationF)'K must
pro!ide e!idence that it has the capability to plan#
implement and monitor its programs and pro(ects.
-!aluation shall pro!ide e!idence that the non-profit
corporationF)'K has mechanisms for planning#
implementing and monitoring its programs and
pro(ects and for ensuring the continuity of
programsFpro(ects e!en when e"ternal funding has
ceased. -!aluation shall also rely on the
presentation of the following e"hibits at the time of
!isit/
8. Krganiational plan
2. Bonitoring and e!aluation tools
0d1 .he Secretary of 4inance# upon the recommendation of
the 2oard of .rustees of the Accrediting -ntity can wai!e
the submission of duly audited financial statements for
newly-organied non-stoc&# non-profit corporationsF
)'Ks which ha!e been organied to carry out programs
of national significance# e.g. foundation to build the
)ational Buseum. .hey shall be eligible to apply for a
three 0,1-year probationary accreditation and registration
as %ualified donee institutions with the Accrediting -ntity.
0e1 -"isting non-stoc&# non-profit corporationsF)'Ks which
ha!e %ualified as donee institutions under 2IR-)-3A
Regulations 8-88# as amended # shall ha!e three 0,1
years beginning the effecti!ity of these rules and
regulations within which to secure a *ertificate of
Accreditation from the Accrediting -ntity. 4ailure by the
said non-stoc&# non-profit corporationsF)'Ks to secure
accreditation within the three-year period shall be a
ground for the cancellation by the 2IR of their
*ertificates of Registration as %ualified-donee
institutions/ Pro!ided# howe!er# .hat donations and
contributions to the said non-stoc&# non-profit
corporationsF)'Ks during the three-year period shall
still be allowed as deductible e"pense on the part of the
donors sub(ect to the pro!isions of Sec. 4 of these
Regulations/ Pro!ided# further# .hat after the three-year
period# only donations and contributions to non-stoc&#
non-profit corporationsF)'Ks which ha!e been
accredited under these Regulations# shall be allowed as
deductible e"pense on the part of the donors. EEpr
0f1 .he Accrediting -ntity shall issue a *ertificate of
#
Accreditation to a non-stoc&# non-profit corporationF)'K
upon determination that it meets the criteria for
accreditation$ Pro!ided# that the *ertificate of
Accreditation shall be !alid for a ma"imum period of fi!e
0<1 years for e"isting non-stoc&# non-profit
corporationsF)'Ks and three 0,1 years for newly-
organied non-stoc&# non-profit corporationsF)'Ks.
0g1 .he Accrediting -ntity shall deny the applications of any
non-stoc&# non-profit corporationF)'K which does not
meet the criteria for accreditation. .he Pri!ate
Accrediting -ntity shall notify the non-stoc&# non-profit
corporationF)'K of the denial of the application# the
reasons therefor# and the e!aluators6 recommendation in
order that the non-stoc&# non-profit corporationF)'K
may meet the criteria for accreditation. A non-stoc&# non-
profit corporationF)'K whose application for
accreditation has been denied by the Pri!ate Accrediting
-ntity shall ha!e one 081 year within which to implement
the e!aluator6s recommendations. After the one-year
implementation period# the non-stoc&# non-profit
corporationF)'K may re-apply for accreditation.
0h1 .he Secretary of 4inance and the *ommissioner of
Internal Re!enue shall o!ersee# monitor and coordinate
with the Accrediting -ntity to ensure that the pro!isions
of these Regulations are complied with.
" (o) %0, (April 11, 0,,$)
.o ac%uire donee institution status# an )'K must first
recei!e certification from the Philippine *ouncil for )'K
*ertification 0P*)*1# an accrediting entity# on the basis of
which the 2ureau of Internal Re!enue will issue the
*ertification of Registration as a 7ualified 3onee Institution.
Hnder a prior e"ecuti!e order# se!eral go!ernment agencies#
including the 3epartment of Science and .echnology
03oS.1# the 3epartment of Social Ielfare and 3e!elopment
03SI31# and the *ommission on Jigher -ducation 0*J-31#
were responsible for accrediting %ualified donee institutions.
.he rele!ant agency depended on the focus area of the
donee.
RR (o) ,0+,3 13(!)
4iling Kf Returns And Payment Kf 3onor6s .a". R
0A1 Re%uirements. R Any person ma&ing a donation
0whether direct or indirect1# unless the donation is
specifically e"empt under the *ode or other special
laws# is re%uired# for e!ery donation# to accomplish
under oath a donor6s ta" return in duplicate. .he return
shall set forth/
081 -ach gift made during the calendar year which is to
be included in computing net gifts$
021 .he deductions claimed and allowable$
0,1 Any pre!ious net gifts made during the same
calendar year#
041 .he name of the donee$
0<1 Relationship of the donor to the donee$ and
0M1 Such further information as the *ommissioner may
re%uire.
021 .ime and place of filing and payment. R .he donor6s ta"
return shall be filed within thirty 0,?1 days after the date
the gift is made or completed and the ta" due thereon
shall be paid at the same time that the return is filed.
Hnless the *ommissioner otherwise permits# the return
shall be filed and the ta" paid to an authoried agent
ban&# the Re!enue 3istrict Kfficer# Re!enue *ollection
Kfficer or duly authoried .reasurer of the city or
municipality where the donor was domiciled at the time
of the transfer# or if there be no legal residence in the
Philippines# with the Kffice of the *ommissioner. In the
case of gifts made by a non-resident# the return may be
filed with the Philippine -mbassy or *onsulate in the
country where he is domiciled at the time of the transfer#
or directly with the Kffice of the *ommissioner. 4or this
purpose# the term 5K44I*- K4 .J- *KBBISSIK)-R5
shall refer to the Re!enue 3istrict Kffice 0R3K1 ha!ing
(urisdiction o!er the 2IR-)ational Kffice 2uilding which
houses the Kffice of the *ommissioner# or presently# to
the Re!enue 3istrict Kffice )o. ,: R South 7ueon
*ity.
$
0*1 )otice of donation by a donor engaged in business. R In
order to be e"empt from donor6s ta" and to claim full
deduction of the donation gi!en to %ualified donee
institutions duly accredited by the Philippine *ouncil for
)'K *ertification# Inc. 0P*)*1# the donor engaged in
business shall gi!e a notice of donation on e!ery
donation worth at least 4ifty .housand Pesos 0P<?#???1
to the Re!enue 3istrict Kffice 0R3K1 which has
(urisdiction o!er his place of business within thirty 0,?1
days after receipt of the %ualified donee institution6s duly
issued *ertificate of 3onation# which shall be attached to
the said )otice of 3onation# stating that not more than
thirty percent 0,?=1 of the said donationFgifts for the
ta"able year shall be used by such accredited non-stoc&#
non-profit corporationF)'K institution 0%ualified-donee
institution1 for administration purposes pursuant to the
pro!isions of Section 8?80A10,1 and 021021 of the *ode.
*.5 L$a$!$)- ;.# GAT
-IR Ruling (o) 8A+,3#+,% (.iga1a ng /anginoon Foundation)
.his refers to your letter dated August 2# 2??M# in effect
re%uesting for an opinion that Eigaya ng Panginoon
4oundation# Inc.# a non-stoc&# non-profit domestic
corporation accredited by the Philippine *ouncil for )'K
*ertification 0P*)*1 as a donee institution is e"empt from
!alue-added ta" 0@A.1.
In reply# please be informed that Section 8?< of the .a"
*ode of 8::; pro!ides that any person who# in the course of
trade or business# sells# barters# e"changes# leases goods or
properties# renders ser!ices# and any person who imports
goods shall be sub(ect to the !alue-added 0@A.1 imposed in
Sections 8?M to 8?8 of the same *ode.
.he phrase 5in the course of trade or business5 means the
regular conduct or pursuit of a commercial or an economic
acti!ity# including transactions incidental thereto# by any
person regardless of whether or not the person engaged
therein is a non-stoc&# non-profit pri!ate organiation
0irrespecti!e of the disposition of its net income and whether
or not it sells e"clusi!ely to members or their guests1# or
go!ernment entity.
Accordingly# if Eigaya ng Panginoon 4oundation# Inc. is
engaged in the sale of goods or ser!ices in the course of a
business pursuit# including transactions incidental thereto# in
general# it shall also be liable for @A. 02IR Ruling )o. S,?-
2;-2??, dated )o!ember 28# 2??, W 3A-?4,-2??4 dated
4ebruary 4# 2??41.
Boreo!er# any ta" e"emption granted to it as a non-stoc&#
non-profit corporation under Section ,? of the .a" *ode of
8::; co!ers only income ta"es for which it is directly liable. It
should be noted that @A. is an indirect ta" payable by the
seller and not by the purchaser of goods. Jowe!er# being an
indirect ta"# it can be shifted or passed on to the
buyerFpurchaser# transferee or lessee of the goods#
properties or ser!ices. Knce shifted to the buyerFcustomer
as an addition to the cost of goods or ser!ices sold# it is no
longer a ta" but an additional cost which the buyerFcustomer
has to pay in order to obtain the goods or ser!ices.
.hus# the shifting of the @A. does not ma&e Eigaya ng
Panginoon 4oundation# Inc. the person directly liable and
therefore# you cannot in!o&e your ta" e"emption pri!ilege
under Section ,? of the .a" *ode of 8::; to a!oid the
passing on or shifting of the @A..
Re!enue from contributions and donations# not being
deri!ed from sale of ser!ices or sale of goods made in the
course of business but rather in connection with its non-
stoc&# non-profit acti!ities# is e"empt from the 82= 0then
8?=1 @A.. Jowe!er# the abo!e e"emption from the 82=
@A. does not e"tend to its purchase of goods or properties
or ser!ices and importation of goods. Jence#
notwithstanding that it is a non-stoc&# non-profit corporation#
its purchase of goods or properties or ser!ices and
importation of goods shall ne!ertheless be sub(ect to the
82= @A. pursuant to Section 8?; of the said *ode
"------------------------------------"
%
0. LOCAL BUSINESS TAXES
0.1 S&.4" .; Tax$,9 P.<"#%
<.8.8 Bunicipality 0E'* +8421
-"cept as otherwise pro!ided in this *ode# municipalities
may le!y ta"es# fees# and charges not otherwise le!ied by
pro!inces.
<.8.2 *ity 0E'* +8<81
-"cept as otherwise pro!ided in this *ode# the city# may le!y
the ta"es# fees# and charges which the pro!ince or
municipality may impose/ Pro!ided# howe!er# .hat the ta"es#
fees and charges le!ied and collected by highly urbanied
and independent component cities shall accrue to them and
distributed in accordance with the pro!isions of this *ode.
.he rates of ta"es that the city may le!y may e"ceed the
ma"imum rates allowed for the pro!ince or municipality by
not more than fifty percent 0<?=1 e"cept the rates of
professional and amusement ta"es.
0.2 B(%$,"%% Tax"%
<.2.8 2asic .a"es 0E'* +84,1
.he municipality may impose ta"es on the following
businesses/
0a1 Kn manufacturers# assemblers# repac&ers# processors#
brewers# distillers# rectifiers# and compounders of
li%uors# distilled spirits# and wines or manufacturers of
any article of commerce of whate!er &ind or nature# in
accordance with the following schedule/ Iith gross
sales or receipts for the Amount of .a" preceding
calendar year in the amount of/
Per Annum
Eess than 8?#???.?? 8M<.??
P 8?#???.?? or more but less than 8<#???.??
8<#???.?? or more but less than 2?#???.??
2?#???.?? or more but less than ,?#???.??
,?#???.?? or more but less than
4?#???.?? MM?.?? 4?#???.?? or more but less than
<?#???.?? 82<.?? <?#???.?? or more but less than ;<#???.??
8#,2?.??
;<#???.?? or more but less than 8??#???.?? 8#M<?.??
8??#???.?? or more but less than 8<?#???.?? 2#2??.??
8<?#???.?? or more but less than 2??#???.?? 2#;<?.??
2??#???.?? or more but less than ,??#???.?? ,#8<?.??
,??#???.?? or more but less than <??#???.?? <#<??.??
<??#???.?? or more but less than ;<?#???.?? 8#???.??
;<?#???.?? or more but less than 8#???#???.?? 8?#???.??
8#???#???.?? or more but less than 2#???#???.?? 8,#;<?.??
2#???#???.?? or more but less than ,#???#???.?? 8M#<??.??
,#???#???.?? or more but less than 4#???#???.?? 8:#8??.??
4#???#???.?? or more but less than <#???#???.?? 2,#8??.??
<#???#???.?? or more but less than M#<??#???.?? 24#,;<.??
M#<??#???.?? or more at a rate not e"ceeding thirty-se!en and a
half percent 0,; 8F2=1 of one percent 08=1
0b1 Kn wholesalers# distributors# or dealers in any article of
commerce of whate!er &ind or nature in accordance with
the following schedule/ Iith gross sales or receipts for
the Amount of .a" preceding calendar year in the
amount of/

Per Annum
Eess than P8#???.?? 88.??
P 8#???.?? or more but less than P 2#???.?? ,,.??
2#???.?? or more but less than ,#???.?? <?.??
,#???.?? or more but less than 4#???.?? ;2.??
4#???.?? or more but less than <#???.?? 8??.??
<#???.?? or more but less than M#???.?? 828.??
M#???.?? or more but less than ;#???.?? 84,.??
;#???.?? or more but less than 8#???.?? 8M<.??
8#???.?? or more but less than 8?#???.?? 88;.??
8?#???.?? or more but less than 8<#???.?? 22?.??
8<#???.?? or more but less than 2?#???.?? 2;<.??
2?#???.?? or more but less than ,?#???.?? ,,?.??
,?#???.?? or more but less than 4?#???.?? 44?.??
&
4?#???.?? or more but less than <?#???.?? MM?.??
<?#???.?? or more but less than ;<#???.?? ::?.??
;<#???.?? or more but less than 8??#???.?? 8,2?.??
8??#???.?? or more but less than 8<?#???.?? 88;?.??
8<?#???.?? or more but less than 2??#???.?? 242?.??
2??#???.?? or more but less than ,??#???.?? ,,??.??
,??#???.?? or more but less than <??#???.?? 44??.??
<??#???.?? or more but less than ;<?#???.?? MM??.??
;<?#???.?? or more but less than 8#???#???.?? 88??.??
8#???#???.?? or more but less than 2#???#???.?? 8????.??
2#???#???.?? or more at a rate not e"ceeding fifty percent
0<?=1 of one percent 08=1.
0c1 Kn e"porters# and on manufacturers# millers# producers#
wholesalers# distributors# dealers or retailers of essential
commodities enumerated hereunder at a rate not
e"ceeding one-half 08F21 of the rates prescribed under
subsections 0a1# 0b1 and 0d1 of this Section/

081 Rice and corn$
021 Iheat or cassa!a flour# meat# dairy products# locally
manufactured# processed or preser!ed food# sugar#
salt and other agricultural# marine# and fresh water
products# whether in their original state or not$
0,1 *oo&ing oil and coo&ing gas$
041 Eaundry soap# detergents# and medicine$
0<1 Agricultural implements# e%uipment and post-
har!est facilities# fertiliers# pesticides# insecticides#
herbicides and other farm inputs$
0M1 Poultry feeds and other animal feeds$
0;1 School supplies$ and
081 *ement.
0d1 Kn retailers# Iith gross sales or receipts Rate of ta" for
the preceding calendar year of/
Per annum
P4??#???.?? or less 2=
more than P4??#???.?? 8=
Pro!ided# howe!er# .hat barangays shall ha!e the
e"clusi!e power to le!y ta"es# as pro!ided under Section
8<2 hereof# on gross sales or receipts of the preceding
calendar year of 4ifty thousand pesos 0PX<?#???.??1 or
less# in the case of cities# and .hirty thousand pesos
0PX,?#???.??1 or less# in the case of municipalities.
0e1 Kn contractors and other independent contractors# in
accordance with the following schedule/
Iith gross receipts for the preceding calendar year in
the amount of/

Amount of .a" Per Annum
Eess than PX <#???.?? 2;.<?
P <#???.?? or more but less than P 8?#???.?? M8.M?
8?#???.?? or more but less than 8<#???.?? 8?4.<?
8<#???.?? or more but less than 2?#???.?? 8M<.??
2?#???.?? or more but less than ,?#???.?? 2;<.??
,?#???.?? or more but less than 4?#???.?? ,8<.??
4?#???.?? or more but less than <?#???.?? <<?.??
<?#???.?? or more but less than ;<#???.?? 88?.??
;<#???.?? or more but less than 8??#???.?? 8,2?.??
8??#???.?? or more but less than 8<?#???.?? 8:8?.??
8<?#???.?? or more but less than 2??#???.?? 2M4?.??
2??#???.?? or more but less than 2<?#???.?? ,M,?.??
2<?#???.?? or more but less than ,??#???.?? 4M2?.??
,??#???.?? or more but less than 4??#???.?? M8M?.??
4??#???.?? or more but less than <??#???.?? 82<?.??
<??#???.?? or more but less than ;<?#???.?? :2<?.??
;<?#???.?? or more but less than 8#???#???.?? 8?2<?.??
8#???#???.?? or more but less than 2#???#???.?? 88<??.??
2#???#???.?? or more at a rate not e"ceeding fifty percent
0<?=1 of one percent 08=1
!0
0f1 Kn ban&s and other financial institutions# at a rate not
e"ceeding fifty percent 0<?=1 of one percent 08=1 on the
gross receipts of the preceding calendar year deri!ed
from interest# commissions and discounts from lending
acti!ities# income from financial leasing# di!idends#
rentals on property and profit from e"change or sale of
property# insurance premium.
0g1 Kn peddlers engaged in the sale of any merchandise or
article of commerce# at a rate not e"ceeding 4ifty pesos
0P<?.??1 per peddler annually.
0h1 Kn any business# not otherwise specified in the
preceding paragraphs# which the sanggunian concerned
may deem proper to ta"/ Pro!ided# .hat on any business
sub(ect to the e"cise# !alue-added or percentage ta"
under the )ational Internal Re!enue *ode# as amended#
the rate of ta" shall not e"ceed two percent 02=1 of
gross sales or receipts of the preceding calendar year.
.he sanggunian concerned may prescribe a schedule of
graduated ta" rates but in no case to e"ceed the rates
prescribed herein.
<.2.2 .a" Rate in Betro Banila 0E'* +8441
.he municipalities within the Betropolitan Banila Area may
le!y ta"es at rates which shall not e"ceed by fifty percent
0<?=1 the ma"imum rates prescribed in the preceding
Section.
<.2., Payment 0E'* +84M1
0a1 .he ta"es imposed under Section 84, shall be payable
for e!ery separate or distinct establishment or place
where business sub(ect to the ta" is conducted and one
line of business does not become e"empt by being
conducted with some other business for which such ta"
has been paid. .he ta" on a business must be paid by
the person conducting the same.
0b1 In cases where a person conducts or operates two 021 or
more of the businesses mentioned in Section 84, of this
*ode which are sub(ect to the same rate of ta"# the ta"
shall be computed on the combined total gross sales or
receipts of the said two 021 or more related businesses.
0c1 In cases where a person conducts or operates two 021 or
more businesses mentioned in Section 84, of this *ode
which are sub(ect to different rates of ta"# the gross
sales or receipts of each business shall be separately
reported for the purpose of computing the ta" due from
each business.
<.2.4 Situs and Allocation
.5! 19,
0a1 4or purposes of collection of the ta"es under Section
84, of this *ode# manufacturers# assemblers# repac&ers#
brewers# distillers# rectifiers and compounders of li%uor#
distilled spirits and wines# millers# producers# e"porters#
wholesalers# distributors# dealers# contractors# ban&s
and other financial institutions# and other businesses#
maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales
outlet ma&ing the sale or transaction# and the ta"
thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located. In cases
where there is no such branch or sales outlet in the city
or municipality where the sale or transaction is made#
the sale shall be duly recorded in the principal office and
the ta"es due shall accrue and shall be paid to such city
or municipality.
0b1 .he following sales allocation shall apply to
manufacturers# assemblers# contractors# producers# and
e"porters with factories# pro(ect offices# plants# and
plantations in the pursuit of their business/
081 .hirty percent 0,?=1 of all sales recorded in the
principal office shall be ta"able by the city or
municipality where the principal office is located$ and
021 Se!enty percent 0;?=1 of all sales recorded in the
!1
principal office shall be ta"able by the city or city or
municipality where the factory is located$ and
0,1 4orty percent 04?=1 to the city ormunicipality where
the plantation is located.
0c1 In cases where a manufacturer# assembler# producer#
e"porter or contractor has two 021 or more factories#
pro(ect offices# plants# or plantations located in different
localities# the se!enty percent 0;?=1 sales allocation
mentioned in subparagraph 0b1 of subsection 021 abo!e
shall be prorated among the localities where the
factories# pro(ect offices# plants# and plantations are
located in proportion to their respecti!e !olumes of
production during the period for which the ta" is due.
0d1 .he foregoing sales allocation shall be applied
irrespecti!e of whether or not sales are made in the
locality where the factory# pro(ect office# plant# or plan is
located.
A" (o) 0%,, Art) 0#3
0a1 3efinition of .erms -
081 Principal Kffice. - the head or main office of the
business appearing in the pertinent documents
submitted to the Securities and -"change
*ommission# or the 3epartment of .rade and
Industry# or other appropriate agencies# as the case
may be.
.he city or municipality specifically mentioned in the
articles of incorporation of official registration papers
as being the official address of said principal office
shall be considered as the situs thereof.
In case there is a transfer or relocation of the
principal office to another city or municipality# it shall
be the duty of the owner# operator or manager of the
business to gi!e due notice of such transfer or
relocation to the local chief e"ecuti!es of the cities or
municipalities concerned within fifteen 08<1 days
after such transfer or relocation is effected.
021 2ranch or Sales Kffice - a fi"ed place in a locality
which conducts operations of the business as an
e"tension of the principal office. Kffices used only as
display areas of the products where no stoc&s or
items are stored for sale# although orders for the
products may be recei!ed thereat# are not branch or
sales offices as herein contemplated. A warehouse
which accepts orders andFor issues sales in!oices
independent of a branch with sales office shall be
considered as a sales office.
0,1 Iarehouse - a building utilied for the storage of
products for sale and from which goods or
merchandise are withdrawn for deli!ery to customers
or dealers# or by persons acting in behalf of the
business. A warehouse that does not accept orders
andFor issue sales in!oices as aforementioned shall
not be considered a branch or sales office.
041 Plantation - a tract of agricultural land planted to
trees or seedlings whether fruit bearing or not#
uniformly spaced or seeded by broadcast methods
or normally arranged to allow highest production. 4or
purposes of this Article# inland fishing ground shall
be considered as plantation.
0<1 -"perimental 4arms - agricultural land utilied by a
business or corporation to conduct studies# tests#
researches or e"periments in!ol!ing agricultural#
agribusiness# marine# or a%uatic# li!estoc&# poultry#
dairy and other similar products for the purpose of
impro!ing the %uality and %uantity of goods or
products.
Kn-site sales of commercial %uantity made in
e"perimental farms shall be similarly imposed the
corresponding ta" under Article 2,, and allocated in
paragraph 0b1 of this Article.
0b1 Sales Allocation -
!2
081 All sales made in a locality where there is a branch or
sales office or warehouse shall be recorded in said
branch or sales office or warehouse and the ta" shall
be payable to the city or municipality where the
same is located.
021 In cases where there is no such branch# sales office#
or warehouse in the locality where the sale is made#
the sale shall be recorded in the principal office
along with the sales made by said principal office
and the ta" shall accrue to the city or municipality
where said principal office is located.
0,1 In cases where there is a factory# pro(ect office# plant
or plantation in pursuit of business# thirty percent
0,?=1 of all sales recorded in the principal office
shall be ta"able by the city or municipality where the
principal office is located and se!enty percent 0;?=1
of all sales recorded in the principal office shall be
ta"able by the city or municipality where the factory#
pro(ect office# plant or plantation is located. E'Hs
where only e"perimental farms are located shall not
entitled to the sales allocation pro!ided in this
subparagraph.
041 In case of a plantation located in a locality other than
that where the factory is located# the se!enty percent
0;?=1 sales allocation shall be di!ided as follows/
0i1 Si"ty percent 0M?=1 to the city or municipality
where the factory is located$ and
0ii1 4orty percent 04?=1 to the city or municipality
where the plantation is located.
0<1 In cases where there are two 021 or more factories#
pro(ect offices# plants or plantations located in
different localities# the se!enty percent 0;?=1 sales
allocation shall be prorated among the localities
where such factories# pro(ect offices# plants# and
plantations are located in proportion to their
respecti!e !olumes of production during the period
for which the ta" is due. In the case of pro(ect offices
of ser!ice and other independent contractors# the
term production shall refer to the cost of pro(ects
actually underta&en during the ta" period.
0M1 .he sales allocation in paragraph 0b1 hereof shall be
applied irrespecti!e of whether or not sales are
made in the locality where the factory# pro(ect office#
plant or plantation is located. In case of sales made
by the factory# pro(ect office# plant or plantation# the
sale shall be co!ered by subparagraphs 081 or 021
abo!e.
0;1 In case of manufacturers or producers which engage
the ser!ices of an independent contractor to produce
or manufacture some of their products# these rules
on situs of ta"ation shall apply e"cept that the
factory or plant and warehouse of the contractor
utilied for the production and storage of the
manufacturers6 products shall be considered as the
factory or plant and warehouse of the manufacturer.
0c1 Port of Eoading - .he city or municipality where the port
of loading is located shall not le!y and collect the ta"
imposable in Article 2,, of this Rule unless the e"porter
maintains in said city or municipality its principal office# a
branch# sales office or warehouse# factory# plant# or
plantation in which case# the rule on the matter shall
apply accordingly.
0d1 Sales made by route truc&s# !ans# or !ehicles -
081 4or route sales made in a locality where a
manufacturer# producer# wholesaler# retailer or
dealer has a branch or sales office or warehouse#
the sale are recorded in the branch# sales office or
warehouse and the ta" due thereon is paid to the
E'H where such branch# sales office or warehouse
is located.
021 4or route sales made in a locality where a
manufacturer# producer# wholesaler# retailer or
dealer has no branch# sales office or warehouse the
sales are recorded in the branch# sales office or
warehouse from where the route truc&s withdraw
!
their products for sale# and the ta" due on such
sales is paid to the E'H where such branch# sales
office or warehouse is located.
0,1 2ased on subparagraphs 081 and 021 abo!e# E'Hs
where route truc&s deli!er merchandise cannot
impose any ta" on said truc&s e"cept the annual
fi"ed ta" authoried to be imposed by the pro!ince in
Article 2,8 of this Rule on e!ery deli!ery truc& or !an
or any motor !ehicle used by manufacturers#
producers# wholesalers# dealers# or retailers# in the
deli!ery or distribution of distilled spirits# fermented
li%uors# soft drin&s# cigars and cigarettes# and other
products as may be determined by the sangguniang
panlalawigan# and by the city# pursuant to Article 22,
of this Rule.
041 In addition to this annual fi"ed ta"# cities may also
collect from same manufacturers# producers#
wholesalers# retailers# and dealers using route truc&s
a mayor6s permit fee which shall be imposed in a
local ta" ordinance pursuant to Article 2,4 in relation
to Article 22, of this Rule.
8"F+-ureau of .5 Finance "pinion 6arc' #, 0,11 (6anila (ort' &ollCa1s)
Indispensable therefore# to the resolution of the issue is the
determination of whether toll plaas# which are strategically
situated along the stretch of the )E-A can be considered as
branch or sales officesFoutlets. Hndeniably# these toll booths
perform functionsFser!ices that the principal or head office
may otherwise perform if not for the impracticality# ta&ing into
consideration the pro"imity of these toll booths in the
entryFe"it points along the e"pressway system. )eedless to
say# toll plaas are !ital installations in carrying out B).*6s
contractual obligations with P)** in the operation of the
)E-A.
2an&ing on the implication of the first sentence of Section
8<? 0a1 of the E'* re%uiring two 021 elements for its
application# namely/ 81 there must be a branch or sales
outlet 5elsewhere5$ and 21 the sale or transaction must be
made in such branch or sale outlet# it is contended that these
are not present in the case of B).*6s operation within the
)E-A.
In support hereto are the following submissions/
81 B).* does not maintain or operate a single branch
office or sales outlet outside of *aloocan *ity.
21 All day to day business acti!ities of B).* are
conducted in its one and only office and the entire
business organiation# senior management# staff#
records# files# computer system ser!ers are housed in its
current office at 2alintawa&# *aloocan *ity.
,1 B).* does not ha!e personnel# records or files
deployed elsewhere.
41 All B).* corporate functions co!ering mar&eting#
accounting# auditing# operations and maintenance
assurance ser!ices# corporate communications# legal
ser!ices# contracts management and procurement#
finance# administrati!e ser!ices# human resource
de!elopment and security are done in the same office.
<1 Kther physical facilities and toll plaas that e"ist in other
areas of the -"pressway do not ha!e separate
organiations and staff# nor do they &eep and maintain
separate sales records# boo&s of account and the li&e.
M1 .oll plaas simply pro!ide support functions and are not
authoried to conduct business nor generate any 5sales5
income on their own.
;1 .he toll plaas are transit tic&et dispensing stations
when the motorist enters the closed system# as well as
!enues for cash payment in the open system. .oll plaas
also house the electronic readers of the -* .a" for
cashless transactions and accept payment for reloading
the stored !alue of the -* .a" in both systems. Some
toll plaas also ha!e weighing stations for enforcement
of truc& o!erloading and storage facilities for e%uipment
and immobilied !ehicles.
@iewed in the light of all the foregoing propositions# it is
concluded that while toll plaas are an essential part of the
automated e"pressway system# they do not ha!e the
capability to earn business income. .oll plaas are neither
branches nor sales outlets citing as basis the second
sentence of Section 8<? 0a1 of the E'*# as follows/ 5In cases
!!
where there is no such branch or sales outlet in the city or
municipality where the sale or transaction is made# the sale
shall be duly recorded in the principal office and the ta"es
due shall accrue and shall be paid to such city or
municipality5.
4rom your contention# toll plaas# although they are essential
parts of the facility do not earn business income. .hey are
only transit tic&et dispensing stations# which among others#
house the electronic readers of the -* .ag for cashless
transactions as well as accept payments for reloading the
stored !alue of the same# in both the closed and open
systems.
If in spite of the functions and ser!ices toll plaas render to
B).*6s clients and being mere installations along the
e"pressway as stated# they cannot be considered as
performing the functions of the head or principal office#
supra# therefore the definition of the term branch or sales
office under Article 24, 0a1 021 of the IRR of the E'*# would
be considered pointless and defies logic. As a matter of
right# the entire gross receipts of B).* should be allocated
to *aloocan *ity.
Iith due respect to the position ta&en by that office# we beg
to disagree. .oll plaas are not mere installations# as you
would want to pro(ect and whose functions do not suitably fit
that of branches or sales officesFoutlets.
@iewed in the conte"t of the definition of a branch or sales
office under Article 24, 0a1 021 as follows 5a fi"ed place in a
locality which conducts operations of the business as an
e"tension of the principal office . . .5# the functions and
ser!ices performed by the toll plaas satisfy the
re%uirements for these installations to be considered as
branch or sales officesFoutlets.
.oll plaas need not be independent with the principal or
head office to be considered as branch or sales outlet.
.o support our position# the two 021 basic re%uisites in the
definition of the term 5branch or sales outlet5 ha!e been met.
.he toll plaas are fi"ed structures in the locality inside the
e"pressway system and they conduct the operations of
B).* as an e"tension of B).*6s principal office in
*aloocan *ity.
As to the contention that toll booths do not generate income
of their own# we also disagree. Eogically# toll plaas need not
generate income of their own because they are performing
the functions as e"tensions of the head or principal office.
.he collection function is a tas& that these toll plaas
perform for and in behalf of the head or principal office.
.herefore# whether their collection function is for their own
account or that of the head or principal office is immaterial.
As pre!iously stated# toll booths not only ser!e as transit
tic&et dispensing stations# house the electronic readers for
the -* .a" for cashless transactions# and accept payment
for reloading the stored !alue for the -* .a" in both closed
and open systems but also accept cash payments from both
open and closed system patrons. In fact# during the meeting
with B).* official on April M# 2?8?# it was categorically
admitted to the 2E'4 .eam by one officer that the daily
collections of each toll booth is readily a!ailable and its
actual collection can be produced if needed.
4urther# during the inspection tour at the B).* facility in
2alintawa&# *aloocan *ity# it was obser!ed that each
computer unit at the toll booths is connected to the main
ser!er at B).*6s head office through a computer networ&
and to where each and e!ery transaction is recorded. .he
team was clarified further that the computer system can
produce both the consolidated and indi!idual statement of
collections which only means that the total daily or periodic
collections of each and e!ery toll plaa or toll booth in
particular can be easily generated. 4or this particular record
to be a!ailable# the computer system is also programmed to
record e!ery transaction of a particular location as recording
and maintaining a consolidated recording of all the collection
transactions generated by all the collection booths of the
entire tollways system.
Iith regard to the determination of the source of income#
and without pre(udice to E'Hs that do not host any toll plaa
!"
or booth# it is !iewed that the citations which determine the
source of income of personal ser!ices are unnecessary. .he
pro!isions of the E'* will suffice to determine whether the
collections made by toll booths at the designated toll plaas
can be considered as business transactions attributable# for
ta"ation purposes# to the locality where such toll plaa or
booth is situated.
In this regard# the ,?=-;?= share allocation of the gross
receipts realied by B).* in the operation of )E-A based
on the &ilometrage tra!ersed in each E'H along the
e"pressway system is not appropriately applicable.
8"F+-ureau of .5 Finance "pinion 6arc' %, 199# (!olgate+/almolive)
Representations are made that *PI is engaged in the
business of manufacturing and mar&eting personal and
household care products. It secured the ser!ices of an
independent contractor the P2- Industries# Inc. 0P2-1 to
pro!ide the *PI the local physical distribution facilities within
specified places in the Philippines. Jowe!er# it is understood
that *PI may also ma&e deli!eries of its products in other
places in the country.
It is further represented that *PI has a warehouse within its
compound in Ba&ati# from where finished products are
transferred to the warehouse of P2- in .acloban. Sales are
boo&ed by the company6s salesmen with !arious customers
within and out of .acloban *ity. .he sales orders are then
submitted to P2- for processing. P2- processes the sales
orders recei!ed from salesmen and prepares the sales
in!oices on the basis of which goods are withdrawn from its
warehouse in .acloban *ity for deli!ery to the !arious
customers.
Kn the basis of the foregoing# the Kffice of the *ity
.reasurer of .acloban *ity contends that *PI is liable for the
ta" on its total sales of goods ta&en from the .acloban *ity
warehouse.
Accordingly# this 3epartment hereby e"presses the !iew that
the Iarehousing and Physical 3istribution contract
aforementioned is a contract between the parties concerned
but which can not be contrary to the pro!isions of the law on
the matter. Stated otherwise# while said contract may be
enforceable as between the parties thereto# the same should
not apply on cases that are e"pressly or fully co!ered by
e"isting law or rule# such as the warehouse of P2- in
.acloban *ity where sales in!oices are issued to co!er
goods withdrawn therefrom. .hus# the products ta&en from
the warehouse of P2- in .acloban *ity and deli!ered to
*PI6s customers outside the city should be recorded and the
ta" thereon paid in .acloban *ity where said warehouse is
situated.
As to the deli!eries or sales made by *PI of products ta&en
from its warehouse in Ba&ati to places where it does not
ha!e any branch# sales office# or another warehouse# the
same should be recorded in Ba&ati where its principal office
is located and the ta"es due thereon should li&ewise be paid
to said municipality.
8"F+-ureau of .5 Finance "pinion Februar1 0*, 1993 (6agnolia !orp)
It is represented that Bagnolia *orporation 0B*1 is a
subsidiary company of San Biguel *orporation and that B*
is a manufacturer with a principal office in Pasig maintained
for management and administrati!e purposes. It has a
factory and sales office in 7ueon *ity# where said route
truc&s withdraw their products for deli!ery to the customers
in Pasig. .hus# the sales of said rout truc&s are recorded in
7ueon *ity and the local business ta"es are paid therein.
It appears# howe!er# that the Kfficer-in-*harge# Bunicipal
.reasurer6s Kffice of Pasig insists that B* should pay
business ta"es in said municipality representing ,?= of its
gross receipts for maintaining therein its principal office.
Kn the other hand# B* contends that in pre!ious years said
*ompany paid only the charges and fees for maintaining its
principal office in Pasig. It maintains the !iew that the
*ompany is not liable for business ta"es to the said
municipality as its principal office is merely for management
!#
and administrati!e purposes# and no sales are made nor
recorded therein upon which ta" is to be based.
*onsidering the abo!e pro!ision of law and the
representations made in your letter# it is the !iew of this
3epartment that Bagnolia *orporation should pay business
ta"es to 7ueon *ity and not to the Bunicipality of Pasig.
Jowe!er# the said municipality may le!y and collect the
annual fi"ed ta" P<??.?? per annum for e!ery deli!ery truc&
or !an of said *ompany deli!ering goods within the
municipality under Section 848 of the aforecited *ode# in
relation with Article 2,M 0b1 of the said IRR# as well as
Bayor6s permit fee and other regulation fees pro!ided for
under e"isting local ta" ordinances of the municipality.
8"F+-ureau of .5 Finance "pinion September 1#, 199$ ((estle
/'ilippines)
In >anuary 8::8# )-S.E- declared a )et Sales for 8::; in
the amount of P8#828#???.M4 which is !ery much lower than
the sales declared in 8::M in the amount of
P8,,#?M?#884.??.
.hat Kffice has accepted their payment for business ta"es
for 8::8# howe!er# said company was re%uired to present
their sales boo& for !erification. It appears that the sales
made in Eaoag *ity was paid thereat in a ;?=-,?=
allocation. Jence# the following %uery/
5*onsidering that the Sales Kffice is located in San )icolas#
will the sales be declared and paid in full in San )icolas or
partly in Eaoag *ityQ It is our !iew that the Sales should be
paid in full and paid in San )icolas.5
Accordingly# this 2ureau e"presses the following !iews/
8. All sales made in its sales office in San )icolas shall be
recorded thereat where such sales office is located and
shall be 8??= ta"able by San )icolas.
2. .he goods sourced from said sales office and deli!ered
to buyers outside said municipality# where there is no
branch# sales office or warehouse# should be considered
as sales made by route truc&s and should be recorded
and the ta" thereon paid in San )icolas where said sales
office is located.
,. .he *ity of Eaoag may le!y and collect an annual fi"ed
ta" for e!ery deli!ery truc& of )-S.E- imposed under
the e"isting local ta" ordinance of the city.
<.2.< .a" Period 0E'* +8M<1
Hnless otherwise pro!ided in this *ode# the ta" period of all local
ta"es# fees and charges shall be the calendar year. Such ta"es# fees
and charges may be paid in %uarterly installments.
<.2.M Accrual of .a" 0E'* +8MM1
Hnless otherwise pro!ided in this *ode# all local ta"es# fees# and
charges shall accrue on the first 08st1 day of >anuary of each year.
Jowe!er# new ta"es# fees or charges# or changes in the rates
thereof# shall accrue on the first 08st1 day of the %uarter ne"t
following the effecti!ity of the ordinance imposing such new le!ies or
rates.
<.2.; .ime of Payment 0E'* +8M;1
Hnless otherwise pro!ided in this *ode# all local ta"es# fees# and
charges shall be paid within the first twenty 02?1 days of >anuary or
of each subse%uent %uarter# as the case may be. .he sanggunian
concerned may# for a (ustifiable reason or cause# e"tend the time for
payment of such ta"es# fees# or charges without surcharges or
penalties# but only for a period not e"ceeding si" 0M1 months.
<.2.8 *ollection by the .reasurer 0E'* +8;?1
All local ta"es# fees# and charges shall be collected by the pro!incial#
city# municipal# or barangay treasurer# or their duly authoried
deputies. .he pro!incial# city or municipal treasurer may designate
the barangay treasurer as his deputy to collect local ta"es# fees# or
charges. In case a bond is re%uired for the purpose# the pro!incial#
city or municipal go!ernment shall pay the premiums thereon in
addition to the premiums of bond that may be re%uired under this
*ode.
!$
<.2.: Power to -"amine 2oo&s of Account 0E'* +8;81
.he pro!incial# city# municipal or barangay treasurer may# by himself
or through any of his deputies duly authoried in writing# e"amine the
boo&s# accounts# and other pertinent records of any person#
partnership# corporation# or association sub(ect to local ta"es# fees
and charges in order to ascertain# assess# and collect the correct
amount of the ta"# fee# or charge. Such e"amination shall be made
during regular business hours# only once for e!ery ta" period# and
shall be certified to by the e"amining official. Such certificate shall be
made of record in the boo&s of accounts of the ta"payer e"amined.
In case the e"amination herein authoried is made by a duly
authoried deputy of the local treasurer# the written authority of the
deputy concerned shall specifically state the name# address# and
business of the ta"payer whose boo&s# accounts# and pertinent
records are to be e"amined# the date and place of such e"amination#
and the procedure to be followed in conducting the same. 4or this
purpose# the records of the re!enue district office of the 2ureau of
Internal Re!enue shall be made a!ailable to the local treasurer# his
deputy or duly authoried representati!e.
6obil /'ilippines v &'e !it1 &reasurer of 6aDati
BobilNs office was located in Ba&ati *ity when it filed an application with the
*ity .reasurer for retirement of business within Ba&ati as it mo!ed its
business to Pasig *ity on September 2??8. After e!aluation# Bobil was
assessed with business ta" of PhP 8.: million. Bobil paid the ta" under
protest and claimed a refund therefrom in 8:::. .he R.* denied the petition
for refund ratiocinating that the payments made by Bobil in 8::8 are
payments for business ta" for 8::; which was paid in >anuary of 8::8.

.he issue in this case is/ IF) the business ta"es paid by Bobil in 8::8#
business ta"es for 8::; or 8::8Q
.he S* distinguished business ta"es and incomes ta"es. 2usiness ta"es
imposed in the e"ercise of police power for regulatory purposes are paid for
the pri!ilege of carrying on a business in the year the ta" was paid. It is paid
at the beginning of the year as a fee to allow the business to operate for the
rest of the year. It is deemed a prere%uisite to the conduct of business.
Income ta"# on the other hand# is a ta" on all yearly profits arising from
property# professions# trades or offices# or as a ta" on a person6s income#
emoluments# profits and the li&e. It is ta" on income# whether net or gross
realied in one ta"able year.
.he business ta"es paid n the year 8::8 is for the pri!ilege of engaging in
business for the same year. .hus# the S* held that the .reasurer of Ba&ati
erroneously treated the assessment and collection of business ta" as if it
were income ta"# by rendering an additional assessment of PhP8.,million for
the re!enue generated for the year 8::8.
0.' T8" Ba#a,9a-
<.,.8 *learance 0E'* +8<20c11
)o city or municipality may issue any license or permit for any
business or acti!ity unless a clearance is first obtained from the
barangay where such business or acti!ity is located or conducted.
4or such clearance# the sangguniang barangay may impose a
reasonable fee. .he application for clearance shall be acted upon
within se!en 0;1 wor&ing days from the filing thereof. In the e!ent that
the clearance is not issued within the said period# the city or
municipality may issue the said license or permit.
<.,.2 2illboards and Signages 0E'* +8<20d10,11
.he barangay may le!y reasonable fees and charges on billboards#
signboards# neon signs# and outdoor ad!ertisements.
0.* C.//(,$)- Tax
<.4.8 Iho may le!y 0E'* +8<M1
*ities or municipalities may le!y a community ta" in accordance with
the pro!isions of this Article.
<.4.2 Eiability of *orporations for .a" 0E'* +8<81
-!ery corporation no matter how created or organied# whether
domestic or resident foreign# engaged in or doing business in the
Philippines shall pay an annual community ta" of 4i!e hundred
pesos 0PX<??.??1 and an annual additional ta"# which# in no case#
!%
shall e"ceed .en thousand pesos 0PX8?#???.??1 in accordance with
the following schedule/
081 4or e!ery 4i!e thousand pesos 0PX<#???.??1 worth of real
property in the Philippines owned by it during the preceding year
based on the !aluation used for the payment of the real property
ta" under e"isting laws# found in the assessment rolls of the city
or municipality where the real property is situated - .wo pesos
0PX2.??1$ and
021 4or e!ery 4i!e thousand pesos 0PX<#???.??1 of gross receipts or
earnings deri!ed by it from its business in the Philippines during
the preceding year - .wo pesos 0PX2.??1. .he di!idends
recei!ed by a corporation from another corporation howe!er
shall# for the purpose of the additional ta"# be considered as part
of the gross receipts or earnings of said corporation.
<.4., .ime W Place of Payment 0E'* ++8M?# 8M81
.he community ta" shall be paid in the place of residence of the
indi!idual# or in the place where the principal office of the (uridical
entity is located.
.he community ta" shall accrue on the first 08st1 day of >anuary of
each year which shall be paid not later than the last day of 4ebruary
of each year. If a person reaches the age of eighteen 0881 years or
otherwise loses the benefit of e"emption on or before the last day of
>une# he shall be liable for the community ta" on the day he reaches
such age or upon the day the e"emption ends. Jowe!er# if a person
reaches the age of eighteen 0881 years or loses the benefit of
e"emption on or before the last day of Barch# he shall ha!e twenty
02?1 days to pay the community ta" without becoming delin%uent.
Persons who come to reside in the Philippines or reach the age of
eighteen 0881 years on or after the first 08st1 day of >uly of any year#
or who cease to belong to an e"empt class on or after the same
date# shall not be sub(ect to the community ta" for that year.
*orporations established and organied on or before the last day of
>une shall be liable for the community ta" for that year. 2ut
corporations established and organied on or before the last day of
Barch shall ha!e twenty 02?1 days within which to pay the
community ta" without becoming delin%uent. *orporations
established and organied on or after the first day of >uly shall not be
sub(ect to the community ta" for that year. If the ta" is not paid within
the time prescribed abo!e# there shall be added to the unpaid
amount an interest of twenty-four percent 024=1 per annum from the
due date until it is paid.
<.4.4 Penalty for )on-payment 0E'* +8M8 last Y1
*orporations established and organied on or before the last day of
>une shall be liable for the community ta" for that year. 2ut
corporations established and organied on or before the last day of
Barch shall ha!e twenty 02?1 days within which to pay the
community ta" without becoming delin%uent. *orporations
established and organied on or after the first day of >uly shall not be
sub(ect to the community ta" for that year. If the ta" is not paid within
the time prescribed abo!e# there shall be added to the unpaid
amount an interest of twenty-four percent 024=1 per annum from the
due date until it is paid.
<.4.< *ommunity .a" *ertificate 0E'* +8M21
A community ta" certificate shall be issued to e!ery person or
corporation upon payment of the community ta". A community ta"
certificate may also be issued to any person or corporation not
sub(ect to the community ta" upon payment of Kne peso 0PX8.??1.
<.4.M Ihen *.* is )ecessary 0E'* +8M,1
0a1 Ihen an indi!idual sub(ect to the community ta" ac&nowledges
any document before a notary public# ta&es the oath of office
upon election or appointment to any position in the go!ernment
ser!ice$ recei!es any license# certificate# or permit from any
public authority$ pays any ta" or fee$ recei!es any money from
any public fund$ transacts other official business$ or recei!es any
salary or wage from any person or corporation# it shall be the
duty of any person# officer# or corporation with whom such
transaction is made or business done or from whom any salary
or wage is recei!ed to re%uire such indi!idual to e"hibit the
community ta" certificate. .he presentation of community ta"
certificate shall not be re%uired in connection with the registration
of a !oter.
!&
0b1 Ihen# through its authoried officers# any corporation sub(ect to
the community ta" recei!es any license# certificate# or permit
from any public authority# pays any ta" or fee# recei!es money
from public funds# or transacts other official business# it shall be
the duty of the public official with whom such transaction is made
or business done# to re%uire such corporation to e"hibit the
community ta" certificate.
0c1 .he community ta" certificate re%uired in the two preceding
paragraphs shall be the one issued for the current year# e"cept
for the period from >anuary until the fifteenth 08<th1 of April each
year# in which case# the certificate issued for the preceding year
shall suffice.
0.0 Ex"/4)$., .; "x4.#) 4#.&"%%$,9 F.," #"9$%)"#"+ ",)"#4#$%"%
"mnibus Investment !ode, Art) %$(a)
"------------------------------------"
3. CORPORATE INCOME TAX
3.1 G#.%% I,&./" (NIRC 22(A) & (E)(*))
-"cept as otherwise pro!ided in this *ode# an income ta" of
thirty-fi!e percent 0,<=1 is hereby imposed upon the ta"able
income deri!ed during each ta"able year from all sources
within and without the Philippines by e!ery corporation# as
defined in Section 22021 of this *ode and ta"able under this
.itle as a corporation# organied in# or e"isting under the
laws of the Philippines/ Pro!ided# .hat effecti!e >anuary 8#
accounting period# the ta"able income shall be computed
without regard to the specific date when specific sales#
purchases and other transactions occur. .heir income and
e"penses for the fiscal year shall be deemed to ha!e been
earned and spent e%ually for each month of the period.
.he reduced corporate income ta" rates shall be applied on
the amount computed by multiplying the number of months
co!ered by the new rates within the fiscal year by the ta"able
income of the corporation for the period# di!ided by twel!e.
recommendation of the Secretary of 4inance# may effecti!e
>anuary 8# 2???# allow corporations the option to be ta"ed at
fifteen percent 08<=1 of gross income as defined herein#
after the following conditions ha!e been satisfied/
021 A ratio of forty percent 04?=1 of income ta" collection
to total ta" re!enues$
a!ailable only to firms whose ratio of cost of sales to gross
sales or receipts from all sources does not e"ceed fifty-fi!e
percent 0<<=1.
ta"able years during which the corporation is %ualified under
the scheme.
4or purposes of this Section# the term 6gross income6 deri!ed
from business shall be e%ui!alent to gross sales less sales
returns# discounts and allowances and cost of goods sold.
5*ost of goods sold5 shall include all business e"penses
directly incurred to produce the merchandise to bring them to
their present location and use.
4or a trading or merchandising concern# 5cost of goods5 sold
shall include the in!oice cost of the goods sold# plus import
duties# freight in transporting the goods to the place where
"0
the goods are actually sold# including insurance while the
goods are in transit.
4or a manufacturing concern# 5cost of goods manufactured
and sold5 shall include all costs of production of finished
goods# such as raw materials used# direct labor and
manufacturing o!erhead# freight cost# insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
A A A
4or purposes of applying the minimum corporate income ta"
pro!ided under Subsection 0-1 hereof# the term 6gross
income6 shall mean gross sales less sales returns# discounts
and allowances and cost of goods sold. 5*ost of goods sold6
shall include all business e"penses directly incurred to
produce the merchandise to bring them to their present
location and use.
4or a trading or merchandising concern# 5cost of goods sold6
shall include the in!oice 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.
4or a manufacturing concern# cost of 5goods manufactured
and sold5 shall include all costs of production of finished
goods# such as raw materials used# direct labor and
manufacturing o!erhead# freight cost# insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
necessarily incurred to pro!ide the ser!ices re%uired by the
customers and clients including 0A1 salaries and employee
benefits of personnel# consultants and specialists directly
rendering the ser!ice and 021 cost of facilities directly utilied
in pro!iding the ser!ice such as depreciation or rental of
e%uipment used and cost of supplies/ Pro!ided# howe!er#
.hat in the case of ban&s# 5cost of ser!ices5 shall include
interest e"pense.
3.2 D./"%)$& C.#4.#a)$.,% (NIRC 22)
0A1 In 'eneral. - -"cept as otherwise pro!ided in this *ode#
an income ta" of thirty-fi!e percent 0,<=1 is hereby
imposed upon the ta"able income deri!ed during each
ta"able year from all sources within and without the
Philippines by e!ery corporation# as defined in Section
22021 of this *ode and ta"able under this .itle as a
corporation# organied in# or e"isting under the laws of
specific sales# purchases and other transactions occur.
.heir income and e"penses for the fiscal year shall be
deemed to ha!e been earned and spent e%ually for each
month of the period.
.he reduced corporate income ta" rates shall be applied
on the amount computed by multiplying the number of
months co!ered by the new rates within the fiscal year
by the ta"able income of the corporation for the period#
di!ided by twel!e.
recommendation of the Secretary of 4inance# may
effecti!e >anuary 8# 2???# allow corporations the option
to be ta"ed at fifteen percent 08<=1 of gross income as
defined herein# after the following conditions ha!e been
"1
satisfied/
021 A ratio of forty percent 04?=1 of income ta"
collection to total ta" re!enues$
a!ailable only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not e"ceed
fifty-fi!e percent 0<<=1.
ta"able years during which the corporation is %ualified
under the scheme.
4or purposes of this Section# the term 6gross income6
deri!ed from business shall be e%ui!alent to gross sales
less sales returns# discounts and allowances and cost of
goods sold. 5*ost of goods sold5 shall include all
business e"penses directly incurred to produce the
merchandise to bring them to their present location and
use.
4or a trading or merchandising concern# 5cost of goods5
sold shall include the in!oice cost of the goods sold# plus
import duties# freight in transporting the goods to the
place where the goods are actually sold# including
4or a manufacturing concern# 5cost of goods
021 Proprietary -ducational Institutions and Jospitals. -
Proprietary educational institutions and hospitals which
are nonprofit shall pay a ta" of ten percent 08?=1 on
their ta"able income e"cept those co!ered by
Subsection 031 hereof/ Pro!ided# that if the gross income
from unrelated trade# business or other acti!ity e"ceeds
fifty percent 0<?=1 of the total gross income deri!ed by
such educational institutions or hospitals from all
sources# the ta" prescribed in Subsection 0A1 hereof
shall be imposed on the entire ta"able income. 4or
purposes of this Subsection# the term 6unrelated trade#
business or other acti!ity6 means any trade# business or
other acti!ity# the conduct of which is not substantially
related to the e"ercise or performance by such
educational institution or hospital of its primary purpose
or function. A 5Proprietary educational institution5 is any
pri!ate school maintained and administered by pri!ate
indi!iduals or groups with an issued permit to operate
from the 3epartment of -ducation# *ulture and Sports
03-*S1# or the *ommission on Jigher -ducation
0*J-31# or the .echnical -ducation and S&ills
3e!elopment Authority 0.-S3A1# as the case may be# in
accordance with e"isting laws and regulations.

0*1 'o!ernment-owned or *ontrolled-*orporations#
Agencies or Instrumentalities. - .he pro!isions of
e"isting special or general laws to the contrary
notwithstanding# all corporations# agencies# or
instrumentalities owned or controlled by the
'o!ernment# e"cept the 'o!ernment Ser!ice Insurance
System 0'SIS1# the Social Security System 0SSS1# the
Philippine Jealth Insurance *orporation 0PJI*1# the
Philippine *harity Sweepsta&es Kffice 0P*SK1 and the
Philippine Amusement and 'aming *orporation
0PA'*KR1# shall pay such rate of ta" upon their ta"able
income as are imposed by this Section upon
corporations or associations engaged in s similar
business# industry# or acti!ity.
"2
031 Rates of .a" on *ertain Passi!e Incomes. -
081 Interest from 3eposits and Lield or any other
Bonetary 2enefit from 3eposit Substitutes and from
.rust 4unds and Similar Arrangements# and
Royalties. - A final ta" at the rate of twenty percent
02?=1 is hereby imposed upon the amount of
interest on currency ban& deposit and yield or any
other monetary benefit from deposit substitutes and
from trust funds and similar arrangements recei!ed
by domestic corporations# and royalties# deri!ed
from sources within the Philippines/ Pro!ided#
howe!er# .hat interest income deri!ed by a domestic
corporation from a depository ban& under the
e"panded foreign currency deposit system shall be
sub(ect to a final income ta" at the rate of se!en and
one-half percent 0; 8F2=1 of such interest income.
021 *apital 'ains from the Sale of Shares of Stoc& )ot
.raded in the Stoc& -"change. - A final ta" at the
rates prescribed below shall be imposed on net
capital gains realied during the ta"able year from
the sale# e"change or other disposition of shares of
stoc& in a domestic corporation e"cept shares sold
or disposed of through the stoc& e"change/
)ot o!er P8??#???DDDDDDDDDD..... <=
Amount in e"cess of P8??#???DDDDD.. 8?=
0,1 .a" on Income 3eri!ed under the -"panded 4oreign
*urrency 3eposit System. - Income deri!ed by a
depository ban& under the e"panded foreign
currency deposit system from foreign currency
transactions with local commercial ban&s# including
branches of foreign ban&s that may be authoried by
the 2ang&o Sentral ng Pilipinas 02SP1 to transact
business with foreign currency depository system
units and other depository ban&s under the
e"panded foreign currency deposit system# including
interest income from foreign currency loans granted
by such depository ban&s under said e"panded
foreign currency deposit system to residents# shall
be sub(ect to a final income ta" at the rate of ten
percent 08?=1 of such income.
Any income of nonresidents# whether indi!iduals or
corporations# from transactions with depository
ban&s under the e"panded system shall be e"empt
from income ta".
041 Intercorporate 3i!idends. - 3i!idends recei!ed by a
domestic corporation from another domestic
corporation shall not be sub(ect to ta".
0<1 *apital 'ains Realied from the Sale# -"change or
3isposition of Eands andFor 2uildings. - A final ta" of
si" percent 0M=1 is hereby imposed on the gain
presumed to ha!e been realied on the sale#
e"change or disposition of lands andFor 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 mar&et !alue as
determined in accordance with Section M0-1 of this
*ode# whiche!er is higher# of such lands andFor
buildings.
*orporations. -
081 Imposition of .a". - A minimum corporate income ta"
of two percent 02=? of the gross income as of the
end of the ta"able year# as defined herein# is hereby
imposed on a corporation ta"able under this .itle#
beginning on the fourth ta"able year immediately
following the year in which such corporation
commenced its business operations# when the
minimum income ta" is greater than the ta"
computed under Subsection 0A1 of this Section for
the ta"able year.
021 *arry 4orward of -"cess Binimum .a". - Any
e"cess of the minimum corporate income ta" o!er
the normal income ta" as computed under
Subsection 0A1 of this Section shall be carried
"
forward and credited against the normal income ta"
for the three 0,1 immediately succeeding ta"able
years.
0,1 Relief from the Binimum *orporate Income .a"
Hnder *ertain *onditions. - .he Secretary of
4inance is hereby authoried to suspend the
imposition of the minimum corporate income ta" on
any corporation which suffers losses on account of
prolonged labor dispute# or because of force
ma(eure# or because of legitimate business re!erses.
.he Secretary of 4inance is hereby authoried to
promulgate# upon recommendation of the
*ommissioner# the necessary rules and regulation
that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income ta" in a meritorious
case.
allowances and cost of goods sold. 5*ost of goods
sold6 shall include all business e"penses directly
incurred to produce the merchandise to bring them
to their present location and use.
3.' F.#"$9, C.#4.#a)$.,% (NIRC 26)
0A1 .a" on Resident 4oreign *orporations. -
081 In 'eneral. - -"cept as otherwise pro!ided in this
*ode# a corporation organied# authoried# or
e"isting under the laws of any foreign country#
engaged in trade or business within the Philippines#
shall be sub(ect to an income ta" e%ui!alent to thirty-
fi!e percent 0,<=1 of the ta"able income deri!ed in
the preceding ta"able year from all sources within
8::8# the rate of income ta" shall be thirty-four
percent 0,4=1$ effecti!e >anuary 8# 8:::# the rate
shall be thirty-three percent 0,,=1# and effecti!e
>anuary 8# 2??? and thereafter# the rate shall be
thirty-two percent 0,2=1.
sales# purchases and other transactions occur. .heir
income and e"penses for the fiscal year shall be
deemed to ha!e been earned and spent e%ually for
each month of the period.
.he reduced corporate income ta" rates shall be
applied on the amount computed by multiplying the
number of months co!ered by the new rates within
"!
the fiscal year by the ta"able income of the
corporation for the period# di!ided by twel!e.
Pro!ided# howe!er# .hat a resident foreign
corporation shall be granted the option to be ta"ed at
fifteen percent 08<=1 on gross income under the
same conditions# as pro!ided in Section 2; 0A1.
021 Binimum *orporate Income .a" on Resident
4oreign *orporations. - A minimum corporate
income ta" of two percent 02=1 of gross income# as
prescribed under Section 2; 0-1 of this *ode# shall
be imposed# under the same conditions# on a
resident foreign corporation ta"able under paragraph
081 of this Subsection.
0,1 International *arrier. - An international carrier doing
business in the Philippines shall pay a ta" of two and
one-half percent 02 8F2=1 on its 5'ross Philippine
2illings5 as defined hereunder/
0a1 International Air *arrier. - 5'ross Philippine
2illings5 refers to the amount of gross re!enue
deri!ed from carriage of persons# e"cess
baggage# cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight# irrespecti!e of the place of sale or issue
and the place of payment of the tic&et or
passage document/ Pro!ided# .hat tic&ets
re!alidated# e"changed andFor indorsed to
another international airline form part of the
'ross Philippine 2illings if the passenger boards
a plane in a port or point in the Philippines/
Pro!ided# further# .hat for a flight which
originates from the Philippines# but
transshipment of passenger ta&es place at any
port outside the Philippines on another airline#
only the ali%uot portion of the cost of the tic&et
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of 'ross Philippine 2illings.
0b1 International Shipping. - 5'ross Philippine
2illings5 means gross re!enue whether for
passenger# cargo or mail originating from the
Philippines up to final destination# regardless of
the place of sale or payments of the passage or
freight documents.
041 Kffshore 2an&ing Hnits. - .he pro!isions of any law
to the contrary notwithstanding# income deri!ed by
offshore ban&ing units authoried by the 2ang&o
Sentral ng Pilipinas 02SP1 to transact business with
offshore ban&ing units# including any interest income
deri!ed from foreign currency loans granted to
residents# shall be sub(ect to a final income ta" at
the rate of ten percent 08?=1 of such income.
Any income of nonresidents# whether indi!iduals or
corporations# from transactions with said offshore
ban&ing units shall be e"empt from income ta".
0<1 .a" on 2ranch Profits Remittances. - Any profit
remitted by a branch to its head office shall be
sub(ect to a ta" of fifteen 08<=1 which shall be based
on the total profits applied or earmar&ed for
remittance without any deduction for the ta"
component thereof 0e"cept those acti!ities which are
registered with the Philippine -conomic 9one
Authority1. .he ta" shall be collected and paid in the
same manner as pro!ided in Sections <; and <8 of
this *ode/ pro!ided# that interests# di!idends# rents#
royalties# including remuneration for technical
ser!ices# salaries# wages premiums# annuities#
emoluments or other fi"ed or determinable annual#
periodic or casual gains# profits# income and capital
gains recei!ed by a foreign corporation during each
ta"able year from all sources within the Philippines
shall not be treated as branch profits unless the
same are effecti!ely connected with the conduct of
its trade or business in the Philippines.
0M1 Regional or Area Jead%uarters and Regional
Kperating Jead%uarters of Bultinational *ompanies.
""
0a1 Regional or area head%uarters as defined in
Section 220331 shall not be sub(ect to income
ta".
0b1 Regional operating head%uarters as defined in
Section 220--1 shall pay a ta" of ten percent
08?=1 of their ta"able income.
0;1 .a" on *ertain Incomes Recei!ed by a Resident
4oreign *orporation. -
0a1 Interest from 3eposits and Lield or any other
Bonetary 2enefit from 3eposit Substitutes# .rust
4unds and Similar Arrangements and Royalties.
- Interest from any currency ban& deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements and royalties deri!ed from
sources within the Philippines shall be sub(ect to
a final income ta" at the rate of twenty percent
02?=1 of such interest/ Pro!ided# howe!er# .hat
interest income deri!ed by a resident foreign
corporation from a depository ban& under the
e"panded foreign currency deposit system shall
be sub(ect to a final income ta" at the rate of
se!en and one-half percent 0; 8F2=1 of such
interest income.
0b1 Income 3eri!ed under the -"panded 4oreign
*urrency 3eposit System. - Income deri!ed by a
depository ban& under the e"panded foreign
currency deposit system from foreign currency
transactions with local commercial ban&s
including branches of foreign ban&s that may be
authoried by the 2ang&o Sentral ng Pilipinas
02SP1 to transact business with foreign currency
deposit system units# including interest income
from foreign currency loans granted by such
depository ban&s under said e"panded foreign
currency deposit system to residents# shall be
sub(ect to a final income ta" at the rate of ten
percent 08?=1 of such income.
Any income of nonresidents# whether indi!iduals
or corporations# from transactions with
depository ban&s under the e"panded system
shall be e"empt from income ta".
0c1 *apital 'ains from Sale of Shares of Stoc& )ot
.raded in the Stoc& -"change. - A final ta" at
the rates prescribed below is hereby imposed
upon the net capital gains realied during the
ta"able year from the sale# barter# e"change or
other disposition of shares of stoc& in a domestic
corporation e"cept shares sold or disposed of
through the stoc& e"change/
)ot o!er P8??#???DDDDDDDDD......D
<=
Kn any amount in e"cess of P8??#???DD. 8?=
0d1 Intercorporate 3i!idends. - 3i!idends recei!ed
by a resident foreign corporation from a
domestic corporation liable to ta" under this
*ode shall not be sub(ect to ta" under this .itle.
021 .a" on )onresident 4oreign *orporation. -
081 In 'eneral. - -"cept as otherwise pro!ided in this
*ode# a foreign corporation not engaged in trade or
business in the Philippines shall pay a ta" e%ual to
thirty-fi!e percent 0,<=1 of the gross income
recei!ed during each ta"able year from all sources
within the Philippines# such as interests# di!idends#
rents# royalties# salaries# premiums 0e"cept
reinsurance premiums1# annuities# emoluments or
other fi"ed or determinable annual# periodic or
casual gains# profits and income# and capital gains#
e"cept capital gains sub(ect to ta" under
subparagraphs 0*1 and 0d1/ Pro!ided# .hat effecti!e
8# 8::8# the rate of income ta" shall be thirty-four
percent 0,4=1$ effecti!e >anuary 8# 8:::# the rate
shall be thirty-three percent 0,,=1$ and# effecti!e
>anuary 8# 2??? and thereafter# the rate shall be
thirty-two percent 0,2=1.
"#
021 )onresident *inematographic 4ilm Kwner# Eessor or
3istributor. - A cinematographic film owner# lessor#
or distributor shall pay a ta" of twenty-fi!e percent
02<=1 of its gross income from all sources within the
Philippines.
0,1 )onresident Kwner or Eessor of @essels *hartered
by Philippine )ationals. - A nonresident owner or
lessor of !essels shall be sub(ect to a ta" of four and
one-half percent 04 8F2=1 of gross rentals# lease or
charter fees from leases or charters to 4ilipino
citiens or corporations# as appro!ed by the
Baritime Industry Authority.
041 )onresident Kwner or Eessor of Aircraft#
Bachineries and Kther -%uipment. - Rentals#
charters and other fees deri!ed by a nonresident
lessor of aircraft# machineries and other e%uipment
shall be sub(ect to a ta" of se!en and one-half
percent 0; 8F2=1 of gross rentals or fees.
0<1 .a" on *ertain Incomes Recei!ed by a )onresident
4oreign *orporation. -
0a1 Interest on 4oreign Eoans. - A final withholding
ta" at the rate of twenty percent 02?=1 is hereby
imposed on the amount of interest on foreign
loans contracted on or after August 8# 8:8M$
0b1 Intercorporate 3i!idends. - A final withholding
ta" at the rate of fifteen percent 08<=1 is hereby
imposed on the amount of cash andFor property
di!idends recei!ed from a domestic corporation#
which shall be collected and paid as pro!ided in
Section <; 0A1 of this *ode# sub(ect to the
condition that the country in which the
nonresident foreign corporation is domiciled#
shall allow a credit against the ta" due from the
nonresident foreign corporation ta"es deemed to
ha!e been paid in the Philippines e%ui!alent to
twenty percent 02?=1 for 8::;# nineteen percent
08:=1 for 8::8# eighteen percent 088=1 for
8:::# and se!enteen percent 08;=1 thereafter#
which represents the difference between the
regular income ta" of thirty-fi!e percent 0,<=1 in
8::;# thirty-four percent 0,4=1 in 8::8# and
thirty-three percent 0,,=1 in 8:::# and thirty-two
percent 0,2=1 thereafter on corporations and
the fifteen percent 08<=1 ta" on di!idends as
pro!ided in this subparagraph$
0c1 *apital 'ains from Sale of Shares of Stoc& not
.raded in the Stoc& -"change. - A final ta" at
the rates prescribed below is hereby imposed
upon the net capital gains realied during the
ta"able year from the sale# barter# e"change or
other disposition of shares of stoc& in a domestic
corporation# e"cept shares sold# or disposed of
through the stoc& e"change/
)ot o!er P8??#???DDDD..
DDDDDD..........<=
Kn any amount in e"cess of
P8??#???DDD.8?=
I&A8 Ruling (o) ,$*+,9 (A62"R &ec'nolog1)
It is represented that A.I-HS 0formerly ABGKR
-E-*.RK)I*S# I)*.1 is a corporation organied and
e"isting under the laws of the State of Pennsyl!ania# H.S.A.
with principal office address at 8,4< -nterprise 3ri!e# Iest
*hester PA 8:,8?$ that A.I-HS was licensed to establish a
regional or area head%uarters in the Philippines with
Securities and -"change *ommission 0S-*1 Eicense )o.
2S4B-?M4 dated Bay 8# 8::2 per certification issued by the
S-* dated August 2:# 2??2$ that the acti!ities of the
regional or area head%uarters shall be limited to acting as
super!isory# communications and coordinating center for its
affiliates# subsidiaries or branches in the region# and that it
will not deri!e any income from sources within the
Philippines and will not participate in any manner in the
management of any subsidiary or branch of the foreign entity
in the Philippines$ that P8FP2 and P,FP4 are corporations
"$
organied and e"isting under and by !irtue of Philippine
laws$ that both companies are wholly-owned subsidiaries of
P-4our# Inc. 0P4I1 and *.I.E. Etd. 0*IE1# with a respecti!e
si"ty-forty percent 0M?-4?=1 ownership distribution in both
subsidiaries$ that P4I is a corporation organied and e"isting
under Philippine laws whereas *IE is a non-resident foreign
corporation duly organied and e"isting under and by !irtue
of the laws of the *ayman Islands$ that both P4I and *IE are
in turn owned by A.I-HS.
It is further represented that on >anuary ?8# 2???# an
Agreement was e"ecuted and entered into between A.I-HS
and its affiliates# which include P8FP2 and P,FP4# to pro!ide
mechanisms for the sharing of costs# ris&s and rights among
the participants therein with respect to certain research and
de!elopment acti!ities$ that under the said Agreement# a
Research Program# wherein research and de!elopment
acti!ities which are to be performed predominantly within the
Hnited States# will be underta&en by A.I-HS to de!elop new
intellectual property rights or 5de!eloped technology5 8 as
the term is defined in the Agreement$ that the participants
shall retain all beneficial and economic title and interest to all
5de!eloped technology5 under the Agreement while the bare
legal title thereto shall be in the name of any participant
identified under any subse%uent agreement as one which is
best able to protect the intellectual property rights associated
with the 5de!eloped technology5# holding said bare legal title
on behalf of the other participants$ that each participant is
granted full rights to utilie any and all 5de!eloped
technology5 or other intangibles resulting from the efforts and
e"penditures co!ered by the Agreement$ that this interest in
5de!eloped technology5 may be relin%uished# abandoned or
transferred to another participant where actual benefit
therefrom is identified$ that such benefited participant shall
ma&e an arm6s length consideration to the relin%uishing
participant$ that the parties shall share among themsel!es
the cost and ris& of research and de!elopment using a
reasonable allocation formula based on the benefits
anticipated to be deri!ed by each party in e"ploiting the
5de!eloped technology$5 that the cost which may be
identified as potentially benefiting only one participant shall
be allocated solely to that participant and remo!ed from the
pool of costs to be shared by all participants$ that such cost
allocation shall be sub(ect to ad(ustments to account for
changes in economic conditions and the business operations
and practices of the parties so that the allocations shall
continue to reflect a reasonable effort to share costs in
proportion to benefits o!er time$ that the research and
de!elopment costs 05RW3 *osts51 which are to be allocated
among the participants shall consist mainly of the following/
0i1 All cost for the conduct by A.I-HS of the Research
Program and the de!elopment of intangibles thereunder
as determined under H.S. generally accepted accounting
principles# including the costs and ris& of unsuccessful
related de!elopment# support costs and corporate
o!erhead costs# and any legal costs# court costs# and
other costs incurred in defense of any intangibles
de!eloped in the course of the Research Program$
0ii1 Amounts paid or incurred by A.I-HS for the ac%uisition#
by purchase# license# or otherwise# of technology relating
to a Product which is# or thereafter becomes co!ered by
the Agreement$
0iii1 *osts for product design and de!elopment ser!ices in
support of the products manufactured by Participant#
performed e"clusi!ely outside of the participant6s country
of organiation$
that the cost ad!anced by A.I-HS with respect to the
Research Program shall be reimbursed by each participant
identified to deri!e benefit therefrom within si"ty 0M?1 days
following the close of an RW3 *alendar Lear as defined in
the Agreement$ that following the close of each calendar
%uarter# or at such other times as agreed by the parties#
each party shall ma&e interim payments of the estimated
cost sharing amount to A.I-HS with respect to the cost
incurred by A.I-HS during such period$ that such interim
payments shall be an ad!ance payment of the amount
ultimately determined to be payable by the respecti!e parties
under the Agreement for the RW3 *alendar Lear$ that the
parties shall li&ewise share in the ris&s of failure and financial
loss associated with the Research Program and ris& arising
"%
directly as a result of the de!elopment andFor e"ploitation of
intangibles including the ris& of loss as a result of product
liability# patent infringement and other claims which may
arise in connection with the de!elopment# manufacture or
sale of products utiliing the intangible.
In the light of the abo!e representations# you now re%uest for
a ruling that/ 081 the cost-sharing payments to be made by
P8FP2 and P,FP4 to A.I-HS for the cost of the research and
de!elopment acti!ities pursuant to the Agreement are not
considered as royalties sub(ect to Philippine ta" under the
RP-HS ta" treaty$ and 021 that the said payments being mere
reimbursements of cost or that the same constitute gross
income not attributable to a permanent establishment of A.I-
HS in addition to being foreign-source income# shall not be
sub(ect to Philippine withholding ta".
In the instant case# no transfer of technology of which A.I-
HS has proprietary interest or &now-how or any undi!ulged
technical information will ta&e place but rather a
de!elopment thereof# with the corresponding rights or
interest being retained by all participants in the !enture.
Article @I of the Agreement pro!ides that the participating
corporations will own all beneficial and economic title and
interest to all 3e!eloped .echnology. .hus# if as a result of
the !enture# A.I-HS de!elops new intellectual property
rightFtechnology# the contributing corporations# which
includes P8FP2 and P,FP4 shall ha!e the beneficial and
economic title and interest to such newly de!eloped
technology. As beneficial and economic title holders# each
participating corporation has full rights to utilie# relin%uish#
abandon or transfer said technology in the concept of an
owner and not as a mere user or recipient of all undi!ulged
technical information concerning industrial# commercial# or
scientific e"perience for a consideration. Such being the
case# the said cost-sharing payments by P8FP2 and P,FP4
cannot be considered 5royalties5 under the RP-HS ta" treaty.
Ihether the said cost-sharing payments are reimbursement
of cost or gross income not attributable to a permanent
establishment of A.I-HS in addition to being foreign-source
income# not sub(ect to Philippine income ta".
2ased on the representation# the research and de!elopment
acti!ities by A.I-HS are to be performed predominantly
within the Hnited States# then the RP-HS ta" treaty finds no
application inasmuch as the herein transaction does not
result in a case of double ta"ation for which a ta" treaty relief
is sought. *onsidering that the ser!ices of A.I-HS to P8FP2
and P,FP4 under the said Ser!ice Agreement are rendered
outside the Philippines# the payments by P8FP2 and P,FP4 to
A.I-HS are considered income deri!ed from sources outside
the Philippines.
In !iew thereof# this Kffice is of the opinion and so holds that
the sub(ect amounts paid by P8FP2 and P,FP4 to A.I-HS are
in consideration for ser!ices performed in the HS and# as
such# are considered income deri!ed from sources outside
the Philippines and therefore# are not sub(ect to Philippine
income ta" and conse%uently to withholding ta".
Jowe!er# while the abo!e sub(ect payments are considered
as reimbursements by P8FP2 and P,FP4 of costs ad!anced
by A.I-HS with respect to the Research Program not sub(ect
to ta" in the Philippines# the matter of identifying the said
e"pense of P8FP2 and P,FP4 as accurately pertaining to the
said Research and 3e!elopment *ost Sharing Agreement is
a %uestion of fact sub(ect to confirmation through audit or
in!estigation# as the case may be.
3.* M$,$/(/ C.#4.#a)" I,&./" Tax
(IR! 0%() @ 0$(A)(0)
*orporations. -
081 Imposition of .a". - A minimum corporate income ta"
of two percent 02=? of the gross income as of the
end of the ta"able year# as defined herein# is hereby
imposed on a corporation ta"able under this .itle#
beginning on the fourth ta"able year immediately
following the year in which such corporation
commenced its business operations# when the
"&
minimum income ta" is greater than the ta"
computed under Subsection 0A1 of this Section for
the ta"able year.
021 *arry 4orward of -"cess Binimum .a". - Any
e"cess of the minimum corporate income ta" o!er
the normal income ta" as computed under
Subsection 0A1 of this Section shall be carried
forward and credited against the normal income ta"
for the three 0,1 immediately succeeding ta"able
years.
0,1 Relief from the Binimum *orporate Income .a"
Hnder *ertain *onditions. - .he Secretary of
4inance is hereby authoried to suspend the
imposition of the minimum corporate income ta" on
any corporation which suffers losses on account of
prolonged labor dispute# or because of force
ma(eure# or because of legitimate business re!erses.
.he Secretary of 4inance is hereby authoried to
promulgate# upon recommendation of the
*ommissioner# the necessary rules and regulation
that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income ta" in a meritorious
case.
allowances and cost of goods sold. 5*ost of goods
sold6 shall include all business e"penses directly
incurred to produce the merchandise to bring them
to their present location and use.
A A A
Binimum *orporate Income .a" on Resident 4oreign
*orporations. - A minimum corporate income ta" of two
percent 02=1 of gross income# as prescribed under
Section 2; 0-1 of this *ode# shall be imposed# under the
same conditions# on a resident foreign corporation
ta"able under paragraph 081 of this Subsection.
RR (o) ,9+9$ (Amended b1 RR (o) 10+0,,%, R6! 0#+0,,$)
R-@-)H- R-'HEA.IK)S )K. :-:8 issued September 2#
8::8 prescribes the regulations to implement RA )o. 8424
relati!e to the imposition of the Binimum *orporate Income
.a" 0B*I.1 on domestic corporations and resident foreign
corporations. Specifically# an B*I. of 2= of the gross
income as of the end of the ta"able year is imposed upon
any domestic corporations beginning the 4th ta"able year
immediately following the ta"able year in which such
corporation commenced its business operations. .he B*I.
will be imposed whene!er such operation has ero or
#0
negati!e ta"able income or whene!er the amount of B*I. is
greater than the normal income ta" due from such operation.
In the case of a domestic corporation whose operations or
acti!ities are partly co!ered by the regular income ta"
system and partly co!ered under a special income ta"
system# the B*I. will apply on operations co!ered by the
regular income ta" system.
.he Regulations will apply to domestic and resident foreign
corporations on their aforementioned ta"able income deri!ed
beginning >anuary 8# 8::8 pursuant to the pertinent
pro!isions of RA 8424# pro!ided# howe!er# that corporations
using the fiscal year accounting period and which are sub(ect
to B*I. on income deri!ed pertaining to any month or
months of the year 8::8 will not be imposed with penalties
for late payment of the ta".
R-@-)H- R-'HEA.IK)S )K. 82-2??; issued on Kctober
8;# 2??; amends certain pro!isions of Re!enue Regulations
0RR1 )o. :-:8 relati!e to the due date within which to pay
the Binimum *orporate Income .a" 0B*I.1 imposed on
domestic corporations and resident foreign corporations
pursuant to Sections 2;0-1 and 280A1021 of the .a" *ode# as
amended.
An B*I. of two percent 02=1 of the gross income as of the
end of the ta"able year 0whether calendar or fiscal year#
depending on the accounting period employed1 is imposed
upon any domestic corporation beginning on the 4th ta"able
year immediately following the ta"able year in which such
corporation commenced its business operations. .he B*I.
shall be imposed whene!er such corporation has ero or
negati!e ta"able income or whene!er the amount of B*I. is
greater than the normal Income .a" due from such
corporation.
)otwithstanding the abo!e pro!ision# howe!er# the
computation and the payment of B*I.# shall li&ewise apply
at the time of filing the %uarterly corporate Income .a" as
prescribed under Sections ;< and ;; of the .a" *ode# as
amended.
.hus# in the computation of the ta" due for the ta"able
%uarter# if the computed %uarterly B*I. is higher than the
%uarterly normal Income .a"# the ta" due to be paid for such
ta"able %uarter at the time of filing the %uarterly corporate
Income .a" Return 0I.R1 shall be the B*I.# which is 2= of
the gross income as of the end of the ta"able %uarter. In the
payment of said %uarterly B*I.# e"cess B*I. from the
pre!ious ta"able yearFs shall not be allowed to be credited.
-"panded withholding ta"# %uarterly corporate Income .a"
payments under the normal Income .a" and the B*I. paid
in the pre!ious ta"able %uarterFs are allowed to be applied
against the %uarterly B*I. due.
.he %uarterly B*I. paid on the %uarterly I.R shall be
credited against the normal Income .a" at year end if in the
preparation and filing of the annual I.R and in the final
computation of the annual Income .a" due# it appears that
the normal Income .a" due is higher than the computed
annual B*I.. Boreo!er# in addition to the %uarterly B*I.
paid and %uarterly normal Income .a" payments in the
ta"able %uarters of the same ta"able year# e"cess B*I. in
the prior yearFs 0sub(ect to the prescripti!e period allowed for
its creditability1# e"panded withholding ta"es in the current
year and e"cess e"panded withholding ta"es in the prior
year shall be allowed to be credited against the annual
Income .a" computed under the normal Income .a" rules.
Jowe!er# if in the computation of the annual Income .a"
due# the computed annual B*I. due appears to be higher
than the annual normal Income .a" due# what may be
credited against the annual B*I. due shall only be the
%uarterly B*I. payments of the current ta"able %uarters# the
%uarterly normal Income .a" payments in the %uarters of the
current ta"able year# the e"panded withholding ta"es in the
current year and e"cess e"panded withholding ta"es in the
prior year. -"cess B*I. from the pre!ious ta"able yearFs
shall not be allowed to be credited therefrom as the same
can only be applied against normal Income .a".
4or purposes of these Regulations# the term# Tnormal
Income .a"U means the income ta" rates prescribed under
Sections 2;0A1 and 280A1081 of the *ode at ,4= on >anuary
#1
8# 8::8$ ,,= effecti!e >anuary 8# 8:::$ at ,2= effecti!e
>anuary 8# 2??? and ,<= effecti!e )o!ember 8# 2??< and
thereafter. Pro!ided# howe!er# that effecti!e >anuary 8# 2??:
the rate of Income .a" shall be ,?= pursuant to RA )o.
:,,;.
.he ta"payer shall pay the B*I. whene!er it is greater than
the regular or normal corporate Income .a" which is
imposed under Sections 2;0A1 and 280A1081 of the .a"
*ode. .he final comparison between the normal Income .a"
payable by the corporation and the B*I. shall be made at
the end of the ta"able year and the payable or e"cess
payment in the annual I.R shall be computed ta&ing into
consideration corporate Income .a" payment made at the
time of filing of %uarterly corporate I.R whether this be B*I.
or normal Income .a".
.he term Tgross incomeU means gross sales less sales
returns# discounts and allowances and cost of goods sold# in
case of sale of goods# or gross re!enue less sales returns#
discounts# allowances and cost of ser!icesFdirect cost# in
case of sale of ser!ices. .his rule# notwithstanding# if apart
from deri!ing income from these core business acti!ities
there are other
8
items of gross income realied or earned by the ta"payer
during the ta"able period which are sub(ect to the normal
corporate Income .a"# the same items must be included as
part of the ta"payerNs gross income for computing B*I..
.his means that the term Tgross incomeU will also include all
items of gross income enumerated under Section ,20A1 of
the .a" *ode# as amended# e"cept income e"empt from
Income .a" and income sub(ect to final withholding ta".
.he B*I. shall be paid in the same manner prescribed for
the payment of the normal corporate Income .a" which is on
a %uarterly and on a yearly basis. It shall be co!ered by a ta"
return designed for the purpose# which will be submitted
together with the corporation6s annual final ad(ustment I.R.
3omestic corporations shall be re%uired to pay the B*I. on
a %uarterly basis# pursuant to the pro!isions of Sections ;<
and ;; of the .a" *ode in relation to Section 24< of the
same *ode# as amended.
In the filing of the %uarterly I.R for the ta"able %uarter which
is due for filing after the effecti!ity of these Regulations# the
computation of the B*I. shall be done on cumulati!e basis
co!ering not only the current ta"able %uarter but also the
pre!ious ta"able %uarters of the same ta"able year. Such
computed B*I. shall be compared with the cumulati!e
normal Income .a"# whereupon the higher amount between
the two shall be the basis of the %uarterly Income .a"
payment to be made for said ta"able %uarter.
.hus# for those using calendar year basis accounting period#
in the filing of the %uarterly I.R for the third %uarter ended
September 2??;# which is due for filing on or before
)o!ember 2:# 2??;# the gross income for the 8st and 2nd
%uarters shall be added to the gross income for the %uarter
ended September 2??;# the total of which shall be the basis
of the 2= B*I. which shall then be compared with the
computed cumulati!e normal Income .a". .he cumulati!e
B*I. for the three 0,1 said %uarters shall be paid in case the
same appears to be higher than the normal Income .a"
computed for the same period. -"cess normal Income .a"
carried o!er from pre!ious ta"able year and payments made
for the pre!ious %uarters of the same ta"able year# including
withholding ta" credits claimed for said pre!ious %uarters of
same ta"able year shall be credited against the computed
ta" due in the cumulati!e %uarterly ta" return.
R-@-)H- B-BKRA)3HB *IR*HEAR ?24-?8 As pro!ided
for by Section 2; 0-1 and Section 28 0A1 021 of the 8::; .a"
*ode# as amended# in computing the gross income sub(ect
to the 2= B*I. for sellers of ser!ices# 56gross income6
means gross receipts less sales returns# allowances#
discounts and cost of ser!ices. 6*ost of ser!ices6 shall mean
all direct costs and e"penses necessarily incurred to pro!ide
the ser!ices re%uired by the customers and clients including
0A1 salaries and employee benefits of personnel# consultants
and specialists directly rendering the ser!ice and 021 cost of
supplies/ . . .5.
#2
As can be gleaned from the abo!e definition of 5cost of
ser!ices5 of the sellers of ser!ices# 5direct costs and
e"penses5 shall only pertain to those costs e"clusi!ely and
directly incurred in relation to the re!enue realied by the
sellers of ser!ices. In fine# these refer to costs which are
considered indispensable to the earning of the re!enue such
that without such costs# no re!enue can be generated. .hus#
e"penses and other costs dispensed outside the ambit of
what has been defined herein as 5direct costs and e"penses5
are not items allowed for inclusion to 5cost of ser!ices5# for
purposes of computing the gross income sub(ect to the 2=
B*I..
-elle !orporation v !IR
2elle *orpNs income ta" return for the year 8::; showed e"cess income ta"
payments. Instead of claiming the amount as a ta" refund# ta"payer decided
to apply it as ta" credit to the succeeding ta"able year by mar&ing the
applicable bo" in the ta" return. .a"payer in fact carried-o!er the e"cess
income ta" payment in the 8::8 and 8::: income ta" returns. In denying
ta"payerNs claim for refund# the Supreme *ourt ruled that once the option to
carry-o!er e"cess income ta" payments to the succeeding years has been
made# it becomes irre!ocable. .hus# applications for refund of the unutilied
e"cess income ta" payments may no longer be allowed.
.he Supreme *ourt# howe!er# clarified that while 2elle *orp may no longer
file a claim for refund# it properly carried o!er its 8::; e"cess income ta"
payments by applying portions therof to its 8::8 and 8::: Binimum
*orporate Income ta".
Knce the carry-o!er option is chosen for e"cess income ta" payment# it
becomes irre!ocable and no refund is a!ailable. Jowe!er# it may be apply
the unutilied e"cess income ta" payments as a ta" credit to the succeeding
ta"able years until fully utilied.
6anila -anDing !orp v !IR
Banila 2an&ing *orporation 0B2*1 was incorporated in 8:M8 and since then
engaged in commercial ban&ing until 8:8; when the 2ang&o Sentral ng
Pilipinas 02SP1 has prohibited it to operate as such because of insol!ency.
After 82 years or on 8:::# the 2SP has authoried B2* to operate as a thrift
ban&. B2* wrote the 2IR re%uesting a ruling in its fa!or to entitle it the 4-year
grace period rec&oned from 8:::. .he 2IR issued a fa!orable ruling and held
that the B*I. may be imposed not earlier than 2??2# i.e. the fourth ta"able
year beginning 8:::.
Pursuant to this ruling# B2* filed with the 2IR a claim for refund of the sum
of PhP ,,.8 million erroneously paid as BI*. for ta"able year 8:::. 3ue to
2IRNs inaction# B2* filed with the *.A a petition for re!iew. .he *.A denied
B2*Ns petition and held that it is not entitled to the 4-year grace period
because it was not a new corporation.
.he S* ruled in fa!or B2* and cited Re! Reg. )o. 4-:< which pro!ided that
the date of the commencement of operations of a thrift ban& is the date it
was registered with the S-* or the date when the *ertificate of Authority to
Kperate was issued by the 2SP# whiche!er comes later. In the case at bar#
B2* was issued by the 2IR a *ertificate of Authority to Kperate as a thrift
ban& and filed with the S-* its Articles of Incorporation# which was appro!ed#
in 8:::.
-IR Ruling 8A+##9+,9 (5lobal -rands)
3.0 R"9$.,a! .# A#"a HH & R"9$.,a! O4"#a)$,9 HH
RA $%9* *
Section M. *hapter III of the same *ode is hereby amended
and designated as *hapter I@. Articles M,# M4# M<# MM and M;
are hereby amended to read as follows/
5*JAP.-R I@
5I)*-).I@-S .K R-'IK)AE KR AR-A J-A37HAR.-RS
A)3 R-'IK)AE KP-RA.I)' J-A37HAR.-RS
5Art. M4. *orporate Income .a" Incenti!e to Regional or Area
Jead%uarters and Regional Kperating Jead%uarters. -
Regional or area head%uarters established in the Philippines
by multinational companies and which head%uarters do not
#
earn or deri!e income from the Philippines and which act as
super!isory# communications and coordinating centers for
their affiliates# subsidiaries# or branches in the Asia-Pacific
Region and other foreign mar&ets shall not be sub(ect to
income ta". Regional operating head%uarters shall be
sub(ect to a ta" rate of ten percent 08?=1 of their ta"able
income as pro!ided for under the )ational Internal Re!enue
*ode# as amended by Republic Act )o. 8424/ Pro!ided#
.hat any income deri!ed from Philippine sources by the
RKJ7 when remitted to the parent company shall be sub(ect
to the ta" on branch profit remittances as pro!ided for in
Section 280a10<1 of the )ational Internal Re!enue *ode.
5Art. M<. @alue-Added .a". - .he regional or area
head%uarters established in the Philippines by multinational
companies shall be e"empted from the !alue-added ta". In
addition# the sale or lease of goods and property and the
rendition of ser!ices to regional or area head%uarters shall
be sub(ect to ero percent 0?=1 @A. rate as pro!ided for in
the )ational Internal Re!enue *ode# as amended.
5Regional operating head%uarters shall be sub(ect to the ten
percent 08?=1 !alue-added ta" as pro!ided for under the
)ational Internal Re!enue *ode# as amended.
5Art. MM. -"emption 4rom All Ginds of Eocal .a"es# 4ees# or
*harges. - .he regional or area head%uarters and regional
operating head%uarters of multinational companies shall be
e"empt from all &inds of local ta"es# fees# or charges
imposed by a local go!ernment unit e"cept real property ta"
on land impro!ements and e%uipment.
5Art. M;. .a" and 3uty 4ree Importation of .raining Baterials
and -%uipment$ Importation of Botor @ehicles. - Regional or
area head%uarters and regional operating head%uarters shall
en(oy ta" and duty free importation of e%uipment and
materials for training and conferences which are needed and
used solely for their functions as regional or area
head%uarters or regional operating head%uarters and which
are not locally a!ailable sub(ect to the prior appro!al of the
2oard of In!estments.
5.he sale or disposition of e%uipment within two 021 years
after importation# entered ta" and duty free# shall re%uire
prior appro!al of the 2oard of In!estments and prior payment
of applicable ta"es and duties wai!ed in fa!or of
RJ7FRKJ7.
5Regional or area head%uarters and regional operating
head%uarters shall be entitled to the importation of new
motor !ehicles sub(ect to the payment of the corresponding
ta"es and duties.
52KKG I@
5I)*-).I@-S .K BHE.I)A.IK)AE *KBPA)I-S
-S.A2EISJI)' R-'IK)AE IAR-JKHS-S .K SHPPEL
SPAR- PAR.S# *KBPK)-).S# S-BI-4I)ISJ-3
PRK3H*.S A)3 RAI BA.-RIAES .K .J- ASIA-
PA*I4I* R-'IK) A)3 K.J-R 4KR-I') BARG-.S5
(IR! 0$(*)
Regional or Area Jead%uarters and Regional Kperating
Jead%uarters of Bultinational *ompanies. -
0a1 Regional or area head%uarters as defined in Section
220331 shall not be sub(ect to income ta".
0b1 Regional operating head%uarters as defined in Section
220--1 shall pay a ta" of ten percent 08?=1 of their
ta"able income.
3.3 S4"&$a! P#.C$%$.,% ;.# I,%(#a,&" C./4a,$"% (NIRC '2)
0A1 Special 3eduction Allowed to Insurance *ompanies. - In the
case of insurance companies# whether domestic or foreign doing
business in the Philippines# the net additions# if any# re%uired by
law to be made within the year to reser!e funds and the sums
other than di!idends paid within the year on policy and annuity
contracts may be deducted from their gross income/ Pro!ided#
howe!er# .hat the released reser!e be treated as income for the
year of release.
#!
021 Butual Insurance *ompanies. - In the case of mutual fire and
mutual employers6 liability and mutual wor&men6s compensation
and mutual casualty insurance companies re%uiring their
members to ma&e premium deposits to pro!ide for losses and
e"penses# said companies shall not return as income any portion
of the premium deposits returned to their policyholders# but shall
return as ta"able income all income recei!ed by them from all
other sources plus such portion of the premium deposits as are
retained by the companies for purposes other than the payment
of losses and e"penses and reinsurance reser!es.
0*1 Butual Barine Insurance *ompanies. - Butual marine insurance
companies shall include in their return of gross income# gross
premiums collected and recei!ed by them less amounts paid to
policyholders on account of premiums pre!iously paid by them
and interest paid upon those amounts between the
ascertainment and payment thereof.
031 Assessment Insurance *ompanies.- Assessment insurance
companies# whether domestic or foreign# may deduct from their
gross income the actual deposit of sums with the officers of the
'o!ernment of the Philippines pursuant to law# as additions to
guarantee or reser!e funds.
3.2 S4"&$a! P#.C$%$.,% ;.# BOI a,+ PEIA #"9$%)"#"+ ",)"#4#$%"%
"mnibus Investment !ode, Art)39(a)
AR.. ,:. Incenti!es to Registered -nterprises. - All
registered enterprises shall be granted the following
incenti!es to the e"tent engaged in a preferred area of
in!estment/
0a1 Income .a" Joliday. -
081 4or si" 0M1 years from commercial operation for
pioneer firms and four 041 years for non-pioneer
firms# new registered firms shall be fully e"empt from
income ta"es le!ied by the )ational 'o!ernment.
Sub(ect to such guidelines as may be prescribed by
the 2oard# the income ta" e"emption will be
e"tended for another year in each of the following
cases/
i. the pro(ect meets the prescribed ratio of capital
e%uipment to number of wor&ers set by the
2oard$
ii. utiliation of indigenous raw materials at rates
set by the 2oard$
iii. the net foreign e"change sa!ings or earnings
amount to at least HSS<??#???.?? annually
during the first three0,1 years of operation.
.he preceding paragraph notwithstanding# no registered
pioneer firm may a!ail of this incenti!e for a period
e"ceeding eight 081 years.
021 4or a period of three 0,1 years from commercial
operation# registered e"panding firms shall be
entitled to an e"emption from income ta"es le!ied by
the )ational 'o!ernment proportionate to their
e"pansion under such terms and conditions as the
2oard may determine$ Pro!ided# howe!er# .hat
during the period within which this incenti!e is
a!ailed of by the e"panding firm it shall not be
entitled to additional deduction for incremental labor
e"pense.
0,1 .he Pro!ision of Article ; 0841 notwithstanding#
registered firms shall not be entitled to any e"tension
of this incenti!e.
RA %91* 0#
-"cept for real property ta"es on land owned by de!elopers#
no ta"es# local and national# shall be imposed on business
establishments operating within the -*K9K)-. In lieu
thereof# fi!e percent 0<=1 of the gross income earned by all
business enterprises within the -*K9K)- shall be paid and
remitted as follows/
a. .hree percent 0,=1 to the )ational 'o!ernment$
b. .wo percent 02=1 which shall be directly remitted by the
business establishments to the treasurerNs office of the
#"
municipality or city where the enterprise is located.
"------------------------------------"
2. CAPITAL GAINS AND LOSSES (NIRC '5)
0A1 3efinitions. - As used in this .itle -
081 *apital Assets. - .he term 5capital assets5 means
property held by the ta"payer 0whether or not
connected with his trade or business1# but does not
include stoc& in trade of the ta"payer or other
property of a &ind which would properly be included
in the in!entory of the ta"payer if on hand at the
close of the ta"able year# or property held by the
ta"payer primarily for sale to customers in the
ordinary course of his trade or business# or property
used in the trade or business# of a character which is
sub(ect to the allowance for depreciation pro!ided in
Subsection 041 of Section ,4$ or real property used
in trade or business of the ta"payer.
021 )et *apital 'ain. - .he term 5net capital gain5
means the e"cess of the gains from sales or
e"changes of capital assets o!er the losses from
such sales or e"changes.
0,1 )et *apital Eoss. - .he term 5net capital loss5 means
the e"cess of the losses from sales or e"changes of
capital assets o!er the gains from such sales or
e"changes.
021 Percentage .a&en Into Account. - In the case of a
ta"payer# other than a corporation# only the following
percentages of the gain or loss recognied upon the sale
or e"change of a capital asset shall be ta&en into
account in computing net capital gain# net capital loss#
and net income/
081 Kne hundred percent 08??=1 if the capital asset has
been held for not more than twel!e 0821 months$ and
021 4ifty percent 0<?=1 if the capital asset has been held
for more than twel!e 0821 months$
0*1 Eimitation on *apital Eosses. - Eosses from sales or
e"changes of capital assets shall be allowed only to the
e"tent of the gains from such sales or e"changes. If a
ban& or trust company incorporated under the laws of
the Philippines# a substantial part of whose business is
the receipt of deposits# sells any bond# debenture# note#
or certificate or other e!idence of indebtedness issued
by any corporation 0including one issued by a
go!ernment or political subdi!ision thereof1# with interest
coupons or in registered form# any loss resulting from
such sale shall not be sub(ect to the foregoing limitation
and shall not be included in determining the applicability
of such limitation to other losses.
031 )et *apital Eoss *arry-o!er. - If any ta"payer# other than
a corporation# sustains in any ta"able year a net capital
loss# such loss 0in an amount not in e"cess of the net
income for such year1 shall be treated in the succeeding
ta"able year as a loss from the sale or e"change of a
capital asset held for not more than twel!e 0821 months.
0-1 Retirement of 2onds# -tc. - 4or purposes of this .itle#
amounts recei!ed by the holder upon the retirement of
bonds# debentures# notes or certificates or other
e!idences of indebtedness issued by any corporation
0including those issued by a go!ernment or political
subdi!ision thereof1 with interest coupons or in
registered form# shall be considered as amounts
recei!ed in e"change therefor.
041 'ains or Eosses 4rom Short Sales# -tc. - 4or purposes
of this .itle -
081 'ains or losses from short sales of property shall be
considered as gains or losses from sales or
e"changes of capital assets$ and
021 'ains or losses attributable to the failure to e"ercise
pri!ileges or options to buy or sell property shall be
##
considered as capital gains or losses.
!'ina -anDing !orp v !A
4acts/
*hina 2an&ing *orp made a <,= e%uity in!estment 0worth
P8MB1 in its JG subsidiary# 4irst *2* *apital Asia# engaged
in financing and in!estment# with Tdeposit-ta&ingU functions.
M years later# upon e"amination of the boo&s W portfolio of
petitioner# 2ang&o Sentral declared that 4irst *2* was
insol!ent.
Petitioner# with the appro!al of 2ang&o Sentral# wrote off its
<,= in!estment as being worthless# thereby treating it as a
bad debt or ordinary loss deductible from its gross income.
*IR disallowed the deduction and assessed petitioner for
income ta" deficiency of about P8B.
*IR a!erred that it should be treated as a Tcapital lossU# and
not an ordinary loss# there being no indebtedness between
petitioner and its subsidiary.
*.A ruled in fa!or of *IR. *A affirmed.
Issue/ IF) the loss can be considered an ordinary loss deductible
from its gross incomeQ
Jeld/ )K. It is a capital loss.
An e%uity in!estment is a capital asset# the sale of which
may result in a capital gain or loss. Shares of stoc&# when
not in the hands of one whose trade or business deals with
the sale# barter or e"change of such shares# is considered a
capital asset. .hus# when the shares become worthless# the
loss is deemed to be a capital loss.
In addition# capital losses may be deducted only to the
e"tent of capital gains from the sale or e"change of capital
assets. Since the e%uity in!estment does not constitute a
loan e"tended by petitioner to its subsidiary# nor is it a debt
sub(ect to obligatory payment by the latter# it is rightfully
considered a long term in!estment# or a capital asset.
-IR Ruling (o) 8A+,#9+,% (ArEuitectonica International !orp)
Ar%uitectonica International *orporation 0the
5Ar%uitectonica51 is a non-resident foreign corporation
organied and e"isting under the laws of the State of 4lorida#
Hnited States engaged in the business of manufacturing#
building# purchasing# in!esting in# trading in# dealing in and
with# goods# wares# merchandise# real and personal property
and ser!ices of e!ery class# &ind and description and in
international trade with affiliates# subsidiaries# or branch
offices in the Asia-Pacific Region.
Ar%uitectonica has been engaged by domestic entities to
prepare conceptual design and schematic design for se!eral
pro(ects in the Philippines# the related ser!ices for which are
all performed by Ar%uitectonica6s architects and personnel in
Biami# 4lorida.
In 2??<# Ar%uitectonica ac%uired from 4ort 2onifacio
3e!elopment *orporation 0423*1# fi!e 0<1 condominium
units 0Sub(ect Hnits1 in its pro(ect in 2onifacio Ridge
intended to be used as temporary lodging of its architects for
their !isits to the Philippines which !isits# a!eraging 8? day
man trips 0including tra!el time1# are limited to site
inspections# coordination with engineers# local architects and
other professionals# in relation to the preparation and
appro!al of plans for a specific pro(ect.
3ue to a change in its business direction# Ar%uitectonica is
intending to dispose of said units and sell the same to
interested third-party buyers.
Lou now re%uest for a confirmation of the following# that/
081 .he gain from the sale of the Sub(ect Hnits by
Ar%uitectonica to third party buyers shall be sub(ect to
,<= final withholding ta" pursuant to Section 40e1 of
Re!enue Regulations )o. ?;-?, in relation to Section
28021081 of the 8::; )ational Internal Re!enue *ode# as
amended by Republic Act )o. :,,; 0the 5.a" *ode51.
.he gain from the sale shall be the e"cess of the selling
price o!er the ac%uisition cost of said units.
021 .he sale by Ar%uitectonica of the Sub(ect Hnits to third-
#$
party buyers shall not be sub(ect to 82= @A. imposed
under Section 8?:0P1 of the .a" *ode since said units
are not primarily held for sale or lease in the ordinary
course of business of Ar%uitectonica.

In reply# please be informed as follows/
081 Hnder Section 28 021 081 of the 8::; )ational Internal
Re!enue *ode# as amended by Republic Act )o. :,,;
0the 5.a" *ode51# Ar%uitectonica being a non-resident
foreign corporation shall be sub(ect to ,<= on its gross
income from all source within the Philippines# such as
interests# di!idends# rents# royalties# salaries# premiums
0e"cept reinsurance premiums1# annuities# emoluments
or other fi"ed or determinable annual# periodic or casual
gains# profits and income# and capital gains# e"cept
capital gains realied from sale# e"change or disposition
of shares of stoc& in a domestic corporation not traded in
the e"change.
It should be noted that capital and income are different.
*apital is wealth or fund$ whereas income is profit or
gain or the flow of wealth. .he determining factor for the
imposition of income ta" is whether any gain or profit
was deri!ed from a transaction.
In another case in!ol!ing the sale of real property# albeit
by an indi!idual# the *ourt of Appeals e"pressly stated
that the gross income in the sale of said real property is
the gain deri!ed from said sale and not the selling price.
4urther# it ruled that the ac%uisition cost must be
deducted from the selling price of the property# the
balance of which is the gross income sub(ect to income
ta".
*onsistent with the foregoing# the gross income in
relation to sale of real property located in the Philippines
was interpreted by Re!enue Regulations )o. ;-?, as the
gain from the sale thereof# i.e.# the difference between
the gross selling price and the cost.
*onse%uently# only the gain from the sale by
Ar%uitectonica of the units to third-party buyers shall be
sub(ect to ,<= final withholding ta" pursuant to Section
4 0e1 of RR ;-?, and Section 2.<; 0I1 081 of RR 2-:8# as
amended in relation to Section 28 021 081 of the .a"
*ode.
021 Iith regard to the !alue added ta"# gi!en that the
sub(ect units were ac%uired primarily for the purpose of
housing its !isiting personnel and not for sale or lease in
the ordinary course of its trade or business# the
subse%uent sale thereof by Ar%uitectonica shall not be
sub(ect to 82= @A..
"------------------------------------"
6. INCOME FROM SOURCES 7ITHIN THE PHILIPPINES
(IR! #0
0A1 'ross Income 4rom Sources Iithin the Philippines. -
.he following items of gross income shall be treated as
gross income from sources within the Philippines/
081 Interests. - Interests deri!ed from sources within the
Philippines# and interests on bonds# notes or other
interest-bearing obligation of residents# corporate or
otherwise$
021 3i!idends. - .he amount recei!ed as di!idends/
0a1 from a domestic corporation$ and
0b1 from a foreign corporation# unless less than fifty
percent 0<?=1 of the gross income of such
foreign corporation for the three-year period
ending with the close of its ta"able year
preceding the declaration of such di!idends or
for such part of such period as the corporation
has been in e"istence1 was deri!ed from
sources within the Philippines as determined
under the pro!isions of this Section$ but only in
an amount which bears the same ration to such
di!idends as the gross income of the corporation
#%
for such period deri!ed from sources within the
Philippines bears to its gross income from all
sources.
0,1 Ser!ices. - *ompensation for labor or personal
ser!ices performed in the Philippines$
041 Rentals and Royalties. - Rentals and royalties from
property located in the Philippines or from any
interest in such property# including rentals or
royalties for -
0a1 .he use of or the right or pri!ilege to use in the
Philippines any copyright# patent# design or
model# plan# secret formula or process# goodwill#
trademar&# trade brand or other li&e property or
right$
0b1 .he use of# or the right to use in the Philippines
any industrial# commercial or scientific
e%uipment$
0c1 .he supply of scientific# technical# industrial or
commercial &nowledge or information$
0d1 .he supply of any assistance that is ancillary
and subsidiary to# and is furnished as a means
of enabling the application or en(oyment of# any
such property or right as is mentioned in
paragraph 0a1# any such e%uipment as is
mentioned in paragraph 0b1 or any such
&nowledge or information as is mentioned in
paragraph 0c1$
0e1 .he supply of ser!ices by a nonresident person
or his employee in connection with the use of
property or rights belonging to# or the installation
or operation of any brand# machinery or other
apparatus purchased from such nonresident
person$
0f1 .echnical ad!ice# assistance or ser!ices
rendered in connection with technical
management or administration of any scientific#
industrial or commercial underta&ing# !enture#
pro(ect or scheme$ and
0g1 .he use of or the right to use/
0i1 Botion picture films$
0ii1 4ilms or !ideo tapes for use in connection
with tele!ision$ and
0iii1 .apes for use in connection with radio
broadcasting.
0<1 Sale of Real Property. - 'ains# profits and income
from the sale of real property located in the
Philippines$ and
0M1 Sale of Personal Property. - 'ains$ profits and
income from the sale of personal property# as
determined in Subsection 0-1 of this Section.
021 .a"able Income 4rom Sources Iithin the Philippines. -
081 'eneral Rule. - 4rom the items of gross income
specified in Subsection 0A1 of this Section# there
shall be deducted the e"penses# losses and other
deductions properly allocated thereto and a ratable
part of e"penses# interests# losses and other
deductions effecti!ely connected with the business
or trade conducted e"clusi!ely within the Philippines
which cannot definitely be allocated to some items or
class of gross income/ Pro!ided# .hat such items of
deductions shall be allowed only if fully substantiated
by all the information necessary for its calculation.
.he remainder# if any# shall be treated in full as
ta"able income from sources within the Philippines.
021 -"ception. - )o deductions for interest paid or
incurred abroad shall be allowed from the item of
gross income specified in subsection 0A1 unless
indebtedness was actually incurred to pro!ide funds
for use in connection with the conduct or operation
#&
of trade or business in the Philippines.
0*1 'ross Income 4rom Sources Iithout the Philippines. -
.he following items of gross income shall be treated as
income from sources without the Philippines/
081 Interests other than those deri!ed from sources
within the Philippines as pro!ided in paragraph 081 of
Subsection 0A1 of this Section$
021 3i!idends other than those deri!ed from sources
within the Philippines as pro!ided in paragraph 021 of
Subsection 0A1 of this Section$
0,1 *ompensation for labor or personal ser!ices
performed without the Philippines$
041 Rentals or royalties from property located without the
Philippines or from any interest in such property
including rentals or royalties for the use of or for the
pri!ilege of using without the Philippines# patents#
copyrights# secret processes and formulas# goodwill#
trademar&s# trade brands# franchises and other li&e
properties$ and
0<1 'ains# profits and income from the sale of real
property located without the Philippines.
031 .a"able Income 4rom Sources Iithout the Philippines. -
4rom the items of gross income specified in Subsection
0*1 of this Section there shall be deducted the e"penses#
losses# and other deductions properly apportioned or
allocated thereto and a ratable part of any e"pense# loss
or other deduction which cannot definitely be allocated to
some items or classes of gross income. .he remainder#
if any# shall be treated in full as ta"able income from
sources without the Philippines.
0-1 Income 4rom Sources Partly Iithin and Partly Iithout
the Philippines.- Items of gross income# e"penses#
losses and deductions# other than those specified in
Subsections 0A1 and 0*1 of this Section# shall be
allocated or apportioned to sources within or without the
Philippines# under the rules and regulations prescribed
by the Secretary of 4inance# upon recommendation of
the *ommissioner. Ihere items of gross income are
separately allocated to sources within the Philippines#
there shall be deducted 0for the purpose of computing
the ta"able income therefrom1 the e"penses# losses and
other deductions properly apportioned or allocated
thereto and a ratable part of other e"penses# losses or
other deductions which cannot definitely be allocated to
some items or classes of gross income. .he remainder#
if any# shall be included in full as ta"able income from
sources within the Philippines. In the case of gross
income deri!ed from sources partly within and partly
without the Philippines# the ta"able income may first be
computed by deducting the e"penses# losses or other
deductions apportioned or allocated thereto and a
ratable part of any e"pense# loss or other deduction
which cannot definitely be allocated to some items or
classes of gross income$ and the portion of such ta"able
income attributable to sources within the Philippines may
be determined by processes or formulas of general
apportionment prescribed by the Secretary of 4inance.
'ains# profits and income from the sale of personal
property produced 0in whole or in part1 by the ta"payer
within and sold without the Philippines# or produced 0in
whole or in part1 by the ta"payer without and sold within
the Philippines# shall be treated as deri!ed partly from
sources within and partly from sources without the
Philippines.
'ains# profits and income deri!ed from the purchase of
personal property within and its sale without the
Philippines# or from the purchase of personal property
without and its sale within the Philippines shall be
treated as deri!ed entirely form sources within the
country in which sold/ Pro!ided# howe!er# .hat gain from
the sale of shares of stoc& in a domestic corporation
shall be treated as deri!ed entirely form sources within
the Philippines regardless of where the said shares are
sold. .he transfer by a nonresident alien or a foreign
corporation to anyone of any share of stoc& issued by a
$0
domestic corporation shall not be effected or made in its
boo& unless/ 081 the transferor has filed with the
*ommissioner a bond conditioned upon the future
payment by him of any income ta" that may be due on
the gains deri!ed from such transfer# or 021 the
*ommissioner has certified that the ta"es# if any#
imposed in this .itle and due on the gain realied from
such sale or transfer ha!e been paid. It shall be the duty
of the transferor and the corporation the shares of which
are sold or transferred# to ad!ise the transferee of this
re%uirement.
041 3efinitions. - As used in this Section the words 5sale5 or
5sold5 include 5e"change5 or 5e"changed5$ and the word
5produced5 includes 5created5# 5fabricated5#
5manufactured5# 5e"tracted5# 5processed5# 5cured5 or
5aged5.
-IR I&A8 Ruling (o) 39+,% (.atitude -roadband, Inc))
.his refers to your letter dated August 84# 2??M re%uesting
e"emption from payment of income ta" and !alue-added ta"
0@A.1 on the rental payment made by Eatitude 2roadband#
Inc. 0Eatitude - Philippines1 to International .elecom-
munications Hnion 0I.H1.
It is represented that I.H is a specialied agency of the
Hnited )ations with office address at Places des )ations#
*J-8288 'ene!a 2?# Switerland$ that Eatitude-Philippines
is a domestic corporation with office address at H28?8 28st
4loor# *itiban& .ower# Paseo de Ro"as# Ba&ati *ity 822M.
It is further represented that Eatitude-Philippines# as
e"hibitor# rented an e"hibition space located in Jong Gong#
from I.H# as organier of I.H .elecom Iorld 2??M# in
consideration of Swiss 4rancs 2<#2??.?? last April M# 2??M.
A foreign corporation li&e I.H is ta"able only on income
deri!ed from sources within the Philippines.
Such being the case and since the sub(ect international
e!ent will be held in Jong Gong# the rental payment to be
paid therefore by Eatitude-Philippines to I.H# being income
deri!ed from sources without the Philippines by a foreign
corporation# is not sub(ect to Philippine income ta".
Boreo!er# the rental payment by Eatitude-Philippines to I.H
is not sub(ect to the twel!e percent 082=1 @A..
Section 8?8 0A1 clearly states that the sale or e"change of
ser!ices# including the use or lease of properties# sub(ect to
@A. includes only those ser!ices that are performed in the
Philippines. Accordingly# the said rental payment for the
lease of an e"hibition space in Jong Gong is therefore
e"empt from @A..
-IR Ruling (o) 8A+,,0+,% (International Botel .icensing !ompan1)
It is represented that *ebu Insular is a corporation organied
and e"isting under the laws of the Philippines$ that it entered
into an International Ser!ices Agreement 0Agreement1 with
Barriott International# Inc.# 0Barriott1 a corporation organied
and e"isting under the laws of the Hnited States of America$
that subse%uently# Barriott assigned its rights under the
Agreement to International Jotel# a non-resident foreign
corporation organied and e"isting under the laws of
Eu"embourg$ that the Agreement in part pro!ides for the
rendition of mar&eting ser!ices that consists primarily of the
promotion and mar&eting of *ebu Insular in international
mar&ets$ that all the mar&eting wor& under the Agreement is
to be performed outside the Philippines$ and that in
consideration for such ser!ices# *ebu Insular pays a fee
e%ui!alent to 8.<= of hotel re!enues.
8. .he Bar&eting fees paid by *ebu Insular to International
Jotel for ser!ices rendered under the Agreement are
considered income from sources without the Philippines
under the .a" *ode of 8::; and# as such# are not
sub(ect to income ta" and conse%uently# to withholding
ta".
Since the mar&eting and promotional ser!ices which
shall be pro!ided by International Jotel for the hotel# in
$1
relation to the promotion# mar&eting and publicity of the
Jotels in international mar&ets world-wide# shall be
underta&en and rendered in areas e"clusi!ely outside
the Philippines and shall not be related to the acti!ities
or to promotion# mar&eting and publicity of the Jotels
within the territorial limits of the Philippines# the
mar&eting fees to be paid by *ebu Insular to
International Jotel for ser!ices performed outside the
Philippines shall be considered as income from sources
without the Philippines which shall not be sub(ect to
Philippine income ta".
2. Bar&eting fees to be paid for ser!ices which shall be
rendered outside the Philippines shall not be sub(ect to
the 82= @A. since @A. is imposed only on the sale or
e"change of goods and ser!ices performed in the
Philippines# in accordance with the pro!isions of Section
8?M and 8?8 of the .a" *ode of 8::;.
Hnder Sections 8?M and 8?8 of the .a" *ode of 8::;#
as amended# @A. shall be imposed only on ser!ices
performed in the Philippines. Since ser!ices to be
rendered by International Jotel to *ebu Insular under
the Agreement shall be rendered outside the Philippines#
Bar&eting fees paid to *ebu Insular for said ser!ices
shall not be sub(ect to the 82= @A..
"------------------------------------"
5. ALLOCATION OF INCOME AND DEDUCTIONS BET7EEN 2 OR
MORE CORPORATIONS O7NEDDCONTROLLED BY THE SAME
INTERESTS (NIRC 0:)
In the case of two or more organiations# trades or
businesses 0whether or not incorporated and whether or not
organied in the Philippines1 owned or controlled directly or
indirectly by the same interests# the *ommissioner is
authoried to distribute# apportion or allocate gross income
or deductions between or among such organiation# trade or
business# if he determined that such distribution#
apportionment or allocation is necessary in order to pre!ent
e!asion of ta"es or clearly to reflect the income of any such
organiation# trade or business.
5.1 T#a,%;"# P#$&$,9 a,+ I,)"##"!a)"+ C./4a,$"%
Revenue Audit 6emorandum "rder (o) 1+9$
8. 2A*G'RKH)3
8.8 .he remar&able decrease in collection from
interrelated group of companies has seriously
affected the collection efforts of the 2ureau.
Statistics showed that while 6inter-related transaction6
accounts for a big percentage of the transfer of
goods and ser!ices in the country# the re!enue
collection from related-party groups continue to go
on a downtrend.
8.2 .he magnitude of re!enue lost has become so
alarming that there is a need to immediately address
this problem. It is a fact that# because these
companies are more interested in their net income
as a whole 0rather than as indi!idual corporations1
there is a desire to minimie ta" payments by ta&ing
ad!antage of the loopholes in our ta" system and by
ma&ing use of schemes that allow them to mo!e
around the law in order to reduce their ta"
obligations.
8., It is therefore necessary to conduct a (oint and
coordinated e"amination of interrelated group of
companies in order to identify the ta" a!oidance
schemes and be able to prescribe the necessary
measures in order to a!oid the erosion of re!enues.
2. '-)-RAE 'HI3-EI)-S
2.8 'eneral Procedures. .he pro!isions laid down in
@olume 8 of the Jandboo& on Audit Procedures and
.echni%ues must be followed with respect to/
a. 2asic reportorial re%uirements$ and
b. general audit procedures and techni%ues.
2.2 Special Audit Procedures. In addition# focus must be
made on the following audit issues/
$2
2.2.8 Hse of ta" shelters 0such as a foundation or
a ta"-e"empt company1 in order to a!ail of ta"
e"emptions or of lower ta" rates$
2.2.2 Shifting income andFor e"penses in fa!or of
a related company with special ta" pri!ileges
0e.g. 2KI Incenti!es# .a" Jolidays# and etc.1$
2.2., .ransfer pricing in inter-company supply of
goods 0tangible and intangible1 and ser!ices$
2.2.4 Inter-company loans and ad!ances# and
financing arrangements where the interest
charged for the use of money is not at arm6s
length$
2.2.< Arbitrary cost-sharing arrangements for
common e"penses$
2.2.M .a" a!oidance through resale and agency
arrangements$ and
2.2.; .hin capitaliation and earning stripping.
2., Hse of Section <? of the )IR*# as amended
2.,.8 .he authority for allocating income and
e"penses between or among related parties is
laid down in Section <? of the )IR*# as
amended. .his Section gi!es the *ommissioner
of Internal Re!enue the authority to ma&e
allocation of income and e"penses between or
among controlled group of companies# if a
related ta"payer has not reported its true ta"able
income.
2.,.2 .he purpose of Section <? is to ensure that
ta"payers clearly reflect income attributable to
controlled transactions and to pre!ent the
a!oidance of ta"es with respect to such
transactions. It places a controlled ta"payer in
ta" parity with an uncontrolled ta"payer by
determining the arm6s-length price of inter-
company transactions.
2.4 3etermination of Arm6s Eength Price R
a. .he method to be used in determining the arm6s-
length price depends on the type of transaction R
whether the transaction in!ol!es a transfer of
property# ser!ices# loans# ad!ances# rentals or other
arrangements. Accordingly# proper (udgment must
be used ta&ing into consideration the peculiarity of
the transaction and the presence of a!ailable
information that would reliably determine the correct
income of a controlled ta"payer.
b. .he different methods of determining the arm6s
length price of a controlled transaction under the
K-*3 Rules on transfer pricing may be used as a
reference. .his includes the use of *omparable
Hncontrolled Price Bethod# Resale Bethod# *ost-
plus Bethod and 'ross Profit Bargin Bethod 0these
are discussed in detail in the ne"t Section1.
c. In addition# the following must be considered/
3ata and Assumptions R consider the
completeness and accuracy of a!ailable data and
information and the reliability of assumptions that are
to be made.
*omparability R consider similar transactions
between unrelated parties. 4actors of comparability
to be considered in the e"amination include/
a. 4unctional analysis R factors such as product
design and engineering# manufacturing#
production and process# mar&eting and
distribution# ad!ertising and etc.
b. *ontractual terms R this include sales and
purchase agreements# !olume# nature of
warranties# credit and payment terms and other
commercial arrangements.
c. Ris&s R mar&et ris&s including fluctuations in
demand# financial ris&s# collection ris& and
commercial ris&s.
d. -conomic conditions R refers to the pre!ailing
conditions in the mar&et.
2.< 3efinition of .erms R
2.<.2 .he term 6controlled6 for purposes of this
RABK shall mean any &ind of control# direct or
indirect# whether legally enforceable and
howe!er e"ercisable or e"ercised. It is the reality
$
of the control which is decisi!e# not its form or
the mode of its e"ercise or ownership. A
presumption of control arises if income and
e"penses ha!e been arbitrarily shifted.
2.<., .he term 6controlled ta"payer6 means any
one or two or more organiations or trade# or
businesses owned or controlled directly or
indirectly by the same interests$
2.<.4 .he term 6true ta"able income6 means# the
ta"able income which would ha!e been reported
by the controlled ta"payer# had it in the conduct
of its affairs dealt with the other member or
members of the group at arm6s-length.
,. AH3I. PRK*-3HR-S
,.8 .ransfer Pricing in interrelated supply of goods or
ser!ices. .his is rele!ant if one of the related-party
en(oys certain pri!ileges such as ta" e"emption#
lower ta" rates# incenti!es# or is a losing company.
,.8.8 In 'eneral. R .he method to be used in
determining the arm6s-length price of a
controlled transaction shall rely primarily on the
best (udgment of the e"aminer after ta&ing into
consideration the pre!ailing circumstances as
well as the a!ailability of information at the time
of transaction.
,.8.2 As a guide# the methods under the K-*3
'uidelines on transfer Pricing may be used# as
follows/
a. .he comparable uncontrolled price method
0*HP1 R this e!aluates the arm6s length by
reference to the amount charged in a
comparable uncontrolled transaction. In
e!aluating comparability# consider the
following/
Z trademar&
Z product differences
Z geographical differences# and
Z e"traordinary mar&et conditions$
b. .he Resale Price Bethod 0RPB1 R it
e!aluates arm6s length by reference to the
gross profit margin realied in comparable
transactions.
c. .he *ost Plus Bethod 0*PB1 R it e!aluates
the arm6s-length by adding the appropriate
gross profit to the controlled ta"payer6s cost
of producing the property in!ol!ed in the
controlled transaction and then impose the
applicable profit rate.
d. .he Profit Split Bethod R this is done
simply by di!iding the profit between the
members in!ol!ed in the transaction ta&ing
into consideration the e"tent of their
participation in the realiation of the
transaction.
,.2 Eoans and Ad!ances# and financing arrangements
between or among related parties R
,.2.8. In 'eneral. Ihen one member of a group
ma&es a loan or ad!ance directly or indirectly to#
or otherwise becomes a creditor of another
member and either party charges an interest
which is not at arm6s length# there may be a ta"
ad!antage to either the lender or borrower.
,.2.2 Eoans and Ad!ances may be in the form of /
a. 2ona fide indebtedness such as loans or
ad!ances of money or other considerations$
b. Indebtedness arising in the ordinary course
of business from sales# leases# or the
rendition of ser!ices by and between
members of the group# or any other similar
e"tension of credit$
c. Alleged indebtedness
4or purposes of this Section# an 5arm6s length
rate of interest5 is the rate of interest which
would ha!e been charged in independent
transactions between unrelated parties under
similar circumstances.
,.2., 4inancing Arrangements.
,.2.,.8 A common element in related-party
groups is the presence of a finance
$!
company 0usually a holding company1 to
pro!ide financial ser!ices for the members
of the group.
,.2.,.2 4inancial ser!ices by a holding company
may range from ser!ing as a central lender
for the group# in which capacity# it may
borrow funds from unrelated financial
institutions and on-loan such amounts to its
subsidiaries. It may also perform financial
intermediary ser!ices for the group including
factoring and hedging.
,.2.,., Ihere one member of a group of
controlled entities ma&es a loan or ad!ance
directly or indirectly# or otherwise becomes
the creditor of another member of such
group# an arm6s length price for the use of
money should be charged. .he same is true
in the case of indebtedness arising in the
ordinary course of business such as sales#
leases# pro!ision of ser!ices and other
similar e"tension of credits.
,., Performance of Ser!ices for Another
,.,.8 In general R under this scheme# one
member of the group performs mar&eting#
managerial# administrati!e# technical or other
ser!ices for the benefit of# or on behalf of
another member of the group without charge or
at a charge which is not arm6s-length.
,.,.2 .o determine the arm6s length price for the
ser!ice# the 52enefit .est5 may be considered.
Hnder this test# the direct benefit to the member
which recei!ed the ser!ice must be considered.
It is necessary to ta&e into account on some
reasonable basis all the costs or deductions
which are directly or indirectly related to the
ser!ice performed.
,.,., Ihere tangible or intangible property is
transferred# sold# assigned# loaned# leased or
otherwise made a!ailable in any manner by one
member of a group to another member of the
group and ser!ices are rendered by the
transferor in connection with such transfer# the
ser!ices rendered in such transaction# pro!ided
it is not ancillary# must be !alued.
,.4 Sharing of *osts
,.4.8 In general. A cost sharing arrangement is an
agreement under which the parties agree to
share the costs in proportion to their respecti!e
share of anticipated benefits. .his is !ery
common in (oint underta&ing and in e"penses
such as research and de!elopment# office and
factory spaces# legal and consultancy ser!ices
and etc.
,.4.2 In determining the appropriateness of the
sharing arrangement# factors such as benefits-
recei!ed# sie of the company# participation in
the !enture# and etc. should be considered.
-IR Ruling (o) 8A+**%+,* (2oppers <ood /roducts)
GIPPE-Philippine 2ranch 0formerly Goppers .imber
Preser!ation Pty. Etd.1 is a corporation duly registered with
the Securities and -"change *ommission 0S-*1 as
Philippine branch of GIPPE-Australia# a foreign corporation
duly organied and e"isting under the laws of Republic of
)ew South Iales. Its is primarily engaged in the business of
selling treated timber and in particular treated poles to
electricity and telecommunication companies on a whole
basis.
GIPPE-Australia# as a parent-company# incurs certain
o!erhead e"penses in connection with the finance#
administration# research and de!elopment# all of which
directly benefit its branches all o!er the world# including the
Philippines# which cannot be definitely allocated or identified
with the operations of a single branch. 3ue to this# GIPPE-
Australia charges a ratable portion of the said o!erhead
e"penses to its branches# including the Philippines. .he
share allocated to GIPPE-Philippine 2ranch is computed
based on ratio which GIPPE-Philippine 2ranch Sales bears
$"
to Jead Kffice Sales and e!idenced by an e"ternal auditor6s
certificate containing the necessary information under
Re!enue Regulations )o. 8M-8M.
2ased on the foregoing# you now re%uest for confirmation of
your opinion that/
8. A branch office6s ratable share in the o!erhead e"penses
incurred by its parent company is a !alid business
e"pense under pertinent Philippine ta" laws# rules and
regulations$ and
2. .he remittance made by a branch office to its parent
company# representing its ratable share in the o!erhead
e"penses incurred by the said parent company# being a
mere reimbursement# is li&ewise not sub(ect to any
Philippine ta".
In reply thereto# please be informed# as follows/
8. -"penditures made by a foreign corporation in
conducting its business are deductible in computing its
ta"able income from sources within the Philippines only
when allocable to the production of income from sources
within the Philippines or where a ratable part of the
general e"penditures is apportioned to income from
sources within the Philippines. .he net income of a
resident foreign corporation# is therefore determined by
deducting from the items of gross income specified in
Section 42 0-1 Oformerly Section ,;0a1P of the )ational
Internal Re!enue *ode# as amended# treated as income
from sources within the Philippines# the e"penses#
losses# and other deductions properly apportioned or
allocated thereto and a ratable part of any other
e"penses# losses# or deductions which cannot definitely
be allocated to some item or class of gross income. .he
remainder# if any# is included in full as net income from
sources within the Philippines. .he ratable part is based
upon the ratio of gross income from sources within the
Philippines to the total gross income.
In !iew thereof# this Kffice hereby confirms your opinion
that a branch office6s ratable share in the o!erhead
e"penses incurred by its parent company is a !alid
business e"pense under pertinent Philippine ta" laws#
rules and regulations.
Accordingly# prior to the claim of a branch6s share from
worldwide o!erhead e"penses as a deduction from its
gross income# it must pro!ide the necessary documents
as re%uired under the aforesaid regulations.
2. .he remittance made by the GIPPE-Philippine 2ranch
represents the payment of its ratable share in the
e"penses of the head office. Such payment is a mere
reimbursement of e"penses incurred by its Jead Kffice
0JK1 or parent company through the cost sharing
arrangement. .he said payment is made in order to
satisfy an e"isting obligation# that is# GIPPE-Philippine
2ranch6s share in head office e"penses# and not to
distribute some of its earnings. .his remittance is not
meant to transfer profits# income or re!enues of GIPPE-
Philippine 2ranch to GIPPE-Australia. 02IR Ruling )o.
8:;-82 dated >une 8;# 8:821
Such being the case# since the remittance discussed
abo!e only represents the cost sharing arrangement and
not transfer of profits# income or re!enues by a GIPPE-
Philippine 2ranch to GIPPE-Australia# the same is not
sub(ect to income ta" or withholding ta".
Boreo!er# for the e"penses to be deductible on the part
of GIPPE-Philippine 2ranch# it is understood that
GIPPE-Australia and GIPPE-Philippine 2ranch ha!e
e"erted reasonable efforts to ensure that the method of
allocation and charges is consistent with the arm6s length
principle as may be determined through ade%uate
documentation. 4inally# in the e!ent that transfer pricing
regulations implementing Section <? of the .a" *ode of
8::;# as amended# are issued by the 2IR# the parties
shall comply with the re%uirements thereof.
-IR Ruling (o) 8A+99*+,* (6arubeni !orporation)
It is represented that B* is a corporation duly organied and
e"isting under the laws of >apan with principal business
address at 4-2 Khtemachi 8-*home# *hiyoda-&u# .o&yo#
$#
>apan$ that B* is licensed to do business in the Philippines
through its Philippine branch# Barubeni *orporation R
Banila 2ranch 0B*-Banila1 duly registered with the
Securities and -"change *ommission 0S-*1$ that BP* is a
of the laws of the Philippines with registered office and
principal place of business at 8th and :th 4loors# E.@. Eocsin
2ldg. Ayala A!enue corner Ba&ati A!enue# Ba&ati *ity$ that
BP* is a 8??= subsidiary of B*$ that pursuant to the intra-
group ser!ices 0I'S1 charge policy between B* and its
domestic and foreign subsidiaries# B* and BP* entered into
a Ser!ice Agreement dated April 8# 2??< whereby B*6s
*orporate Staff 3i!ision shall perform ser!ices in fa!or of
BP*# consisting in/
8. Information and ad!ice with respect to general
administration# human resources# media relations W
ad!ertisement# accounting# finance# ris& management
and information with respect to legal matters and
economic W industrial research$
2. Ser!ices with respect to payroll and welfare for
>apanese e"patriates$
,. Ad!ice and assistance with regard to certain information
peculiar to each country by Regional Strategy W
*oordination 3epartment of B*.
It is further represented that for all the abo!ementioned
ser!ices which will be performed by B* outside the
Philippines# BP* shall pay B* compensation for ser!ices to
be semi-annually agreed in writing by the parties based on
agreed allocation ratios without additional mar&-up or profit$
that such compensation for ser!ices determined to be on
arm6s-length basis# represents allocation or reimbursement
of actual costs by B* to BP* based on actual costs and
e"penses incurred by staff of B* in pro!iding the ser!ice to
BP*$ and that B*-Banila 2ranch has no participation in the
Ser!ice Agreement between B* and BP*.
In this regard# you are re%uesting confirmation of your
opinion# as follows/
8. .he compensation to be deri!ed by B* from BP* for
ser!ices rendered pursuant to the Ser!ice Agreement is
not sub(ect to incomeFwithholding ta" since the same is
mere reimbursement of costs without mar&-up or profit$
and
2. .he said compensation to be paid by BP* to B* under
the Ser!ice Agreement is deductible from BP*6s gross
income as a !alid e"pense.
8. .he compensation for ser!ices being mere
reimbursement of costs without mar&-up or profit and
rendered outside the Philippines shall be e"empt from
Philippine income ta".
Inasmuch as it has been represented that the BP* shall
pay B* compensation for ser!ices based on agreed
allocation ratios without additional mar&-up or profit# the
ser!ice fees# pursuant to the Ser!ice Agreement# are not
sub(ect to Philippine income ta". Payments co!ering
actual and direct costs and e"penses without mar&-up or
profit are mere reimbursement of costs and therefore# do
not constitute ta"able income. 02IR Ruling )o. 3A-?<,-
?4 dated 4ebruary M# 2??41 2y its !ery nature#
reimbursement of costs is not income for being mere
returns of capital 02IR Ruling )o. 3A-,84-:8 dated
August 24# 8::81. Accordingly# the ser!ice fees to be
paid by BP* to B* are not considered as ta"able
income sub(ect to Philippine income ta" and
conse%uently to withholding ta".
4urther# since the ser!ices are to be rendered by B*
outside the Philippines# the ser!ice fees pursuant to the
Ser!ice Agreement are not sub(ect to Philippine income
ta" pursuant to Section 28021081 of the .a" *ode of
8::;# as amended.
2. .he compensation for ser!ices is deductible from BP*6s
gross income as a !alid e"pense.
.he compensation for ser!ices to be paid by BP* to B*
is deductible from the gross income of BP*. .he
ser!ices to be performed by B* to BP* pursuant to an
I'S charge policy between B* and its domestic and
$$
foreign subsidiaries li&e BP*# which ser!ices include
information and ad!ice with respect to general
administration# human resources# media relations W
ad!ertisement# accounting# finance# ris& management
and information with respect to legal matters and
economic W industrial research among others are
ordinary and necessary e"penses deductible on the part
of BP*. .he said e"penses being directly connected
with and appropriate in the conduct of the business of
BP*# the same may thus be considered as ordinary and
necessary e"penses pursuant to Section ,40A1081 of the
.a" *ode of 8::;# as amended# which pro!ides that
such ordinary and necessary e"penses paid or incurred
during the ta"able year in carrying on or which are
directly attributable to the de!elopment# management#
operation andFor conduct of the trade# business or
e"ercise of profession are allowed as deduction from
gross income.
Boreo!er# for the e"penses to be deductible on the part
of BP*# it is understood that the parties ha!e e"erted
reasonable efforts to ensure that the method of
allocation and charges is consistent with the arm6s length
principle as may be determined through ade%uate
documentation. 4inally# in the e!ent that transfer pricing
regulations implementing Section <? of the .a" *ode of
8::;# as amended# are issued by the 2IR# the parties
shall comply with the re%uirements thereof.
5.2 I,)"#1C./4a,- L.a,%
R6" (o) *3+99
8. Kb(ecti!es/
8.8 .o adopt the arm6s length bargaining standard as
the ultimate test for determining the correct gross
income and deductions between two or more
enterprises under common control.
8.2 .o pro!ide a means of redistributing or
reapportioning income and e"penses of ta"payers
under common control after applying Section <? of
the )IR*# as amended.
2. *o!erage/
.his paper applies to all forms of bona fide indebtedness
and includes/
2.8 Eoans or ad!ances of money or other consideration
0whether or not e!idence by a written instrument1$
2.2 Indebtedness arising in the ordinary course of
business out of sales# leases# or the rendition of
ser!ices by or between members of the group# or
any other similar e"tension$
2., 2ut does not apply to alleged indebtedness which
was in fact a contribution of capital or a distribution
by a corporation with respect to its shares.
,. Applying Arm6s Eength on Section <? of the )IR*# as
amended
,.8 Section <?. Allocation of income and deductions. R
In any case of two or more organiations# trades# or
businesses 0whether or not incorporated and
whether or not organied in the Philippines1 owned
or controlled directly or indirectly by the same
interests# the *ommissioner of Internal Re!enue is
authoried to distribute# apportion# or allocate gross
income or deductions between or among such
organiations# trades# or businesses# if he
determines that such distribution# apportionment# or
allocation is necessary in order to pre!ent e!asion of
ta"es or clearly to reflect the income of any such
organiations# trades or businesses.
,.2 Section <? empowers the *ommissioner to rectify
abnormalities and distortions in income brought
about by common control through the adoption of
standards considered fair# reasonable or at arm6s
length.
$%
,., .his Krder adopts the arm6s length bargaining
standard as the ultimate test for determining the
fairness of related party transactions - i.e.# 5the
standard to be applied in e!ery case is that of an
uncontrolled ta"payer dealing at arm6s length with
another uncontrolled ta"payer5.
4. 3etermination of .a"able Income on Inter-company
Eoans or Ad!ances
4.8 In general. Ihere one member of a group of
controlled entities ma&es a loan or ad!ances directly
or indirectly# or otherwise becomes a creditor of
another member of such group# and charges no
interest# or charges interest at a rate which is not
e%ual to an arm6s-length rate as defined in
subparagraph 021 of this paragraph# the
*ommissioner may ma&e appropriate allocations to
reflect an arm6s length interest rate for the use of
such loan or ad!ance.
4.8.8 If payments are made to parties under
common control according to a legally
enforceable contract# the contract may still be
recognied as !alid. Jowe!er# for purposes of
determining the true ta"able income of the
parties in!ol!ed# the interest rate charged may
be sub(ected to reallocation.
4.8.2 Section <? does not apply only to ta"able
entities. Reallocation may also apply to ta"-
e"empt organiations.
4.2 Arm6s Eength interest rate.
4.2.8 In general. 4or purposes of this Krder# the
arm6s length interest rate shall be the rate of
interest which was charged or would ha!e been
charged at the time the indebtedness arose in
independent transaction with or between
unrelated parties under similar circumstances.
All rele!ant factors will be considered# including
the amount and duration of the loan# the security
in!ol!ed# the credit standing of the borrower#
and the interest rate pre!ailing at the situs of the
lender or creditor for comparable loans.
4.2.2 4or purposes of determining the arm6s
length rate in domestic transactions# the interest
rate to be used is the 2an& Reference Rate
02RR1 prescribed by the 2ang&o Sentral ng
Pilipinas 02SP1.
4.2., .he fact that the interest rate actually
charged on a loan or ad!ance is e"pressly
indicated on a written instrument does not
preclude the application of Section <? to such
loan or ad!ance.
<. Interest Period
<.8 .he interest period shall commence at the date the
indebtedness arises# e"cept that with respect to
indebtedness arising in the ordinary course of
business out of sales# leases# or supply of goods
and ser!ices which are generally considered as
trade accounts recei!ables or payables# the interest
period shall not commence if the ta"payer is able to
establish that the normal trade practice in a gi!en
industry is to allow balances# in the case of similar
transactions with unrelated parties# to remain
outstanding for a longer period without charging
interest.
<.2 4or purposes of determining the period of time for
which a balance is outstanding# payments or credits
shall be applied against the earliest balance
outstanding. .he ta"payer may# in accordance with
an agreement# apply such payments or credits in
some other order in its boo&s only after establishing
that the arrangement is customary for parties in that
particular business.
-IR Ruling (o) 8A+,9*+,* (6arubeni !orporation)
.his refers to your letter dated August 8<# 2??< stating that
on September 8,# 2??<# a Eoan Agreement was entered into
$&
between Barubeni *orporation 0Barubeni1# a corporation
organied and e"isting under the laws of >apan with principal
office at 4-2# Khtemachi I-chome# *hiyoda-&u# .o&yo# >apan#
and Eipa -coone Properties# Inc. 0E-PI1# a corporation
organied and e"isting under the laws of the Philippines with
principal office at 8;th 4loor Eiberty *enter# 8?4 J.@. dela
*osta Street# Salcedo @illage# Ba&ati *ity$ that E-PI6s
outstanding capital stoc& is forty percent 04?=1 owned by
Barubeni while the remaining si"ty percent 0M?=1 is owned
by *elestial *orporation 0*elestial1# a company organied
and e"isting under the laws of the Philippines$ and that
pursuant to the said Eoan Agreement# Barubeni lent to E-PI
a loan in the aggregate amount not e"ceeding 4ifty Billion
>apanese Len.
2ased on the foregoing representations# you now re%uest
confirmation of your opinion that no interest income shall be
imputed on the interest-free loan e"tended by Barubeni to
E-PI considering that the said loan was e"tended solely to
finance the operational and capital e"penditure of E-PI.
In reply thereto# please be informed that Section <? of the
.a" *ode of 8::; pro!ides that R
5Sec. <?. Allocation of Income and 3eductions. R In the
case of two or more organiations# trades or businesses
0whether or not incorporated and whether or not organied in
the Philippines1 owned or controlled directly or indirectly by
the same interests# the *ommissioner is authoried to
distribute# apportion or allocate gross income or deductions
between or among such organiation# trade or business# if
he determines that such distribution# apportionment or
allocation is necessary in order to pre!ent e!asion of ta"es
or clearly to reflect the income of any such organiation#
trade or business.5
*orollarily# Re!enue Bemorandum Krder )o. M,-::
pro!ides that this applies to all forms of bona fide
indebtedness and includes/
8. Eoans or ad!ances of money or other consideration
0whether or not e!idenced by a written instrument1$
2. Indebtedness arising in the ordinary course of business
out of sales# leases# or the rendition of ser!ices by or
between members of the group# or any other similar
e"tension$
,. 2ut does not apply to alleged indebtedness which was in
fact a contribution of capital or a distribution by a
corporation with respect to its shares.
.his Kffice ruled that R
5. . . inter-corporate ad!ances are not co!ered by Re!enue
Bemorandum Krder 0RBK1 )o. M,-:: dated >uly 8:# 8:::.
Section 2., of RBK states that it does not apply to
indebtedness which was in fact a contribution to capital. .he
foregoing inter-corporate ad!ances are analogous to capital
contribution since it is based on percentage of stoc&holdings
of the stoc&holders ma&ing the ad!ances. .he fact that some
indi!idual stoc&holders in some instances are not able to
contribute to the fund constituting the ad!ances does not
destroy its character as an analogous capital contribution. In
other instances where the ad!ances are made due to
financial need of borrowing company and the financial ability
of the lending company# it is clear that these are emergency
loans to help a related company which is short of capital.
.hese are not the instances co!ered by Section 4.8. of the
RBK which would authorie the *ommissioner of Internal
Re!enue to allocate interest income under Section <? of the
.a" *ode of 8::; because such inter-corporate loans are
clearly transactions# done for ta" a!oidance or e!asion
purposes.5
5Accordingly# the interest-free shareholder6s ad!ancesFloans
made by REI to R*2* Realty are in the nature of capital
contributions and therefore not co!ered by RBK )o. M,-::
and conse%uently not sub(ect to the imputed interest under
the aforesaid RBK. As such# any income recei!ed by REI
from its shareholder6s ad!ances to R*2* Realty are not
sub(ect to income ta" and conse%uently to withholding ta".
5""" """ """5
.he interest-free shareholder6s ad!ancesFloans in the abo!e-
cited ruling are in the same nature as those lent by Barubeni
to E-PI because the said loan shall only be utilied by the
%0
latter for operational and capital e"penditures and therefore
not co!ered by RBK )o. M,-:: as such not sub(ect to the
imputed interest under the aforesaid RBK.
IJ-R-4KR-# in !iew of the foregoing# this Kffice hereby
confirms your opinion that no interest income should be
imputed on the interest-free loan e"tended by Barubeni
considering that the said loan was made in order for E-PI to
meet its !arious financial obligations.
.apanda1 Foods !orp v !IR
/'ilippine (ational "il !ompan1 v !IR
"------------------------------------"
1:. ALLO7ABLE DEDUCTIONS (NIRC '*)
-"cept for ta"payers earning compensation income arising
from personal ser!ices rendered under an employer-
employee relationship where no deductions shall be allowed
under this Section other than under subsection 0B1 hereof# in
computing ta"able income sub(ect to income ta" under
Sections 24 0A1$ 2< 0A1$ 2M$ 2; 0A1# 021 and 0*1$ and 28 0A1
081# there shall be allowed the following deductions from
gross income$
0A1 -"penses. -
081 Krdinary and )ecessary .rade# 2usiness or
Professional -"penses.-
0a1 In 'eneral. - .here shall be allowed as
deduction from gross income all the ordinary
and necessary e"penses paid or incurred during
the ta"able year in carrying on or which are
directly attributable to# the de!elopment#
management# operation andFor conduct of the
trade# business or e"ercise of a profession#
including/
0i1 A reasonable allowance for salaries# wages#
and other forms of compensation for
personal ser!ices actually rendered#
including the grossed-up monetary !alue of
fringe benefit furnished or granted by the
employer to the employee/ Pro!ided# .hat
the final ta" imposed under Section ,,
hereof has been paid$
0ii1 A reasonable allowance for tra!el e"penses#
here and abroad# while away from home in
the pursuit of trade# business or profession$
0iii1 A reasonable allowance for rentals andFor
other payments which are re%uired as a
condition for the continued use or
possession# for purposes of the trade#
business or profession# of property to which
the ta"payer has not ta&en or is not ta&ing
title or in which he has no e%uity other than
that of a lessee# user or possessor$
0i!1 A reasonable allowance for entertainment#
amusement and recreation e"penses during
the ta"able year# that are directly connected
to the de!elopment# management and
operation of the trade# business or
profession of the ta"payer# or that are
directly related to or in furtherance of the
conduct of his or its trade# business or
e"ercise of a profession not to e"ceed such
ceilings as the Secretary of 4inance may# by
rules and regulations prescribe# upon
recommendation of the *ommissioner#
ta&ing into account the needs as well as the
special circumstances# nature and character
of the industry# trade# business# or
profession of the ta"payer/ Pro!ided# .hat
any e"pense incurred for entertainment#
%1
amusement or recreation that is contrary to
law# morals public policy or public order shall
in no case be allowed as a deduction.
0b1 Substantiation Re%uirements. - )o deduction
from gross income shall be allowed under
Subsection 0A1 hereof unless the ta"payer shall
substantiate with sufficient e!idence# such as
official receipts or other ade%uate records/ 0i1 the
amount of the e"pense being deducted# and 0ii1
the direct connection or relation of the e"pense
being deducted to the de!elopment#
management# operation andFor conduct of the
trade# business or profession of the ta"payer.
0c1 2ribes# Gic&bac&s and Kther Similar Payments. -
)o deduction from gross income shall be
allowed under Subsection 0A1 hereof for any
payment made# directly or indirectly# to an
official or employee of the national go!ernment#
or to an official or employee of any local
go!ernment unit# or to an official or employee of
a go!ernment-owned or -controlled corporation#
or to an official or employee or representati!e of
a foreign go!ernment# or to a pri!ate
corporation# general professional partnership# or
a similar entity# if the payment constitutes a
bribe or &ic&bac&.
021 -"penses Allowable to Pri!ate -ducational
Institutions. - In addition to the e"penses allowable
as deductions under this *hapter# a pri!ate
educational institution# referred to under Section 2;
021 of this *ode# may at its option elect either/ 0a1 to
deduct e"penditures otherwise considered as capital
outlays of depreciable assets incurred during the
ta"able year for the e"pansion of school facilities or
0b1 to deduct allowance for depreciation thereof
under Subsection 041 hereof.
021 Interest.-
081 In 'eneral. - .he amount of interest paid or incurred
within a ta"able year on indebtedness in connection
with the ta"payer6s profession# trade or business
shall be allowed as deduction from gross income/
Pro!ided# howe!er# .hat the ta"payer6s otherwise
allowable deduction for interest e"pense shall be
reduced by an amount e%ual to the following
percentages of the interest income sub(ected to final
ta"/
048=1 beginning >anuary 8# 8::8$
0,:=1 beginning >anuary 8# 8:::$ and
0,8=1 beginning >anuary 8# 2???$
021 -"ceptions. - )o deduction shall be allowed in
respect of interest under the succeeding
subparagraphs/
0a1 If within the ta"able year an indi!idual ta"payer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in
ad!ance through discount or otherwise/
Pro!ided# .hat such interest shall be allowed a a
deduction in the year the indebtedness is paid/
Pro!ided# further# .hat if the indebtedness is
payable in periodic amortiations# the amount of
interest which corresponds to the amount of the
principal amortied or paid during the year shall
be allowed as deduction in such ta"able year$
0b1 If both the ta"payer and the person to whom the
payment has been made or is to be made are
persons specified under Section ,M 021$ or
0c1 If the indebtedness is incurred to finance
petroleum e"ploration.
0,1 Kptional .reatment of Interest -"pense. - At the
option of the ta"payer# interest incurred to ac%uire
property used in trade business or e"ercise of a
profession may be allowed as a deduction or treated
as a capital e"penditure.
%2
0*1 .a"es.-
081 In 'eneral. - .a"es paid or incurred within the
ta"able year in connection with the ta"payer6s
profession# trade or business# shall be allowed as
deduction# e"cept
0a1 .he income ta" pro!ided for under this .itle$
0b1 Income ta"es imposed by authority of any
foreign country$ but this deduction shall be
allowed in the case of a ta"payer who does not
signify in his return his desire to ha!e to any
e"tent the benefits of paragraph 0,1 of this
subsection 0relating to credits for ta"es of foreign
countries1$
0c1 -state and donor6s ta"es$ and
0d1 .a"es assessed against local benefits of a &ind
tending to increase the !alue of the property
assessed.
Pro!ided# .hat ta"es allowed under this Subsection#
when refunded or credited# shall be included as part
of gross income in the year of receipt to the e"tent of
the income ta" benefit of said deduction.
021 Eimitations on 3eductions. - In the case of a
nonresident alien indi!idual engaged in trade or
business in the Philippines and a resident foreign
corporation# the deductions for ta"es pro!ided in
paragraph 081 of this Subsection 0*1 shall be allowed
only if and to the e"tent that they are connected with
income from sources within the Philippines.
0,1 *redit Against .a" for .a"es of 4oreign *ountries. -
If the ta"payer signifies in his return his desire to
ha!e the benefits of this paragraph# the ta" imposed
by this .itle shall be credited with/
0a1 *itien and 3omestic *orporation. - In the case
of a citien of the Philippines and of a domestic
corporation# the amount of income ta"es paid or
incurred during the ta"able year to any foreign
country$ and
0b1 Partnerships and -states. - In the case of any
such indi!idual who is a member of a general
professional partnership or a beneficiary of an
estate or trust# his proportionate share of such
ta"es of the general professional partnership or
the estate or trust paid or incurred during the
ta"able year to a foreign country# if his
distributi!e share of the income of such
partnership or trust is reported for ta"ation under
this .itle.
An alien indi!idual and a foreign corporation
shall not be allowed the credits against the ta"
for the ta"es of foreign countries allowed under
this paragraph.
041 Eimitations on *redit. - .he amount of the credit
ta&en under this Section shall be sub(ect to each of
the following limitations/
0a1 .he amount of the credit in respect to the ta"
paid or incurred to any country shall not e"ceed
the same proportion of the ta" against which
such credit is ta&en# which the ta"payer6s
ta"able income from sources within such country
under this .itle bears to his entire ta"able
income for the same ta"able year$ and
0b1 .he total amount of the credit shall not e"ceed
the same proportion of the ta" against which
such credit is ta&en# which the ta"payer6s
ta"able income from sources without the
Philippines ta"able under this .itle bears to his
entire ta"able income for the same ta"able year.
0<1 Ad(ustments on Payment of Incurred .a"es. - If
%
accrued ta"es when paid differ from the amounts
claimed as credits by the ta"payer# or if any ta" paid
is refunded in whole or in part# the ta"payer shall
notify the *ommissioner$ who shall redetermine the
amount of the ta" for the year or years affected# and
the amount of ta" due upon such redetermination# if
any# shall be paid by the ta"payer upon notice and
demand by the *ommissioner# or the amount of ta"
o!erpaid# if any# shall be credited or refunded to the
ta"payer. In the case of such a ta" incurred but not
paid# the *ommissioner as a condition precedent to
the allowance of this credit may re%uire the ta"payer
to gi!e a bond with sureties satisfactory to and to be
appro!ed by the *ommissioner in such sum as he
may re%uire# conditioned upon the payment by the
ta"payer of any amount of ta" found due upon any
such redetermination. .he bond herein prescribed
shall contain such further conditions as the
*ommissioner may re%uire.
0M1 Lear in Ihich *redit .a&en. - .he credits pro!ided
for in Subsection 0*10,1 of this Section may# at the
option of the ta"payer and irrespecti!e of the method
of accounting employed in &eeping his boo&s# be
ta&en in the year which the ta"es of the foreign
country were incurred# sub(ect# howe!er# to the
conditions prescribed in Subsection 0*10<1 of this
Section. If the ta"payer elects to ta&e such credits in
the year in which the ta"es of the foreign country
accrued# the credits for all subse%uent years shall be
ta&en upon the same basis and no portion of any
such ta"es shall be allowed as a deduction in the
same or any succeeding year.
0;1 Proof of *redits. - .he credits pro!ided in
Subsection 0*10,1 hereof shall be allowed only if the
ta"payer establishes to the satisfaction of the
*ommissioner the following/
0a1 .he total amount of income deri!ed from
sources without the Philippines$
0b1 .he amount of income deri!ed from each
country# the ta" paid or incurred to which is
claimed as a credit under said paragraph# such
amount to be determined under rules and
regulations prescribed by the Secretary of
4inance$ and
0c1 All other information necessary for the
!erification and computation of such credits.
031 Eosses. -
081 In 'eneral.- Eosses actually sustained during the
ta"able year and not compensated for by insurance
or other forms of indemnity shall be allowed as
deductions/
0a1 If incurred in trade# profession or business$
0b1 Kf property connected with the trade# business
or profession# if the loss arises from fires#
storms# shipwrec&# or other casualties# or from
robbery# theft or embelement.
.he Secretary of 4inance# upon recommendation of
the *ommissioner# is hereby authoried to
promulgate rules and regulations prescribing# among
other things# the time and manner by which the
ta"payer shall submit a declaration of loss sustained
from casualty or from robbery# theft or
embelement during the ta"able year/ Pro!ided#
howe!er# .hat the time limit to be so prescribed in
the rules and regulations shall not be less than thirty
0,?1 days nor more than ninety 0:?1 days from the
date of disco!ery of the casualty or robbery# theft or
embelement gi!ing rise to the loss.
0c1 )o loss shall be allowed as a deduction under
this Subsection if at the time of the filing of the
return# such loss has been claimed as a
deduction for estate ta" purposes in the estate
ta" return.
%!
021 Proof of Eoss. - In the case of a nonresident alien
indi!idual or foreign corporation# the losses
deductible shall be those actually sustained during
the year incurred in business# trade or e"ercise of a
profession conducted within the Philippines# when
such losses are not compensated for by insurance
or other forms of indemnity. .he Secretary of
4inance# upon recommendation of the
*ommissioner# is hereby authoried to promulgate
rules and regulations prescribing# among other
things# the time and manner by which the ta"payer
shall submit a declaration of loss sustained from
casualty or from robbery# theft or embelement
during the ta"able year/ Pro!ided# .hat the time to
be so prescribed in the rules and regulations shall
not be less than thirty 0,?1 days nor more than ninety
0:?1 days from the date of disco!ery of the casualty
or robbery# theft or embelement gi!ing rise to the
loss$ and
0,1 )et Kperating Eoss *arry-K!er. - .he net operating
loss of the business or enterprise for any ta"able
year immediately preceding the current ta"able year#
which had not been pre!iously offset as deduction
from gross income shall be carried o!er as a
deduction from gross income for the ne"t three 0,1
consecuti!e ta"able years immediately following the
year of such loss/ Pro!ided# howe!er# .hat any net
loss incurred in a ta"able year during which the
ta"payer was e"empt from income ta" shall not be
allowed as a deduction under this Subsection/
Pro!ided# further# .hat a net operating loss carry-
o!er shall be allowed only if there has been no
substantial change in the ownership of the business
or enterprise in that -
0i1 )ot less than se!enty-fi!e percent 0;<=1 in
nominal !alue of outstanding issued shares.# if
the business is in the name of a corporation# is
held by or on behalf of the same persons$ or
0ii1 )ot less than se!enty-fi!e percent 0;<=1 of the
paid up capital of the corporation# if the business
is in the name of a corporation# is held by or on
behalf of the same persons.
4or purposes of this subsection# the term 5not
operating loss5 shall mean the e"cess of allowable
deduction o!er gross income of the business in a
ta"able year.
Pro!ided# .hat for mines other than oil and gas
wells# a net operating loss without the benefit of
incenti!es pro!ided for under -"ecuti!e Krder )o.
22M# as amended# otherwise &nown as the Kmnibus
In!estments *ode of 8:8;# incurred in any of the
first ten 08?1 years of operation may be carried o!er
as a deduction from ta"able income for the ne"t fi!e
0<1 years immediately following the year of such
loss. .he entire amount of the loss shall be carried
o!er to the first of the fi!e 0<1 ta"able years following
the loss# and any portion of such loss which
e"ceeds# the ta"able income of such first year shall
be deducted in li&e manner form the ta"able income
of the ne"t remaining four 041 years.
041 *apital Eosses. -
0a1 Eimitation. - Eoss from sales or -"changes of
capital assets shall be allowed only to the e"tent
pro!ided in Section ,:.
0b1 Securities 2ecoming Iorthless. - If securities as
defined in Section 22 0.1 become worthless
during the ta"able year and are capital assets#
the loss resulting therefrom shall# for purposes
of this .itle# be considered as a loss from the
sale or e"change# on the last day of such
ta"able year# of capital assets.
0<1 Eosses 4rom Iash Sales of Stoc& or Securities. -
Eosses from 5wash sales5 of stoc& or securities as
pro!ided in Section ,8.
%"
0M1 Iagering Eosses. - Eosses from wagering
transactions shall b allowed only to the e"tent of the
gains from such transactions.
0;1 Abandonment Eosses. -
0a1 In the e!ent a contract area where petroleum
operations are underta&en is partially or wholly
abandoned# all accumulated e"ploration and
de!elopment e"penditures pertaining thereto
shall be allowed as a deduction/ Pro!ided# .hat
accumulated e"penditures incurred in that area
prior to >anuary 8# 8:;: shall be allowed as a
deduction only from any income deri!ed from
the same contract area. In all cases# notices of
abandonment shall be filed with the
*ommissioner.
0b1 In case a producing well is subse%uently
abandoned# the unamortied costs thereof# as
well as the undepreciated costs of e%uipment
directly used therein# shall be allowed as a
deduction in the year such well# e%uipment or
facility is abandoned by the contractor/ Pro!ided#
.hat if such abandoned well is reentered and
production is resumed# or if such e%uipment or
facility is restored into ser!ice# the said costs
shall be included as part of gross income in the
year of resumption or restoration and shall be
amortied or depreciated# as the case may be.
0-1 2ad 3ebts. -
081 In 'eneral. - 3ebts due to the ta"payer actually
ascertained to be worthless and charged off within
the ta"able year e"cept those not connected with
profession# trade or business and those sustained in
a transaction entered into between parties
mentioned under Section ,M 021 of this *ode/
Pro!ided# .hat reco!ery of bad debts pre!iously
allowed as deduction in the preceding years shall be
included as part of the gross income in the year of
reco!ery to the e"tent of the income ta" benefit of
said deduction.
021 Securities 2ecoming Iorthless. - If securities# as
defined in Section 22 0.1# are ascertained to be
worthless and charged off within the ta"able year
and are capital assets# the loss resulting therefrom
shall# in the case of a ta"payer other than a ban& or
trust company incorporated under the laws of the
Philippines a substantial part of whose business is
the receipt of deposits# for the purpose of this .itle#
be considered as a loss from the sale or e"change#
on the last day of such ta"able year# of capital
assets.
041 3epreciation. -
081 'eneral Rule. - .here shall be allowed as a
depreciation deduction a reasonable allowance for
the e"haustion# wear and tear 0including reasonable
allowance for obsolescence1 of property used in the
trade or business. In the case of property held by
one person for life with remainder to another person#
the deduction shall be computed as if the life tenant
were the absolute owner of the property and shall be
allowed to the life tenant. In the case of property
held in trust# the allowable deduction shall be
apportioned between the income beneficiaries and
the trustees in accordance with the pertinent
pro!isions of the instrument creating the trust# or in
the absence of such pro!isions# on the basis of the
trust income allowable to each.
021 Hse of *ertain Bethods and Rates. - .he term
5reasonable allowance5 as used in the preceding
paragraph shall include# but not limited to# an
allowance computed in accordance with rules and
regulations prescribed by the Secretary of 4inance#
upon recommendation of the *ommissioner# under
any of the following methods/
%#
0a1 .he straight-line method$
0b1 3eclining-balance method# using a rate not
e"ceeding twice the rate which would ha!e been
used had the annual allowance been computed
under the method described in Subsection 041
081$
0c1 .he sum-of-the-years-digit method$ and
0d1 any other method which may be prescribed by
the Secretary of 4inance upon recommendation
of the *ommissioner.
0,1 Agreement as to Hseful Eife on Ihich 3epreciation
Rate is 2ased. - Ihere under rules and regulations
prescribed by the Secretary of 4inance upon
recommendation of the *ommissioner# the ta"payer
and the *ommissioner ha!e entered into an
agreement in writing specifically dealing with the
useful life and rate of depreciation of any property#
the rate so agreed upon shall be binding on both the
ta"payer and the national 'o!ernment in the
absence of facts and circumstances not ta&en into
consideration during the adoption of such
agreement. .he responsibility of establishing the
e"istence of such facts and circumstances shall rest
with the party initiating the modification. Any change
in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not be
effecti!e for ta"able years prior to the ta"able year in
which notice in writing by certified mail or registered
mail is ser!ed by the party initiating such change to
the other party to the agreement/
Pro!ided# howe!er# that where the ta"payer has
adopted such useful life and depreciation rate for
any depreciable and claimed the depreciation
e"penses as deduction from his gross income#
without any written ob(ection on the part of the
*ommissioner or his duly authoried
representati!es# the aforesaid useful life and
depreciation rate so adopted by the ta"payer for the
aforesaid depreciable asset shall be considered
binding for purposes of this Subsection.
041 3epreciation of Properties Hsed in Petroleum
Kperations. - An allowance for depreciation in
respect of all properties directly related to production
of petroleum initially placed in ser!ice in a ta"able
year shall be allowed under the straight-line or
declining-balance method of depreciation at the
option of the ser!ice contractor.
Jowe!er# if the ser!ice contractor initially elects the
declining-balance method# it may at any subse%uent
date# shift to the straight-line method.
.he useful life of properties used in or related to
production of petroleum shall be ten 08?1 years of
such shorter life as may be permitted by the
*ommissioner.
Properties not used directly in the production of
petroleum shall be depreciated under the straight-
line method on the basis of an estimated useful life
of fi!e 0<1 years.
0<1 3epreciation of Properties Hsed in Bining
Kperations. - an allowance for depreciation in
respect of all properties used in mining operations
other than petroleum operations# shall be computed
as follows/
0a1 At the normal rate of depreciation if the e"pected
life is ten 08?1 years or less$ or
0b1 3epreciated o!er any number of years between
fi!e 0<1 years and the e"pected life if the latter is
more than ten 08?1 years# and the depreciation
thereon allowed as deduction from ta"able
income/ Pro!ided# .hat the contractor notifies
the *ommissioner at the beginning of the
depreciation period which depreciation rate
%$
allowed by this Section will be used.
0M1 3epreciation 3eductible by )onresident Aliens
-ngaged in .rade or 2usiness or Resident 4oreign
*orporations. - In the case of a nonresident alien
indi!idual engaged in trade or business or resident
foreign corporation# a reasonable allowance for the
deterioration of Property arising out of its use or
employment or its non-use in the business trade or
profession shall be permitted only when such
property is located in the Philippines.
0'1 3epletion of Kil and 'as Iells and Bines. -
081 In 'eneral. - In the case of oil and gas wells or
mines# a reasonable allowance for depletion or
amortiation computed in accordance with the cost-
depletion method shall be granted under rules and
regulations to be prescribed by the Secretary of
finance# upon recommendation of the
*ommissioner. Pro!ided# .hat when the allowance
for depletion shall e%ual the capital in!ested no
further allowance shall be granted/ Pro!ided# further#
.hat after production in commercial %uantities has
commenced# certain intangible e"ploration and
de!elopment drilling costs/ 0a1 shall be deductible in
the year incurred if such e"penditures are incurred
for non-producing wells andFor mines# or 0b1 shall be
deductible in full in the year paid or incurred or at the
election of the ta"payer# may be capitalied and
amortied if such e"penditures incurred are for
producing wells andFor mines in the same contract
area.
5Intangible costs in petroleum operations5 refers to
any cost incurred in petroleum operations which in
itself has no sal!age !alue and which is incidental to
and necessary for the drilling of wells and
preparation of wells for the production of petroleum/
Pro!ided# .hat said costs shall not pertain to the
ac%uisition or impro!ement of property of a character
sub(ect to the allowance for depreciation e"cept that
the allowances for depreciation on such property
shall be deductible under this Subsection.
Any intangible e"ploration# drilling and de!elopment
e"penses allowed as a deduction in computing
ta"able income during the year shall not be ta&en
into consideration in computing the ad(usted cost
basis for the purpose of computing allowable cost
depletion.
021 -lection to 3educt -"ploration and 3e!elopment
-"penditures. - In computing ta"able income from
mining operations# the ta"payer may at his option#
deduct e"ploration and de!elopment e"penditures
accumulated as cost or ad(usted basis for cost
depletion as of date of prospecting# as well as
e"ploration and de!elopment e"penditures paid or
incurred during the ta"able year/ Pro!ided# .hat the
amount deductible for e"ploration and de!elopment
e"penditures shall not e"ceed twenty-fi!e percent
02<=1 of the net income from mining operations
computed without the benefit of any ta" incenti!es
under e"isting laws. .he actual e"ploration and
de!elopment e"penditures minus twenty-fi!e percent
02<=1 of the net income from mining shall be carried
forward to the succeeding years until fully deducted.
.he election by the ta"payer to deduct the
e"ploration and de!elopment e"penditures is
irre!ocable and shall be binding in succeeding
ta"able years.
5)et income from mining operations5# as used in this
Subsection# shall mean gross income from
operations less 5allowable deductions5 which are
necessary or related to mining operations.
5Allowable deductions5 shall include mining# milling
and mar&eting e"penses# and depreciation of
properties directly used in the mining operations.
.his paragraph shall not apply to e"penditures for
the ac%uisition or impro!ement of property of a
character which is sub(ect to the allowance for
%%
depreciation.
In no case shall this paragraph apply with respect to
amounts paid or incurred for the e"ploration and
de!elopment of oil and gas.
.he term 5e"ploration e"penditures5 means
e"penditures paid or incurred for the purpose of
ascertaining the e"istence# location# e"tent or %uality
of any deposit of ore or other mineral# and paid or
incurred before the beginning of the de!elopment
stage of the mine or deposit.
.he term 5de!elopment e"penditures5 means
e"penditures paid or incurred during the
de!elopment stage of the mine or other natural
deposits. .he de!elopment stage of a mine or other
natural deposit shall begin at the time when deposits
of ore or other minerals are shown to e"ist in
sufficient commercial %uantity and %uality and shall
end upon commencement of actual commercial
e"traction.
0,1 3epletion of Kil and 'as Iells and Bines
3eductible by a )onresident Alien indi!idual or
4oreign *orporation. - In the case of a nonresident
alien indi!idual engaged in trade or business in the
Philippines or a resident foreign corporation#
allowance for depletion of oil and gas wells or mines
under paragraph 081 of this Subsection shall be
authoried only in respect to oil and gas wells or
mines located within the Philippines.
0J1 *haritable and Kther *ontributions. -
081 In 'eneral. - *ontributions or gifts actually paid or
made within the ta"able year to# or for the use of the
'o!ernment of the Philippines or any of its agencies
or any political subdi!ision thereof e"clusi!ely for
public purposes# or to accredited domestic
corporation or associations organied and operated
e"clusi!ely for religious# charitable# scientific# youth
and sports de!elopment# cultural or educational
purposes or for the rehabilitation of !eterans# or to
social welfare institutions# or to non-go!ernment
organiations# in accordance with rules and
regulations promulgated by the Secretary of finance#
upon recommendation of the *ommissioner# no part
of the net income of which inures to the benefit of
any pri!ate stoc&holder or indi!idual in an amount
not in e"cess of ten percent 08?=1 in the case of an
indi!idual# and fi!e percent 0=1 in the case of a
corporation# of the ta"payer6s ta"able income
deri!ed from trade# business or profession as
computed without the benefit of this and the
following subparagraphs.
021 *ontributions 3eductible in 4ull. - )otwithstanding
the pro!isions of the preceding subparagraph#
donations to the following institutions or entities shall
be deductible in full$
0a1 3onations to the 'o!ernment. - 3onations to the
'o!ernment of the Philippines or to any of its
agencies or political subdi!isions# including fully-
owned go!ernment corporations# e"clusi!ely to
finance# to pro!ide for# or to be used in
underta&ing priority acti!ities in education#
health# youth and sports de!elopment# human
settlements# science and culture# and in
economic de!elopment according to a )ational
Priority Plan determined by the )ational
-conomic and 3e!elopment Authority 0)-3A1#
In consultation with appropriate go!ernment
agencies# including its regional de!elopment
councils and pri!ate philantrophic persons and
institutions/ Pro!ided# .hat any donation which
is made to the 'o!ernment or to any of its
agencies or political subdi!isions not in
accordance with the said annual priority plan
shall be sub(ect to the limitations prescribed in
paragraph 081 of this Subsection$
0b1 3onations to *ertain 4oreign Institutions or
International Krganiations. - 3onations to
%&
foreign institutions or international organiations
which are fully deductible in pursuance of or in
compliance with agreements# treaties# or
commitments entered into by the 'o!ernment of
the Philippines and the foreign institutions or
international organiations or in pursuance of
special laws$
corporation/
081 Krganied and operated e"clusi!ely for scientific#
research# educational# character-building and youth
and sports de!elopment# health# social welfare#
cultural or charitable purposes# or a combination
thereof# no part of the net income of which inures to
the benefit of any pri!ate indi!idual$
021 Ihich# not later than the 8<th day of the third month
after the close of the accredited nongo!ernment
organiations ta"able year in which contributions are
recei!ed# ma&es utiliation directly for the acti!e
conduct of the acti!ities constituting the purpose or
function for which it is organied and operated#
unless an e"tended period is granted by the
Secretary of 4inance in accordance with the rules
and regulations to be promulgated# upon
0,1 .he le!el of administrati!e e"pense of which shall#
on an annual basis# conform with the rules and
regulations to be prescribed by the Secretary of
*ommissioner# but in no case to e"ceed thirty
percent 0,?=1 of the total e"penses$ and
would be distributed to another nonprofit domestic
corporation organied for similar purpose or
purposes# or to the state for public purpose# or would
be distributed by a court to another organiation to
be used in such manner as in the (udgment of said
court shall best accomplish the general purpose for
which the dissol!ed organiation was organied.
5utiliation5 means/
organied.
treated as a utiliation# but only if at the time
such amount is set aside# the accredited
nongo!ernment organiation has established to
the satisfaction of the *ommissioner that the
amount will be paid for the specific pro(ect within
a period to be prescribed in rules and
regulations to be promulgated by the Secretary
of 4inance# upon recommendation of the
*ommissioner# but not to e"ceed fi!e 0<1 years#
and the pro(ect is one which can be better
accomplished by setting aside such amount than
by immediate payment of funds.
0,1 @aluation. - .he amount of any charitable
contribution of property other than money shall be
based on the ac%uisition cost of said property.
041 Proof of 3eductions. - *ontributions or gifts shall be
&0
allowable as deductions only if !erified under the
rules and regulations prescribed by the Secretary of
*ommissioner.
0I1 Research and 3e!elopment.-
081 In 'eneral. - a ta"payer may treat research or
de!elopment e"penditures which are paid or
incurred by him during the ta"able year in
connection with his trade# business or profession as
ordinary and necessary e"penses which are not
chargeable to capital account. .he e"penditures so
treated shall be allowed as deduction during the
ta"able year when paid or incurred.
021 Amortiation of *ertain Research and 3e!elopment
-"penditures. - At the election of the ta"payer and in
accordance with the rules and regulations to be
prescribed by the Secretary of 4inance# upon
recommendation of the *ommissioner# the following
research and de!elopment e"penditures may be
treated as deferred e"penses/
0a1 Paid or incurred by the ta"payer in connection
with his trade# business or profession$
0b1 )ot treated as e"penses under paragraph :81
hereof$ and
0c1 *hargeable to capital account but not
chargeable to property of a character which is
sub(ect to depreciation or depletion.
In computing ta"able income# such deferred
e"penses shall be allowed as deduction ratably
distributed o!er a period of not less than si"ty 0M?1
months as may be elected by the ta"payer
0beginning with the month in which the ta"payer first
realies benefits from such e"penditures1.
.he election pro!ided by paragraph 021 hereof may
be made for any ta"able year beginning after the
effecti!ity of this *ode# but only if made not later
than the time prescribed by law for filing the return
for such ta"able year. .he method so elected# and
the period selected by the ta"payer# shall be
adhered to in computing ta"able income for the
ta"able year for which the election is made and for
all subse%uent ta"able years unless with the
appro!al of the *ommissioner# a change to a
different method is authoried with respect to a part
or all of such e"penditures. .he election shall not
apply to any e"penditure paid or incurred during any
ta"able year for which the ta"payer ma&es the
election.
0,1 Eimitations on 3eduction. - .his Subsection shall not
apply to/
0a1 Any e"penditure for the ac%uisition or
impro!ement of land# or for the impro!ement of
property to be used in connection with research
and de!elopment of a character which is sub(ect
to depreciation and depletion$ and
0b1 Any e"penditure paid or incurred for the purpose
of ascertaining the e"istence# location# e"tent# or
%uality of any deposit of ore or other mineral#
including oil or gas.
0>1 Pension .rusts. - An employer establishing or
maintaining a pension trust to pro!ide for the payment of
reasonable pensions to his employees shall be allowed
as a deduction 0in addition to the contributions to such
trust during the ta"able year to co!er the pension liability
accruing during the year# allowed as a deduction under
Subsection 0A1 081 of this Section 1 a reasonable amount
transferred or paid into such trust during the ta"able year
in e"cess of such contributions# but only if such amount
081 has not theretofore been allowed as a deduction# and
021 is apportioned in e%ual parts o!er a period of ten 08?1
consecuti!e years beginning with the year in which the
transfer or payment is made.
&1

0G1 Additional Re%uirements for 3eductibility of *ertain
Payments. - Any amount paid or payable which is
otherwise deductible from# or ta&en into account in
computing gross income or for which depreciation or
amortiation may be allowed under this Section# shall be
allowed as a deduction only if it is shown that the ta"
re%uired to be deducted and withheld therefrom has
been paid to the 2ureau of Internal Re!enue in
accordance with this Section <8 and 88 of this *ode.

0E1 Kptional Standard 3eduction. - In lieu of the deductions
allowed under the preceding Subsections# an indi!idual
sub(ect to ta" under Section 24# other than a nonresident
alien# may elect a standard deduction in an amount not
e"ceeding ten percent 08?=1 of his gross income.
Hnless the ta"payer signifies in his return his intention to
elect the optional standard deduction# he shall be
considered as ha!ing a!ailed himself of the deductions
allowed in the preceding Subsections. Such election
when made in the return shall be irre!ocable for the
ta"able year for which the return is made/ Pro!ided# .hat
an indi!idual who is entitled to and claimed for the
optional standard deduction shall not be re%uired to
submit with his ta" return such financial statements
otherwise re%uired under this *ode/ Pro!ided# further#
.hat e"cept when the *ommissioner otherwise permits#
the said indi!idual shall &eep such records pertaining to
his gross income during the ta"able year# as may be
re%uired by the rules and regulations promulgated by the
*ommissioner.

0B1 Premium Payments on Jealth andFor Jospitaliation
Insurance of an Indi!idual .a"payer. - .he amount of
premiums not to e"ceed .wo thousand four hundred
pesos 0P2#4??1 per family or .wo hundred pesos 0P2??1
a month paid during the ta"able year for health andFor
hospitaliation insurance ta&en by the ta"payer for
himself# including his family# shall be allowed as a
deduction from his gross income/ Pro!ided# .hat said
family has a gross income of not more than .wo
hundred fifty thousand pesos 0P2<?#???1 for the ta"able
year/ Pro!ided# finally# .hat in the case of married
ta"payers# only the spouse claiming the additional
e"emption for dependents shall be entitled to this
deduction.
)otwithstanding the pro!ision of the preceding
Subsections# .he Secretary of 4inance# upon
recommendation of the *ommissioner# after a public
hearing shall ha!e been held for this purpose# may
prescribe by rules and regulations# limitations or ceilings
for any of the itemied deductions under Subsections 0A1
to 0>1 of this Section/ Pro!ided# .hat for purposes of
determining such ceilings or limitations# the Secretary of
4inance shall consider the following factors/ 081
ade%uacy of the prescribed limits on the actual
e"penditure re%uirements of each particular industry$
and 021 effects of inflation on e"penditure le!els/
Pro!ided# further# .hat no ceilings shall further be
imposed on items of e"pense already sub(ect to ceilings
under present law.
R"=($%$)"% ;.# D"+(&)$$!$)-
!IR v Isabela !ultural !orp)
4acts/ .he I**# recei!ed from the 2IR an assessment for
deficiency income ta" arising from the 2IR s disallowance of
I** s claimed e"pense deductions for professional and
security ser!ices billed to and paid by I** in 8:8M in the
amount of P,,,#8:M.8M# to wit/
0a1 -"penses for the auditing ser!ices of S'@ W *o.# for the
year ending 3ecember ,8# 8:8<$
0b1 -"penses for the legal ser!ices Oinclusi!e of retainer
feesP of the law firm 2engon 9arraga )arciso *udala
Pecson Acuna W 2engson for the years 8:84 and 8:8<.
0c1 -"pense for security ser!ices of -l .igre Security W
In!estigation Agency for the months of April and Bay
8:8M.
0d1 .he alleged understatement of I**Ns interest income on
the three promissory notes due from Realty In!estment#
&2
Inc. and for deficiency e"panded withholding ta" in the
amount of P4#8:;.;:# inclusi!e of surcharges and
interest# both for the ta"able year 8:8M for alleged failure
of I** to withhold 8= e"panded withholding ta" on its
claimed P244#8:?.?? deduction for security ser!ices.
I** sought a reconsideration of the sub(ect assessments.
Jowe!er# it recei!ed a final notice before seiure demanding
payment of the amounts stated in the said notices. I** then
went to the *.A which rendered a decision canceling and
setting aside the assessment notices issued against I**. It
held that the claimed deductions for professional and
security ser!ices were properly claimed by I**. 2IR then
filed a petition for re!iew with the *A# which affirmed the
*.A decision# thus the present case before the S*.
Issue/ Are these deductions allowedQ
Jeld/
081 .he re%uisites for the deductibility of ordinary and
necessary trade# business# or professional e"penses#
li&e e"penses paid for legal and auditing ser!ices# are/
0a1 the e"pense must be ordinary and necessary$
0b1 it must ha!e been paid or incurred during the ta"able
year$
0c1 it must ha!e been paid or incurred in carrying on the
trade or business of the ta"payer$ and
0d1 it must be supported by receipts# records or other
pertinent papers.
021 .he re%uisite that it must ha!e been paid or incurred
during the ta"able year is further %ualified by Section 4<
of the )ational Internal Re!enue *ode 0)IR*1 which
states that/ 5OtPhe deduction pro!ided for in this .itle shall
be ta&en for the ta"able year in which Tpaid or accruedU
or Tpaid or incurredU# dependent upon the method of
accounting upon the basis of which the net income is
computed " " "5. I** uses the accrual method of
accounting and pursuant to Re!enue
Audit Bemorandum Krder )o. 8-2???# e"penses not
being claimed as deductions by a ta"payer in the current
year when they are incurred cannot be claimed as
deduction from income for the succeeding year. .hus# a
ta"payer who is authoried to deduct certain e"penses
and other allowable deductions for the current year but
failed to do so cannot deduct the same for the ne"t year.
.he accrual of income and e"pense is permitted when
the all-e!ents test has been met. .his test re%uires/
0a1 fi"ing of a right to income or liability to pay$ and
0b1 the a!ailability of the reasonable accurate
determination of such income or liability. .he test
does not demand that the amount of income or
liability be &nown absolutely# only that a ta"payer
has at his disposal the information necessary to
compute the amount with reasonable accuracy. .he
all-e!ents test is satisfied where computation
remains uncertain# if its basis is unchangeable$ the
test is satisfied where a computation may be
un&nown# but is not as much as un&nowable# within
the ta"able year. .he amount of liability does not
ha!e to be determined e"actly$ it must be
determined with 5reasonable accuracy.5 Accordingly#
the term 5reasonable accuracy5 implies something
less than an e"act or completely accurate amount.
0,1 .he e"penses for legal ser!ices pertain to the 8:84 and
8:8< legal and retainer fees of the law firm 2engon
9arraga )arciso *udala Pecson Acuna W 2engson#
and for reimbursement of the e"penses of said firm in
connection with I** s ta" problems for the year 8:84.
4rom the nature of the claimed deductions and the span
of time during which the firm was retained since 8:M?#
I** can be e"pected to ha!e reasonably &nown the
retainer fees charged by the firm as well as the
compensation for its legal ser!ices. .he failure to
determine the e"act amount of the e"pense during the
ta"able year when they could ha!e been claimed as
deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. 4or one#
I**# in the e"ercise of due diligence could ha!e in%uired
into the amount of their obligation to the firm# especially
so that it is using the accrual method of accounting. 4or
&
another# it could ha!e reasonably determined the
amount of legal and retainer fees owing to its familiarity
with the rates charged by their long time legal
consultant. .he defense of delayed billing by the firm
and the company# which under the circumstances# is not
sufficient to e"empt it from being charged with
&nowledge of the reasonable amount of the e"penses for
legal and auditing ser!ices
041 .he professional fees of S'@ W *o. for auditing the
financial statements of I** for the year 8:8< cannot be
!alidly claimed as e"pense deductions in 8:8M. .his is
so because I** failed to present e!idence showing that
e!en with only 5reasonable accuracy#5 as the standard to
ascertain its liability to S'@ W *o. in the year 8:8<# it
cannot determine the professional fees which said
company would charge for its ser!ices. I** thus failed to
discharge the burden of pro!ing that the claimed
e"pense deductions for the professional ser!ices were
allowable deductions for the ta"able year 8:8M. Jence#
per Re!enue Audit Bemorandum Krder )o. 8-2???#
they cannot be !alidly deducted from its gross income
for the said year and were therefore properly disallowed
by the 2IR.
0<1 As to the e"penses for security ser!ices# the records
show that these e"penses were incurred by I** in 8:8M
and could therefore be properly claimed as deductions
for the said year.
0M1 Kn the purported understatement of interest income
from the promissory notes of Realty In!estment# Inc.#
findings of the *.A and the *ourt of Appeals that no
such understatement e"ists are sustained and that only
simple interest computation and not a compounded one
should ha!e been applied by the 2IR. .here is indeed no
stipulation between the latter and I** on the application
of compounded interest. Hnder Article 8:<: of the *i!il
*ode# unless there is a stipulation to the contrary#
interest due should not further earn interest.
0;1 .he findings of the *.A and the *ourt of Appeals that
I** truly withheld the re%uired withholding ta" from its
claimed deductions for security ser!ices and remitted the
same to the 2IR is supported by payment order and
confirmation receipts. Jence# the Assessment )otice for
deficiency e"panded withholding ta" was properly
cancelled and set aside.
D$%)$,9($%8"+ ;#./ Tax C#"+$)%
!IR v !entral .u=on 8rug !orp)
.he 2? percent discount re%uired by the law to be gi!en to
senior citiens is a ta" credit# not merely a ta" deduction
from the gross income or gross sale of the establishment
concerned. A ta" credit is used by a pri!ate establishment
only after the ta" has been computed$ a ta" deduction#
before the ta" is computed. RA ;4,2 unconditionally grants
a ta" credit to all co!ered entities. .hus# the pro!isions of
the re!enue regulation that withdraw or modify such grant
are !oid. 2asic is the rule that administrati!e regulations
cannot amend or re!o&e the law.
*entral Euon 3rug *orp. 0T*entralU1 is a domestic
corporation primarily engaged in retailing of medicines and
other pharmaceutical products. 4rom >anuary to 3ecember
8::M# respondent granted 2? per cent sales discount to
%ualified senior citiens on their purchases of medicines
pursuant to RA ;4,2 and its Implementing Rules and
Regulations. 4or the said period# the amount allegedly
representing the 2? per cent sales discount granted by
respondent to %ualified senior citiens totaled P:?4#;M:.??.
Kn >anuary 8M# 8::8# respondent filed with petitioner a claim
for ta" refundFcredit in the amount of P:?4#;M:.?? allegedly
arising from the 2? per cent sales discount granted by
respondent to %ualified senior citiens in compliance with RA
;4,2. Hnable to obtain affirmati!e response from petitioner#
respondent ele!ated its claim to the *ourt of .a" Appeals !ia
a Petition for Re!iew. .he .a" *ourt dismissed respondentNs
Petition for lac& of merit. Jowe!er# upon the motion for
reconsideration lodged by the respondent to the *.A# the
latter issued a .a" *redit *ertificate in fa!or of the former.
&!

.he *A affirmed in toto the Resolution of the *.A. It
reasoned that RA ;4,2 re%uired neither a ta" liability nor a
payment of ta"es by pri!ate establishments prior to the
a!ailment of a ta" credit. Boreo!er# such credit is not
tantamount to an unintended benefit from the law# but rather
a (ust compensation for the ta&ing of pri!ate property for
public use. Jence# this petition.
Issue/
Ihether the respondent# despite incurring a net loss# may
still claim the 2? percent sales discount as a ta" credit.
Jeld/ .he petition is 3-)I-3. .he decision and resolution of
*A are A44IRB-3.

Section 40a1 of RA ;4,2 grants to senior citiens the
pri!ilege of obtaining a 2? percent discount on their
purchase of medicine from any pri!ate establishment in the
country. .he latter may then claim the cost of the discount as
a ta" credit e!en though an establishment operates at a loss.
.a" credit generally refers to an amount that is Tsubtracted
directly from oneNs total ta" liability.U It is an Tallowance
against the ta" itselfU or Ta deduction from what is owedU by a
ta"payer to the go!ernment. It should be understood in
relation to other ta" concepts. Kne of these is ta" deduction
-- defined as a subtraction Tfrom income for ta" purposes#U or
an amount that is Tallowed by law to reduce income prior to
OtheP application of the ta" rate to compute the amount of ta"
which is due.U A ta" credit differs from a ta" deduction. A
ta" credit reduces the ta" due# including -- whene!er
applicable -- the income ta" that is determined after
applying the corresponding ta" rates to ta"able income. A
ta" deduction# on the other hand# reduces the income that is
sub(ect to ta" in order to arri!e at ta"able income. A ta"
credit is used only after the ta" has been computed$ a ta"
deduction# before. Since a ta" credit is used to reduce
directly the ta" that is due# there ought to be a ta" liability
before the ta" credit can be applied. Iithout that liability#
any ta" credit application will be useless. .here will be no
reason for deducting the latter when there is# to begin with#
no e"isting obligation to the go!ernment. Jowe!er# the
e"istence of a ta" credit or its grant by law is not the same as
the a!ailment or use of such credit. Ihile the grant is
mandatory# the a!ailment or use is not.

If a net loss is reported by# and no other ta"es are currently
due from# a business establishment# there will ob!iously be
no ta" liability against which any ta" credit can be applied.
4or the establishment to choose the immediate a!ailment of
a ta" credit will be premature and impracticable.
)e!ertheless# the irrefutable fact remains that# under RA
;4,2# *ongress has granted without conditions a ta" credit
benefit to all co!ered establishments.

Although this ta" credit benefit is a!ailable# it need not be
used by losing !entures# since there is no ta" liability that
calls for its application. 2y its nature# the ta" credit may still
be deducted from a future# not a present# ta" liability# without
which it does not ha!e any use. Ihile a ta" liability is
essential to the a!ailment or use of any ta" credit# prior ta"
payments are not. Kn the contrary# for the e"istence or
grant solely of such credit# neither a ta" liability nor a prior
ta" payment is needed.

In addition to the pro!isions in the .a" *ode# there are also
ta" treaties and special laws that grant or allow ta" credits#
e!en though no prior ta" payments ha!e been made. It is
e!ident that prior ta" payments are not indispensable to the
a!ailment of a ta" credit. A!ailment under RA ;4,2 did not
re%uire prior ta" payments by pri!ate establishments
concerned. RA ;4,2 specifically allows pri!ate
establishments to claim as ta" credit the amount of
discounts they grant. In turn# the Implementing Rules and
Regulations# issued pursuant thereto# pro!ide the
procedures for its a!ailment. .o deny such credit# despite
the plain mandate of the law and the regulations carrying out
that mandate# is indefensible.

A discount is an Tabatement or reduction made from the
gross amount or !alue of anything.U .o be more precise# it is
in business parlance Ta deduction or lowering of an amount
of money$U or Ta reduction from the full amount or !alue of
&"
something# especially a price.U A distinguishing feature of
the implementing rules of RA ;4,2 is the pri!ate
establishmentNs outright deduction of the discount from the
in!oice price of the medicine sold to the senior citien. It is#
therefore# e"pected that for each retail sale made under this
law# the discount period lasts no more than a day# because
such discount is gi!en -- and the net amount thereof
collected -- immediately upon perfection of the sale.
Although prompt payment is made for an armNslength
transaction by the senior citien# the real and compelling
reason for the pri!ate establishment gi!ing the discount is
that the law itself ma&es it mandatory.

Ihat RA ;4,2 grants the senior citien is a mere discount
pri!ilege# not a sales discount or any of the abo!e discounts
in particular. Prompt payment is not the reason for 0although
a necessary conse%uence of1 such grant. .o be sure# the
pri!ilege en(oyed by the senior citien must be e%ui!alent to
the ta" credit benefit en(oyed by the pri!ate establishment
granting the discount. Let# under the re!enue regulations
promulgated by our ta" authorities# this benefit has been
erroneously li&ened and confined to a sales discount.

.o a senior citien# the monetary effect of the pri!ilege may
be the same as that resulting from a sales discount.
Jowe!er# to a pri!ate establishment# the effect is different
from a simple reduction in price that results from such
discount. In other words# the ta" credit benefit is not the
same as a sales discount. .his benefit cannot and should
not be treated as a ta" deduction.

.o stress# the effect of a sales discount on the income
statement and income ta" return of an establishment
co!ered by RA ;4,2 is different from that resulting from the
a!ailment or use of its ta" credit benefit. Ihile the former is
a deduction before# the latter is a deduction after# the income
ta" is computed. As mentioned earlier# a discount is not
necessarily a sales discount# and a ta" creditfor a simple
discount pri!ilege should not be automatically treated li&e a
sales discount. Hbi le" non distinguit# nec nos distinguere
debemus. Ihere the law does not distinguish# we ought not
to distinguish.

Sections 2.i and 4 of Re!enue Regulations )o. 0RR1 2-:4
define ta" credit as the 2? percent discount deductible from
gross income for income ta" purposes# or from gross sales
for @A. or other percentage ta" purposes. In effect# the ta"
credit benefit under RA ;4,2 is related to a sales discount.
.his contri!ed definition is improper# considering that the
latter has to be deducted from gross sales in order to
compute the gross income in the income statement and
cannot be deducted again# e!en for purposes of computing
the income ta".

Ihen the law says that the cost of the discount may be
claimed as a ta" credit# it means that the amount -- when
claimed -- shall be treated as a reduction from any ta"
liability. .he option to a!ail of the ta" credit benefit depends
upon the e"istence of a ta" liability# but to limit the benefit to
a sales discount -- which is not e!en identical to the discount
pri!ilege that is granted by law -- does not define it at all and
ser!es no useful purpose. .he definition must# therefore# be
stric&en down. .he law cannot be amended by a mere
regulation. In fact# a regulation that Toperates to create a
rule out of harmony with the statute is a mere nullity.U It
cannot pre!ail.

Kur ta" authorities fill in the details that T*ongress may not
ha!e the opportunity or competence to pro!ide.U .he
regulations these authorities issue are relied upon by
ta"payers# who are certain that these will be followed by the
courts. *ourts# howe!er# will not uphold these authoritiesN
interpretations when clearly absurd# erroneous or improper.
In the present case# the ta" authorities ha!e gi!en the term
ta" credit in Sections 2.i and 4 of RR 2-:4 a meaning utterly
in contrast to what RA ;4,2 pro!ides. .heir interpretation
has muddled up the intent of *ongress in granting a mere
discount pri!ilege# not a sales discount. .he administrati!e
agency issuing these regulations may not enlarge# alter or
restrict the pro!isions of the law it administers$ it cannot
engraft additional re%uirements not contemplated by the
legislature. In case of conflict# the law must pre!ail. A
Tregulation adopted pursuant to law is law.U *on!ersely# a
regulation or any portion thereof not adopted pursuant to law
&#
is no law and has neither
the force nor the effect of law.
.he word may in the te"t of the statute implies that the
a!ailability of the ta" credit benefit is neither unrestricted nor
mandatory. .here is no absolute right conferred upon the
respondent# or any similar ta"payer# to a!ail itself of the ta"
credit remedy whene!er it chooses$ Tneither does it impose a
duty on the part of the go!ernment to sit bac& and allow an
important facet of ta" collection to be at the sole control and
discretion of the ta"payer.U 4or the ta" authorities to
R-*-). >HRISPRH3-)*- C .AAA.IK) EAI compel
respondent to deduct the 2? percent discount from either its
gross income or its gross salesis# therefore# not only to ma&e
an imposition without basis in law# but also to blatantly
contra!ene the law itself.

Ihat Section 4.a of RA ;4,2 means is that the ta" credit
benefit is merely permissi!e# not imperati!e. .he
respondent is gi!en two options -- either to claim or not to
claim the cost of the discounts as a ta" credit. In fact# it may
e!en ignore the credit and simply consider the gesture as an
act of beneficence# an e"pression of its social conscience. It
is the e"istence or the lac& of a ta" liability that determines
whether the cost of the discounts can be used as a ta"
credit. RA ;4,2 does not gi!e respondent the unfettered
right to a!ail itself of the credit whene!er it pleases. )either
does it allow our ta" administrators to e"pand or contract the
legislati!e mandate. T.he [plain meaning ruleN or !erba legis
in statutory construction is thus applicable " " ". Ihere the
words of a statute are clear# plain and free from ambiguity# it
must be gi!en its literal meaning and applied without
attempted interpretation.U Sections 2.i and 4 of RR 2-:4
deny the e"ercise by the State of its power of eminent
domain. 2e it stressed that the pri!ilege en(oyed by senior
citiens does not come directly from the State# but rather
from the pri!ate establishments concerned. Accordingly# the
ta" credit benefit granted to these establishments can be
deemed as their (ust compensation for pri!ate property ta&en
by the State for public use.
.he concept of public use is no longer confined to the
traditional notion of use by the public# but held synonymous
with public interest# public benefit# public welfare# and
public con!enience. .he discount pri!ilege to which our
senior citiens are entitled is actually a benefit en(oyed by
the general public to which these citiens belong. .he
discounts gi!en would ha!e entered the coffers and formed
part of the gross sales of the pri!ate establishments
concerned# were it not for RA ;4,2. .he permanent
reduction in their total re!enues is a forced subsidy
corresponding to the ta&ing of pri!ate property for public use
or benefit.

As a result of the 2? percent discount imposed by RA ;4,2#
the respondent becomes entitled to a (ust compensation.
.his term refers not only to the issuance of a ta" credit
certificate indicating the correct amount of the discounts
gi!en# but also to the promptness in its release. -%ui!alent
to the payment of property ta&en by the State# such issuance
-- when not done within a reasonable time from the grant of
the discounts -- cannot be considered as (ust compensation.
.he effect# respondent is made to suffer the conse%uences
of being immediately depri!ed of its re!enues while awaiting
actual receipt# through the certificate# of the e%ui!alent
amount it needs to cope with the reduction in its re!enues.

Ihile it is a declared commitment under Section 8 of RA
;4,2# social (ustice Tcannot be in!o&ed to trample on the
rights of property owners who under our *onstitution and
laws are also entitled to protection. .he social (ustice
consecrated in our *onstitution is not intended to ta&e away
rights from a person and gi!e them to another who is not
entitled thereto.U 4or this reason# a (ust compensation for
income that is ta&en away from respondent becomes
necessary. It is in the ta" credit that our legislators find
support to realie social (ustice# and no administrati!e body
can alter that fact.

.o put it differently# a pri!ate establishment that merely
brea&s e!en-- without the discounts yet -- will surely start to
incur losses because of such discounts. .he same effect is
e"pected if its mar&-up is less than 2? percent# and if all its
sales come from retail purchases by R-*-).
&$
>HRISPRH3-)*- C .AAA.IK) EAI senior citiens.
Aside from the obser!ation we ha!e already raised earlier# it
will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its
gross income or its gross sales. Kperating at a loss through
no fault of its own# it will realie that the ta" credit limitation
under RR 2-:4 is inutile# if not improper. Iorse# profit-
generating businesses will be put in a better position if they
a!ail themsel!es of ta" credits denied those that are losing#
because no ta"es are due from the latter.

RA ;4,2 itself see&s to adopt measures whereby senior
citiens are assisted by the community as a whole and to
establish a program beneficial to them. .hese ob(ecti!es are
consonant with the constitutional policy of ma&ing Thealth "
" " ser!ices a!ailable to all the people at affordable costU
and of gi!ing Tpriority for the needs of the " " " elderly.U
Sections 2.i and 4 of RR 2-:4# howe!er# contradict these
constitutional policies and statutory ob(ecti!es.
4urthermore# *ongress has allowed all pri!ate
establishments a simple ta" credit# not a deduction. In fact#
no cash outlay is re%uired from the go!ernment for the
a!ailment or use of such credit. .he deliberations on
4ebruary <# 8::2 of the 2icameral *onference *ommittee
Beeting on Social >ustice# which finalied RA ;4,2# disclose
the true intent of our legislators to treat the sales discounts
as a ta" credit# rather than as a deduction from gross
income.

RA ;4,2 is a special law that should pre!ail o!er the .a"
*ode -- a general law. RA ;4,2 is an earlier law not
e"pressly repealed by# and therefore remains an e"ception
to# the .a" *ode -- a later law. Ihen the former states that
a ta" credit may be claimed# then the re%uirement of prior ta"
payments under certain pro!isions of the latter# as discussed
abo!e# cannot be made to apply. )either can the instances
of or references to a ta" deduction under the .a" *ode be
made to restrict RA ;4,2. )o pro!ision of any re!enue
regulation can supplant or modify the acts of *ongress
E,)"#)a$,/",)B A/(%"/",) a,+ R"&#"a)$.,a! Ex4",%"
Revenue Regulation (o) 1,+0,,0
S-*.IK) 8. *o!erage. R .hese regulations shall co!er
entertainment# amusement and recreation e"penses of the
following ta"payers/
a. Indi!iduals engaged in business# including ta"able
estates and trusts$
b. Indi!iduals engaged in the practice of profession$
c. 3omestic corporations$
d. Resident foreign corporations$
e. 'eneral professional partnerships# including its
members.
S-*.IK) 2. 3efinition of .erms. R 4or purposes of
these Regulations# the term 5-ntertainment# Amusement and
Recreation -"penses5 includes representation e"penses
andFor depreciation or rental e"pense relating to
entertainment facilities# as described below.
.he term 5Representation -"penses5 shall refer to e"penses
incurred by a ta"payer in connection with the conduct of his
trade# business or e"ercise of profession# in entertaining#
pro!iding amusement and recreation to# or meeting with# a
guest or guests at a dining place# place of amusement#
country club# theater# concert# play# sporting e!ent# and
similar e!ents or places. 4or purposes of these Regulations#
representation e"penses shall not refer to fi"ed
representation allowances that are sub(ect to withholding ta"
on wages pursuant to appropriate re!enue regulations.
In the case particularly of a country# golf# sports club# or any
other similar club where the employee or officer of the
ta"payer is the registered member and the e"penses
incurred in relation thereto are paid for by the ta"payer# there
shall be a presumption that such e"penses are fringe
benefits sub(ect to fringe benefits ta" unless the ta"payer
can pro!e that these are actually representation e"penses.
4or purposes of pro!ing that said e"pense is a
representation e"pense and not fringe benefits# the ta"payer
should maintain receipts and ade%uate records that indicate
the 0a1 amount of e"pense 0b1 date and place of e"pense 0c1
&%
purpose of e"pense 0d1 professional or business relationship
of e"pense 0e1 name of person and company entertained
with contact details.
.he term 5-ntertainment 4acilities5 shall refer to 081 a yacht#
!acation home or condominium$ and 021 any similar item of
real or personal property used by the ta"payer primarily for
the entertainment# amusement# or recreation of guests or
employees. .o be considered an entertainment facility# such
yacht# !acation home or condominium# or item of real or
personal property must be owned or form part of the
ta"payer6s trade# business or profession# or rented by such
ta"payer# for which the ta"payer claims a depreciation or
rental e"pense. A yacht shall be considered an
entertainment facility under these Regulations if its use is in
fact not restricted to specified officers or employees or
positions in such a manner as to ma&e the same a fringe
benefit for purposes of imposing the fringe benefits ta".
.he term 5'uests5 shall mean persons or entities with which
the ta"payer has direct business relations# such as but not
limited to# clientsFcustomers or prospecti!e
clientsFcustomers. .he term shall not include employees#
officers# partners# directors# stoc&holders# or trustees of the
ta"payer.
S-*.IK) ,. -"clusions. R .he following e"penses are
not considered entertainment# amusement and recreation
e"penses as defined under Section 2 hereof.
a. -"penses which are treated as compensation or
fringe benefits for ser!ices rendered under an
employer-employee relationship# pursuant to
Re!enue Regulations 2-:8 # ,-:8 and amendments
thereto$
b. -"penses for charitable or fund raising e!ents$
c. -"penses for bonafide business meeting of
stoc&holders# partners or directors$
d. -"penses for attending or sponsoring an employee
to a business league or professional organiation
meeting$
e. -"penses for e!ents organied for promotion#
mar&eting and ad!ertising including concerts#
conferences# seminars# wor&shops# con!entions#
and other similar e!ents$
f. Kther e"penses of a similar nature.
)otwithstanding the foregoing# such items of e"clusions
may# nonetheless# %ualify as items of deduction under
Section ,4 of the .a" *ode of 8::;# sub(ect to
conditions for deductibility stated therein.
S-*.IK) 4. Re%uisites of 3eductibility of 5-ntertainment#
Amusement and Recreation -"pense5. R .he following are
the re%uisites for deductibility of entertainment# amusement
and recreation e"pense as defined abo!e sub(ect to the
ceiling prescribed under Section < of these Regulations/
a. It must be paid or incurred during the ta"able year$
b. It must be/ 0i1 directly connected to the de!elopment#
management and operation of the trade# business or
profession of the ta"payer$ or 0ii1 directly related to or
in furtherance of the conduct of his or its trade#
business or e"ercise of a profession$
c. It must not be contrary to law# morals# good
customs# public policy or public order$
d. It must not ha!e been paid# directly or indirectly# to
an official or employee of the national go!ernment#
or any local go!ernment unit# or of any go!ernment-
owned or controlled corporation 0'K**1# or of a
foreign go!ernment# or to a pri!ate indi!idual# or
corporation# or general professional partnership
0'PP1# or a similar entity# if it constitutes a bribe#
&ic&bac& or other similar payment$
e. It must be duly substantiated by ade%uate proof. .he
official receipts# or in!oices# or bills or statements of
accounts should be in the name of the ta"payer
claiming the deduction$ and
f. .he appropriate amount of withholding ta"# if
applicable# should ha!e been withheld therefrom and
paid to the 2ureau of Internal Re!enue.
S-*.IK) <. *eiling on -ntertainment# Amusement# and
Recreation -"pense. R .here shall be allowed a deduction
from gross income for entertainment# amusement and
recreation e"pense# as defined in Section 2 of these
&&
Regulations# in an amount e%ui!alent to the actual
entertainment# amusement and recreation e"pense paid or
incurred within the ta"able year by the ta"payer# but in no
case shall such deduction e"ceed ?.<? percent 0=1 of net
sales 0i.e.# gross sales less sales returnsFallowances and
sales discounts1 for ta"payers engaged in sale of goods or
properties$ or 8.?? percent 0=1 of net re!enue 0i.e.# gross
re!enue less discounts1 for ta"payers engaged in sale of
ser!ices# including e"ercise of profession and use or lease of
properties. Jowe!er# if the ta"payer is deri!ing income from
both sale of goodsFproperties and ser!ices# the allowable
entertainment# amusement and recreation e"pense shall in
all cases be determined based on an apportionment formula
ta&ing into consideration the percentage of the net salesFnet
re!enue to the total net salesFnet re!enue# but which in no
case shall e"ceed the ma"imum percentage ceiling pro!ided
in these Regulations.
Apportionment 4ormula/
)et salesFnet re!enue
RCRRRRRRCRRRRRRRR" Actual -"pense
.otal )et sales W net re!enue
Illustration/ -RA *orporation is engaged in the sale of goods
and ser!ices with net salesFnet re!enue of P2??#??? and
P8??#??? respecti!ely. .he actual entertainment#
amusement and recreation e"pense for the second semester
of 2??2 totaled to P,#???.
N") Sa!"% D
N") R"C",("%
(1)
E,).B
A/(%"/",)
& R"&. Ex4.
(EAR) a%"+
., ;.#/(!aJ
(2)
Max
P"#&",)a9"
.; C"$!$,9
"x4",%"JJ
(')
A!!.<a!"
a/.(,) ). "
&!a$/"+ a%
EAR "x4.
(<8$&8"C"# $%
!.<"# .; &.!.
2 & ')
(*)
Sale of
'oods
P2??#??? P2#??? P8#??? P8#???
Sale of
Ser!ices
8??#??? 8#??? 8#??? 8#???
.K.AE P,??#??? P,#??? P2#??? P2B:::
\Apportionment 4ormula
Sale of 'oods 0P2??#???FP,??#???1 " P,#???
Sale of Ser!ices0P8??#???FP,??#???1 " P,#???
\\Ba"imum Percentage *eiling
Sale of 'oods 0P2??#??? " ?.<?=1
Sale of Ser!ices 0P8??#??? " 8=1
In the abo!e illustration# -RA *orporation can only claim a
total of P2#??? as entertainment# amusement and recreation
e"pense.
)otwithstanding the ceiling imposed on such e"pense# the
claimed e"pense shall be sub(ect to !erification and audit for
purposes of determining its deductibility as well as
compliance with the substantiation re%uirements as pro!ided
in these Regulations. Jowe!er# if after !erification a ta"payer
is found to ha!e shifted the amount of the entertainment#
amusement and recreation e"pense to any other e"pense in
order to a!oid being sub(ected to the ceiling herein
prescribed# the amount shifted shall be disallowed in its
totality# without pre(udice to such penalties as may be
imposed by the .a" *ode of 8::;.
S-*.IK) M. Reporting. R .he ta"payer is hereby
re%uired to use in its financial statements and income ta"
return the account title 5entertainment# amusement and
recreation e"pense5# or in the alternati!e# to disclose in the
notes to financial statements the amount corresponding
thereto when recording e"penses paid or incurred of the
nature as defined in Section 2 of these Regulations.
Jowe!er# such e"pense should be reported in the ta"payer6s
income ta" return as a separate e"pense item.
NOLCO (R"C",(" R"9(!a)$., N.. 1*1:1)
S-*.IK) 8. Scope. C Pursuant to the pro!isions of Section
244 of the )ational Internal Re!enue *ode of 8::;
0hereinafter referred to as the *ode1# these Regulations are
hereby promulgated to go!ern the deduction from gross
100
income of the )et Kperating Eoss *arry-K!er 0)KE*K1
pursuant to Section ,4 031 0,1 of the *ode# which pro!ides/
T)et Kperating Eoss *arry-o!er.- .he net operating loss of
the business or enterprise for any ta"able year immediately
preceding the current ta"able year# which had not been
pre!iously offset as deduction from gross income shall be
carried o!er as a deduction from gross income for the ne"t
three 0,1 consecuti!e ta"able years immediately following
the year of such loss/ Pro!ided# howe!er# .hat any net loss
incurred in a ta"able year during which the ta"payer was
e"empt from income ta" shall not be allowed as a deduction
under this Subsection/ Pro!ided# further# .hat a net
operating loss carry-o!er shall be allowed only if there has
been no substantial change in the ownership of the business
or enterprise in that -
T0i1 )ot less than se!enty-fi!e percent 0;<=1 in nominal
!alue of outstanding issued shares# if the business is in the
name of a corporation# is held by or on behalf of the same
persons$ or
T0ii1 )ot less than se!enty-fi!e percent 0;<=1 of the paid up
capital of the corporation# if the business is in the name of a
corporation# is held by or on behalf of the same persons.
T4or purposes of this Subsection# the term [net operating
lossN shall mean the e"cess of allowable deduction o!er
gross income of the business in a ta"able year/
TPro!ided# .hat for mines other than oil and gas wells# a net
operating loss without the benefit of incenti!es pro!ided for
under -"ecuti!e Krder )o. 22M# as amended# otherwise
&nown as the Kmnibus In!estments *ode of 8:8;# incurred
in any of the first ten 08?1 years of operation may be carried
o!er as a deduction from ta"able income for the ne"t fi!e 0<1
years immediately following the year of such loss. .he entire
amount of the loss shall be carried o!er to the first of the fi!e
0<1 ta"able years following the loss# and any portion of such
loss which e"ceeds the ta"able income of such first year
shall be deducted in li&e manner from the ta"able income of
the ne"t remaining four 041 years.U
S-*. 2. 'eneral Principles and Policies. -
2.8 4or purposes of these Regulations# the allowance for
deduction of )KE*K shall be limited only to net
operating losses accumulated beginning >anuary 8#
8::8.
2.2 In general# )KE*K shall be allowed as a deduction from
the gross income of the same ta"payer who sustained
and accumulated the net operating losses regardless of
the change in its ownership. .his rule shall also apply in
the case of a merger where the ta"payer is the sur!i!ing
entity.
2., Hnless otherwise pro!ided in these Regulations# )KE*K
of the ta"payer shall not be transferred or assigned to
another person# whether directly or indirectly# such as#
but not limited to# the transfer or assignment thereof
through a merger# consolidation or any form of business
combination of such ta"payer with another person.
2.4 )KE*K shall also be allowed if there has been no
substantial change in the ownership of the business or
enterprise in that not less than ;<= in nominal !alue of
outstanding issued shares or not less than ;<= of the
paid up capital of the corporation# if the business is in the
name of the corporation# is held by or on behalf of the
same persons.
.he ;<= e%uity# ownership or interest rule prescribed in
these Regulations shall only apply to a transfer or
assignment of the ta"payerNs net operating losses as a
result of or arising from the said ta"payerNs merger or
consolidation or business combination with another
person. In case the transfer or assignment of the
ta"payerNs net operating losses arises from the said
ta"payerNs merger# consolidation or combination with
another person# the transferee or assignee shall not be
entitled to claim the same as deduction from gross
income unless# as a result of the said merger#
consolidation or combination# the shareholders of the
transferorFassignor# or the transferor 0in case of other
101
business combinations1 gains control of at least ;<= or
more in nominal !alue of the outstanding issued shares
or paid up capital of the transfereeFassignee 0in case the
transfereeFassignee is a corporation1 or ;<= or more
interest in the business of the transfereeFassignee 0in
case the transfereeFassignee is other than a
corporation1.
2.< Hnless otherwise pro!ided in these Regulations# an
indi!idual 0including estate or trust1 engaged in trade or
business or in the e"ercise of profession# or a domestic
or resident foreign corporation may be allowed to claim
deduction of hisFits corresponding )KE*K/ Pro!ided#
howe!er# that an indi!idual who claims the 8?= optional
standard deduction shall not simultaneously claim
deduction of the )KE*K/ Pro!ided# further# that the
three-year reglementary period shall continue to run
notwithstanding the fact that the aforesaid indi!idual
a!ailed of the 8?= optional standard deduction during
the said period.
2.M .he three-year reglementary period on the carry-o!er of
)KE*K shall continue to run notwithstanding the fact
that the corporation paid its income ta" under the
TBinimum *orporate Income .a"U computation.
2.; )KE*K shall be a!ailed of on a Tfirst-in# first-outU basis.
2.8 .he net operating loss incurred by a ta"payer in the year
in which a substantial change in ownership in such
ta"payer occurs shall not be affected by such change in
ownership# notwithstanding subsections 2., and 2.4.
S-*. ,. 3efinition of .erms. - 4or purposes of these
Regulations# the words and phrases herein pro!ided shall
mean as follows/
,.8 'ross Income - -"cept as otherwise pro!ided in these
Regulations# the term T'ross IncomeU means the
pertinent items of income referred to in Section ,20A1 of
the .a" *ode of 8::; which are re%uired to be declared
in the ta"payerNs Income .a" Return for purposes of
computing his ta"able income as defined in Section ,8
of the same *ode. All e"empt income and other items of
income sub(ect to final ta" shall not form part of the
gross income.
,.2 Allowable 3eductions C .he term TAllowable 3eductionsU
means the items of deduction enumerated under Section
,40A1 to 0>1 and Section ,40B1# including the special
deductions allowed to insurance companies under
Section ,; of the *ode# but e"cluding )KE*K and any
item of incenti!e deduction allowable under any special
law that does not actually in!ol!e cash outlay/ Pro!ided#
that# in the case of an indi!idual entitled to claim the
Kptional Standard 3eduction 0KS31 under Section
,40E1# in lieu of the deductions enumerated under
Section ,40A1 to 0G1# the term Tallowable deductionsU
shall mean the aforesaid KS3 plus deduction of
premium payments on health andFor hospitaliation
insurance as pro!ided under Section ,40B1 of the *ode#
if applicable.
,., )et Kperating Eoss - .he term T)et Kperating EossU
shall mean the e"cess of allowable deduction o!er gross
income of the business in a ta"able year.
,.4 )ominal @alue of Kutstanding Issued Shares - .he term
T)ominal @alue of Kutstanding Issued SharesU shall
refer to the par !alue 0in case of par !alue shares of
stoc&1 or stated !alue 0in case of no par !alue shares of
stoc&1 of shares of stoc& issued to the stoc&holders of
the corporation.
,.< Paid Hp *apital of the *orporation - .he term TPaid Hp
*apital of the *orporationU shall refer to the total amount
paid by stoc&holders for their subscriptions in the shares
of stoc& of the corporation# including any amount paid
o!er and abo!e the par !alue or stated !alue of the
share of stoc& 0e.g.# premium on capital1. 4or this
purpose# the ta"payers shall maintain complete and
accurate records of the paid-up capital of the
shareholders.
102
,.M .a"able Income C .he term T.a"able IncomeU means
the e"cess amount of the pertinent items of gross
income o!er the allowable deductions andFor personal
and additional e"emptions# if any# authoried under the
*ode or under any special law.
,.; .a"able Lear - .he term T.a"able LearU means the
calendar year# or the fiscal year ending during such
calendar year# upon the basis of which the net income is
computed under .itle II of the *ode. .a"able year
includes# in the case of a return made for a fractional
part of a year# the period for which such return is made.
.he term T4iscal LearU means an accounting period of
twel!e 0821 months ending on the last day of any month
other than 3ecember.
,.8 Substantial *hange in the Kwnership of the 2usiness or
-nterprise - .he term T Substantial *hange in the
Kwnership of the 2usiness or -nterpriseU shall refer to a
change in the ownership of the business or enterprise as
a result of or arising from its merger or consolidation or
combination with another person in the manner as
pro!ided in subsection 2.4 of these Regulations. Any
change in ownership as a result of or arising thereunder
shall not be treated as a substantial change for as long
as the stoc&holders of the party thereto# to whom the net
operating loss is attributable# gains or retains ;<= or
more interest after such merger or consolidation or
combination.
,.: Berger - 4or purposes of these Regulations# the term
TBergerU shall refer to the absorption of a corporation by
another corporation# the latter retaining its own name
and identity and ac%uiring the assets# liabilities#
franchises and powers of the former# and the absorbed
corporation ceasing to e"ist as a separate (uridical
person.
,.8? *onsolidation - 4or purposes of these Regulations#
the term T*onsolidationU shall refer to a situation when
two or more corporations are e"tinguished# and by the
same process a new one is created# ta&ing o!er the
assets and assuming the liabilities of the said
e"tinguished corporations$ or the unification of two or
more corporations into a single new corporation# ha!ing
the combined capital# franchises and powers of all its
constituents.
,.88 *ombination - 4or purposes of these Regulations#
the term T*ombinationU shall refer to a situation when an
owner of a business# organied as a sole proprietorship#
admits a partner in his business for the purpose of
forming a co-partnership# or any such business
combination which# in effect# is similar or synonymous
thereto.
,.82 2y or on 2ehalf of the Same Persons - .he term T2y
or on 2ehalf of the Same PersonsU shall refer to the
maintenance of ownership despite change as when/
8. )o actual change in ownership is in!ol!ed in case
the transfer in!ol!es change from direct ownership
to indirect ownership# or !ice !ersa.
Illustration/
4acts/ P *orporation owns 7 *orporation that has
)KE*K. P *orporation transfers 7 *orporationNs
shares to R *orporation in e"change for 8??= of R
*orporation shares.
Jeld/ 7 *orporationNs )KE*K is retained because
7 *orporationNs shares are held TbyU R *orporation
Ton behalf of U P *orporation# the original owner.
2. )o actual change in ownership is in!ol!ed as in the
case of merger of the subsidiary into the parent
company.
Illustration/
4acts/ A *orporation owns 8??= of L *orporation. L
*orporation owns 8??= of 9 *orporation. 9
*orporation has )KE*K. 9 *orporation is merged
10
into L *orporation.
Jeld/ 9 *orporationNs )KE*K should be retained
and transferred to L *orporation. Prior to the
merger# A *orporation already indirectly owned 9
*orporation# i.e.# 9 *orporationNs shares were held
TbyU L *orporation Ton behalf of U A *orporation.
After the merger# A now directly owns 9 *orporation
Oabsorbed corporationP which continues to e"ist in L
*orporation.
Any reference in these Regulations to the T;<=
e%uity# ownership# or interest ruleU# T;<= or more in
nominal !alueU# T;<= or more interestU# and other
similar terms shall be construed within the conte"t of
this definition.
)otwithstanding the abo!e# in determining whether
there is actual change in ownership in the abo!e-
mentioned and similar cases# each and e!ery step of
the transaction shall be considered and the whole
transaction or series of transactions shall be treated
as a single unit.
S-*. 4. .a"payers -ntitled to 3educt )KE*K from 'ross
Income. C Any indi!idual 0including estates and trusts1
engaged in trade or business or in the e"ercise of his
profession# and domestic and resident foreign corporations
sub(ect to the normal income ta" 0e.g.# manufacturers and
traders1 or preferential ta" rates under the *ode 0e.g.#
pri!ate educational institutions# hospitals# and regional
operating head%uarters1 on their ta"able income as defined
in Section , of these Regulations shall be entitled to deduct
from hisFits gross income for the current year hisFits
accumulated net operating losses for the immediately
preceding three 0,1 consecuti!e ta"able years/ Pro!ided#
howe!er# that net operating losses incurred or sustained
prior to >anuary 8# 8::8 shall not %ualify for purposes of the
)KE*K. Pro!ided# further# that any pro!ision of these
Regulations notwithstanding# the following shall not be
entitled to claim deduction of )KE*K/
4.8 Kffshore 2an&ing Hnit 0K2H1 of a foreign ban&ing
corporation# and 4oreign *urrency 3eposit Hnit 04*3H1
of a domestic or foreign ban&ing corporation# duly
authoried as such by the 2ang&o Sentral ng Pilipinas
02SP1$
4.2 An enterprise registered with the 2oard of In!estments
02KI1 with respect to its 2KI-registered acti!ity en(oying
the Income .a" Joliday incenti!e. Its accumulated net
operating losses incurred or sustained during the period
of such Income .a" Joliday shall not %ualify for
purposes of the )KE*K$
4., An enterprise registered with the Philippine -conomic
9one Authority 0P-9A1# pursuant to R.A. )o. ;:8M# as
amended# with respect to its P-9A-registered business
acti!ity. Its accumulated net operating losses incurred or
sustained during the period of its P-9A registration shall
not %ualify for purposes of the )KE*K$
4.4 An enterprise registered under R.A. )o. ;22;# otherwise
&nown as the 2ases *on!ersion and 3e!elopment Act
of 8::2# e.g.# S2BA-registered enterprises# with respect
to its registered business acti!ity. Its accumulated net
operating losses incurred or sustained during the period
of its said registered operation shall not %ualify for
purposes of the )KE*K$
4.< 4oreign corporations engaged in international shipping
or air carriage business in the Philippines$ and
4.M In general# any person# natural or (uridical# en(oying
e"emption from income ta"# pursuant to the pro!isions of
the *ode or any special law# with respect to its operation
during the period for which the aforesaid e"emption is
applicable. Its accumulated net operating losses incurred
or sustained during the said period shall not %ualify for
purposes of the )KE*K.
S-*. <. 3etermination of Substantial *hange in the
Kwnership of the 2usiness.
<.8 .ime of 3etermination of Substantial *hange in the
10!
Kwnership of the 2usiness$ 3etermined as of the -nd of
the .a"able Lear. - .he substantial change in the
ownership of the business or enterprise shall be
determined as of the end of the ta"able year when
)KE*K is to be claimed as deduction. Ihether or not
substantial change in ownership occurred shall be
determined on the basis of any change in the ownership
of interest in the said business or enterprise arising from
or incident to its merger# or consolidation# or combination
with another person 0e.g.# in the case of merger or
consolidation of two or more corporations# such change
shall be determined based on the ownership of the
outstanding shares of stoc& issued or based on paid-up
capital as of the end of the ta"able year# and as a result
of or arising from the said merger or consolidation1.
<.2 Ihen *hange Kccurs. - A change in the ownership of
the business occurs when the person who sustained net
operating losses enters into a merger# or consolidation
or combination with another person# thereby resulting to
the transfer or con!eyance of the said net operating
losses# to another person# in the course of the said
merger or consolidation or combination.
0a1 Ihen )o Substantial *hange Kccurs. - )o
substantial change in ownership of the business
occurs if# as a result of the said merger or
consolidation or combination# the stoc&holders of the
transferor# or the transferor# in case of other
business combinations# gains control of at least ;<=
or more in nominal !alue of the outstanding issued
shares or paid-up capital of the transferee-assignee
0in case the transferee-assignee is a corporation1 or
;<= or more interest in the business of the
transferee-assignee 0in case the transferee-assignee
is other than a corporation1.
0b1 Ihen Substantial *hange Kccurs. - A substantial
change in ownership of the business occurs if# as a
result of the transaction referred to in subsection <.2
0a1 hereof# the stoc&holders of the transferor or the
transferor# in case of other business combinations#
gains control of the aforesaid transferee-assignee
only to the e"tent of less than ;<=.
S-*. M. -ntitlement to )et Kperating Eoss *arry- K!er. -
M.8 In 'eneral. - In general# only net operating losses
incurred by a %ualified ta"payer for the period beginning
>anuary 8# 8::8 may be carried o!er to the ne"t three
0,1 immediately succeeding ta"able years following the
year of such loss for purposes of the )KE*K deduction.
Pro!ided# howe!er# that for mines other than oil and gas
wells# a net operating loss without the benefit of
incenti!es pro!ided for under -"ecuti!e Krder )o. 22M#
otherwise &nown as the Kmnibus In!estments *ode of
8:8;# as amended # incurred in any of the first ten 08?1
years of operation may be carried o!er as a deduction
from ta"able income for the ne"t fi!e 0<1 years
immediately following the year of such loss. Pro!ided#
further# that the entire amount of the loss shall be carried
o!er to the first of the fi!e 0<1 ta"able years following the
loss# and any portion of such loss which e"ceeds the
ta"able income of such first year shall be deducted in
li&e manner from the ta"able income of the ne"t
remaining 041 four years.
M.2 .ransitory Apportionment of )KE*K# in *ase of
*orporation Hsing the 4iscal Lear Accounting Period. -
In general# only net operating losses incurred beginning
>anuary 8# 8::8 may be claimed as a )KE*K
deduction. In the case of a corporation using a fiscal
year accounting period as of the said date# whose result
of operations for the fiscal year 8::;-8::8 shows a net
operating loss# the allowable )KE*K for the succeeding
fiscal years shall be determined# as follows/
)KE*K for the entire fiscal year 08::;-8::81 """
Bultiplied by the ratio of/ )o. of months in 8::8
82 mos. co!ering 4L :;-:8 """
)KE*K to be carried o!er to 4Ls 8::8-8:::#
8:::-2???# andFor 2???-2??8 """
10"
M., Ihere .a"payer is -"empt# or Partly -"empt from
Income .a"# or -n(oying Preferential .a" .reatment
Hnder Special Eaws. - )et operating loss or losses
incurred by any person who is e"empt from income ta"#
or en(oying preferential ta" treatment pursuant to the
pro!isions of special laws# shall not be allowed a
)KE*K deduction 0e.g.# any 2KI-registered enterprise
en(oying income ta" holiday pursuant to -.K. )o. 22M#
as amended# otherwise &nown as the Kmnibus
In!estments *ode of 8:8;$ or any P-9A-registered
enterprise en(oying preferential ta" treatment or income
ta" holiday pursuant to R.A. )o. ;:8M# as amended$ any
person en(oying preferential ta" treatment pursuant to
R.A. )o. ;22;# otherwise &nown as the 2ases
*on!ersion and 3e!elopment Act of 8::2. See Section
4 of these Regulations for further discussion1.
In case any of the aforementioned persons is engaged in
both registered and unregistered business acti!ities
under any of the aforesaid laws 0e.g.# a corporation with
a 2KI-registered acti!ity en(oying income ta" holiday$
and other unregistered business acti!ities not en(oying
any 2KI incenti!e1 the net operating loss or losses
sustained or incurred by the said 2KI-enterprise from its
registered acti!ities shall not be allowed as )KE*K
deduction from its gross income deri!ed from the
unregistered business acti!ities.
M.4 7uarterly and Annual A!ailment of )KE*K. - )KE*K
shall be allowed as deduction in computing the
ta"payerNs income ta"es per %uarter and annual final
ad(ustment income ta" returns/ Pro!ided# howe!er# that
if per the ta"payerNs final annual ad(ustment income ta"
return# the entire operations for the year resulted to a net
operating loss# such net operating loss may be claimed
as )KE*K deduction in the immediately succeeding
ta"able year/ Pro!ided# further# that )KE*K may be
claimed as deduction only within a period of three 0,1
consecuti!e ta"able years immediately following the year
the net operating loss was sustained or incurred. In
order that compliance with this three- year statutory
re%uisite may be effecti!ely monitored# the ta"payer
shall# at all times# show its )KE*K deduction# in its
income ta" return# as a separate item of deduction. In no
case may )KE*K be claimed# as a part of the
ta"payerNs other itemied deductions# li&e under
deduction of Tlosses#U in general.
M.< )KE*K in Relation to the Binimum *orporate Income
.a" 0B*I.1. - In general# domestic and resident foreign
corporations sub(ect to the normal income ta" rate are
liable to the 2= B*I.# if applicable# computed based on
gross income# whene!er the amount of the B*I. is
greater than the normal income ta" due 0computed with
the benefit of )KE*K# if any1# pursuant to Sections 2; or
28 of the *ode. .hus# such corporation cannot en(oy the
benefit of )KE*K for as long as it is sub(ect to B*I. in
any ta"able year. Pro!ided# howe!er# that the running of
the three-year period for the e"piry of )KE*K is not
interrupted by the fact that such corporation is sub(ect to
B*I. in any ta"able year during such three-year period.
S-*. ;. Presentation of )KE*K in the .a" Return and
Hnused )KE*K in the Income Statement. C.he )KE*K
shall be separately shown in the ta"payerNs income ta"
return 0also shown in the Reconciliation Section of the .a"
Return1 while the Hnused )KE*K shall be presented in the
)otes to the 4inancial Statements showing# in detail# the
ta"able year in which the net operating loss was sustained or
incurred# and any amount thereof claimed as )KE*K
deduction within three 0,1 consecuti!e years immediately
following the year of such loss. 4ailure to comply with this
re%uirement will dis%ualify the ta"payer from claiming the
)KE*K.
Ba+ D")%K R"=($%$)"% ;.# D"+(&)a$!$)-
RR (o) 09+,0 0 (amending RR (o) 9+99 3)
R-@-)H- R-'HEA.IK)S )K. <-:: issued Barch 8M#
8::: implements Section ,40-1 of the .a" *ode of 8::;
relati!e to the re%uirements for deductibility of bad debts
10#
from gross income of a corporation or an indi!idual engaged
in trade or business or a professional engaged in the
practice of his profession. .he re%uisites for !alid deduction
of bad debts from gross income are/ a1 there must be an
e"isting indebtedness due to the ta"payer which must be
!alid and legally demandable$ b1 the same must be
connected with the ta"payer6s trade# business or practice of
profession$ c1 the same must not be sustained in a
transaction entered into between related parties enumerated
under Section ,M021 of the .a" *ode of 8::;$ d1 the same
must be actually charged off the boo&s of accounts of the
ta"payer as of the end of the ta"able year$ and e1 the same
must be actually ascertained to be worthless and
uncollectible as of the end of the ta"able year. .he reco!ery
of bad debts pre!iously allowed as deduction in the
preceding year or years will be included as part of the
ta"payer6s gross income in the year of such reco!ery to the
e"tent of the income ta" benefit of said deduction.
R-@-)H- R-'HEA.IK)S )K. 2<-?2
S-*. 2. AB-)3B-). C Section , of RR <-:: on the
re%uisites for !alid deduction of bad debts from gross income
is hereby amended by deleting the penultimate paragraph of
the said Section and should now read as follows/
TSec. ,. Re%uisites for !alid deduction of bad debts from
gross income. C .he re%uisites for deductibility of bad debts
are/
081 .here must be an e"isting indebtedness due to the
ta"payer which must be !alid and legally demandable$
021 .he same must be connected with the ta"payerNs trade#
business or practice of profession$
0,1 .he same must not be sustained in a transaction
entered into between related parties enumerated under
Sec. ,M021 of the .a" *ode of 8::;$
041 .he same must be actually charged off the boo&s of
accounts of the ta"payer as of the end of the ta"able
year$ and
0<1 .he same must be actually ascertained to be worthless
and uncollectible as of the end of the ta"able year.
T2efore a ta"payer may charge off and deduct a debt# he
must ascertain and be able to demonstrate with reasonable
degree of certainty the uncollectibility of the debt. .he
*ommissioner of Internal Re!enue will consider all pertinent
e!idence# including the !alue of the collateral# if any#
securing the debt and the financial condition of the debtor in
determining whether a debt is worthless# or the assigning of
the case for collection to an independent collection lawyer
who is not under the employ of the ta"payer and who shall
report on the legal obstacle and the !irtual impossibility of
collecting the same from the debtor and who shall issue a
statement under oath showing the propriety of the
deductions thereon made for alleged bad debts. .hus# where
the surrounding circumstances indicate that a debt is
worthless and uncollectible and that legal action to enforce
payment would in all probability not result in the satisfaction
of e"ecution on a (udgment# a showing of those facts will be
sufficient e!idence of the worthlessness of the debt for the
purpose of deduction.
In the case of ban&s# the *ommissioner of Internal Re!enue
shall determine whether or not bad debts are worthless and
uncollectible in the manner pro!ided in the immediately
preceding paragraph. Iithout pre(udice to the
*ommissionerNs determination of the worthlessness and
uncollectibility of debts# the ta"payer shall submit a 2ang&o
Sentral ng PilipinasFBonetary 2oard written appro!al of the
writing off of the indebtedness from the ban&sN boo&s of
accounts at the end of the ta"able year.
TAlso# in no case may a recei!able from an insurance or
surety company be written-off from the ta"payerNs boo&s and
claimed as bad debts deduction unless such company has
been declared closed due to insol!ency or for any such
similar reason by the Insurance *ommissioner.U
F#$,9" B",";$)% (RR N.. :'156 2.''(D))
031 .a" Accounting for the 4ringe 2enefit 4urnished to the
10$
-mployee and the 4ringe 2enefit .a" 3ue .hereon. R
As a general rule# the amount of ta"able fringe benefit
and the fringe benefits ta" shall constitute allowable
deductions from gross income of the employer.
Jowe!er# if the basis for computation of the fringe
benefits ta" is the depreciation !alue# the onal !alue as
determined by the *ommissioner pursuant to Section
M0-1 of the *ode or the fair mar&et !alue as determined
in the current real property ta" declaration of a certain
property# only the actual fringe benefits ta" paid shall
constitute a deductible e"pense for the employer. .he
!alue of the fringe benefit shall not be deductible and
shall be presumed to ha!e been tac&ed on or actually
claimed as depreciation e"pense by the employer.
Pro!ided# howe!er# that if the aforesaid onal !alue or
fair mar&et !alue of the said property is greater than its
cost sub(ect to depreciation# the e"cess amount shall be
allowed as a deduction from the employer6s gross
income as fringe benefit e"pense.
Illustrations on fringe benefit furnished or granted by the
employer to an employee 0other than a ran&-and-file
employee1
081 3uring the year 8::8# A2* *orporation paid for the
monthly rental of a residential house of its branch
manager 0Br. 3ela *ru1 amounting to PMM#???.??.
In this case# the monthly ta"able grossed-up monetary
!alue of the said fringe benefit furnished or granted to its
branch manager 0Br. 3ela *ru1 shall be P<?#???.??#
computed as follows/
Bonthly rental for the residential house PMM#???.??
'rossed-up monetary benefit granted
0PMM#???.?? di!ided by MM= factor for
calendar year 8::8 times <?= ta"able portion1
P<?#???.??
RRRCCCC
4ringe benefit ta" due thereon 0,4=1 P8;#???.??
XXXXXXXXX
A2* *orporation shall ta&e up in its boo&s of accounts
the PMM#???.?? fringe benefit furnished to Br. 3ela *ru#
under account title 54ringe 2enefit -"pense5 and the
amount of 8;#???.?? under the account title 54ringe
2enefit .a" -"pense5. .he aforesaid amounts shall be
fully allowed as deductions from the gross income of
A2* *orporation and shall be ta&en up in the said
employer6s boo&s of accounts as follows/
3ebit/ 4ringe 2enefit -"pense PMM#???
3ebit/ 4ringe 2enefit .a" -"pense P8;#???
*redit/ *ash P8,#???
.o record fringe benefit e"pense and fringe benefit ta"
paid on rental of the residential property furnished to Br.
3ela *ru for his residential use. 0)ote/ If the fringe
benefit e"pense of PMM#???.?? has already accrued but
not yet paid# use the account title 5fringe benefit
payable5. If the fringe benefit ta" has already accrued
but not yet paid# use the account title 5fringe benefit ta"
payable51.
021 AL9 *orporation owns a condominium unit. 3uring the
year 8::8# the said corporation furnished and granted
the said property for the residential use of its Assistant
@ice-President. .he fair mar&et !alue of the said
property as determined by the *ommissioner pursuant
to Section M0-1 of the *ode amounts P8?#???#???.??
while its fair mar&et !alue as shown in its current Real
Property .a" 3eclaration amounts to P8#???#???.??. In
this case# the higher fair mar&et !alue of P8?#???#???.??
as determined by the *ommissioner shall be used in
computing the monetary of the fringe benefit so
furnished or granted to said employee and the fringe
benefit ta" due thereon shall be computed as follows/
Bonthly rental !alue of the property
0P8?#???#??? times <= thereof times <?=
10%
di!ided by 82 months1 P2?#8,,.,,
'rossed-up monetary !alue thereof as fringe
benefit 0P2?#8,,.,, di!ided by MM= factor for calendar
year 8::81 P,8#<M<.MM
4ringe 2enefit ta" due thereon 0,4=1 P8?#;,2.,2
XXXXXXXXX
In general# under this illustration# the AL9 *orporation
shall not further claim deduction for allowing its Assistant
@ice-President the use of its residential property since
the cost for the use thereof has already been reco!ered
as deduction from its gross income under 53epreciation
-"pense5. Jowe!er# since the fringe benefit ta" in the
amount of P8?#;,2.,2# assumed and paid by AL9
corporation has not as yet been reco!ered by way of
deduction from gross income# the same shall be allowed
as a deduction from its gross income. AL9 *orporation
shall ta&e up the foregoing in its boo&s of accounts# as
follows/
3ebit/ 4ringe 2enefit .a" -"pense P8?#;,2.,2
*redit/ *ashF4ringe 2enefit .a" PayableP8?#;,2.,2
.o record fringe benefit ta" e"pense for the
residential property furnished to employees.
Jowe!er# if the cost of the aforesaid condominium unit
sub(ect to depreciation allowance 0e"ample/ its
ac%uisition cost is only P;#???#???.??1 is lesser than its
fair mar&et !alue as determined by the *ommissioner
0i.e. P8?#???#???.??1# the e"cess amount 0i.e.
P,#???#???.??1 shall be amortied throughout the
remaining estimated useful life of the residential property
used in computing the said employer6s depreciation
e"pense and allowed as a deduction from the said
employer6s gross income as fringe benefit e"pense.
.hus# if the remaining estimated useful life thereof during
the year 8::8 is fifteen 08<1 years# its monthly
amortiation shall be computed as follows/
Bonthly amortiation 0P,#???#???.?? di!ided by 8<
years di!ided by 82 months1 P8M#MMM.M;
In this case# AL9 *orporation shall ta&e up the foregoing
in its boo&s of accounts as follows/
3ebit/ 4ringe benefit e"pense P8M#MMM.M;
3ebit/ 4ringe benefit ta" P8?#;,2.,2
*redit/ Income constructi!ely realied P8M#MMM.M;
*redit/ *ashF4ringe benefit ta" payable P8?#;,2.,2
.o record fringe benefit and fringe benefit ta" e"penses
and income constructi!ely realied from the use of
company-owned residential property furnished to
employees.
O4)$.,a! S)a,+a#+ D"+(&)$.,
RA 99,# 3 (amending (IR! 3#(.))
Section ,40E1 of Republic Act )o. 8424# as amended#
otherwise &nown as the )ational Internal Re!enue *ode of
8::;# is hereby amended to read as follows/
5S-*. ,4. 3eductions from 'ross Income. - -"cept for
ta"payers earning compensation income arising from
personal ser!ices rendered under an employer-employee
relationship where no deductions shall be allowed under this
Section other than under Subsection 0B1hereof# in
computing ta"able income sub(ect to income ta" under
Sections 240A1$ 2<0A1$ 2M$ 2;0A1# 021# 0*1$ and 280A1081#
there shall be allowed the following deductions from the
gross income/
50A1 -"penses. -
5" " ".
50E1 Kptional Standard 3eduction. - In lieu of the deductions
allowed under the preceding Subsections# an indi!idual
sub(ect to ta" under Section 24# other than a nonresident
alien# may elect a standard deduction in an amount not
e"ceeding forty percent 04?=1 of his gross sales or gross
10&
receipts# as the case may be. In the case of a corporation
sub(ect to ta" under section 2;0A1 and 280A1081# it may elect
a standard deduction in an amount not e"ceeding forty
percent 04?=1 of it gross income as defined in Section ,2 of
this *ode. Hnless the ta"payer signifies in his return his
intention to elect the optional standard deduction# he shall be
considered as ha!ing a!ailed himself of the deductions
allowed in the preceding Subsections. Such election when
made in the return shall be irre!ocable for the ta"able year
for which the return is made/ Pro!ided# .hat an indi!idual
who is entitled to and claimed for the optional standard shall
not be re%uired to submit with his ta" return such financial
statements otherwise re%uired under this *ode/ Pro!ided#
further# .hat e"cept when the *ommissioner otherwise
permits# the said indi!idual shall &eep such records
pertaining to his gross sales or gross receipts# or the said
corporation shall &eep such records pertaining to his gross
income as defined in Section ,2 of this *ode during the
ta"able year# as may be re%uired by the rules and
regulations promulgated by the Secretary of 4inance# upon
recommendation of the *ommissioner.
50B1 " " ".5
5" " ".5
RR (o) ,1*+,$
0See attachment1
"------------------------------------"
11. ITEMS NOT DEDUCTIBLE (NIRC '3)
0A1 'eneral Rule. - In computing net income# no deduction
shall in any case be allowed in respect to -
081 Personal# li!ing or family e"penses$
021 Any amount paid out for new buildings or for
permanent impro!ements# or betterments made to
increase the !alue of any property or estate$
.his Subsection shall not apply to intangible drilling
and de!elopment costs incurred in petroleum
operations which are deductible under Subsection
0'1 081 of Section ,4 of this *ode.
0,1 Any amount e"pended in restoring property or in
ma&ing good the e"haustion thereof for which an
allowance is or has been made$ or
041 Premiums paid on any life insurance policy co!ering
the life of any officer or employee# or of any person
financially interested in any trade or business carried
on by the ta"payer# indi!idual or corporate# when the
ta"payer is directly or indirectly a beneficiary under
such policy.
021 Eosses from Sales or -"changes of Property. - In
computing net income# no deductions shall in any case
be allowed in respect of losses from sales or e"changes
of property directly or indirectly -
081 2etween members of a family. 4or purposes of this
paragraph# the family of an indi!idual shall include
only his brothers and sisters 0whether by the whole
or half-blood1# spouse# ancestors# and lineal
descendants$ or
021 -"cept in the case of distributions in li%uidation#
between an indi!idual and corporation more than
fifty percent 0<?=1 in !alue of the outstanding stoc&
of which is owned# directly or indirectly# by or for
such indi!idual$ or
0,1 -"cept in the case of distributions in li%uidation#
between two corporations more than fifty percent
0<?=1 in !alue of the outstanding stoc& of which is
owned# directly or indirectly# by or for the same
indi!idual if either one of such corporations# with
respect to the ta"able year of the corporation
preceding the date of the sale of e"change was
110
under the law applicable to such ta"able year# a
personal holding company or a foreign personal
holding company$
041 2etween the grantor and a fiduciary of any trust$ or
0<1 2etween the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person
is a grantor with respect to each trust$ or
0M1 2etween a fiduciary of a trust and beneficiary of
such trust.
"------------------------------------"
12. GALUE ADDED TAXES
12.1 GATB )8" a%$&%
(IR! 1,9, 1,*(A) 1
st
7, 1,$(A) 1
st
7
S-*. 8?<. Persons Eiable. - Any person who# in the course
of trade or business# sells barters# e"changes# leases goods
or properties# renders ser!ices# and any person who imports
goods shall be sub(ect to the !alue-added ta" 0@A.1
imposed in Sections 8?M to 8?8 of this *ode.
.he !alue-added ta" is an indirect ta" and the amount of ta"
may be shifted or passed on to the buyer# transferee or
lessee of the goods# properties or ser!ices. .his rule shall
li&ewise apply to e"isting contracts of sale or lease of goods#
properties or ser!ices at the time of the effecti!ity of
Republic Act )o. ;;8M.
.he phrase 5in the course of trade or business5 means the
regular conduct or pursuit of a commercial or an economic
acti!ity# including transactions incidental thereto# by any
person regardless of whether or not the person engaged
therein is a nonstoc&# nonprofit pri!ate organiation
0irrespecti!e of the disposition of its net income and whether
or not it sells e"clusi!ely to members or their guests1# or
go!ernment entity.
.he rule of regularity# to the contrary notwithstanding#
ser!ices as defined in this *ode rendered in the Philippines
by nonresident foreign persons shall be considered as being
course of trade or business.
S-*. 8?M. @alue-Added .a" on Sale of 'oods or Properties.
-
0A1 Rate and 2ase of .a". - .here shall be le!ied# assessed
and collected on e!ery sale# barter or e"change of goods
or properties# !alue-added ta" e%ui!alent to ten percent
08?=1 of the gross selling price or gross !alue in money
of the goods or properties sold# bartered or e"changed#
such ta" to be paid by the seller or transferor.
081 .he term 5goods5 or 5properties5 shall mean all
tangible and intangible ob(ects which are capable of
pecuniary estimation and shall include/
0a1 Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business$
0b1 .he right or the pri!ilege to use patent#
copyright# design or model# plan# secret formula
or process# goodwill# trademar&# trade brand or
other li&e property or right$
0c1 .he right or the pri!ilege to use in the
Philippines of any industrial# commercial or
scientific e%uipment$
0d1 .he right or the pri!ilege to use motion picture
films# tapes and discs$ and
0e1 Radio# tele!ision# satellite transmission and
cable tele!ision time.
.he term 5gross selling price5 means the total amount of
money or its e%ui!alent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale#
111
barter or e"change of the goods or properties# e"cluding
the !alue-added ta". .he e"cise ta"# if any# on such
goods or properties shall form part of the gross selling
price.
S-*. 8?8. @alue-added .a" on Sale of Ser!ices and Hse or
Eease of Properties. -

and collected# a !alue-added ta" e%ui!alent to ten
percent 08?=1 of gross receipts deri!ed from the sale or
e"change of ser!ices# including the use or lease of
properties.

R6! (o) %+0,,*
B-BKRA)3HB 4RKB .J- -A-*H.I@- S-*R-.ARL
.K / Secretary# 3epartment of 4inance
*c / *ommissioner# 2ureau of *ustoms
*ommissioner# 2ureau of Internal Re!enue
SH2>-*. / R-*KBB-)3A.IK) .K I)*R-AS- .J-
@AEH- A33-3 .AA RA.- 4RKB 8?
P-R*-). .K 82 P-R*-). -44-*.I@-
4-2RHARL 8# 2??M
3A.- / >anuary ,8# 2??M
Pursuant to your recommendation contained in your
Bemorandum for the President dated >anuary ,?. 2??M#
copy hereto attached# please be informed that the same has
been appro!ed by the President# pursuant to Section 4 of
Republic Act 0RA1 )o. :,,;.
RR (o) 1*+,9 #)1,9+1, #)1,9+0, #)1,9+3
S-*.IK) 4.8?<-8. Persons Eiable. C Any person who# in the
course of his trade or business# sells# barters# e"changes or
leases goods or properties# or renders ser!ices# and any
person who imports goods# shall be liable to @A. imposed in
Secs. 8?M to 8?8 of the .a" *ode.
Jowe!er# in the case of importation of ta"able goods# the
importer# whether an indi!idual or corporation and whether
or not made in the course of his trade or business# shall be
liable to @A. imposed in Sec. 8?; of the .a" *ode.
TPersonU refers to any indi!idual# trust# estate# partnership#
corporation# (oint !enture# cooperati!e or association.
T.a"able personU refers to any person liable for the payment
of @A.# whether registered or registrable in accordance with
Sec. 2,M of the .a" *ode.
T@A.-registered personU refers to any person who is
registered as a @A. ta"payer under Sec. 2,M of the .a"
*ode. Jis status as a @A.-registered person shall continue
until the cancellation of such registration.
T.a"able saleU refers to the sale# barter# e"change andFor
lease of goods or properties# including transactions Tdeemed
saleU and the performance of ser!ice for a consideration#
whether in cash or in &ind# all of which are sub(ect to ta"
under Secs. 8?M and 8?8 of the .a" *ode.
S-*. 4.8?<-2. )ature and *haracteristics of @A.. C @A. is a
ta" on consumption le!ied on the sale# barter# e"change or
lease of goods or properties and ser!ices in the Philippines
and on importation of goods into the Philippines. .he seller
is the one statutorily liable for the payment of the ta" but the
amount of the ta" may be shifted or passed on to the buyer#
transferee or lessee of the goods# properties or ser!ices.
.his rule shall li&ewise apply to e"isting contracts of sale or
lease of goods# properties or ser!ices at the time of the
effecti!ity of RA )o. :,,;. Jowe!er# in the case of
importation# the importer is the one liable for the @A..
S-*. 4.8?<-,. Beaning of TIn the *ourse of .rade or
2usinessU. C .he term Tin the course of trade or businessU
means the regular conduct or pursuit of a commercial or
economic acti!ity# including transactions incidental thereto#
by any person regardless of whether or not the person
112
engaged therein is a non-stoc&# non-profit pri!ate
organiation 0irrespecti!e of the disposition of its net income
and whether or not it sells e"clusi!ely to members or their
guests1# or go!ernment entity.
)on-resident persons who perform ser!ices in the
Philippines are deemed to be ma&ing sales in the course of
trade or business# e!en if the performance of ser!ices is not
regular.
2apatiran ng mga (aglilinDgod sa /ama'alaan ng /ilipinas v &an
AbaDada 5uro v rmita
4acts/
Kn Bay 24# 2??<# the President signed into law Republic Act
:,,; or the @A. Reform Act. 2efore the law was to ta&e effect
on >uly 8# 2??<# the *ourt issued a temporary restraining order
en(oining go!ernment from implementing the law in response to
a slew of petitions for certiorari and prohibition %uestioning the
constitutionality of the new law.- )K)-3-E-'A.IK) ISSH-/
.he new law in its Sections 4# < and M granted the Secretary of
4inance the authority to ascertain whether by 3ecember,8#
2??<# the @A. collection as a percentage of '3P of the pre!ious
year e"ceeds 2 and 4F<= or the national go!ernment deficit as a
percentage of '3P of the pre!ious year e"ceeds 8 and 8F2=. If
either of these two instances has occurred# the Secretary of
4inance# must submit such information to the President. .hen
the 82= @A. rate must be imposed by the President effecti!e
>anuary 8# 2??M.
Issue/
IF) the RA :,,;6s stand-by authority to the -"ecuti!e to
increase the @A. rate# especially on account of the
recommendatory power granted to the Secretary of 4inance#
constitutes undue delegation of legislati!e powerQ
Jeld/ )K.
*ongress does not abdicate its functions or unduly delegate
power when it describes what (ob must be done# who must do it#
and what is the scope of his authority$ in our comple" economy
that is fre%uently the only way in which the legislati!e process
can go forward.
.he case before the *ourt is not a delegation of legislati!e
power. It is simply a delegation of ascertainment of facts upon
which enforcement and administration of the increased rate
under the law is contingent. .he legislature has made the
operation of the 82= rate effecti!e >anuary 8# 2??M# contingent
upon a specified fact or condition. It lea!es the entire operation
or non-operation of the 82= rate upon factual matters outside of
the control of the e"ecuti!e. )o discretion would be e"ercised by
the President. Jighlighting the absence of discretion is the fact
that the word shall is used in the common pro!iso. .he use of
the word shall connote a mandatory order. Its use in a statute
denotes an imperati!e obligation and is inconsistent with the idea
of discretion.- .hus# it is the ministerial duty of the President to
immediately impose the82= rate upon the e"istence of any of
the conditions specified by *ongress. .his is a duty# which
cannot be e!aded by the President. It is a clear directi!e to
impose the 82=@A. rate when the specified conditions are
present.- In ma&ing his recommendation to the President on the
e"istence of either of the two conditions# the Secretary of
4inance is not acting as the alter ego of the President or e!en
her subordinate. Je is acting as the agent of the legislati!e
department# to determine and declare the e!ent upon which its
e"pressed will is to ta&e effect. .he Secretary of 4inance
becomes the means or tool by which legislati!e policy is
determined and implemented# considering that he possesses all
the facilities to gather data and information and has a much
broader perspecti!e to properly e!aluate them. Jis function is to
gather and collate statistical data and other pertinent information
and !erify if any of the two conditions laid out by *ongress is
present.- .here is no undue delegation of legislati!e power but
only of the discretion as to the e"ecution of a law. .his is
constitutionally permissible. *ongress did not delegate the power
to ta" but the mere implementation of the law. .he intent and will
to increase the @A. rate to 82= came from *ongress and the
tas& of the President is to simply e"ecute the legislati!e policy.
04rom A2?8? class of 3ean *arlota C scribd.com1
11
12.2 O, G..+% a,+ P#.4"#)$"%
82.2.8 In 'eneral
(IR! 1,*(A) 1
st
7
and collected on e!ery sale# barter or e"change of goods
or properties# !alue-added ta" e%ui!alent to ten percent
08?=1 of the gross selling price or gross !alue in money
of the goods or properties sold# bartered or e"changed#
such ta" to be paid by the seller or transferor.
081 .he term 5goods5 or 5properties5 shall mean all
tangible and intangible ob(ects which are capable of
pecuniary estimation and shall include/
0a1 Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business$
0b1 .he right or the pri!ilege to use patent#
copyright# design or model# plan# secret formula
or process# goodwill# trademar&# trade brand or
0c1 .he right or the pri!ilege to use in the
Philippines of any industrial# commercial or
scientific e%uipment$
0d1 .he right or the pri!ilege to use motion picture
films# tapes and discs$ and
0e1 Radio# tele!ision# satellite transmission and
cable tele!ision time.
barter or e"change of the goods or properties# e"cluding the
!alue-added ta". .he e"cise ta"# if any# on such goods or
properties shall form part of the gross selling price.
RR (o) 1*+,9 #)1,*+1 (amended b1 RR (o) ,#+,% 1)
@A. is imposed and collected on e!ery sale# barter or
e"change# or transactions Tdeemed saleU of ta"able goods or
properties at the rate of twel!e percent 082=1 0starting
4ebruary 8# 2??M1 of the gross selling price or gross !alue in
money of the goods or properties sold# bartered# or
e"changed# or deemed sold in the Philippines.
82.2.2 'oods or Properties
(IR! 1,*(A)(1)
081 .he term 5goods5 or 5properties5 shall mean all tangible
and intangible ob(ects which are capable of pecuniary
estimation and shall include/
0a1 Real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or
business$
0b1 .he right or the pri!ilege to use patent# copyright#
design or model# plan# secret formula or process#
goodwill# trademar&# trade brand or other li&e
property or right$
0c1 .he right or the pri!ilege to use in the Philippines of
any industrial# commercial or scientific e%uipment$
0d1 .he right or the pri!ilege to use motion picture films#
tapes and discs$ and
0e1 Radio# tele!ision# satellite transmission and cable
tele!ision time.
the !alue-added ta". .he e"cise ta"# if any# on such
goods or properties shall form part of the gross selling
11!
price.
RR (o) 1*+,9 #)1,*+0
S-*. 4.8?M-2. Beaning of the .erm T'oods or PropertiesU. C
.he term Tgoods or propertiesU refers to all tangible and
intangible ob(ects which are capable of pecuniary estimation
and shall include# among others/
081 Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or
business$
021 .he right or the pri!ilege to use patent# copyright# design
or model# plan# secret formula or process# goodwill#
trademar&# trade brand or other li&e property or right$
0,1 .he right or the pri!ilege to use any industrial
commercial or scientific e%uipment$ 041 .he right or the
pri!ilege to use motion picture films# films# tapes and
discs$ and 0<1 Radio# tele!ision# satellite transmission
and cable tele!ision time.
82.2., 'ross Selling Price
(IR! 1,*(A)(1) last 7, (8)
barter or e"change of the goods or properties# e"cluding the
!alue-added ta". .he e"cise ta"# if any# on such goods or
properties shall form part of the gross selling price.
031 3etermination of the .a". -
081 .he ta" shall be computed by multiplying the total
amount indicated in the in!oice by one-ele!enth
08F881.
021 Sales Returns# Allowances and Sales 3iscounts. -
.he !alue of goods or properties sold and
subse%uently returned or for which allowances were
granted by a @A.-registered person may be
deducted from the gross sales or receipts for the
%uarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount
granted and indicated in the in!oice at the time of
sale and the grant of which does not depend upon
the happening of a future e!ent may be e"cluded
from the gross sales within the same %uarter it was
gi!en.
0,1 Authority of the *ommissioner to 3etermine the
Appropriate .a" 2ase. - .he *ommissioner shall# by
4inance# determine the appropriate ta" base in
cases where a transaction is deemed a sale# barter
or e"change of goods or properties under
Subsection 021 hereof# or where the gross selling
price is unreasonably lower than the actual mar&et
!alue.
RR (o) 1*+,9 #)1,*+# (amended b1 RR (o) ,#+,% #)
Section 4. 'RKSS S-EEI)' PRI*-. - Sec. 4.8?M-4 of RR
)o. 8M-2??< is hereby amended to read as follows/
TS-*. 4.8?M-4. Beaning of the .erm ['ross Selling PriceN. C
.he term Tgross selling priceU means the total amount of
@A.. .he e"cise ta"# if any# on such goods or properties
shall form part of the gross selling price.
In the case of sale# barter or e"change of real property
sub(ect to @A.# gross selling price shall mean the
consideration stated in the sales document or the fair mar&et
!alue whiche!er is higher. If the @A. is not billed separately
in the document of sale# the selling price or the consideration
stated therein shall be deemed to be inclusi!e of @A.. .he
term [fair mar&et !alueN shall mean whiche!er is higher of/ 81
the fair mar&et !alue as determined by the *ommissioner
11"
Fonal !alue# or 21 the fair mar&et !alue as shown in
schedule of !alues of the Pro!incial and *ity Assessors 0real
property ta" declaration1. Jowe!er# in the absence of onal
!alueFfair mar&et !alue as determined by the *ommissioner#
gross selling price refers to the mar&et !alue shown in the
latest real property ta" declaration or the consideration#
whiche!er is higher. If the gross selling price is based on the
onal !alue or mar&et !alue of the property# the onal or
mar&et !alue shall be deemed e"clusi!e of @A.. .hus# the
onal !alueFmar&et !alue# net of the output @A.# should still
be higher than the consideration in the document of sale#
e"clusi!e of the @A..
If the sale of real property is on installment plan where the
onal !alueFfair mar&et !alue is higher than the
considerationFselling price# e"clusi!e of the @A.# the @A.
shall be based on the ratio of actual collection of the
consideration# e"clusi!e of the @A.# against the agreed
consideration # e"clusi!e of the @A.# appearing in the
*ontract to SellF*ontract of Sale applied to the onal
!alueFfair mar&et !alue of the property at the time of the
e"ecution of the *ontract to SellF*ontract of Sale at the
inception of the contract. .hus# since the output @A. is
based on the mar&et !alue of the property which is higher
than the considerationFselling price in the sales document#
e"clusi!e of the @A.# the input @A. that can be claimed by
the buyer shall be the separately-billed output @A. in the
sales document issued by the seller. .herefore# the output
@A. which is based on the mar&et !alue must be billed
separately by the seller in the sales document with specific
mention that the @A. billed separately is based on the
mar&et !alue of the property.
Illustration/
A2* *orporation sold a parcel of land to AL9 *ompany on
>uly 2# 2??M for P8#???#???.??# plus the output @A.# with a
monthly installment payment of P8?#???.??# plus the output
@A.. .he onal !alue of the sub(ect property at the time of
sale amounted to P8#<??#???.??. *ompute for the output ta"
due on the installment payment.
4ormula/
Actual collection 0e"clusi!e of the @A.1 " 9onal !alue " 82=
Agreed consideration 0e"c. of the @A.1
P8?#???.?? " P8#<??#???.?? X P8<#???.??
P8#???#???.??
P8<#???.?? " 82= X P8#8??.??
XXXXXXXX
Selling price is the amount of consideration in a contract of
sale between the buyer and seller or the total price of the
sale which may include cash or property and e!idence of
indebtedness issued by the buyer# e"cluding the @A.. T
A!!.<a!" D"+(&)$.,%
(IR! 1,*(8)
031 3etermination of the .a". -
081 .he ta" shall be computed by multiplying the total
amount indicated in the in!oice by one-ele!enth
08F881.
021 Sales Returns# Allowances and Sales 3iscounts. -
.he !alue of goods or properties sold and
subse%uently returned or for which allowances were
granted by a @A.-registered person may be
deducted from the gross sales or receipts for the
%uarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount
granted and indicated in the in!oice at the time of
sale and the grant of which does not depend upon
the happening of a future e!ent may be e"cluded
from the gross sales within the same %uarter it was
gi!en.
0,1 Authority of the *ommissioner to 3etermine the
Appropriate .a" 2ase. - .he *ommissioner shall# by
11#
4inance# determine the appropriate ta" base in
cases where a transaction is deemed a sale# barter
or e"change of goods or properties under
Subsection 021 hereof# or where the gross selling
price is unreasonably lower than the actual mar&et
!alue.
RR (o) 1*+,9 #)1,*+9
S-*. 4.8?M-:. Allowable 3eductions from 'ross Selling
Price. C In computing the ta"able base during the month or
%uarter# the following shall be allowed as deductions from
gross selling price/
0a1 3iscounts determined and granted at the time of sale#
which are e"pressly indicated in the in!oice# the amount
thereof forming part of the gross sales duly recorded in
the boo&s of accounts.
Sales discount indicated in the in!oice at the time of
sale# the grant of which is not dependent upon the
happening of a future e!ent# may be e"cluded from the
gross sales within the same monthF%uarter it was gi!en.
0b1 Sales returns and allowances for which a proper credit
or refund was made during the month or %uarter to the
buyer for sales pre!iously recorded as ta"able sales.
82.2.4 Kn Importations
(IR! 1,%
0A1 In 'eneral. - .here shall be le!ied# assessed and
collected on e!ery importation of goods a !alue-added
ta" e%ui!alent to ten percent 08?=1 based on the total
!alue used by the 2ureau of *ustoms in determining
tariff and customs duties plus customs duties# e"cise
ta"es# if any# and other charges# such ta" to be paid by
the importer prior to the release of such goods from
customs custody/ Pro!ided# .hat where the customs
duties are determined on the basis of the %uantity or
!olume of the goods# the !alue-added ta" shall be based
on the landed cost plus e"cise ta"es# If any.

021 .ransfer of 'oods by .a"--"empt Persons. - In the case
of ta"-free importation of goods into the Philippines by
persons# entities or agencies e"empt from ta" where
such goods are subse%uently sold# transferred or
e"changed in the Philippines to non-e"empt persons or
entities# the purchasers# transferees or recipients shall
be considered the importers thereof# who shall be liable
for any internal re!enue ta" on such importation. .he ta"
due on such importation shall constitute a lien on the
goods superior to all charges or liens on the goods#
irrespecti!e of the possessor thereof.
RR (o) 1*+,9 #)1,%+1
0a1 In general. C @A. is imposed on goods brought into the
Philippines# whether for use in business or not. .he ta"
shall be based on the total !alue used by the 2K* in
determining tariff and customs duties# plus customs
duties# e"cise ta"# if any# and other charges# such as
postage# commission# and similar charges# prior to the
release of the goods from customs custody.
In case the !aluation used by the 2K* in computing
customs duties is based on !olume or %uantity of the
imported goods# the landed cost shall be the basis for
computing @A.. Eanded cost consists of the in!oice
amount# customs duties# freight# insurance and other
charges. If the goods imported are sub(ect to e"cise ta"#
the e"cise ta" shall form part of the ta" base.
.he same rule applies to technical importation of goods
sold by a person located in a Special -conomic 9one to
a customer located in a customs territory.
)o @A. shall be collected on importation of goods which
are specifically e"empted under Sec. 8?: 081 of the .a"
*ode.
0b1 Applicability and payment. C .he rates prescribed under
Sec. 8?; 0A1 of the .a" *ode shall be applicable to all
11$
importations withdrawn from customs custody.
.he @A. on importation shall be paid by the importer
prior to the release of such goods from customs custody.
TImporterU refers to any person who brings goods into
the Philippines# whether or not made in the course of his
trade or business. It includes non-e"empt persons or
entities who ac%uire ta"-free imported goods from
e"empt persons# entities or agencies.
0c1 Sale# transfer or e"change of imported goods by ta"-
e"empt persons. C In the case of goods imported into
the Philippines by @A.-e"empt persons# entities or
agencies which are subse%uently sold# transferred or
e"changed in the Philippines to non-e"empt persons or
entities# the latter shall be considered the importers
thereof and shall be liable for @A. due on such
importation. .he ta" due on such importation shall
constitute a lien on the goods# superior to all chargesFor
liens# irrespecti!e of the possessor of said goods.
82.2.< Special Pro!isions Applicable to Sale of 'oods W Properties
82.2.<.8 8eemed Sale &ransactions
(IR! 1,*(-)
081 .ransfer# use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business$
021 3istribution or transfer to/
0a1 Shareholders or in!estors as share in the profits of
the @A.-registered persons$ or
0b1 *reditors in payment of debt$
0,1 *onsignment of goods if actual sale is not made within
si"ty 0M?1 days following the date such goods were
consigned$ and
041 Retirement from or cessation of business# with respect to
in!entories of ta"able goods e"isting as of such
retirement or cessation.
RR (o) 1*+,9 #)1,*+% (amended b1 RR (o) ,#+,% %)
0a1 .he following transactions shall be Tdeemed saleU
pursuant to Sec. 8?M 021 of the .a" *ode/
081 .ransfer# use or consumption not in the course of
business of goods or properties originally intended
for sale or for use in the course of business. .ransfer
of goods or properties not in the course of business
can ta&e place when @A.-registered person
withdraws goods from his business for his personal
use$
021 3istribution or transfer to/
i. Shareholders or in!estors share in the profits of
@A.-registered person$
Property di!idends which constitute stoc&s in
trade or properties primarily held for sale or
lease declared out of retained earnings on or
after >anuary 8# 8::M and distributed by the
company to its shareholders shall be sub(ect to
@A. based on the onal !alue or fair mar&et
!alue at the time of distribution# whiche!er is
applicable.
ii. *reditors in payment of debt or obligation.
0,1 *onsignment of goods if actual sale is not made
within M? days following the date such goods were
consigned. *onsigned goods returned by the
consignee within the M?-day period are not deemed
sold$
041 Retirement from or cessation of business with
respect to all goods on hand# whether capital goods#
11%
stoc&-in-trade# supplies or materials as of the date of
such retirement or cessation# whether or not the
business is continued by the new owner or
successor. .he following circumstances shall#
among others# gi!e rise to transactions Tdeemed
saleU for purposes of this Section$
i. *hange of ownership of the business. .here is a
change in the ownership of the business when a
single proprietorship incorporates$ or the
proprietor of a single proprietorship sells his
entire business.
ii. 3issolution of a partnership and creation of a
new partnership which ta&es o!er the business.
0b1 .he *ommissioner of Internal Re!enue shall determine
the appropriate ta" base in cases where a transaction is
deemed a sale# barter or e"change of goods or
properties under Sec. 4.8?M-; paragraph 0a1 hereof# or
where the gross selling price is unreasonably lower than
the actual mar&et !alue. .he gross selling price is
unreasonably lower than the actual mar&et !alue if it is
lower by more than ,?= of the actual mar&et !alue of
the same goods of the same %uantity and %uality sold in
the immediate locality on or nearest the date of sale.
4or transactions deemed sale# the output ta" shall be
based on the mar&et !alue of the goods deemed sold as
of the time of the occurrence of the transactions
enumerated in Sec. 4.8?M-;0a1081#021# and 0,1 of these
Regulations. Jowe!er# in the case of retirement or
cessation of business# the ta" base shall be the
ac%uisition cost or the current mar&et price of the goods
or properties# whiche!er is lower.
In the case of a sale where the gross selling price is
unreasonably lower than the fair mar&et !alue# the actual
mar&et !alue shall be the ta" base.
82.2.<.2 !'ange or !essation of :A& Status
RR (o) 1*+,9 #)1,*+$ (amended b1 RR (o) 1,+0,11)
0a1 Sub(ect to output ta"
.he @A. pro!ided for in Sec. 8?M of the .a" *ode shall
apply to goods or properties originally intended for sale
or use in business# and capital goods which are e"isting
as of the occurrence of the following/
081 *hange of business acti!ity from @A. ta"able status
to @A.-e"empt status. An e"ample is a @A.-
registered person engaged in a ta"able acti!ity li&e
wholesaler or retailer who decides to discontinue
such acti!ity and engages instead in life insurance
business or in any other business not sub(ect to
@A.$
021 Appro!al of a re%uest for cancellation of registration
due to re!ersion to e"empt status.
0,1 Appro!al of a re%uest for cancellation of registration
due to a desire to re!ert to e"empt status after the
lapse of three 0,1 consecuti!e years from the time of
registration by a person who !oluntarily registered
despite being e"empt under Sec. 8?: 021 of the .a"
*ode.
041 Appro!al of a re%uest for cancellation of registration
of one who commenced business with the
e"pectation of gross sales or receipts e"ceeding
P8#<??#???.??# but who failed to e"ceed this amount
during the first twel!e months of operation.
0b1 )ot sub(ect to output ta"
.he @A. shall not apply to goods or properties which are
originally intended for sale or for use in the course of
business e"isting as of the occurrence of the following/
081 *hange of control of a corporation by ac%uisition of
the controlling interest of such corporation by
another stoc&holder 0indi!idual or corporate1 or
11&
group of stoc&holders. .he goods or properties used
in business 0including those held for lease1 or those
comprising the stoc& in trade of the corporation
ha!ing a change in corporate control will not be
considered sold# bartered# or e"changed despite the
change in the ownership interest in the said
corporation.
Jowe!er# the e"change of goods or properties
including the real estate properties used in business
or held for sale or for lease by the transferor# for
shares of stoc&s# whether resulting in corporate
control or not# is sub(ect to @A..
Illustration/ Abel *orporation 0transferee1 is a
merchandising concern and has an in!entory of
goods for sale amounting to PhP 8 Billion. )el
*orporation 0transferor1# a real estate de!eloper#
e"changed its real properties for shares of stoc&s of
Abel *orporation resulting in the ac%uisition of
corporate control. .he in!entory of goods owned by
Abel *orporation is not sub(ect to output ta" despite
the change in corporate control because the same
corporation still owns them. .his is in recognition of
the separate and distinct personality of the
corporation from its stoc&holders. Jowe!er# the
e"change of real properties held for sale or lease by
)el *orporation# for the shares of stoc&s of Abel
*orporation# whether resulting in corporate control or
not# is sub(ect to @A..
021 *hange in the trade or corporate name of the
business$
0,1 Berger or consolidation of corporations. .he unused
input ta" of the dissol!ed corporation# as of the date
of merger or consolidation# shall be absorbed by the
sur!i!ing or new corporation.
(IR! 1,*(!)
.he ta" imposed in Subsection 0A1 of this Section shall also
apply to goods disposed of or e"isting as of a certain date if
under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of 4inance#
upon recommendation of the *ommissioner# the status of a
person as a @A.-registered person changes or is
terminated.
12.' O, S"#C$&"%
82.,.8 In 'eneral
(IR! 1,$(A) 1
st
7
properties.
RR (o) 1*+,9 #)1,$+1 (amended b1 RR (o) ,#+,% 9)
S-*. 4.8?8-8. @A. on the Sale of Ser!ices and Hse or
Eease of Properties. C Sale or e"change of ser!ices# as well
as the use or lease of properties# as defined in Sec. 8?8 0A1
of the .a" *ode shall be sub(ect to @A.# e%ui!alent to twel!e
percent 082=1 of the gross receipts 0e"cluding @A.1 starting
4ebruary 8# 2??M.
82.,.2 Sale and -"change of Ser!ices
(IR! 1,$(A) 0
nd
7
.he phrase 5sale or e"change of ser!ices5 means the
performance of all &inds or ser!ices in the Philippines for
others for a fee# remuneration or consideration# including
those performed or rendered by construction and ser!ice
contractors$ stoc&# real estate# commercial# customs and
immigration bro&ers$ lessors of property# whether
personal or real$ warehousing ser!ices$ lessors or
distributors of cinematographic films$ persons engaged
in milling processing# manufacturing or repac&ing goods
for others$ proprietors# operators or &eepers of hotels#
120
motels# resthouses# pension houses# inns# resorts$
proprietors or operators of restaurants# refreshment
parlors# cafes and other eating places# including clubs
and caterers$ dealers in securities$ lending in!estors$
transportation contractors on their transport of goods or
cargoes# including persons who transport goods or
cargoes for hire another domestic common carriers by
land# air and water relati!e to their transport of goods or
cargoes$ ser!ices of franchise grantees of telephone and
telegraph# radio and tele!ision broadcasting and all other
franchise grantees e"cept those under Section 88: of
this *ode$ ser!ices of ban&s# non-ban& financial
intermediaries and finance companies$ and non-life
insurance companies 0e"cept their crop insurances1#
including surety# fidelity# indemnity and bonding
companies$ and similar ser!ices regardless of whether
or not the performance thereof calls for the e"ercise or
use of the physical or mental faculties. .he phrase 6sale
or e"change of ser!ices6 shall li&ewise include/
081 .he lease or the use of or the right or pri!ilege to
use any copyright# patent# design or model# plan
secret formula or process# goodwill# trademar&# trade
brand or other li&e property or right$
021 .he lease of the use of# or the right to use of any
industrial# commercial or scientific e%uipment$
0,1 .he supply of scientific# technical# industrial or
041 .he supply of any assistance that is ancillary
and subsidiary to and is furnished as a means of
enabling the application or en(oyment of any
such property# or right as is mentioned in
subparagraph 021 or any such &nowledge or
information as is mentioned in subparagraph 0,1$
0<1 .he supply of ser!ices by a nonresident person
or his employee in connection with the use of
property or rights belonging to# or the installation
or operation of any brand# machinery or other
apparatus purchased from such nonresident
person.
0M1 .he supply of technical ad!ice# assistance or
ser!ices rendered in connection with technical
pro(ect or scheme$
0;1 .he lease of motion picture films# films# tapes
and discs$ and
081 .he lease or the use of or the right to use radio#
tele!ision# satellite transmission and cable
tele!ision time.
RR (o) 1*+,9 #)1,$+0
S-*. 4.8?8-2. Beaning of TSale or -"change of Ser!icesU. C
.he term Tsale or e"change of ser!icesU means the
performance of all &ind of ser!ices in the Philippines for
others for a fee# remuneration or consideration# whether in
&ind or in cash# including those performed or rendered by the
following/
081 construction and ser!ice contractors$
021 stoc&# real estate# commercial# customs and immigration
bro&ers$
0,1 lessors of property# whether personal or real$
041 persons engaged in warehousing ser!ices$
0<1 lessors or distributors of cinematographic films$
0M1 persons engaged in milling# processing# manufacturing
or repac&ing goods for others$
0;1 proprietors# operators# or &eepers of hotels# motels# rest
houses# pension houses# inns# resorts# theaters# and
mo!ie houses$
081 proprietors or operators of restaurants# refreshment
and caterers$
0:1 dealers in securities$
08?1lending in!estors$
0881transportation contractors on their transport of goods or
121
cargoes for hire and other domestic common carriers by
land relati!e to their transport of goods or cargoes$
0821common carriers by air and sea relati!e to their transport
of passengers# goods or cargoes from one place in the
Philippines to another place in the Philippines$
08,1sales of electricity by generation# transmission# andFor
distribution companies$
0841franchise grantees of electric utilities# telephone and
telegraph# radio andFor tele!ision broadcasting and all
other franchise grantees# e"cept franchise grantees of
radio andFor tele!ision broadcasting whose annual gross
receipts of the preceding year do not e"ceed .en Billion
Pesos 0P8?#???#???.??1# and franchise grantees of gas
and water utilities$
08<1non-life insurance companies 0e"cept their crop
insurances1# including surety# fidelity# indemnity and
bonding companies$ and
08M1similar ser!ices regardless of whether or not the
performance thereof calls for the e"ercise or use of the
physical or mental faculties.
.he phrase Tsale or e"change of ser!icesU shall li&ewise
include/
081 .he lease or the use of or the right or pri!ilege to use
any copyright# patent# design or model# plan# secret
formula or process# goodwill# trademar&# trade brand or
021 .he lease or the use of# or the right to use any industrial#
commercial or scientific e%uipment$
0,1 .he supply of scientific# technical industrial or
041 .he supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or en(oyment of any such property# or
right as is mentioned in subparagraph 021 hereof or any
such &nowledge or information as is mentioned in
subparagraph 0,1 hereof$
0<1 .he supply of ser!ices by a non-resident person or his
employee in connection with the use of property or rights
belonging to# or the installation or operation of any
brand# machinery or other apparatus purchased from
such nonresident person$
0M1 .he supply of technical ad!ice# assistance or ser!ices
rendered in connection with technical management or
administration of any scientific# industrial or commercial
underta&ing# !enture# pro(ect or scheme$
0;1 .he lease of motion picture films# films# tapes# and discs$
and
081 .he lease or the use of# or the right to use# radio#
tele!ision# satellite transmission and cable tele!ision
time.
82.,., 'ross Receipts
(IR! 1,$(A) last 7
.he term 5gross receipts5 means the total amount of money
or its e%ui!alent representing the contract price#
compensation# ser!ice fee# rental or royalty# including the
amount charged for materials supplied with the ser!ices and
deposits and ad!anced payments actually or constructi!ely
recei!ed during the ta"able %uarter for the ser!ices
performed or to be performed for another person# e"cluding
!alue-added ta".
RR (o) 1*+,9 #)1,$+# (amended b1 RR (o) ,#+,% 11)
S-*. 4.8?8-4. 3efinition of 'ross Receipts. -T'ross receiptsU
refers to the total amount of money or its e%ui!alent
representing the contract price# compensation# ser!ice fee#
rental or royalty# including the amount charged for materials
supplied with the ser!ices and deposits applied as payments
for ser!ices rendered and ad!ance payments actually or
constructi!ely recei!ed during the ta"able period for the
ser!ices performed or to be performed for another person#
e"cluding the @A.# e"cept those amounts earmar&ed for
payment to unrelated third 0,rd 1 party or recei!ed as
reimbursement for ad!ance payment on behalf of another
which do not redound to the benefit of the payor.
A payment is a payment to a third 0,rd1 party if the same is
made to settle an obligation of another person# e.g.#
122
customer or client# to the said third party# which obligation is
e!idenced by the sales in!oiceFofficial receipt issued by said
third party to the obligorFdebtor 0e.g.# customer or client of
the payor of the obligation1.
An ad!ance payment is an ad!ance payment on behalf of
another if the same is paid to a third 0,rd1 party for a present
or future obligation of said another party which obligation is
e!idenced by a sales in!oiceFofficial receipt issued by the
obligeeFcreditor to the obligorFdebtor 0i.e.# the
aforementioned Tanother partyU1 for the sale of goods or
ser!ices by the former to the latter.
4or this purpose [unrelated partyN shall not include ta"payerNs
employees# partners# affiliates 0parent# subsidiary and other
related companies1# relati!es by consanguinity or affinity
within the fourth 04th1 ci!il degree# and trust fund where the
ta"payer is the trustor# trustee or beneficiary# e!en if co!ered
by an agreement to the contrary.
T*onstructi!e receiptU occurs when the money consideration
or its e%ui!alent is placed at the control of the person who
rendered the ser!ice without restrictions by the payor. .he
following are e"amples of constructi!e receipts/
081 deposit in ban&s which are made a!ailable to the
seller of ser!ices without restrictions$
021 issuance by the debtor of a notice to offset any debt
or obligation and acceptance thereof by the seller as
payment for ser!ices rendered$ and
0,1 transfer of the amounts retained by the payor to the
account of the contractor.
12.* Ex"/4)B I"#.1#a)"+ a,+ E;;"&)$C"!- I"#.1#a)"+
T#a,%a&)$.,%
82.4.8 2asic Statutes and Regulations
82.4.8.8 >empt &ransactions
(IR! 1,9, 11*
0a1 Sale of nonfood agricultural products$ marine and forest
products in their original state by the primary producer or
the owner of the land where the same are produced$
0b1 Sale of cotton seeds in their original state$ and copra$
0c1 Sale or importation of agricultural and marine food
products in their original state# li!estoc& and poultry of or
&ing generally used as# or yielding or producing foods for
human consumption$ and breeding stoc& and genetic
materials therefor.
Products classified under this paragraph and paragraph
0a1 shall be considered in their original state e!en if they
ha!e undergone the simple processes of preparation or
preser!ation for the mar&et# such as freeing# drying#
salting# broiling# roasting# smo&ing or stripping.
Polished andFor hus&ed rice# corn grits# raw cane sugar
and molasses# and ordinary salt shall be considered in
their original state$
0d1 Sale or importation of fertiliers$ seeds# seedlings and
fingerlings$ fish# prawn# li!estoc& and poultry feeds#
including ingredients# whether locally produced or
imported# used in the manufacture of finished feeds
0e"cept specialty feeds for race horses# fighting coc&s#
a%uarium fish# oo animals and other animals generally
considered as pets1$
0e1 Sale or importation of coal and natural gas# in whate!er
form or state# and petroleum products 0e"cept lubricating
oil# processed gas# grease# wa" and petrolatum1 sub(ect
to e"cise ta" imposed under .itle @I$
0f1 Sale or importation of raw materials to be used by the
buyer or importer himself in the manufacture of
petroleum products sub(ect to e"cise ta"# e"cept
lubricating oil# processed gas# grease# wa" and
petrolatum$
12
0g1 Importation of passenger andFor cargo !essels of more
than fi!e thousand tons 0<#???1 whether coastwise or
ocean-going# including engine and spare parts of said
!essel to be used by the importer himself as operator
thereof$
0h1 Importation of personal and household effects belonging
to the residents of the Philippines returning from abroad
and nonresident citiens coming to resettle in the
Philippines/ Pro!ided# .hat such goods are e"empt from
customs duties under the .ariff and *ustoms *ode of
the Philippines$
0i1 Importation of professional instruments and implements#
wearing apparel# domestic animals# and personal
household effects 0e"cept any !ehicle# !essel# aircraft#
machinery other goods for use in the manufacture and
merchandise of any &ind in commercial %uantity1
belonging to persons coming to settle in the Philippines#
for their own use and not for sale# barter or e"change#
accompanying such persons# or arri!ing within ninety
0:?1 days before or after their arri!al# upon the
production of e!idence satisfactory to the *ommissioner#
that such persons are actually coming to settle in the
Philippines and that the change of residence is bona
fide$
0(1 Ser!ices sub(ect to percentage ta" under .itle @$
0&1 Ser!ices by agricultural contract growers and milling for
others of palay into rice# corn into grits and sugar cane
into raw sugar$
0l1 Bedical# dental# hospital and !eterinary ser!ices sub(ect
to the pro!isions of Section 8; of Republic Act )o. ;;8M#
as amended/
0m1 -ducational ser!ices rendered by pri!ate educational
institutions# duly accredited by the 3epartment of
-ducation# *ulture and Sports 03-*S1 and the
*ommission on Jigher -ducation 0*J-31# and those
rendered by go!ernment educational institutions$
0n1 Sale by the artist himself of his wor&s of art# literary
wor&s# musical compositions and similar creations# or his
ser!ices performed for the production of such wor&s$
0o1 Ser!ices rendered by indi!iduals pursuant to an
employer-employee relationship$
0p1 Ser!ices rendered by regional or area head%uarters
established in the Philippines by multinational
corporations which act as super!isory# communications
and coordinating centers for their affiliates# subsidiaries
or branches in the Asia-Pacific Region and do not earn
or deri!e income from the Philippines$
0%1 .ransactions which are e"empt under international
agreements to which the Philippines is a signatory or
under special laws# e"cept those under Presidential
3ecree )os. MM# <2: and 8<:?$
0r1 Sales by agricultural cooperati!es duly registered with
the *ooperati!e 3e!elopment Authority to their
members as well as sale of their produce# whether in its
original state or processed form# to non-members$ their
importation of direct farm inputs# machineries and
e%uipment# including spare parts thereof# to be used
directly and e"clusi!ely in the production andFor
processing of their produce$
0s1 Sales by electric cooperati!es duly registered with the
*ooperati!e 3e!elopment authority or )ational
-lectrification Administration# relati!e to the generation
and distribution of electricity as well as their importation
of machineries and e%uipment# including spare parts#
which shall be directly used in the generation and
distribution of electricity$
0t1 'ross receipts from lending acti!ities by credit or multi-
purpose cooperati!es duly registered with the
*ooperati!e 3e!elopment Authority whose lending
operation is limited to their members$
12!
0u1 Sales by non-agricultural# non- electric and non-credit
cooperati!es duly registered with the *ooperati!e
3e!elopment Authority/ Pro!ided# .hat the share capital
contribution of each member does not e"ceed 4ifteen
thousand pesos 0P8<#???1 and regardless of the
aggregate capital and net surplus ratably distributed
among the members$
0!1 -"port sales by persons who are not @A.-registered$
0w1 Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of
trade or business or real property utilied for low-cost
and socialied housing as defined by Republic Act )o.
;2;:# otherwise &nown as the Hrban 3e!elopment and
Jousing Act of 8::2# and other related laws# house and
lot and other residential dwellings !alued at Kne million
pesos 0P8#???#???1 and below/ Pro!ided# .hat not later
than >anuary ,8st of the calendar year subse%uent to
the effecti!ity of this Act and each calendar year
thereafter# the amount of Kne million pesos
0P8#???#???1 shall be ad(usted to its present !alue using
the *onsumer Price Inde"# as published by the national
Statistics Kffice 0)SK1$
0"1 Eease of a residential unit with a monthly rental not
e"ceeding -ight thousand pesos 0P8#???1$ Pro!ided#
.hat not later than >anuary ,8st of the calendar year
subse%uent to the effecti!ity of Republic Act )o. 8248
and each calendar year thereafter# the amount of -ight
thousand pesos 0P8#???1 shall be ad(usted to its present
!alue using the *onsumer Price Inde" as published by
the )ational Statistics Kffice 0)S?1$
0y1 Sale# importation# printing or publication of boo&s and
any newspaper# magaine re!iew or bulletin which
appears at regular inter!als with fi"ed prices for
subscription and sale and which is not de!oted
principally to the publication of paid ad!ertisements$ and
01 Sale or lease of goods or properties or the performance
of ser!ices other than the transactions mentioned in the
preceding paragraphs# the gross annual sales andFor
receipts do not e"ceed the amount of 4i!e hundred fifty
thousand pesos 0P<<?#???1/ Pro!ided# .hat not later
than >anuary ,8st of the calendar year subse%uent to
the effecti!ity of Republic Act )o. 8248 and each
calendar year thereafter# the amount of 4i!e hundred
fifty thousand pesos 0<<?#???1 shall be ad(usted to its
present !alue using the *onsumer Price Inde"# as
published by the )ational Statistics Kffice 0)SK1.
.he foregoing e"emptions to the contrary notwithstanding#
any person whose sale of goods or properties or ser!ices
which are otherwise not sub(ect to @A.# but who issues a
@A. in!oice or receipt therefor shall# in addition to his liability
to other applicable percentage ta"# if any# be liable to the ta"
imposed in Section 8?M or 8?8 without the benefit of input
ta" credit# and such ta" shall also be recognied as input ta"
credit to the purchaser under Section 88?# all of this *ode.
S-*. 88M. .a" on Persons -"empt 4rom @alue-Added .a"
0@A.1. - Any person whose sales or receipts are e"empt
under Section 8?:01 of this *ode from the payment of
!alue-added ta" and who is not a @A.-registered person
shall pay a ta" e%ui!alent to three percent 0,=1 of his gross
%uarterly sales or receipts/ Pro!ided# .hat cooperati!es shall
be e"empt from the three percent 0,=1gross receipts ta"
herein imposed.
RR (o) 1*+,9 #)1,9+1 (amended b1 RR (o) ,#+,% 1#, 11*+1
0A1 In general. C T@A.-e"empt transactionsU refer to the sale
of goods or properties andFor ser!ices and the use or
lease of properties that is not sub(ect to @A. 0output ta"1
and the seller is not allowed any ta" credit of @A. 0input
ta"1 on purchases.
.he person ma&ing the e"empt sale of goods# properties
or ser!ices shall not bill any output ta" to his customers
because the said transaction is not sub(ect to @A..
021 -"empt transactions. C
12"
081 Sub(ect to the pro!isions of Section 4.8?:-2 hereof#
the following transactions shall be e"empt from @A./
0a1 Sale or importation of agricultural and marine
food products in their original state# li!estoc&
and poultry of a &ind generally used as# or
yielding or producing foods for human
consumption$ and breeding stoc& and genetic
materials therefor.
Ei!estoc& shall include cows# bulls and cal!es#
pigs# sheep# goats and rabbits. Poultry shall
include fowls# duc&s# geese and tur&ey.
Ei!estoc& or poultry does not include fighting
coc&s# race horses# oo animals and other
animals generally considered as pets.
Barine food products shall include fish and
crustaceans# such as# but not limited to# eels#
trout# lobster# shrimps# prawns# oysters# mussels
and clams.
Beat# fruit# fish# !egetables and other
agricultural and marine food products classified
under this paragraph shall be considered in their
original date e!en if they ha!e undergone the
simple processes of preparation or preser!ation
for the mar&et# such as freeing# drying# salting#
broiling# roasting# smo&ing or stripping# including
those using ad!anced technological means of
pac&aging# such as shrin& wrapping in plastics#
!acuum pac&ing# tetra-pac&# and other similar
pac&aging methods.
Polished andFor hus&ed rice# corn grits# raw
cane sugar and molasses# ordinary salt and
copra shall be considered as agricultural food
products in their original state.
Sugar whose content of sucrose by weight# in
the dry state# has a polarimeter reading of ::.<
and abo!e are presumed to be refined sugar.
*ane sugar produced from the following shall be
presumed# for internal re!enue purposes# to be
refined sugar/
081 product of a refining process#
021 products of a sugar refinery# or
0,1 product of a production line of a sugar mill
accredited by the 2IR to be producing
andFor capable of producing sugar with
polarimeter reading of ::.<o and abo!e# and
for which the %uedan issued therefor# and
!erified by the Sugar Regulatory
Administration# identifies the same to be of a
polarimeter reading of ::.<o and abo!e.
2agasse is not included in the e"emption
pro!ided for under this section.
0b1 Sale or importation of fertiliers# seeds#
seedlings and fingerlings# fish# prawn# li!estoc&
and poultry feeds# including ingredients# whether
locally produced or imported# used in the
manufacture of finished feeds 0e"cept specialty
feeds for race horses# fighting coc&s# a%uarium
fish# oo animals and other animals generally
considered as pets1$
TSpecialty feedsU refers to non-agricultural feeds
or food for race horses# fighting coc&s# a%uarium
fish# oo animals and other animals generally
considered as pets.
0c1 Importation of personal and household effects
belonging to residents of the Philippines
returning from abroad and non-resident citiens
coming to resettle in the Philippines$ Pro!ided#
that such goods are e"empt from customs duties
under the .ariff and *ustoms *ode of the
Philippines$
0d1 Importation of professional instruments and
12#
implements# wearing apparel# domestic animals#
and personal household effects 0e"cept any
!ehicle# !essel# aircraft# machinery and other
goods for use in the manufacture and
merchandise of any &ind in commercial %uantity1
belonging to persons coming to settle in the
Philippines# for their own use and not for sale#
barter or e"change# accompanying such
persons# or arri!ing within ninety 0:?1 days
before or after their arri!al# upon the production
of e!idence satisfactory to the *ommissioner of
Internal Re!enue# that such persons are actually
coming to settle in the Philippines and that the
change of residence is bonafide$
0e1 Ser!ices sub(ect to percentage ta" under .itle @
of the .a" *ode# as enumerated below/
081 Sale or lease of goods or properties or the
performance of ser!ices of non-@A.-
registered persons# other than the
transactions mentioned in paragraphs 0A1 to
0H1 of Sec. 8?:081 of the .a" *ode# the
gross annual sales andFor receipts of which
does not e"ceed the amount of Kne Billion
4i!e Jundred .housand Pesos
0P8#<??#???.??1$ Pro!ided# .hat not later
than >anuary ,8# 2??: and e!ery three 0,1
years thereafter# the amount herein stated
shall be ad(usted to its present !alue using
the *onsumer Price Inde"# as published by
the )ational Statistics Kffice 0)SK1 0Sec.
88M of the .a" *ode1$
021 Ser!ices rendered by domestic common
carriers by land# for the transport of
passengers and &eepers of garages 0Sec.
88;1$
0,1 Ser!ices rendered by international air F
shipping carriers 0Sec. 8881$
041 Ser!ices rendered by franchise grantees of
radio andFor tele!ision broadcasting whose
annual gross receipts of the preceding year
do not e"ceed .en Billion Pesos
0P8?#???#???.??1# and by franchise grantees
of gas and water utilities 0Sec. 88:1$
0<1 Ser!ice rendered for o!erseas dispatch#
message or con!ersation originating from
the Philippines 0Sec. 82?1$
0M1 Ser!ices rendered by any person# company
or corporation 0e"cept purely cooperati!e
companies or associations1 doing life
insurance business of any sort in the
Philippines 0Sec. 82,1$
0;1 Ser!ices rendered by fire# marine or
miscellaneous insurance agents of foreign
insurance companies 0Sec. 8241$
081 Ser!ices of proprietors# lessees or operators
of coc&pits# cabarets# night or day clubs#
bo"ing e"hibitions# professional bas&etball
games# >ai-Alai and race trac&s 0Sec. 82<1$
and
0:1 Receipts on sale# barter or e"change of
shares of stoc& listed and traded through the
local stoc& e"change or through initial public
offering 0Sec. 82;1.
0f1 Ser!ices by agricultural contract growers and
milling for others of palay into rice# corn into
grits# and sugar cane into raw sugar$
TAgricultural contract growersU refers to those
persons producing for others poultry# li!estoc& or
other agricultural and marine food products in
their original state.
0g1 Bedical# dental# hospital and !eterinary ser!ices#
e"cept those rendered by professionals.
12$
Eaboratory ser!ices are e"empted. If the
hospital or clinic operates a pharmacy or drug
store# the sale of drugs and medicine is sub(ect
to @A..
0h1 -ducational ser!ices rendered by pri!ate
educational institutions duly accredited by the
3epartment of -ducation 03ep-31# the
*ommission on Jigher -ducation 0*J-31 and
the .echnical -ducation and S&ills 3e!elopment
Authority 0.-S3A1 and those rendered by
go!ernment educational institutions$
T-ducational ser!icesU shall refer to academic#
technical or !ocational education pro!ided by
pri!ate educational institutions duly accredited
by the 3ep-3# the *J-3 and .-S3A and those
rendered by go!ernment educational institutions
and it does not include seminars# in-ser!ice
training# re!iew classes and other similar
ser!ices rendered by persons who are not
accredited by the 3ep-3# the *J-3 andFor the
.-S3A$
0i1 Ser!ices rendered by indi!iduals pursuant to an
employer-employee relationship$
0(1 Ser!ices rendered by regional or area
head%uarters established in the Philippines by
multinational corporations which act as
super!isory# communications and coordinating
centers for their affiliates# subsidiaries or
branches in the Asia Pacific Region and do not
earn or deri!e income from the Philippines$
0&1 .ransactions which are e"empt under
international agreements to which the
Philippines is a signatory or under special laws
e"cept those granted under P3 )o. <2: R
Petroleum -"ploration *oncessionaires under
the Petroleum Act of 8:4:$ and
0l1 Sales by agricultural cooperati!es duly
registered and in good standing with the
*ooperati!e 3e!elopment Authority 0*3A1 to
their members# as well as sale of their produce#
whether in its original state or processed form# to
non-members# their importation of direct farm
inputs# machineries and e%uipment# including
spare parts thereof# to be used directly and
e"clusi!ely in the production andFor processing
of their produce.
Sale by agricultural cooperati!es to non-
members can only be e"empted from @A. if the
producer of the agricultural products sold is the
cooperati!e itself. If the cooperati!e is not the
producer 0e.g.# trader1# then only those sales to
its members shall be e"empted from @A.$
It is to be reiterated howe!er# that sale or
importation of agricultural food products in their
original state is e"empt from @A. irrespecti!e of
the seller and buyer thereof# pursuant to
Subsection 0a1 hereof.
0m1 'ross receipts from lending acti!ities by credit or
multi-purpose cooperati!es duly registered and
in good standing with the *ooperati!e
3e!elopment Authority#
0n1 Sales by non-agricultural# non-electric and non-
credit cooperati!es duly registered with and in
good standing with the *3A$ Pro!ided# .hat the
share capital contribution of each member does
not e"ceed 4ifteen .housand Pesos
0P8<#???.??1 and regardless of the aggregate
capital and net surplus ratably distributed among
the members.
Importation by non-agricultural# non-electric and
non-credit cooperati!es of machineries and
e%uipment# including spare parts thereof# to be
12%
used by them are sub(ect to @A..
0o1 -"port sales by persons who are not @A.-
registered$
0p1 .he following sales of real properties are e"empt
from @A.# namely/
081 Sale of real properties not primarily held for
sale to customers or held for lease in the
ordinary course of trade or business.
Jowe!er# e!en if the real property is not
primarily held for sale to customers or held
for lease in the ordinary course of trade or
business but the same is used in the trade
or business of the seller# the sale thereof
shall be sub(ect to @A. being a transaction
incidental to the ta"payerNs main business.
021 Sale of real properties utilied for low-cost
housing as defined by RA )o. ;2;:#
otherwise &nown as the THrban
3e!elopment and Jousing Act of 8::2U and
other related laws# such as RA )o. ;8,<
and RA )o. 8;M,.
TEow-cost housingU refers to housing
pro(ects intended for homeless low-income
family beneficiaries# underta&en by the
'o!ernment or pri!ate de!elopers# which
may either be a subdi!ision or a
condominium registered and licensed by the
Jousing and Eand Hse Regulatory
2oardFJousing 0JEHR21 under 2P 2lg. 22?#
P3 )o. :<; or any other similar law# wherein
the unit selling price is within the selling
price ceiling per unit of P;<?#???.?? under
RA )o. ;2;:# otherwise &nown as the
THrban 3e!elopment and Jousing Act of
8::2U and other laws# such as RA )o. ;8,<
and RA )o. 8;M,.
0,1 Sale of real properties utilied for socialied
housing as defined under RA )o. ;2;:# and
other related laws# such as RA )o. ;8,<
and RA )o. 8;M,# wherein the price ceiling
per unit is P22<#???.?? or as may from time
to time be determined by the JH3** and
the )-3A and other related laws.
TSocialied housingU refers to housing
programs and pro(ects co!ering houses and
lots or home lots only underta&en by the
'o!ernment or the pri!ate sector for the
underpri!ileged and homeless citiens which
shall include sites and ser!ices
de!elopment# long-term financing# liberated
terms on interest payments# and such other
benefits in accordance with the pro!isions of
RA )o. ;2;:# otherwise &nown as the
THrban 3e!elopment and Jousing Act of
8::2U and RA )o. ;8,< and RA )o. 8;M,.
TSocialied housingU shall also refer to
pro(ects intended for the underpri!ileged and
homeless wherein the housing pac&age
selling price is within the lowest interest
rates under the Hnified Jome Eending
Program 0HJEP1 or any e%ui!alent housing
program of the 'o!ernment# the pri!ate
sector or non-go!ernment organiations.
041 Sale of residential lot !alued at Kne Billion
4i!e Jundred .housand Pesos
0P8#<??#???.??1 and below# or house W lot
and other residential dwellings !alued at
.wo Billion 4i!e Jundred .housand Pesos
0P2#<??#???.??1 and below where the
instrument of saleFtransferFdisposition was
e"ecuted on or after )o!ember 8# 2??<$
Pro!ided# .hat not later than >anuary ,8#
2??: and e!ery three 0,1 years thereafter#
the amounts stated herein shall be ad(usted
to its present !alue using the *onsumer
12&
Price Inde"# as published by the )ational
Statistics Kffice 0)SK1$ Pro!ided# further#
that such ad(ustment shall be published
through re!enue regulations to be issued not
later than Barch ,8 of each year$
If two or more ad(acent residential lots are
sold or disposed in fa!or of one buyer# for
the purpose of utiliing the lots as one
residential lot# the sale shall be e"empt from
@A. only if the aggregate !alue of the lots
do not e"ceed P8#<??#???.??. Ad(acent
residential lots# although co!ered by
separate titles andFor separate ta"
declarations# when sold or disposed to one
and the same buyer# whether co!ered by
one or separate 3eed of *on!eyance# shall
be presumed as a sale of one residential lot.
0%1 Eease of residential units with a monthly rental
per unit not e"ceeding .en .housand Pesos
0P8?#???.??1# regardless of the amount of
aggregate rentals recei!ed by the lessor during
the year$ Pro!ided# that not later than >anuary
,8# 2??: and e!ery three 0,1 years thereafter#
the amount of P8?#???.?? shall be ad(usted to
its present !alue using the *onsumer Price
Inde"# as published by the )SK$
.he foregoing notwithstanding# lease of
residential units where the monthly rental per
unit e"ceeds .en .housand Pesos 0P8?#???.??1
but the aggregate of such rentals of the lessor
during the year do not e"ceed Kne Billion 4i!e
Jundred Pesos 0P8#<??#???.??1 shall li&ewise
be e"empt from @A.# howe!er# the same shall
be sub(ected to three percent 0,=1 percentage
ta".
In cases where a lessor has se!eral residential
units for lease# some are leased out for a
monthly rental per unit of not e"ceeding
P8?#???.?? while others are leased out for more
than P8?#???.?? per unit# his ta" liability will be
as follows/
8. .he gross receipts from rentals not
e"ceeding P8?#???.?? per month per unit
shall be e"empt from @A. regardless of the
aggregate annual gross receipts.
2. .he gross receipts from rentals e"ceeding
P8?#???.?? per month per unit shall be
sub(ect to @A. if the aggregate annual gross
receipts from said units only 0not including
the gross receipts from units leased for not
more than P8?#???.??1 e"ceeds
P8#<??#???.??. Ktherwise# the gross
receipts will be sub(ect to the ,= ta"
imposed under Section 88M of the .a"
*ode.
.he term [residential unitsN shall refer to
apartments and houses W lots used for
residential purposes# and buildings or parts or
units thereof used solely as dwelling places
0e.g.# dormitories# rooms and bed spaces1
e"cept motels# motel rooms# hotels and hotel
rooms# lodging houses# inns and pension
houses.
.he term [unitN shall mean an apartment unit in
the case of apartments# house in the case of
residential houses$ per person in the case of
dormitories# boarding houses and bed spaces$
and per room in case of rooms for rent.
0r1 Sale# importation# printing or publication of
boo&s and any newspaper# magaine# re!iew# or
bulletin which appears at regular inter!als with
fi"ed prices for subscription and sale and which
is not de!oted principally to the publication of
paid ad!ertisements$
10
0s1 Sale# importation or lease of passenger or cargo
!essels and aircraft# including engine#
e%uipment and spare parts thereof for domestic
or international transport operations$ Pro!ided#
that the e"emption from @A. on the importation
and local purchase of passenger andFor cargo
!essels shall be limited to those of one hundred
fifty 08<?1 tons and abo!e# including engine and
spare parts of said !essels$ Pro!ided# further#
that the !essels to be imported shall comply with
the age limit re%uirement# at the time of
ac%uisition counted from the date of the !esselNs
original commissioning# as follows/ 0i1 for
passenger andFor cargo !essels# the age limit is
fifteen 08<1 years old# 0ii1 for tan&ers# the age
limit is ten 08?1 years old# and 0iii1 4or high-
speed passenger crafts# the age limit is fi!e 0<1
years old$ Pro!ided# finally# that e"emption shall
be sub(ect to the pro!isions of Section 4 of
Republic Act )o. :2:<# otherwise &nown as
T.he 3omestic Shipping 3e!elopment Act of
2??4U$
0t1 Importation of life-sa!ing e%uipment# safety and
rescue e%uipment and communication and
na!igational safety e%uipment# steel plates and
other metal plates including marine-grade
aluminum plates# used for shipping transport
operations$ Pro!ided# that the e"emption shall
be sub(ect to the pro!isions of Section 4 of
Republic Act. )o. :2:<# otherwise &nown as
[.he 3omestic Shipping 3e!elopment Act of
2??4N$
0u1 Importation of capital e%uipment# machinery#
spare parts# life- sa!ing and na!igational
e%uipment# steel plates and other metal plates
including marine-grade aluminum plates to be
used in the construction# repair# reno!ation or
alteration of any merchant marine !essel
operated or to be operated in the domestic
trade. Pro!ided# that the e"emption shall be
sub(ect to the pro!isions of Section 8: of
Republic Act. )o. :2:<# otherwise &nown as
[.he 3omestic Shipping 3e!elopment Act of
2??4N$
0!1 Importation of fuel# goods and supplies by
persons engaged in international shipping or air
transport operations$ Pro!ided# that the said fuel#
goods and supplies shall be used e"clusi!ely or
shall pertain to the transport of goods andFor
passenger from a port in the Philippines directly
to a foreign port# or !ice !ersa# without doc&ing
or stopping at any other port in the Philippines
unless the doc&ing or stopping at any other
Philippine port is for the purpose of unloading
passengers andFor cargoes that originated from
abroad# or to load passengers andFor cargoes
bound for abroad$ Pro!ided# further# that if any
portion of such fuel# goods or supplies is used
for purposes other than that mentioned in this
paragraph# such portion of fuel# goods and
supplies shall be sub(ect to twel!e percent
082=1 @A. starting 4ebruary 8# 2??M$
0w1 Ser!ices of ban&s# non-ban& financial
intermediaries performing %uasi-ban&ing
functions# and other non-ban& financial
intermediaries# such as money changers and
pawnshops# sub(ect to percentage ta" under
Secs. 828 and 822 # respecti!ely# of the .a"
*ode$ and
0"1 Sale or lease of goods or properties or the
performance of ser!ices other than the
transactions mentioned in the preceding
paragraphs# the gross annual sales andFor
receipts do not e"ceed the amount of Kne
Billion 4i!e Jundred .housand Pesos
0P8#<??#???.??1$ Pro!ided# .hat not later than
>anuary ,8# 2??: and e!ery three 0,1 years
thereafter# the amount of P8#<??#???.?? shall be
ad(usted to its present !alue using the
11
*onsumer Price Inde"# as published by the
)SK.
4or purposes of the threshold of P8#<??#???.??# the
husband and the wife shall be considered separate
ta"payers. Jowe!er# the aggregation rule for each
ta"payer shall apply. 4or instance# if a professional#
aside from the practice of his profession# also
deri!es re!enue from other lines of business which
are otherwise sub(ect to @A.# the same shall be
combined for purposes of determining whether the
threshold has been e"ceeded. .hus# the @A.-
e"empt sales shall not be included in determining
the threshold.
-IR Ruling (o) 8A+999+,* (A..&!B -iotec'nolog1)
AEE.-*J 2IK.-*J)KEK'L *KRPKRA.IK)# is a
of the laws of the Philippines$ that it is engaged in the
importation of fish# poultry and li!estoc& feed ingredients for
sale in the country$ that on April 2<# 2??<# a *ertificate of
Product Registration has been issued by the 2ureau of
Animal Industry 02AI1.
In connection therewith# you now re%uest for confirmation of
your opinion that the importation and sale of the abo!e-
mentioned products which are used as ingredients in the
manufacture of finished feeds primarily for consumption of
li!estoc& and poultry as well as fish and prawns are e"empt
from !alue-added ta" 0@A.1.
In 2IR @A. Ruling )o. ?M?-?2 dated September 8M# 2??2#
this Kffice ruled that R
5. . . . .he foregoing pro!ision refers to three transactions as
being e"empted from @A.# namely/
8. Sale or importation of fertiliers# seeds# seedlings and
fingerlings$
2. Sale or importation of fish# prawn# li!estoc& and poultry
feeds$ and
,. Sale or importation of feed ingredients used in the
manufacture of fish# prawn# li!estoc& and poultry feeds.
Item ,# clearly refers to ingredients used in the manufacture
of animal feeds. .he word 5ingredients5 or 5feed ingredients5
are defined under R.A. )o. 8<<M# as amended by
Presidential 3ecree )o. ;# and implemented by
Administrati!e Krder )o. ,< dated September 2,# 8:;< as
5any single article of feed or feeding stuff which enters into
the composition of a ration# concentrate# or
supplement.5 . . . .5
It is significant to note that since the manufacture#
importation# sale or distribution of feeds or feeding stuff
re%uire a prior registration and permit from the 2ureau of
Animal Industry 02AI1 under R.A. )o. 8<<M# as amended by
Presidential 3ecree )o. ;# the certification on the nature and
composition of the commoditiesFitems as stated in the
registration and import permit issued by 2AI will go!ern the
classification of the said items for purposes of @A. under
Section 8?:0d1 of the .a" *ode of 8::;. Since the 2AI has
classified Gem *urb 3ry as ingredients in the manufacture of
feeds# your importation of the said articles is e"empt from
the payment of @A..
Accordingly# this ruling shall ser!e as authority of the 2ureau
of *ustoms to release the abo!e importation# which shall be
in lieu of the issuance of the Application to Release Imported
'oods 0A.RI'1.
Inasmuch as the abo!e-mentioned products ha!e been
certified by the 2AI as ingredients in the manufacture of
finished feeds primarily for consumption of li!estoc&# poultry#
fish and prawns# the importation thereof shall be e"empt
from @A. pursuant to Section 8?:0d1 of the .a" *ode of
8::;# as amended by R.A. )o. :,,;.
82.4.8.2 ;ero Rated 5oods (persons) and Services
(IR! 1,*(A)(0) and 1,$(-)
.he following sales by @A.-registered persons shall be
sub(ect to ero percent 0?=1 rate/
12
0a1 -"port Sales. - .he term 5e"port sales5 means/
081 .he sale and actual shipment of goods from the
Philippines to a foreign country# irrespecti!e of any
shipping arrangement that may be agreed upon
which may influence or determine the transfer of
ownership of the goods so e"ported and paid for in
acceptable foreign currency or its e%ui!alent in
goods or ser!ices# and accounted for in accordance
with the rules and regulations of the 2ang&o Sentral
ng Pilipinas 02SP1$
021 Sale of raw materials or pac&aging materials to a
nonresident buyer for deli!ery to a resident local
e"port-oriented enterprise to be used in
manufacturing# processing# pac&ing or repac&ing in
the Philippines of the said buyer6s goods and paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
2ang&o Sentral ng Pilipinas 02SP1$
0,1 Sale of raw materials or pac&aging materials to
e"port-oriented enterprise whose e"port sales
e"ceed se!enty percent 0;?=1 of total annual
production$
041 Sale of gold to the 2ang&o Sentral ng Pilipinas
02SP1$ and
0<1 .hose considered e"port sales under -"ecuti!e
Krder )K. 22M# otherwise &nown as the Kmnibus
In!estment *ode of 8:8;# and other special laws.
0b1 4oreign *urrency 3enominated Sale. - .he phrase
5foreign currency denominated sale5 means sale to a
nonresident of goods# e"cept those mentioned in
Sections 84: and 8<?# assembled or manufactured in
the Philippines for deli!ery to a resident in the
Philippines# paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the 2ang&o Sentral ng Pilipinas 02SP1.
0c1 Sales to persons or entities whose e"emption under
special laws or international agreements to which the
Philippines is a signatory effecti!ely sub(ects such sales
to ero rate.
.ransactions Sub(ect to 9ero Percent 0?=1 Rate. - .he
following ser!ices performed in the Philippines by @A.-
registered persons shall be sub(ect to ero percent 0?=1
rate.
081 Processing# manufacturing or repac&ing goods for other
persons doing business outside the Philippines which
goods are subse%uently e"ported# where the ser!ices
are paid for in acceptable foreign currency and
regulations of the 2ang&o Sentral ng Pilipinas 02SP1$
021 Ser!ices other than those mentioned in the preceding
paragraph# the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the 2ang&o
Sentral ng Pilipinas 02SP1$
0,1 Ser!ices rendered to persons or entities whose
e"emption under special laws or international
agreements to which the Philippines is a signatory
effecti!ely sub(ects the supply of such ser!ices to ero
percent 0?=1 rate$
041 Ser!ices rendered to !essels engaged e"clusi!ely in
international shipping$ and
0<1 Ser!ices performed by subcontractors andFor contractors
in processing# con!erting# of manufacturing goods for an
enterprise whose e"port sales e"ceed se!enty percent
0;?=1 of total annual production.
RR (o) 1*+,9 #)1,*+9 (amended b1 RR (o) ,#+,% 9)
9ero-Rated Sales of 'oods or Properties. C A ero-rated
sale of goods or properties 0by a @A.-registered person1 is a
ta"able transaction for @A. purposes# but shall not result in
1
any output ta". Jowe!er# the input ta" on purchases of
goods# properties or ser!ices# related to such ero-rated
sale# shall be a!ailable as ta" credit or refund in accordance
with these Regulations.
.he following sales by @A.-registered persons shall be
sub(ect to ero percent 0?=1 rate/
0a1 -"port sales. C T-"port SalesU shall mean/
081 .he sale and actual shipment of goods from the
Philippines to a foreign country# irrespecti!e of any
shipping arrangement that may be agreed upon
which may influence or determine the transfer of
ownership of the goods so e"ported# paid for in
acceptable foreign currency or its e%ui!alent in
goods or ser!ices# and accounted for in accordance
with the rules and regulations of the 2ang&o Sentral
ng Pilipinas 02SP1$
021 .he sale of raw materials or pac&aging materials to
a non-resident buyer for deli!ery to a resident local
e"port-oriented enterprise to be used in
manufacturing# processing# pac&ing or repac&ing in
the Philippines of the said buyerNs goods# paid for in
acceptable foreign currency# and accounted for in
accordance with the rules and regulations of the
2SP$
0,1 .he sale of raw materials or pac&aging materials to
an e"port-oriented enterprise whose e"port sales
e"ceed se!enty percent 0;?=1 of total annual
production$
Any enterprise whose e"port sales e"ceed ;?= of
the total annual production of the preceding ta"able
year shall be considered an e"port-oriented
enterprise.
041 Sale of gold to the 2SP$ and
0<1 .ransactions considered e"port sales under
-"ecuti!e Krder )o. 22M# otherwise &nown as the
Kmnibus In!estments *ode of 8:8;# and other
special laws.
T*onsidered e"port sales under -"ecuti!e Krder )o.
22MU shall mean the Philippine port 4.K.2. !alue
determined from in!oices# bills of lading# inward
letters of credit# landing certificates# and other
commercial documents# of e"port products e"ported
directly by a registered e"port producer# or the net
selling price of e"port products sold by a registered
e"port producer to another e"port producer# or to an
e"port trader that subse%uently e"ports the same$
Pro!ided# .hat sales of e"port products to another
producer or to an e"port trader shall only be deemed
e"port sales when actually e"ported by the latter# as
e!idenced by landing certificates or similar
commercial documents$ Pro!ided# further# .hat
pursuant to -K 22M and other special laws# e!en
without actual e"portation# the following shall be
considered constructi!ely e"ported/ 081 sales to
bonded manufacturing warehouses of e"port-
oriented manufacturers$ 021 sales to e"port
processing ones pursuant to Republic Act 0RA1
)os. ;:8M# as amended# ;:?,# ;:22 and other
similar e"port processing ones$ 0,1 sale to
enterprises duly registered and accredited with the
Subic 2ay Betropolitan Authority pursuant to RA
;22;$ 041 sales to registered e"port traders operating
bonded trading warehouses supplying raw materials
in the manufacture of e"port products under
guidelines to be set by the 2oard in consultation with
the 2ureau of Internal Re!enue 02IR1 and the
2ureau of *ustoms 02K*1$ 0<1 sales to diplomatic
missions and other agencies andFor instrumentalities
granted ta" immunities# of locally manufactured#
assembled or repac&ed products whether paid for in
foreign currency or not.
4or purposes of ero-rating# the e"port sales of
registered e"port traders shall include commission
income. .he e"portation of goods on consignment
shall not be deemed e"port sales until the e"port
1!
products consigned are in fact sold by the
consignee$ and Pro!ided# finally# that sales of goods#
properties or ser!ices made by a @A.-registered
supplier to a 2KI- registered manufacturerFproducer
whose products are 8??= e"ported are considered
e"port sales. A certification to this effect must be
issued by the 2oard of In!estment 02KI1 which shall
be good for one year unless subse%uently re-issued
by the 2KI.
0M1 .he sale of goods# supplies# e%uipment and fuel to
persons engaged in international shipping or
international air transport operations$ Pro!ided# that
the same is limited to goods# supplies# e%uipment
and fuel pertaining to or attributable to the transport
of goods and passengers from a port in the
Philippines directly to a foreign port# or !ice !ersa#
without doc&ing or stopping at any other port in the
Philippines unless the doc&ing or stopping at any
other Philippine port is for the purpose of unloading
passengers andFor cargoes that originated from
abroad# or to load passengers andFor cargoes bound
for abroad$ Pro!ided# further# that if any portion of
such fuel# goods or supplies is used for purposes
other than that mentioned in this paragraph# such
portion of fuel goods and supplies shall be sub(ect to
twel!e percent 082=1 output @A. starting 4ebruary
8# 2??M.
0b1 T4oreign *urrency 3enominated SaleU. C T4oreign
*urrency 3enominated SaleU means the sale to a non-
resident of goods# e"cept those mentioned in Secs. 84:
and 8<? of the .a" *ode# assembled or manufactured in
the Philippines for deli!ery to a resident in the
Philippines# paid for in acceptable foreign currency and
regulations of the 2SP.
Sales of locally manufactured or assembled goods for
household and personal use to 4ilipinos abroad and
other non-residents of the Philippines as well as
returning K!erseas 4ilipinos under the Internal -"port
Program of the go!ernment paid for in con!ertible
foreign currency and accounted for in accordance with
the rules and regulations of the 2SP shall also be
considered e"port sales.
0c1 TSales to Persons or -ntities 3eemed .a"-e"empt under
Special Eaw or International AgreementU. - Sales of
goods or property to persons or entities who are ta"-
e"empt under special laws# e.g. sales to enterprises duly
registered and accredited with the Subic 2ay
Betropolitan Authority 0S2BA1 pursuant to R.A. )o.
;22;# sales to enterprises duly registered and accredited
with the Philippine -conomic 9one Authority 0P-9A1 or
international agreements to which the Philippines is
signatory# such as# Asian 3e!elopment 2an& 0A321#
International Rice Research Institute 0IRRI1# etc.# shall
be effecti!ely sub(ect to @A. at ero-rate.
RR (o) 1*+,9 #)1,$+9 (amended b1 RR (o) ,#+,% 10)
0a1 In general. - A ero-rated sale of ser!ice 0by a @A.-
registered person1 is a ta"able transaction for @A.
purposes# but shall not result in any output ta". Jowe!er#
the input ta" on purchases of goods# properties or
ser!ices related to such ero-rated sale shall be
a!ailable as ta" credit or refund in accordance with these
Regulations.
0b1 .ransactions Sub(ect to 9ero Percent 0?=1 @A. Rate. -
.he following ser!ices performed in the Philippines by a
@A.-registered person shall be sub(ect to ero percent
0?=1 @A. rate/
081 Processing# manufacturing or repac&ing goods for
other persons doing business outside the
Philippines# which goods are subse%uently e"ported#
where the ser!ices are paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the 2SP$
021 Ser!ices other than processing# manufacturing or
repac&ing rendered to a person engaged in business
1"
conducted outside the Philippines or to a non-
resident person not engaged in business who is
outside the Philippines when the ser!ices are
performed# the consideration for which is paid for in
accordance with the rules and regulations of the
2SP$
effecti!ely sub(ects the supply of such ser!ices to
ero percent 0?=1 rate$
041 Ser!ices rendered to persons engaged in
international shipping or air transport operations#
including leases of property for use thereof$
Pro!ided# howe!er# that the ser!ices referred to
herein shall not pertain to those made to common
carriers by air and sea relati!e to their transport of
passengers# goods or cargoes from one place in the
Philippines to another place in the Philippines# the
same being sub(ect to twel!e percent 082=1 @A.
under Sec. 8?8 of the .a" *ode starting 4eb. 8#
2??M$
0<1 Ser!ices performed by subcontractors andFor
contractors in processing# con!erting# or
manufacturing goods for an enterprise whose e"port
sales e"ceed se!enty percent 0;?=1 of the total
annual production$
0M1 .ransport of passengers and cargo by domestic air
or sea carriers from the Philippines to a foreign
country. 'ross receipts of international air carriers
doing business in the Philippines and international
sea carriers doing business in the Philippines are
still liable to a percentage ta" of three percent 0,=1
based on their gross receipts as pro!ided for in Sec.
888 of the .a" *ode but shall not to be liable to
@A.$ and
0;1 Sale of power or fuel generated through renewable
sources of energy such as# but not limited to#
biomass# solar# wind# hydropower# geothermal and
steam# ocean energy# and other emerging sources
using technologies such as fuel cells and hydrogen
fuels$ Pro!ided# howe!er# that ero-rating shall apply
strictly to the sale of power or fuel generated through
renewable sources of energy# and shall not e"tend
to the sale of ser!ices related to the maintenance or
operation of plants generating said power.
E;;"&)% .; C.%)1%8a#$,9
-IR Ruling (o) 8A+,93+,$ (-RA(8RS)!"6)
2RA)3-RS.*KB 0Philippines1# Inc. 0the P-9A *ompany1#
is a company organied and e"isting under the laws of the
Philippines with business address at the ,?th 4loor# Hnion
2an& Plaa# Beralco A!enue corner Kny" Road# Krtigas
*enter# Pasig *ity$ that it is duly registered with the
Philippine -conomic 9one Authority 0P-9A1 and is engaged
in business process outsourcing ser!ices using computer
based I. enabled systems to ser!ice the needs of its global
clients$ that it is an affiliate of 2randers.*om# Inc.$ that on the
other hand# 2randers.*om# Inc. 02randers-HSA1 is a HS
entity engaged in the wholesale and design of !arious
business promotional items# gifts and gi!eaways on the
internet$ that it has a Regional Kperating Jead%uarters in
the Philippines# 2RA)3-RS.*KB 0RKJ71# I)*. 0RKJ71$
that the RKJ7 renders general administration#
sourcingFprocurement# corporate finance ad!isory ser!ices
as well as engineering# I. and other technical support to
2randers-HSA$ that the RKJ7 also handles order
management# product design# credit and collection# finance#
engineering# I. as well as merchandising and mar&eting
ser!ices for the P-9A *ompany$ that the P-9A *ompany
leases from the Hnion 2an& of the Philippines 0Hnion 2an&1
the 8;th and ,?th 4loor of the Hnion 2an& Plaa# with
rentable areas of one thousand four hundred and 8?F8??
08#4??.8?1 and one thousand fi!e hundred nine and M8F8??
08#<?:.M81 s%uare meters# respecti!ely$ that the P-9A
*ompany occupies the ,?th 4loor of the building and
1#
subleases the 8;th 4loor 0the subleased property1 to the
RKJ7$ that being the lessee# the P-9A *ompany is billed
by Hnion 2an& for the rentals on the 8;th and ,?th 4loors$
that in turn# the P-9A *ompany bills the RKJ7 for the
latter6s share of the rental o!er the subleased property$ that
@A. official receipts are issued by the P-9A *ompany for
the rental payments recei!ed from the RKJ7$ that the
collection is recorded by the P-9A *ompany as rental
income in its boo&s$ that for its part# the RKJ7 treats the
same as its rental e"pense$ that the P-9A *ompany#
li&ewise# owns certain e%uipment consisting of ser!ers#
computers# printers and such other office facilities which it
leases to the RKJ7$ that the terms of this e%uipment leasing
is embodied in the Bemorandum of Agreement 0BKA1 dated
>une M# 2??;# e"ecuted by the parties$ that a rental fee for
the use of the e%uipment is charged by the P-9A *ompany
to the RKJ7$ that as in the case of the office space being
subleased to the RKJ7# the P-9A *ompany issues @A.
Kfficial Receipts on the rentals for these e%uipment$ that the
same is recorded as other income in the boo&s of the P-9A
*ompany with the corresponding output @A.$ that in
addition# the P-9A *ompany pays for some e"penses
common to the P-9A *ompany and the RKJ7# that the
suppliers of goods and ser!ices# such as electric and water
companies# issue their respecti!e in!oices andFor receipts
only to the P-9A *ompany since it is the P-9A *ompany
that holds the contract with such suppliers$ that howe!er#
since some of these costs and e"penses pertain to the
RKJ7# the P-9A *ompany subse%uently bills the RKJ7 on
a reimbursement of cost basis$ that this arrangement is
embodied in a separate BKA# dated Barch 28# 2??;#
between the P-9A *ompany and the RKJ7$ that it is
stipulated in the said BKA that the P-9A *ompany will
ad!ance RKJ76s share for the following common e"penses$
8. RentalF4acilities -"pensesFAssociation 3ues$
2. .ra!el *osts$
,. Professional Ser!ices *osts 0such as consultants#
accounting and auditing ser!ices1$
4. Kffice -"pense and Supplies 0including office# &itchen
supplies and toiletries1$
<. .elephoneF*ommunications$
M. Kther *osts 0including dues# licenses# fees# etc.1
that other than the receipt for the subleasing of office space
which is being treated as income by the P-9A *ompany and
as e"pense by the RKJ7# all other common e"penses are
initially paid by the P-9A *ompany# sub(ect to subse%uent
reimbursement by the RKJ7 for its share$ that in short#
certain purchases are centralied with the P-9A *ompany$
that after paying the bills for these common e"penses# the
P-9A *ompany bills and collects from the RKJ7 for the
latter6s proportionate share in these common e"penses by
issuing a billing statement and a non-@A. official receipt in
the name of the RKJ7$ that in effect# the P-9A *ompany
only ad!ances the payment of the utility bills and other
e"penses corresponding to the RKJ76s share and then the
RKJ7 subse%uently reimburses the same at cost and
without any profit$ and that the BKA contains the details on
how the P-9A *ompany and the RKJ7 apportion these
common e"penses# such as floor area# number of personnel#
etc.
2ased on the foregoing representations# you now re%uest
confirmation of your opinion that R
8. .he billings by the P-9A *ompany for a portion of the
office space subleased to the RKJ7 as well as from the
lease of certain e%uipment to the latter are sub(ect to the
,<= corporate income ta" and 82= @A.$
2. .he payments made by the RKJ7 to the P-9A
*ompany representing reimbursement for certain
common e"penses initially ad!anced by the P-9A
*ompany are mere reimbursements of costs and not
ser!ice fees$
,. .he amount paid by the RKJ7 to the P-9A *ompany#
being 5pure reimbursement of costs5# i.e.#
reimbursements for certain common e"penses initially
ad!anced by the P-9A *ompany# are not sub(ect to
income ta"# withholding ta" and @A..
In reply thereto# please be informed as follows/
8. Hnder the circumstances# the P-9A *ompany entered
into a *ontract of Sublease with the RKJ7 co!ering the
portion of the rented office space being used by the
1$
RKJ7. Since it is the P-9A *ompany which contracted
with Hnion 2an& for the rental of the office spaces being
used by both entities# the P-9A *ompany is billed by
Hnion 2an& for the entire space being occupied by these
two companies. In this regard# the P-9A *ompany
records the entire rental payments as rental e"pense in
its boo&s. .hereafter# the P-9A *ompany bills the
RKJ7 for the latter6s share in the office space rental
under the sublease agreement and records the billings
as rentalFother income# together with the corresponding
output @A.. Iith respect to the lease of the e%uipment#
the P-9A *ompany also records the rental as its
income# together with the corresponding output @A..
.he leasing acti!ity is not one of the acti!ities of the
P-9A *ompany registered with P-9A.
Accordingly# since the rental income is not deri!ed from
a registered acti!ity of the P-9A *ompany# it shall be
sub(ect to the ,<= regular corporate income ta".
Ei&ewise# the P-9A *ompany shall be liable for 82=
@A. on the rental income which shall be passed on as
input ta" to the RKJ7.
2. It is a common principle in ta"ation that reimbursement
of e"penses# by its !ery nature# is not income but merely
a return of capital. In the instant case# the arrangement
between the P-9A *ompany and the RKJ7 under the
BKA is similar to the abo!e cost-sharing arrangement
since it is agreed that the P-9A *ompany will be
reimbursed by the RKJ7 for its share in the common
e"penses. .he BKA between the P-9A *ompany
clearly states that the P-9A *ompany shall initially pay
for the common e"penses \ subse%uent reimbursement
by the RKJ7 of that portion allocated to \ a reasonable
cost-benefit arrangement 0i.e.# floor area# number of
personnel# etc.1. .he payments made by the RKJ7 to
the P-9A *ompany which actually represent
reimbursement for certain common e"penses that were
initially ad!anced by the P-9A *ompany should be
treated as a reimbursement of cost. Accordingly# such
reimbursement is not income but merely a return of
capital.
,. 4inally# reimbursement-at-cost transactions# e"penses
which are incurred by the ad!ancing party for the benefit
and for the account of the party accommodated can be
considered reimbursable e"penses not forming part of
gross receipts of the ad!ancing party sub(ect to ta".
Since the party see&ing reimbursement does not sell#
barter# e"change# nor lease any food or property# and
neither does it render any ser!ice to the party
accommodated# the reimbursements are not sub(ect to
the 82= @A.. 3Jc-Aa
Such being the case# since payments recei!ed by the
P-9A *ompany from the RKJ7 for the latter6s share in
the common e"penses do not represent income to the
P-9A *ompany# the said payments shall not be sub(ect
to income ta" and conse%uently to withholding ta".
Boreo!er# payments made by the RKJ7 to the P-9A
*ompany are li&ewise not sub(ect to @A..
IJ-R-4KR-# in !iew of the foregoing# this Kffice hereby
confirms your opinion that R
8. .he billings by the P-9A *ompany for a portion of the
office space subleased to the RKJ7 as well as from the
lease of certain e%uipment to the latter are sub(ect to the
,<= corporate income ta" and 82= @A.$
2. .he payments made by the RKJ7 to the P-9A
*ompany representing reimbursement for certain
common e"penses initially ad!anced by the P-9A
*ompany are mere reimbursements of costs and not
ser!ice fees$ and
,. .he amount paid by the RKJ7 to the P-9A *ompany#
being 5pure reimbursement of costs5# i.e.#
reimbursements for certain common e"penses initially
ad!anced by the P-9A *ompany# are not sub(ect to
income ta"# withholding ta" and @A..
C.//$%%$.,% +"+(&)"+ ;#./ $,C.$&"
-IR Ruling (o) ,#$+11 (5rundfos /umps)
4acts/
1%
' *o. is a @A.-registered domestic company engaged in
selling water pumps and pumping solutions to local
customers. ' *o. also earns commission income from sales
e"ecuted by its parent company in Singapore to Philippine
customers# for which ' *o. acts as a liaison between the
Singaporean company and its Philippine customers. .he
commission income ' *o. constructi!ely recei!es is
deducted from its payables to the parent company.
Issue/
Is the commission income recei!ed by ' *o. sub(ect to ?=
@A.Q
Ruling/
)o$ they are sub(ect to 82= @A.. Hnder Section 8?8021021
of the .a" *ode# ser!ices are sub(ect to ?= @A. if/ 081 the
ser!ices are rendered to persons engaged in business
conducted outside the Philippines or to non-resident foreign
clients not engaged in business who are outside the
Philippines when the ser!ices are performed$ and 021 the
fees are paid in an acceptable foreign currency and
accounted for in accordance with the rules and regulations of
the 2SP.
' *o. does not meet the re%uirements abo!e since 081 its
commissions are for ser!ices rendered in the Philippines to
its parent company# a foreign entity outside the Philippines at
the time the ser!ices are rendered$ and 021 the commissions
are not paid in foreign currency inwardly remitted to the
Philippines in accordance with the rules and regulations of
the 2SP. Rather# the commissions are deducted from its
payables to the parent company. As such# ' *o.Ns
commissions are sub(ect to the 82= @A..
0-ditorNs )ote/ .o %ualify for ero-rating prior to RA )o. ;;8M
Oappro!ed on Bay <# 8::4P# the consideration for the
ser!ices should be paid for in acceptable foreign currency
which is inwardly remitted to the Philippines and accounted
for in accordance with the rules and regulations of the
*entral 2an& of the Philippines. Jowe!er# RA )o. ;;8M
remo!ed the re%uirement for inward remittance. Section
8?8021021 now reads/ TSer!ices other than those mentioned
in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a non-
resident person not engaged in business who is outside the
Philippines when the ser!ices are performed# the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the 2SPU.1
0from S'@ W *o. Barch 2?88 .a" 2ulletin#
http/FFwww.ey.comFPublicationF!wEHAssetsF.a"]2ulletin]-
]Barch]2?88FS4IE-Fta"bull-march88.pdf1
H.)"! S"#C$&"% ). P$!.)%DCa$, C#"<
-IR Ruling (o) ,99+11 (8elta Air .ines)
4acts/
3 *o.# a HS corporation with a branch office in the
Philippines# is engaged in international air transport ser!ices.
3 *o. regularly procures hotel ser!ices such as
accommodation and lodging# including meals# for its pilots
and cabin crew during flight layo!ers in the Philippines.
Issue/
Is the sale of hotel ser!ices to 3 *o. sub(ect to @A. at ?=Q
Ruling/
)o. Section 8?8021041 of the .a" *ode# as implemented by
Section 4.8?8-<0b1041 of RR )o. 8M-2??<# as amended# and
clarified by Item 88 of RB* )o. ?4M-?8# pro!ides that to
%ualify for @A. ero-rating# the ser!ices rendered by a @A.-
registered person to a person engaged in international air
transport operations must pertain to# or must be attributable
to# the transport of goods and passengers from a port in the
Philippines directly to a foreign port without doc&ing or
stopping at any port in the Philippines.
1&
.he hotel ser!ices procured by 3 *o. pertain to room
accommodations# and food and be!erage ser!ices. As these
ser!ices are rendered within the hotelNs premises# the
ser!ices ha!e no direct connection with the transport of
goods and passengers. As such# the ser!ices cannot be
considered as directly attributable to the transport of goods
and passengers from a Philippine port directly to a foreign
port. .herefore# the sale of these hotel ser!ices is sub(ect to
82= @A..
82.4.8., ffectivel1 ;ero+rated &ransactions
RR (o) 1*+,9 #)1,*+* (amended b1 RR (o) ,#+,% *)
Beaning of the term [-ffecti!ely 9ero-Rated Sale of 'oods
and PropertiesN. C .he term [effecti!ely ero-rated sale of
goods and propertiesN shall refer to the local sale of goods
and properties by a @A.- registered person to a person or
entity who was granted indirect ta" e"emption under special
laws or international agreement.U
RR (o) 1*+,9 #)1,$+* (amended b1 RR (o) ,#+,% 13)
Beaning of the term [-ffecti!ely 9ero-Rated Sale of
Ser!icesN. .he term [effecti!ely ero-rated sales of ser!icesN
shall refer to the local sale of ser!ices by a @A. -registered
person to a person or entity who was granted in direct ta"
e"emption under special laws or international agreement.
-IR Ruling 8A+,**+,$ (8iamond Star Agro /roducts)
.his refers to your letter dated >anuary 2<# 2??8 re%uesting
for confirmation of your opinion that the sale of goods#
properties or ser!ices by @A.-registered suppliers to
3IABK)3 S.AR A'RK PRK3H*.S# I)*. 053IABK)35#
for bre!ity1 being considered e"port sales shall be sub(ect to
ero percent 0?=1 @A. rate without need of prior appro!ed
application with the appropriate 2IR office for effecti!e ero-
rating. *a3A.c
It is represented that 3IABK)3 is a domestic corporation
organied and e"isting under the laws of the Republic of the
Philippines$ that it is engaged in the processing of
agricultural products and as such# is a duly registered @alue-
Added .a" 0@A.1 ta"payer$ that it is li&ewise a 2KI-
registered producer whose products are 8??= e"ported$ that
pursuant to Re!enue Regulations )o. 8M-2??<# sale of
goods# properties or ser!ices made by @A.-registered
suppliers to a 2KI-registered manufacturerFproducer whose
products are 8??= e"ported are considered e"port sales#
which is sub(ect to ero percent 0?=1 @A. rate$ that# hence#
your local purchases of goods# materials# properties and
ser!ices used e"clusi!ely for the production of agricultural
food products# which are 8??= e"ported# are sub(ect to @A.
at ero percent 0?=1 rate$ that# howe!er# your @A.-
registered suppliers were denied by some 2IR personnel the
status of @A. ero-rate because they failed to secure an
appro!ed application for @A. ero-rating$ and that in !iew of
the issuance of Re!enue Regulations )o. 4-2??;# wherein
the re%uirements of securing appro!ed applications for @A.
ero-rating under Re!enue Regulations )o. 8M-2??< and
Re!enue Bemorandum Krder )o. ;-2??M was remo!ed# you
are of the opinion that the appro!al for @A. ero-rating of
your @A.-registered suppliers is no longer re%uired.
Jence# since the sales of goods# materials# properties and
ser!ices by @A.-registered suppliers to 3IABK)3 0a
registered 8??= e"port producer1# which are for the
e"clusi!e use of the latter6s production of agricultural food
products# fall within the definition of e"port sale under -.K.
)o. 22M such sale is the e"port sale contemplated by
Section 8?M 0A1 021 0a1 0<1 of the .a" *ode of 8::; as
implemented by Section 4.8?M-< 0a1 0<1 of Re!enue
Regulations )o. 8M-2??<# which is sub(ect to @A. ero-
rating. 0@A. Ruling )os. ??,-2??2 dated 4ebruary M# 2??2
and ?8?-2??< dated >uly 28# 2??<1.
.hat sales to 2KI-registered enterprises whose
manufactured products are 8??= e"ported to foreign
countries shall be accorded automatic ero-rating without the
necessity of applying for and securing prior appro!al for
ero-rating has been consistently ruled by this Kffice
1!0
4urthermore# under Section 4.8?M-M of RR 8M-2??<# sales to
a 2KI-registered enterprise OSec. 4.8?M-< 0a1 abo!eP whose
products are 8??= e"ported which are sub(ect to @A. at
ero percent 0?=1 rate do not re%uire prior appro!ed
application with the appropriate 2IR office for @A. ero-
rating.
Accordingly# this Kffice is of the opinion and hereby holds
that the sales of goods# materials# properties and ser!ices by
@A.-registered suppliers to 3IABK)3 being considered
e"port sales shall be sub(ect to ero percent 0?=1 @A. rate
without the necessity of applying for and securing prior
appro!al for @A. ero-rating.
82.4.8.4 !ertain 8istinctions =ero+rated and
effectivel1 =ero+rated @ e>empt
!IR v Seagate &ec'nolog1
4acts/
Seagate is a resident foreign corporation duly registered with the
S-* to do business in the Philippines# as well as with P-9A.
Seagate is also a @A.-registered company.
Seagate now see&s the refund of the unutilied input @A. 0not
offset by any output @A.1.
Issue/ IF) Seagate is entitled to a ta" refund for the unutilied
input @A.Q
Jeld/ L-S. Seagate may !alidly claim a refund for the unutilied
input @A..
As a P-9A-registered enterprise# Seagate is entitled to fiscal
incenti!es and benefits under P3 MM and -K 22M# as well as
the e"emptions granted under RA ;22; W RA ;844. .hese
laws gi!e Seagate a preferential ta" treatment such that it
shall be e"empt from @A.# and it is also entitled to ta"
credits.
9ero-rated W effecti!ely ero-rated are similar in effect# but
different in source. 9ero-rated transactions refer to the
e"port sale of goods or supply of ser!ices. .he ta" rate is
ero# thus resulting in no ta" liability against the purchaser.
.he seller charges no output @A.. Jowe!er# he may still
claim a refund for the input @A. pre!iously charged by its
suppliers. An effecti!ely ero-rated transaction is one
wherein the sale or supply is done to persons whose
e"emptions granted by special law of international
agreements sub(ect such a transaction to a ero ta" rate#
resulting in no ta" liability# as well. Similarly# the seller may
claim a refund of the input @A. pre!iously charged by its
suppliers.
9ero-rating and -"emptions differ in the e"tent of relief that
results from each. In ero-rated transactions# there is a total
relief for the purchaser. Jowe!er# in e"empt transactions#
although the transaction itself is not sub(ect to @A.# the
purchaser cannot claim a refund for input ta"es paid.
Since SeagateNs transactions are effecti!ely ero-rated# as
pro!ided by special law# they may !alidly claim a ta" refund
for the input @A. it pre!iously paid to its suppliers.
!IR v !ebu &o1o !orporation
4acts/
*ebu .oyo is a domestic corporation engaged in the
manufacture of products for use in .@s# etc. It is also !alidly
registered with the P-9A.
8?= of its sales are based on e"ports to its mother company in
>apan. .he other 2?= are sold to other business enterprises
doing business within the Bactan -"port Processing 9one.
Issue/ IF) it is entitled to a ta" refund for the unutilied input @A.Q
4acts/ L-S. *ebu .oyo may !alidly claim a refund for the unutilied
input @A..
Since respondent is engaged in the e"port business# and is
!alidly registered as a @A. ta"payer# it is entitled to the ?=
ta" rate# as well as to a refund for any unutilied input ta"es.
Pa%%1., "x"/4)$., .; PAGCOR )#"a)"+ a% a()./a)$&a!!- F"#.1#a)"+
(,+"# NIRC 1:6(B)(')
1!1
!IR v Acesite (/'ilippines) Botel !orporation
4acts/
Acesite is the owner and operator of the Joliday Inn Banila#
where PA'*KR is a lessee. Acesite also caters food W
be!arages to PA'*KRNs patrons.
Acesite incurred @A. amounting to more than P,?B. It tried to
shift it to PA'*KR# but PA'*KR refused payment# a!erring that
it was an e"empt entity.
Acesite paid for the @A. instead# fearing the conse%uences of
non-payment.
Issue/ IF) PA'*KRNs ta" e"emption includes an indirect ta"# such
as @A. to entitle Acesite to ?= @A. rateQ
Jeld/ L-S. Acesite is entitled to a refund of the @A. paid in
relation to its transactions with PA'*KR.
Ihen transactions are entered into with ta"-e"empt entities#
the transaction becomes an effecti!ely ero-rated one.
Although the ta" liability stems from an indirect ta"# such as
@A.# the special law granted PA'*KR a blan&et e"emption
such that there was no distinction between direct and
indirect ta"es. Since Acesite contracted with PA'*KR# an
entity that is ta"-e"empt# all its transactions with the latter are
effecti!ely ero-rated.
/A5!"R v -IR
4acts/
Iith the enactment of R.A. no. :,,; amending certain sections of
the )IR*# PA'*KR# formerly e"empted from the payment of any
type of ta"# e"cept a franchise ta" of <= of the gross re!enue# is now
e"cluded from the enumeration of 'K**s that are e"empt from
payment of corporate ta". OSection 8 of RA :,,; amended Section
2; 0c1 of the )IR*P.
Also# 2IR issued Re!enue Regulations no. 8M-2??< specifically
identifying PA'*KR as one of the franchisees sub(ect to 8?= @A.
imposed under Section 8?8 of the )IR*# as amended by RA no.
:,,;.
Issue/ IF) PA'*KR is still e"empt from corporate income ta" and
@A. with the enactment of RA :,,;
Jeld/ P-.I.IK) PAR.EL B-RI.KRIKHS. Section 8 of Republic
Act )o. :,,;# amending Section 2; 0c1 of the )ational
Internal Re!enue *ode of 8::;# by e"cluding petitioner
Philippine Amusement and 'aming *orporation from the
enumeration of go!ernment-owned and controlled
corporations e"empted from corporate income ta" is !alid
and constitutional# while 2IR Re!enue Regulations )o. 8M-
2??< insofar as it sub(ects PA'*KR to 8?= @A. is null and
!oid for being contrary to the )ational Internal Re!enue
*ode of 8::;# as amended by Republic Act )o. :,,;.
8. *orporate income ta"
A perusal of the legislati!e records of the 2icameral
*onference Beeting of the *ommittee on Iays on Beans
dated Kctober 2;# 8::; would show that the e"emption of
PA'*KR from the payment of corporate income ta" was
due to the ac%uiescence of the *ommittee on Iays on
Beans to the re%uest of PA'*KR that it be e"empt from
such ta".
Hnder R.A. )o. 8424# the e"emption of PA'*KR from
paying corporate income ta" was not based on a
classification showing substantial distinctions which ma&e for
real differences# but to reiterate# the e"emption was granted
upon the re%uest of PA'*KR that it be e"empt from the
payment of corporate income ta".
Iith the subse%uent enactment of R.A. )o. :,,;# amending
R.A. )o. 8424# PA'*KR has been e"cluded from the
enumeration of 'K**s that are e"empt from paying
corporate income ta". .he records of the 2icameral
*onference Beeting dated April 88# 2??<# of the *ommittee
on the 3isagreeing Pro!isions of Senate 2ill )o. 8:<? and
Jouse 2ill )o. ,<<<# show that it is the legislati!e intent that
PA'*KR be sub(ect to the payment of corporate income
ta".
.a"ation is the rule and e"emption is the e"ception. .he
1!2
burden of proof rests upon the party claiming e"emption to
pro!e that it is# in fact# co!ered by the e"emption so claimed.
As a rule# ta" e"emptions are construed strongly against the
claimant. -"emptions must be shown to e"ist clearly and
categorically# and supported by clear legal pro!ision.
In this case# PA'*KR failed to pro!e that it is still e"empt
from the payment of corporate income ta"# considering that
Section 8 of R.A. )o. :,,; amended Section 2; 0c1 of the
)ational Internal Re!enue *ode of 8::; by omitting
PA'*KR from the e"emption. .he legislati!e intent# as
shown by the discussions in the 2icameral *onference
Beeting# is to re%uire PA'*KR to pay corporate income ta"$
hence# the omission or remo!al of PA'*KR from e"emption
from the payment of corporate income ta". It is a basic
precept of statutory construction that the e"press mention of
one person# thing# act# or conse%uence e"cludes all others
as e"pressed in the familiar ma"im e"pressio unius est
e"clusio alterius. .hus# the e"press mention of the 'K**s
e"empted from payment of corporate income ta" e"cludes
all others. )ot being e"cepted# petitioner PA'*KR must be
regarded as coming within the pur!iew of the general rule
that 'K**s shall pay corporate income ta"# e"pressed in
the ma"im/ e"ceptio firmat regulam in casibus non e"ceptis.
)o !iolation of e%ual protection clause/ PA'*KRNs
e"emption from payment of corporate income ta"# as
pro!ided in Section 2; 0c1 of R.A. )o. 8424# or the )ational
Internal Re!enue *ode of 8::;# was not made pursuant to a
!alid classification based on substantial distinctions and the
other re%uirements of a reasonable classification by
legislati!e bodies# so that the law may operate only on some#
and not all# without !iolating the e%ual protection clause. .he
legislati!e records show that the basis of the grant of
e"emption to PA'*KR from corporate income ta" was
PA'*KRNs own re%uest to be e"empted.
)o !iolation of non-impairment clause/ As regards
franchises# Section 88# Article AII of the *onstitution
pro!ides that no franchise or right shall be granted e"cept
under the condition that it shall be sub(ect to amendment#
alteration# or repeal by the *ongress when the common
good so re%uires.
Hnder Section 88# Article AII of the *onstitution# PA'*KRNs
franchise is sub(ect to amendment# alteration or repeal by
*ongress such as the amendment under Section 8 of R.A.
)o. :,;;. Jence# the pro!ision in Section 8 of R.A. )o.
:,,;# amending Section 2; 0c1 of R.A. )o. 8424 by
withdrawing the e"emption of PA'*KR from corporate
income ta"# which may affect any benefits to PA'*KRNs
transactions with pri!ate parties# is not !iolati!e of the non-
impairment clause of the *onstitution.
2. @A.
Anent the !alidity of RR )o. 8M-2??<# the *ourt holds that
the pro!ision sub(ecting PA'*KR to 8?= @A. is in!alid for
being contrary to R.A. )o. :,,;. )owhere in R.A. )o. :,,;
is it pro!ided that petitioner can be sub(ected to @A.. R.A.
)o. :,,; is clear only as to the remo!al of petitioner6s
e"emption from the payment of corporate income ta"# which
was already addressed abo!e by this *ourt.
As pointed out by the KS'# R.A. )o. :,,; itself e"empts
petitioner from @A. pursuant to Section ; 0&1 thereof# which
reads/
Sec. ;. Section 8?: of the same *ode# as amended# is
hereby further amended to read as follows/
Section 8?:. -"empt .ransactions. - 081 Sub(ect to the
pro!isions of Subsection 021 hereof# the following
transactions shall be e"empt from the !alue-added ta"/
" " " "
0&1 .ransactions which are e"empt under international
agreements to which the Philippines is a signatory or under
special laws# e"cept Presidential 3ecree )o. <2:.,;
Petitioner is e"empt from the payment of @A.# because
PA'*KRNs charter# P.3. )o. 88M:# is a special law that
grants petitioner e"emption from ta"es.
Boreo!er# the e"emption of PA'*KR from @A. is
supported by Section M of R.A. )o. :,,;# which retained
Section 8?8 021 0,1 of R.A. )o. 8424.
1!
OR.A. )o. :,,;P# S-*. M. Section 8?8 of the same *ode
0R.A. )o. 84241# as amended# is hereby further amended to
read as follows/
S-*. 8?8. @alue-Added .a" on Sale of Ser!ices and Hse or
Eease of Properties. R
0A1 Rate and 2ase of .a". R .here shall be le!ied#
assessed and collected# a !alue-added ta" e%ui!alent to ten
properties/ " " "
" " " "
021 .ransactions Sub(ect to 9ero Percent 0?=1 Rate. R .he
rate$
" " " "
e"emption under special laws or international agreements to
which the Philippines is a signatory effecti!ely sub(ects the
supply of such ser!ices to ero percent 0?=1 rate$
" " " "
As pointed out by petitioner# although R.A. )o. :,,;
introduced amendments to Section 8?8 of R.A. )o. 8424 by
imposing @A. on other ser!ices not pre!iously co!ered# it
did not amend the portion of Section 8?8 021 0,1 that
sub(ects to ero percent rate ser!ices performed by @A.-
registered persons to persons or entities whose e"emption
under special laws or international agreements to which the
Philippines is a signatory effecti!ely sub(ects the supply of
such ser!ices to ?= rate.
Petitioner6s e"emption from @A. under Section 8?8 021 0,1 of
R.A. )o. 8424 has been thoroughly and e"tensi!ely
discussed in *ommissioner of Internal Re!enue !. Acesite
0Philippines1 Jotel *orporation.
It is settled rule that in case of discrepancy between the
basic law and a rule or regulation issued to implement said
law# the basic law pre!ails# because the said rule or
regulation cannot go beyond the terms and pro!isions of the
basic law. RR )o. 8M-2??<# therefore# cannot go beyond the
pro!isions of R.A. )o. :,,;. Since PA'*KR is e"empt from
@A. under R.A. )o. :,,;# the 2IR e"ceeded its authority in
sub(ecting PA'*KR to 8?= @A. under RR )o. 8M-2??<$
hence# the said regulatory pro!ision is hereby nullified.
82.4.8.< 8estination /rinciple
(IR! 1,$(-)(0) before amendment
Ser!ices other than those mentioned in the preceding
paragraph# the consideration for which is paid for in
(IR! 1,$(-)(0) after amendment b1 RA 933%
Ser!ices other than those mentioned in the preceding
paragraph rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person
not engaged in business who is outside the Philippines when
the ser!ices are performed# the consideration for which is
paid for in acceptable foreign currency and accounted for in
> D"%)$,a)$., P#$,&$4!"? .# >C#.%% B.#+"# D.&)#$,"?
:A& Ruling ,,9+99
It is represented that 'ulf -"press *orporation 0'-*1# a
domestic corporation duly organied and e"isting under
Philippine Eaws# is a @A.-registered company$ that it acts as
the general agent of 'ulf Air *ompany 0'A*1# a foreign air
carrier with principal office in 2ahrain# pursuant to a contract
e"ecuted by the parties on >uly 8# 8::<$ that its income are
foreign currency-denominated and purely commissions
earned as agent of 'A*$ that 'A*6s 2ranch Kffice in the
Philippines has been automatically deducting the
commissions due from its remittable re!enues in effecting
the remittance to the Jead Kffice thru authoried agent
1!!
ban&s$ that# in effect# acceptable foreign currency is
constructi!ely remitted to '-* by the foreign principal and
which is being accounted for in accordance with the rules
and regulations of the 2ang&o Sentral ng Pilipinas 02SP1#
and that in !iew of these# you consider '-* as a ero-rated
ta"payer under the Section 8?20a1021 of the .a" *ode of
8::;# as amended.
In reply# please be informed that our @A. law# which was
first adopted and promulgated under -.K. 2;,# effecti!e
>anuary 8# 8:88# is basically a *onsumption .ype @A.
System and# in general# follows the destination principle or
*ross 2order 3octrine. Hnder the @A. System# @A.
e"emption and @A. ero-rating are distinguished as follows/
5. . . ero-rating should be used when the authorities really
wish to ensure that a product is to be free of @A.. Hsing an
e"emption for @A. means that the ta" is borne by the trader#
and if that trader sells to the public# he must pass on the ta"
on input to the public in his PRI*- or cut payments to his
factors of production 0capital and labor1. .his suggests that
countries that generally wish to pass on to the consumer the
benefits of @A.-free goods and ser!ices should be allowed
to use the ero rate.5 O@A. .a" International Practice and
Problems# Allan A. .ait# International Bonetary 4und#
Iashington 3.*.# 8:88# p. <8P
Accordingly# the onus of ta"ation under our @A. System is in
that country where goods# property or ser!ices are destined#
used or consumed. .his is the reason why under our @A.
law# goods# property or ser!ices destined to# used or
consumed in the Philippines are sub(ect to the 8?= @A.
whereas those destined# used or consumed abroad are
sub(ect to ero percent 0?=1 @A.. 0Sections 8?< and 8?8#
.a" *ode of 8::;1
.he sale of ser!ices sub(ect to ero percent 0?=1 @A. under
Section 8?8021021# of the .a" *ode of 8::;# are limited to
such sales which are destined for consumption outside of
the Philippines.
As sales agent of 'HE4 AIR *KBPA)L# an international
airline company# '-* is paid commission for ser!ices
rendered in the Philippines in behalf of its foreign principal.
.he situs of ser!ices rendered is within the Philippines and it
is here where such ser!ices are used or consumed.
.herefore# '-*6s sale of ser!ices must be sub(ect to the
8?= @A. rather than the ?= @A.# regardless of whether its
compensation for ser!ices rendered be paid in foreign
currency actually or constructi!ely remitted.
:A& Ruling ,#,+9$
.his refers to your letter dated 4ebruary 24# August 8; and
August 2,# 8::8# re%uesting opinion on whether or not your
client# Barsman .ours and .ra!el *orporation# is entitled to
ero-rated !alue-added-ta" on its sales of ser!ices 0tour
pac&age# indi!idual ser!ices# tra!el agency1 to foreign
tourists.
It is represented that your client is engaged in the business
of .ra!el and .ours Agency# that it offers !arious ser!ices
li&e 081 tour pac&age# 021 indi!idual ser!ices and 0,1 tra!el
agency# pro!ided in the following manner$
081 .our Pac&age R 4oreign tourists who come to the
Philippines are pro!ided with !arious facilities li&e hotel
room# meals# transportation# tour guide# and other
related ser!ices by the facility pro!ider or in some cases
by a sub-contractor contracted by your client. .he facility
pro!ider bills your client 0in the latter6s own name1 for
ser!ices rendered and facilities pro!ided 0inclusi!e of
@A.# where applicable1. Hpon receipt of the abo!e
billing# your client prepares the billing to its foreign
counterpart. Payments are made by its foreign
counterpart in foreign currency inwardly remitted to the
Philippines# inclusi!e of the portion payable by your
client to the facility pro!ider. In some cases# your client
recei!es payments in foreign currency from the local
offices of multinational companies or pri!ate indi!iduals.
021 Indi!idual Ser!ices R Lour client sells the tour
components to the tourists 0not as a pac&age1 as
follows/ 0a1 room only$ 0b1 room with brea&fast or full
board$ 0c1 transportation only$ 0d1 transportation with
1!"
guide. Lour client deri!es income from these ser!ices in
the form of mar&-up added to the amounts billed by the
facilities pro!iders 0such as hotels or transportation
contractors1. Payments for ser!ices rendered to foreign
tourists are normally recei!ed by your client on foreign
e"change which are accounted for in accordance with
the Rules W Regulations of the 2ang&o Sentral )g
Pilipinas while payments for ser!ices rendered to
domestic tourists are generally recei!ed by your client in
Philippine peso.
0,1 .ra!el Agency R As tra!el agents# your client sells
tic&ets or passage documents to its customers. Lour
client6s margin does not e"ceed := of the gross selling
price of such tic&ets or passage documents.
In reply# please be informed of the following/
8. Hnder the @alue-Added-.a" 0@A.1 System# e"emption
from @A. and 9ero Percent 0?=1 are distinguished# as
follows/
5. . . # ero rating should be used when the authorities
really wish to ensure that a product is to be free of @A..
Hsing an e"emption for @A. means that the ta" is borne
by the trader# and if that trader sells to the public# he
must pass on the ta" on input to the public in his price or
cut payments to his factors of production 0capital and
labor1. .his suggests that countries that generally wish
to pass on to the consumer the benefits of @A.-free
goods and ser!ices should be allowed to use the ero
rate.5 O@alue Added .a" International Practice and
Problems# Allan A. .ait# International Bonetary 4und#
Iashington# 3.*.# 8:88# p. <8P
Kur @A. law# which was first adopted and promulgated
under -K )o. 2;, effecti!e >anuary 8# 8::8# basically
adhered to the *onsumption .ype @A. Regime and# in
general# follows the destination principle.
.he sales of ser!ices sub(ect to ero percent 0?=1 @A.
under Section 8?8021021# of the .a" *ode of 8::;# are
limited to such sales which are destined for consumption
outside of the Philippines in that such ser!ices are
tac&ed-in as part of the cost of goods e"ported. .he
ero-rating also e"tends to pro(ect studies# information
ser!ices# engineering and architectural designs and
other similar ser!ices sold by a resident of the
Philippines to a non-resident foreign client because
these ser!ices are li&ewise destined to be consumed
abroad. .he phrase 5pro(ect studies# information
ser!ices# engineering and architectural designs and
other similar ser!ices5 does not include ser!ices
rendered by tra!el agents to foreign tourists in the
Philippines following the doctrine of e(usdem generis#
since such ser!ices by tra!el agents are not of the same
class or of the same nature as those enumerated under
the aforesaid section.
*onsidering that the ser!ices by your client to foreign
tourists are basically and substantially rendered within
the Philippines# it follows that the onus of ta"ation of the
re!enue arising therefore# for @A. purposes# is also
within the Philippines. 4or this reason# it is our
considered opinion that the tour pac&age ser!ices of
your client to foreign tourists in the Philippines cannot
legally %ualify for ero-rated 0?=1 @A. but rather sub(ect
to the regular @A. rate of 8?=.
2. Iith respect to the indi!idual ser!ices offered by your
client# considering that the ser!ice is destined and
consumed substantially within the Philippines# for the
same rationale as discussed abo!e# your client6s gross
receipts from tourists 0whether domestic or foreign
tourists and whether recei!ed in foreign e"change or in
Philippine peso1 shall be sub(ect to the 8?= @A..
Jowe!er# your clients shall be entitled to input ta" credit
on their purchases of goods and ser!ices from @A.-
registered suppliers and facilities pro!iders pro!ided the
same are co!ered by @A.-registered sales in!oices or
receipts.
,. Relati!e to your client6s sale of tic&ets or passage
documents to customers as tra!el agents# wherein your
1!#
clients6 margin does not e"ceed := of the gross selling
price of such tic&ets or passage documents# your gross
receipts therefrom shall# li&ewise# be sub(ect to 8?= @A.
0limited to the said margin1 pursuant to RB* )o. ;-:8.
!IR v American >press
As a general rule# the !alue-added ta" 0@A.1 system uses the destination
principle. Jowe!er# our @A. law itself pro!ides for a clear e"ception# under
which the supply of ser!ice shall be ero-rated when the following
re%uirements are met/ 081 the ser!ice is performed in the Philippines$ 021 the
ser!ice falls under any of the categories pro!ided in Section 8?20b1 of the
.a" *ode$ and 0,1 it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the 2ang&o Sentral ng
Pilipinas. Since respondentNs ser!ices meet these re%uirements# they are
ero-rated. PetitionerNs Re!enue Regulations that alter or re!o&e the abo!e
re%uirements are ultra vires and in!alid.
4acts/
Respondent# a Philippine branch of American -"press International#
Inc. 0organied and e"isting under the laws of 3elaware# HSA1# with
office in Ba&ati *ity# is a ser!icing unit of American -"press
International# Inc.- Jong&ong 2ranch 0Ame"-JG1 and is engaged
primarily to facilitate the collections of Ame"-JG recei!able from card
members situated in the Philippines and payment to ser!ice
establishments in the Philippines.
Ame" Philippines registered itself with the 2IR as a @A. ta"payer
and was issued @A. Registration *ertificate. 4or year 8::;# it filed
with the 2IR its %uarterly @A. returns which it subse%uently
amended. Kn April 8,# 8:::# OrespondentP filed with the 2IR a letter-
re%uest for the refund of its 8::; e"cess input ta"es in the amount of
P,#;<8#?M;.?4# which amount was arri!ed at after deducting from its
total input @A. paid of P,#;M,#?M?.4, its applied output @A.
liabilities only for the third and fourth %uarters of 8::; amounting to
P<#8:,.MM and PM#;::.4,# respecti!ely. It cites as basis Section 88?
021 of the 8::; .a" *ode/
021 -"cess Kutput or Input .a". - If at the end of any ta"able %uarter
the output ta" e"ceeds the input ta"# the e"cess shall be paid by the
@A.-registered person. If the input ta" e"ceeds the output ta"# the
e"cess shall be carried o!er to the succeeding %uarter or %uarters.
Any input ta" attributable to the purchase of capital goods or to ero-
rated sales by a @A.-registered person may at his option be
refunded or credited against other internal re!enue ta"es# sub(ect to
the pro!isions of Section 882.
Since there was no immediate action on the part of the 2IR# Ame"
Philippines filed a petition. It argued that/
a. -"port sales by a @A.-registered person# the consideration for
which is paid for in acceptable foreign currency inwardly remitted to
the Philippines and accounted for in accordance with e"isting
regulations of the 2ang&o Sentral ng Pilipinas# are sub(ect to O@A.P
at ero percent 0?=1. Section 102.(sic) Value-added tax on sale of
services)+ 0a1 Rate and base of ta>) + .here shall be le!ied#
assessed and collected# a !alue-added ta" e%ui!alent to 8?=
percent of gross receipts deri!ed by any person engaged in the sale
of ser!ices. " " " /rovided .hat the following ser!ices performed in
the Philippines by @A.-registered persons shall be sub(ect to ?=/
081 " " "
021 Ser!ices other than those mentioned in the preceding
subparagraph# the consideration is paid for in acceptable foreign
currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of the
2SP. " " ".N
b. Input ta"es on domestic purchases of ta"able goods and ser!ices
related to ero-rated re!enues are a!ailable as ta" refund in
accordance with Section 8?M 0now Section 8821 of the O.a" *odeP
and Section 80a1 of ORe!enueP Regulations O0RR1P )o. <-8;# to state/
S"&)$., 1:3. R";(,+% .# )ax &#"+$)% .; $,4() )ax. -
0A1 ;ero+rated or effectivel1 ;ero+rated Sales) + Any @A.-registered
person# e"cept those co!ered by paragraph 0a1 abo!e# whose sales
are ero-rated or are effecti!ely ero-rated# may# within two 021 years
after the close of the ta"able %uarter when such sales were made#
apply for the issuance of ta" credit certificate or refund of the input
ta"es due or attributable to such sales# to the e"tent that such input
ta" has not been applied against output ta". " " ". OSection 8?M0a1 of
the .a" *odePN
1!$
[S"&)$., 6. Zero-rating) - 0a1 In general. - A ero-rated sale is a
ta"able transaction for !alue-added ta" purposes. A sale by a @A.-
registered person of goods andFor ser!ices ta"ed at ero rate shall
not result in any output ta". .he input ta" on his purchases of goods
or ser!ices related to such ero-rated sale shall be a!ailable as ta"
credit or refundable in accordance with Section 8M of these
Regulations. " " ".N OSection 80a1# ORRP <-8;P
.he *.A ruled in fa!our of Ame" Philippines holding that its ser!ices
are sub(ect to ero-rate pursuant to Section 8?80b1 of the .a"
Reform Act of 8::; and Section 4.8?2-2 0b1021 of Re!enue
Regulations <-:M.
.he *A affirmed# saying that respondentNs ser!ices fell under the first
type enumerated in Section 4.8?2-20b1021 of RR ;-:<# as amended
by RR <-:M. .he consideration in both types of ser!ice# howe!er#
was paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the 2ang&o Sentral ng
Pilipinas. 4urthermore# the *A reasoned that reliance on @A. Ruling
)o. ?4?-:8 was unwarranted. 2y re%uiring that respondentNs
ser!ices be consumed abroad in order to be ero-rated# petitioner
went beyond the sphere of interpretation and into that of legislation.
Jence# this petition.
Issue/ IF) the *ourt of Appeals committed re!ersible error in
holding that respondent is entitled to the refund of the
amount of P,#,<2#4?M.<: allegedly representing e"cess
input @A. for the year 8::;Q
Ruling/ )K. Ser!ices performed by @A.-registered persons in the
Philippines 0other than the processing# manufacturing or
repac&ing of goods for persons doing business outside the
Philippines1# when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of
the 2SP# are ero-rated.
Respondent is a @A.-registered person that facilitates the
collection and payment of recei!ables belonging to its non-
resident foreign client# for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in
conformity with 2SP rules and regulations. *ertainly# the
ser!ice it renders in the Philippines is not in the same
category as Tprocessing# manufacturing or repac&ing of
goodsU and should# therefore# be ero-rated.
Ser!ice has been defined as Tthe art of doing something
useful for a person or company for a feeU or Tuseful labor or
wor& rendered or to be rendered by one person to another.U
4or facilitating in the Philippines the collection and payment
of recei!ables belonging to its Jong Gong-based foreign
client# and getting paid for it in duly accounted acceptable
foreign currency# respondent renders ser!ice falling under
the category of ero rating. Pursuant to the .a" *ode# a
@A. of ero percent should# therefore# be le!ied upon the
supply of that ser!ice.
In the present case# respondentNs role in the consumer credit
process described abo!e primarily consists of gathering the
bills and credit card drafts of different ser!ice establishments
located in the Philippines and forwarding them to the RK*s
outside the country. Ser!icing the bill is not the same as
billing. 4or the former type of ser!ice alone# respondent
already gets paid.

.he parent company -- to which the RK*s and respondent
belong -- ta&es charge not only of redeeming the drafts from
the RK*s and sending the chec&s to the ser!ice
establishments# but also of billing the credit card holders for
their respecti!e drafts that it has redeemed. Ihile it usually
imposes finance charge upon the holders# none may be
e"acted by respondent upon either the RK*s or the card
holders.
.he ser!ice parta&es of the nature of e"port sales as applied
to goods# especially when rendered in the Philippines by a
@A.-registered person that gets paid in acceptable foreign
currency accounted for in accordance with 2SP rules and
regulations.
VAT Requireents for
t!e Su""l# of Service

.he @A. is a ta" on consumption Te"pressed as a
percentage of the !alue added to goods or ser!icesU
1!%
purchased by the producer or ta"payer. As an indirect ta"
on ser!ices# its main ob(ect is the transaction itself or# more
concretely# the performance of all &inds of ser!ices
conducted in the course of trade or business in the
Philippines. .hese ser!ices must be regularly conducted in
this country$ underta&en in Tpursuit of a commercial or an
economic acti!ity$U for a !aluable consideration$ and not
e"empt under the .a" *ode# other special laws# or any
international agreement.

Iithout doubt# the transactions respondent entered into with
its Jong Gong-based client meet all these re%uirements.

First# respondent regularly renders in the Philippines the
ser!ice of facilitating the collection and payment of
recei!ables belonging to a foreign company that is a clearly
separate and distinct entity.

Second# such ser!ice is commercial in nature$ carried on
o!er a sustained period of time$ on a significant scale$ with a
reasonable degree of fre%uency$ and not at random#
fortuitous or attenuated.

&'ird# for this ser!ice# respondent definitely recei!es
consideration in foreign currency that is accounted for in
conformity with law.

Finall1# respondent is not an entity e"empt under any of our
laws or international agreements.

Services Su$%ect to
Zero VAT

As a general rule# the @A. system uses the destination
principle as a basis for the (urisdictional reach of the ta".
'oods and ser!ices are ta"ed only in the country where they
are consumed. .hus# e"ports are ero-rated# while imports
are ta"ed.

*onfusion in ero rating arises because petitioner e%uates
the performance of a particular type of ser!ice with the
consumption of its output abroad. In the present case# the
facilitation of t'e collection of recei!ables is different from the
utili=ation or consumption of t'e outcome of such ser!ice.
Ihile the facilitation is done in the Philippines# the
consumption is not. Respondent renders assistance to its
foreign clients -- the RK*s outside the country -- by
recei!ing the bills of ser!ice establishments located here in
the country and forwarding them to the RK*s abroad. .he
consumption contemplated by law# contrary to petitionerNs
administrati!e interpretation# does not imply that the ser!ice
be done abroad in order to be ero-rated.

*onsumption is Tthe use of a thing in a way that thereby
e"hausts it.U Applied to ser!ices# the term means the
performance or Tsuccessful completion of a contractual duty#
usually resulting in the performerNs release from any past or
future liability " " ".U .he ser!ices rendered by respondent
are performed or successfully completed upon its sending to
its foreign client the drafts and bills it has gathered from
ser!ice establishments here. Its ser!ices# ha!ing been
performed in the Philippines# are therefore also consumed in
the Philippines.

Hnli&e goods# ser!ices cannot be physically used in or
bound for a specific place when their destination is
determined. Instead# there can only be a Tpredetermined
end of a courseU when determining the ser!ice Tlocation or
position " " " for legal purposes.U RespondentNs facilitation
ser!ice has no physical e"istence# yet ta&es place upon
rendition# and therefore upon consumption# in the
Philippines. Hnder the destination principle# as petitioner
asserts# such ser!ice is sub(ect to @A. at the rate of 8?
percent.

Res"ondent&s Services 'xe"t
fro t!e (estination )rinci"le

Jowe!er# the law clearly pro!ides for an e"ception to the
destination principle$ that is# for a ero percent @A. rate for
ser!ices that are performed in t'e /'ilippines# Tpaid for in
accordance with the rules and regulations of the O2SPP.U
1!&
.hus# for the supply of ser!ice to be ero-rated as an
e"ception# the law merely re%uires that first# the ser!ice be
performed in the Philippines$ second# the ser!ice fall under
any of the categories in Section 8?20b1 of the .a" *ode$
and# t'ird, it be paid in acceptable foreign currency
accounted for in accordance with 2SP rules and regulations.

Indeed# these three re%uirements for e"emption from the
destination principle are met by respondent. Its facilitation
ser!ice is performed in the Philippines. It falls under the
second category found in Section 8?20b1 of the .a" *ode#
because it is a ser!ice other than Tprocessing# manufacturing
or repac&ing of goodsU as mentioned in the pro!ision.
Hndisputed is the fact that such ser!ice meets the statutory
condition that it be paid in acceptable foreign currency duly
accounted for in accordance with 2SP rules. .hus# it should
be ero-rated.
Tax Situs of a
Zero-Rated Service

.he law neither ma&es a %ualification nor adds a condition in
determining the ta" situs of a ero-rated ser!ice. Hnder this
criterion# the place where the ser!ice is rendered determines
the (urisdiction to impose the @A.. Performed in the
Philippines# such ser!ice is necessarily sub(ect to its
(urisdiction# for the State necessarily has to ha!e Ta
substantial connectionU to it# in order to enforce a ero rate.
.he place of payment is immaterial$ much less is the place
where the output of the ser!ice will be further or ultimately
used.

*o +ualifications
,nder RR --./

In implementing the @A. pro!isions of the .a" *ode# RR <-
8; pro!ides for the ero rating of ser!ices other than the
processing# manufacturing or repac&ing of goods -- in
general and without %ualifications -- when paid for by the
person to whom such ser!ices are rendered in acceptable
foreign currency inwardly remitted and duly accounted for in
accordance with the 2SP 0then *entral 2an&1 regulations.
In sum# ha!ing resol!ed that transactions of respondent are
ero-rated# the *ourt upholds the formerNs entitlement to the
refund as determined by the appellate court.

4urthermore# under a ero-rating scheme# the sale or
e"change of a particular ser!ice is completely freed from the
@A.# because the seller is entitled to reco!er# by way of a
refund or as an input ta" credit# the ta" that is included in the
cost of purchases attributable to the sale or e"change.
TO.Phe ta" paid or withheld is not deducted from the ta"
base.U Ja!ing been applied for within the reglementary
period# respondentNs refund is in order.
!IR v -urmeister and <ain Scandinavian !ontractor 6indanao
4acts/
A foreign consortium# composed of 2urmeister-3enmar& W
others# entered into a 8<-year contract with )APK*KR for the
maintenance and operation of 2 power barges in Bindanao
2urmeister-3enmar&# which was appointed the coordination
manager# established a Philippine subsidiary 0respondent1 and
subcontracted the actual operation W maintenance
)APK*KR paid the consortium in a mi"ture of currencies# while
the consortium paid respondent in foreign currency inwardly
remitted to the Philippines through the ban&ing system
Respondent registered as a @A. ta"payer pursuant to a 2IR
Ruling# which stated that if it chooses to register as a @A.
ta"payer W its ser!ices are paid for in acceptable foreign
currency W accounted for pursuant to the rules of 2SP# its
transactions shall be sub(ect to @A. at ero-rate
Respondent a!ailed of the @oluntary Assessment Program
wherein it sub(ected part of its sales to the 8?= @A.# pursuant to
a subse%uent Re!enue Regulations
Respondent then paid the corresponding output @A. of a little
o!er PMB
.he @A. Re!iew *ommittee# howe!er# reconfirmed that the
ser!ices being rendered by respondent are sub(ect to @A. at
?=# instead of 8?=
1"0
Issue/ IF) respondent is entitled to a ta" credit or refund for the
erroneously paid output @A.Q
Jeld/ )K. Respondent is not entitled to a refund of the output @A.
paid.
Aside from registering as a @A. entity and complying with
the rules of 2SP# another essential condition is that the
ser!ices should be rendered to a person or entity who is
doing business .()%$+" the Philippines. Although this phrase
is clearly stated in the 8
st
paragraph of the applicable
pro!ision# it should be interpreted to also %ualify the general
term Tser!icesU as mentioned in the ne"t subse%uent
paragraph of the same pro!ision. Ktherwise# the re%uirement
of payment of foreign currency will become irrele!ant.
4urther# when both the pro!ider and recipient of the ser!ices
are doing business in the Philippines# this would fall s%uarely
within the ambit of domestic sales or supply of ser!ices#
sub(ect to the regular @A. rate of 8?=. Ihile the members
of the consortium may be non-resident foreign corporation#
the consortium itself# to whom respondent is supplying
ser!ices for# is actually doing business in the Philippines# as
e!idenced by its 8<-year contract with )APK*KR.
.hus# although this (urisdiction generally follows the
destination principle with regard to @A. 0e"ports are ero-
rated# while imports are ta"ed1# as enunciated in American
-"press# there is an e"ception to this rule. .he ser!ices
enumerated# if performed in the Philippines# shall not be
allowed the ero-rated @A.# but shall be sub(ected to the
regular @A. rate of 8?=.
12.0 Tax C#"+$)%: I,4()DO()4() Tax
82.<.8 Ihat is the nature of the Input @A.Q
AbaDada 5uro v rmita
T!alue-added ta" due from or paid by a @A.-registered
person on the importation of goods or local purchase of
goods and ser!ices# including lease or use of property# in the
course of trade or business.U
Input ta" 0inclusi!e of input @A.1 carried o!er from the
pre!ious %uarter may be credited against the output
@A.# pro!ided it shall not e"ceed ;?= of the output
@A..
(IR! 11,(A)
*reditable Input .a". -
081 Any input ta" e!idenced by a @A. in!oice or official
receipt issued in accordance with Section 88, hereof on
the following transactions shall be creditable against the
output ta"/
0a1 Purchase or importation of goods/
0i1 4or sale$ or
0ii1 4or con!ersion into or intended to form part of a
finished product for sale including pac&aging
materials$ or
0iii1 4or use as supplies in the course of business$ or
0i!1 4or use as materials supplied in the sale of
ser!ice$ or
0!1 4or use in trade or business for which deduction
for depreciation or amortiation is allowed under
this *ode# e"cept automobiles# aircraft and
yachts.
0b1 Purchase of ser!ices on which a !alue-added ta"
has been actually paid.
021 .he input ta" on domestic purchase of goods or
properties shall be creditable/
0a1 .o the purchaser upon consummation of sale and on
importation of goods or properties$ and
0b1 .o the importer upon payment of the !alue-added
ta" prior to the release of the goods from the custody
of the 2ureau of *ustoms.
Jowe!er# in the case of purchase of ser!ices# lease
or use of properties# the input ta" shall be creditable
to the purchaser# lessee or licensee upon payment
of the compensation# rental# royalty or fee.
1"1
0,1 A @A.-registered person who is also engaged in
transactions not sub(ect to the !alue-added ta" shall be
allowed ta" credit as follows/
0a1 .otal input ta" which can be directly attributed to
transactions sub(ect to !alue-added ta"$ and
0b1 A ratable portion of any input ta" which cannot be
directly attributed to either acti!ity.
.he term 5input ta"5 means the !alue-added ta" due
from or paid by a @A.-registered person in the
course of his trade or business on importation of
goods or local purchase of goods or ser!ices#
including lease or use of property# from a @A.-
registered person. It shall also include the
transitional input ta" determined in accordance with
Section 888 of this *ode.
.he term 5output ta"5 means the !alue-added ta"
due on the sale or lease of ta"able goods or
properties or ser!ices by any person registered or
re%uired to register under Section 2,M of this *ode.
RR (o) 1*+,9 #)11,+1 @ #)11,+0
*redits 4or Input .a". -- TInput ta"U means the @A. due on
or paid by a @A.-registered person on importation of goods
or local purchases of goods# properties# or ser!ices#
including lease or use of properties# in the course of his
trade or business. It shall also include the transitional input
ta" and the presumpti!e input ta" determined in accordance
with Sec. 888 of the .a" *ode.
It includes input ta"es which can be directly attributed to
transactions sub(ect to the @A. plus a ratable portion of any
input ta" which cannot be directly attributed to either the
ta"able or e"empt acti!ity.
Any input ta" on the following transactions e!idenced by a
@A. in!oice or official receipt issued by a @A.-registered
person in accordance with Secs. 88, and 2,; of the .a"
*ode shall be creditable against the output ta"/
0a1 Purchase or importation of goods
081 4or sale$ or
021 4or con!ersion into or intended to form part of a
finished product for sale# including pac&aging
materials$ or
0,1 4or use as supplies in the course of business$ or
041 4or use as raw materials supplied in the sale of
ser!ices$ or
0<1 4or use in trade or business for which deduction for
depreciation or amortiation is
0b1 Purchase of real properties for which a @A. has actually
been paid$
0c1 Purchase of ser!ices in which a @A. has actually been
paid$
0d1 .ransactions Tdeemed saleU under Sec. 8?M 021 of the
.a" *ode$
0e1 .ransitional input ta" allowed under Sec. 4.888 0a1 of
these Regulations$
0f1 Presumpti!e input ta" allowed under Sec. 4.888 0b1 of
these Regulations$
0g1 .ransitional input ta" credits allowed under the transitory
and other pro!isions of these Regulations.
S-*. 4.88?-2. Persons Iho *an A!ail of the Input .a"
*redit. -- .he input ta" credit on importation of goods or local
purchases of goods# properties or ser!ices by a @A.-
registered person shall be creditable/
0a1 .o the importer upon payment of @A. prior to the
release of goods from customs custody$
0b1 .o the purchaser of the domestic goods or properties
upon consummation of the sale$ or
0c1 .o the purchaser of ser!ices or the lessee or licensee
1"2
upon payment of the compensation# rental# royalty or
fee.allowed under the .a" *ode#
82.<.2 Kn 3epreciable 'oods
(IR! 11,(A)(0)(b) 0
nd
7
Jowe!er# in the case of purchase of ser!ices# lease or use
of properties# the input ta" shall be creditable to the
purchaser# lessee or licensee upon payment of the
compensation# rental# royalty or fee.
RR (o) 1*+,9 #)11,+3 (amended b1 RR (o) ,#+,% 1*)
*laim for Input .a" on 3epreciable 'oods. -- Ihere a @A.-
registered person purchases or imports capital goods# which
are depreciable assets for income ta" purposes# the
aggregate ac%uisition cost of which 0e"clusi!e of @A.1 in a
calendar month e"ceeds Kne Billion pesos 0P8#???#???.??1#
regardless of the ac%uisition cost of each capital good# shall
be claimed as credit against output ta" in the following
manner/
0a1 If the estimated useful life of a capital good is fi!e 0<1
years or more C .he input ta" shall be spread e!enly
o!er a period of si"ty 0M?1 months and the claim for input
ta" credit will commence in the calendar month when the
capital good is ac%uired. .he total input ta"es on
purchases or importations of this type of capital goods
shall be di!ided by M? and the %uotient will be the
amount to be claimed monthly.
0b1 If the estimated useful life of a capital good is less than
fi!e 0<1 years C .he input ta" shall be spread e!enly on a
monthly basis by di!iding the input ta" by the actual
number of months comprising the estimated useful life of
the capital good. .he claim for input ta" credit shall
commence in the calendar month that the capital goods
were ac%uired.
Ihere the aggregate ac%uisition cost 0e"clusi!e of @A.1
of the e"isting or finished depreciable capital goods
purchased or imported during any calendar month does
not e"ceed Kne million pesos 0P 8#???#???.??1# the total
input ta"es will be allowable as credit against output ta"
in the month of ac%uisition$ Pro!ided# howe!er# that the
total amount of input ta"es 0input ta" on depreciable
capital goods plus other allowable input ta"es1 allowed
to be claimed against the output ta" in the %uarterly @A.
Returns shall be sub(ect to the limitation prescribed
under Sec. 4.88?-; of these Regulations.
*apital goods or properties refers to goods or properties
with estimated useful life greater than one 081 year and
which are treated as depreciable assets under Sec.
,4041 of the .a" *ode# used directly or indirectly in the
production or sale of ta"able goods or ser!ices.
.he aggregate ac%uisition cost of depreciable assets in
any calendar month refers to the total price# e"cluding
the @A.# agreed upon for one or more assets ac%uired
and not on the payments actually made during the
calendar month. .hus# an asset ac%uired on installment
for an ac%uisition cost of more than P8#???#???.??#
e"cluding the @A.# will be sub(ect to the amortiation of
input ta" despite the fact that the monthly
paymentsFinstallments may not e"ceed P8#???#???.??.
Illustration/ E2J *orporation sold capital goods on
installment on Kctober 8# 2??<. It is agreed that the
selling price# including the @A.# shall be payable in fi!e
0<1 e%ual monthly installments. .he data pertinent to the
sold assets are as follows/
Selling Price
0e"clusi!e of @A.1
- P <#???#???.??
Passed-on @A. - <??#???.??
Kriginal *ost of Asset - ,#???#???.??
Accumulated 3epreciation
at the time of sale
- 8#???#???.??
Hnutilied Input .a"
0Sold Asset1
- 8??#???.??
1"
Accounting -ntries/
QuickTimeand a
decompressor
are needed to see this picture.
\ .he input ta" of P <??#???.?? on the bought capital
goods worth P <#???#???.?? shall be spread e!enly o!er
a period of M? months starting the month of purchase.
If the depreciable capital good is soldFtransferred within a
period of fi!e 0<1 years or prior to the e"haustion of the
amortiable input ta" thereon# the entire unamortied input
ta" on the capital goods soldFtransferred can be claimed as
input ta" credit during the monthF%uarter when the sale or
transfer was made but sub(ect to the limitation prescribed
under Sec. 4.88?-; of these Regulations.
*onstruction in progress 0*IP1 is the cost of construction
wor& which is not yet completed. *IP is not depreciated until
the asset is placed in ser!ice. )ormally# upon completion# a
*IP item is reclassified and the reclassified asset is
capitalied and depreciated.
*IP is considered# for purposes of claiming input ta"# as a
purchase of ser!ice# the !alue of which shall be determined
based on the progress billings. Hntil such time the
construction has been completed# it will not %ualify as capital
goods as herein defined# in which case# input ta" credit on
such transaction can be recognied in the month the
payment was made$ Pro!ided# that an official receipt of
payment has been issued based on the progress billings.
In case of contract for the sale of ser!ice where only the
labor will be supplied by the contractor and the materials will
be purchased by the contractee from other suppliers# input
ta" credit on the labor contracted shall still be recognied on
the month the payment was made based on a progress
billings while input ta" on the purchase of materials shall be
recognied at the time the materials were purchased.
Knce the input ta" has already been claimed while the
construction is still in progress# no additional input ta" can be
claimed upon completion of the asset when it has been
reclassified as a depreciable capital asset and depreciated.
82.<., -"cess Kutput or Input @A. and 3etermination of *reditable
Input @A.
(IR! 11,(-) (amended b1 RA 93*1 @ 11,(!))
-"cess Kutput or Input .a". - If at the end of any ta"able
%uarter the output ta" e"ceeds the input ta"# the e"cess shall
be paid by the @A.-registered person. If the input ta"
e"ceeds the output ta"# the e"cess shall be carried o!er to
the succeeding %uarter or %uarters. any input ta" attributable
to the purchase of capital goods or to ero-rated sales by a
@A.-registered person may at his option be refunded or
credited against other internal re!enue ta"es# sub(ect to the
pro!isions of Section 882.
RR (o) 1*+,9 #)11,+9, #)11,+* @ #)11,+% (amended b1 RR (o)
,0+,% @ RR (o) ,#+,% 19)
S-*. 4.88?-<. 3etermination of Input .a" *reditable during
a .a"able Bonth or 7uarter. -- .he amount of input ta"es
creditable during a month or %uarter shall be determined in
the manner illustrated abo!e by adding all creditable input
ta"es arising from the transactions enumerated under the
1"!
preceding subsections of Sec. 4.88? during the month or
%uarter plus any amount of input ta" carried-o!er from the
preceding month or %uarter# reduced by the amount of claim
for @A. refund or ta" credit certificate 0whether filed with the
2IR# the 3epartment of 4inance# the 2oard of In!estments or
the 2K*1 and other ad(ustments# such as purchases returns
or allowances# input ta" attributable to e"empt sales and
input ta" attributable to sales sub(ect to final @A.
withholding.
S-*. 4.88?-M. 3etermination of the Kutput .a" and @A.
Payable and *omputation of @A. Payable or -"cess .a"
*redits. -- In a sale of goods or properties# the output ta" is
computed by multiplying the gross selling price as defined in
these Regulations by the regular rate of @A.. 4or sellers of
ser!ices# the output ta" is computed by multiplying the gross
receipts as defined in these Regulations by the regular rate
of @A..
In all cases where the basis for computing the output ta" is
either the gross selling price or the gross receipts# but the
amount of @A. is erroneously billed in the in!oice# the total
in!oice amount shall be presumed to be comprised of the
gross selling priceFgross receipts plus the correct amount of
@A.. Jence# the output ta" shall be computed by multiplying
the total in!oice amount by a fraction using the rate of @A.
as numerator and one hundred percent 08??=1 plus rate of
@A. as the denominator. Accordingly# the input ta" that can
be claimed by the buyer shall be the corrected amount of
@A. computed in accordance with the formula herein
prescribed.
.here shall be allowed as a deduction from the output ta"
the amount of input ta" deductible as determined under Sec.
4.88?-8 to 4.88?-< of these Regulations to arri!e at @A.
payable on the monthly @A. declaration and the %uarterly
@A. returns# sub(ect to the limitations set forth in Section
4.88?-;.
S-*. 4.88?-;. @A. Payable 0-"cess Kutput1 or -"cess Input
.a".
0a1 If at the end of any ta"able %uarter the output ta"
e"ceeds the input ta"# the e"cess shall be paid by the
@A.-registered person.
Illustration/
4or a gi!en ta"able %uarter A2* *orp. has output @A. of
8?? and input @A. of 8?. Since output ta" e"ceeds the input
ta" for such ta"able %uarter# all of the input ta" may be
utilied to offset against the output ta". .hus# the net @A.
payable is 8?? minus 8? X 2?.
0b1 If the input ta" inclusi!e of input ta" carried o!er from the
pre!ious %uarter e"ceeds the output ta"# the e"cess
input ta" shall be carried o!er to the succeeding %uarter
or %uarters$ Pro!ided# howe!er# that any input ta"
attributable to ero-rated sales by a @A.-registered
person may at his option be refunded or applied for a ta"
credit certificate which may be used in the payment of
internal re!enue ta"es# sub(ect to the limitations as may
be pro!ided for by law# as well as# other implementing
rules.
Illustration/
4or a gi!en ta"able %uarter# AL9 *orporation has output
@A. of 8?? and input @A. of 88?. Since input ta" e"ceeds
the output ta" for such ta"able %uarter# there is an e"cess
input ta" at the end of the %uarter of 8? which may be carried
o!er to the ne"t %uarter or %uarters.
:A& Ruling (o) ,00+,# (/.8&)
It is represented that the Philippine Eong 3istance
.elephone *ompany 0PE3. for bre!ity1 fails to recei!e# at
the re%uired time# the *ertificates of *reditable .a" Iithheld
at Source 02IR 4orm )o. 2,?;1 from its withholding agents#
including more than 8?? go!ernment agencies nationwide.
According to you# 5OuPsually PE3. recei!es such *ertificates
only when said withholding agents recei!es 0sic1 a notice of
disconnection for failure to pay the remaining balance which
actually represents the amount of @A. or -I. pre!iously
withheld.5 .hus# for the year 2??2# PE3. failed to utilie at
1""
the appropriate time such withheld ta"es# either as input
ta"es or withholding ta" credits# because the issuance of the
2IR 4orm )o. 2,?; were made by the withholding agents
only after or subse%uent to the filing dates of the re%uired
returns.
In support of your opinion# you ha!e submitted the following
arguments/
8. .he .a" *ode does not pro!ide a prescripti!e period
within which e"cess input @A. can be carried-o!er to the
succeeding %uarter or %uarters# and therefore# the same
may be carried-forward continuously. Section 88?021 of
the .a" *ode enables @A.-registered sellers to carry-
o!er to the succeeding %uarter or %uarters the e"cess
input @A. o!er the output @A. of the present %uarters.
2. .he e"cess income ta" paid by the ta"payer
prospecti!ely may be carried forward indefinitely#
pursuant to Section ;M of the .a" *ode. -"cess income
ta"es paid as shown in the ta"payers6 final ad(ustment
returns can be credited against the income ta" liabilities
of the succeeding ta"able years.
,. *onsistent with the tenets of (ustice and fairness# sellers-
payees should be allowed to apply as ta" credits# the
ta"es withheld and remitted to the 2IR by the customers-
payors# and should not be pre(udiced# therefore# by the
tardiness of the payors in submitting the 2IR 4orms )o.
2,8;.
4. It is not administrati!ely feasible for PE3. to amend
pre!iously filed returns to include creditable ta"es
co!ered by belatedly issued certificates of withheld
ta"es.
Ie reply. .he re%uest of the ta"payer is denied according to
the following discussion.
.he withholding of ta"es at source is a collection system that
has been adopted in this (urisdiction in order to ensure that
income and transactions during a ta"able period or year are
properly sub(ected to ta"es. Jence# persons# whether
(uridical or natural# are mandated by law to act as
withholding agents in the collection and remittance of said
ta"es to go!ernment at the designated time and place.
Similarly# ta"payers ha!e the legal obligation to pay the
correct amount of ta"es on their income and transactions
during a ta"able period or year# according to the pro!isions
of law# rules and regulations.
.he withholding ta" system was de!ised for two main
reasons/ first# to pro!ide the ta"payer a con!enient manner
to meet his probable income ta" liability$ and second# to
ensure the collection of the income ta" which could
otherwise be lost or substantially reduced through failure to
file the corresponding returns. .o these# a third reason may
be added/ to impro!e the go!ernment6s cash flow. 0*itiban&
!s. *A# et al.# 'R 8?;4,4# Kctober 8?# 8::;1
Hnder this system# income is !iewed as a flow and is
measured o!er a period of time &nown as an 5accounting
period.5 An accounting period co!ers twel!e months#
subdi!ided into four e%ual segments &nown as 5%uarters.5
Income realied within the ta"payer6s annual accounting
period 0fiscal or calendar year1 becomes the basis for the
computation of the gross income and the ta" liability. 0ibid.1
In the case of income ta"es# Section <;021 of the .a" *ode
legally authories the 2IR to re%uire the withholding of a ta"
on the items of income payable to persons residing in the
Philippines by payor-persons# which shall be credited
against the income ta" liability of the ta"payer for the ta"able
year. .a"es deducted and withheld under Section <; by
withholding agents shall be co!ered by a return and paid to
designated authoried persons. .he return for creditable
withholding ta"es shall be filed and the payment made not
later than the last day of the month following the close of the
%uarter during which withholding was made. In this regard#
the *ommissioner# with the appro!al of the Secretary of
4inance# may e!en re%uire these withholding agents to pay
or deposit the ta"es deducted or withheld at more fre%uent
inter!als when necessary to protect the interest of the
go!ernment. 0Section <80A1# .a" *ode1
1"#
3uring any ta"able year# a corporation shall file a %uarterly
summary declaration of its gross income and deductions on
a cumulati!e basis for the preceding %uarter or %uarters
upon which the income ta" shall be le!ied# collected and
paid. .he ta" so computed shall be decreased by the
amount of ta" pre!iously paid or assessed during the
preceding %uarters and shall be paid not later than si"ty 0M?1
days from the close of each of the first three %uarters of the
ta"able year# whether calendar or fiscal year. 0Section ;<#
.a" *ode1 Such corporation that is liable to pay income ta"
under Section 2; of the *ode shall then file a final
ad(ustment return co!ering the total ta"able income for the
preceding calendar or fiscal year.
In case the corporation is entitled to a ta" credit or refund of
the e"cess estimated %uarterly income ta"es paid# the
e"cess amount shown on its final ad(ustment return may be
carried o!er and credited against the estimated %uarterly
income ta" liabilities for the ta"able %uarters of the
succeeding ta"able years. Knce the option to carry-o!er and
apply the e"cess %uarterly income ta" against income ta"
due for the ta"able %uarters of the succeeding ta"able years
has been made# such option shall be considered irre!ocable
for that ta"able period and no application for cash refund or
issuance of a ta" credit certificate shall be allowed therefor.5
0italics supplied1
.he corporate %uarterly declaration shall be filed within si"ty
0M?1 days following the close of each of the first three
%uarters of the ta"able year# and the final ad(ustment return
shall be filed on or before the fifteenth day of April# or on or
before the fifteenth day of the fourth month following the
close of the fiscal year# as the case may be. .he income ta"
due on the corporate %uarterly returns and the final
ad(ustment income ta" returns shall be paid at the time the
declaration or return is filed in a manner prescribed by the
*ommissioner. 0Section ;;# .a" *ode1
.he same principle for the withholding system on income
ta"es must be applied for @A. purposes. An accounting
period co!ers twel!e months# subdi!ided into four e%ual
segments &nown as 5%uarters.5 .he gross receipts realied
within the ta"payer6s annual accounting period 0fiscal or
calendar year1 becomes the basis for the computation of the
net output ta" liability of the ta"payer.
4or @A. in particular# e!ery person liable to pay the !alue-
added ta" imposed shall generally file a %uarterly return of
the amount of his gross sales or receipts within twenty-fi!e
02<1 days following the close of each ta"able %uarter
prescribed for each ta"payer$ howe!er# the @A.-registered
person shall pay the !alue-added ta" on a monthly basis.
Knly one consolidated return shall be filed by the ta"payer
for his principal place of business or head office and all
branches. 0Section 884# .a" *ode1 In the case of the
'o!ernment or any of its political subdi!isions#
instrumentalities or agencies# including go!ernment-owned
or -controlled-corporations 0'K**s1# they are# before
ma&ing payment on account of each purchase of goods from
sellers and ser!ices rendered by contractors which are
sub(ect to the !alue-added ta" imposed in Sections 8?M and
8?8 of this *ode# re%uired to deduct and withhold the !alue-
added ta" due at the general rate of three percent 0,=1 of
the gross payment for the purchase of goods and si" percent
0M=1 on gross receipts for ser!ices rendered by contractors
on e!ery sale or installment payment which shall be
creditable against the !alue-added ta" liability of the seller or
contractor# or eight-and-a-half percent 08.<=1 in the case of
public wor&s contractors although this latter case will not
apply to PE3. since it is not a public wor&s contractor. 4or
this purpose# the payor or person in control of the payment
shall be considered as the withholding agent# and the !alue-
added ta" withheld shall be remitted within ten 08?1 days
following the end of the month the withholding was made.
0Section 8840*1# .a" *ode1
In relation to Section 884 of the .a" *ode# the @A.-
registered ta"payer shall determine and pay# at the end of
each ta"able %uarter# the e"cess output ta"es that it may
ha!e according to Section 88?021 of the .a" *ode. If the
input ta" e"ceeds the output ta"# the e"cess shall be carried
o!er to the succeeding %uarter or %uarters.
1"$
.he .a" *ode pro!ides for a two-year prescripti!e period for
the claim of refunds or credits of ta"es. In proper cases# the
*ommissioner shall grant a refund or issue the ta" credit
certificate for creditable input ta"es for ero-rated or
effecti!ely ero-rated transactions# as well as capital goods#
within one hundred twenty 082?1 days from the date of
submission of complete documents in support of the
application filed in accordance with Subsections 0A1 and 021
of Section 882 of the .a" *ode. In this regard# the .a" *ode
pro!ides a two-year prescription period within which such
applications shall be made. 0Section 882# .a" *ode1 Kutside
of these transactions# the .a" *ode pro!ides a general two-
year prescripti!e period for the ta"payer to file a written claim
for the refund or credit of ta"es erroneously or illegally
recei!ed# as well as penalties imposed by the 2IR without
authority. A return that shows an o!erpayment shall be
considered as a written claim for credit or refund. 0Section
2?4# .a" *ode1
As a means to ensure that ta"payers are correctly filing the
amount of ta"es due from them# the 2ureau of Internal
Re!enue is authoried to assess a ta"payer for deficiency
ta"es# within three 0,1 years# in general# from the last day for
the filing of or from the date of the filing of the return
according to the pro!isions of Section 2?, of the .a" *ode.
Iithin this period of time# also# the ta"payer is re%uired to
preser!e its boo&s of accounts and other accounting
records# the efficient management of which is best left for the
ta"payer and its accounting# credit or finance department# at
the !ery least# to underta&e. .o guide the ta"payers#
howe!er# the Secretary of 4inance# upon the
recommendation of the *ommissioner of Internal Re!enue#
has issued and duly promulgated Re!enue Regulations
pursuant to Section 244 and 24< of the .a" *ode# including
Section 24<0i1 thereof# in order to implement the abo!e-
stated and cited ta" pro!isions.
'ood faith on the part of the ta"payer# in respect of its failure
to timely recei!e its certificates of creditable withholding
ta"es from its income-payors and customers or clients who
are designated withholding agents of go!ernment# is not an
acceptable argument and is definitely not sufficient to (ustify
its re%uest. .a"es are paramount# and their efficient and
timely collection# as much as their proper monitoring# are
o!erriding considerations in the present case. .he law# rules
and regulations on the matter of withholding ta"es and the
obligations of the withholding agents are clearly set out and
are already beyond %uibbling at this time.
2ased on the foregoing# therefore# this Kffice rules as
follows/
8. .here cannot be a carry-o!er of withheld ta"es that ha!e
not ob!iously been credited as yet in any gi!en ta"able
year.
2. Iithheld ta"es# whether these are @A. or income ta"es#
can only be deducted from items of income or credited
against output ta"es# for the gi!en and corresponding
ta"able period or year.
,. .he ta"payer must file a written claim for refund or credit
of ta"es remitted by its withholding ta" agents within the
two-year prescription period pro!ided in Section 2?4 of
the .a" *ode if it does not# in the alternati!e# amend its
returns to reflect belatedly recei!ed certificates of
creditable withheld ta"es on unreported items of income#
or of creditable input ta"es that ha!e not been deducted
from output ta"es in the case of @A.# during the ta"able
period or year in!ol!ed# whiche!er case may be
applicable.
82.<.4 .ransitionalFPresumpti!e Input .a" *redits
(IR! 111
0A1 .ransitional Input .a" *redits. - A person who becomes
liable to !alue-added ta" or any person who elects to be
a @A.-registered person shall# sub(ect to the filing of an
in!entory according to rules and regulations prescribed
by the Secretary of finance# upon recommendation of the
*ommissioner# be allowed input ta" on his beginning
in!entory of goods# materials and supplies e%ui!alent for
eight percent 08=1 of the !alue of such in!entory or the
1"%
actual !alue-added ta" paid on such goods# materials
and supplies# whiche!er is higher# which shall be
creditable against the output ta".
021 Presumpti!e Input .a" *redits. -
081 Persons or firms engaged in the processing of
sardines# mac&erel and mil&# and in manufacturing
refined sugar and coo&ing oil# shall be allowed a
presumpti!e input ta"# creditable against the output
ta"# e%ui!alent to one and one-half percent 08 8F2=1
of the gross !alue in money of their purchases of
primary agricultural products which are used as
inputs to their production.
As used in this Subsection# the term 5processing5
shall mean pasteuriation# canning and acti!ities
which through physical or chemical process alter the
e"terior te"ture or form or inner substance of a
product in such manner as to prepare it for special
use to which it could not ha!e been put in its original
form or condition.
021 Public wor&s contractors shall be allowed a
presumpti!e input ta" e%ui!alent to one and one-half
percent 08 8F2=1 of the contract price with respect to
go!ernment contracts only in lieu of actual input
ta"es therefrom.
RR (o) 1*+,9 #)111+1
0a1 .ransitional Input .a" *redits on 2eginning In!entories
.a"payers who became @A.-registered persons upon
e"ceeding the minimum turno!er of P8#<??#???.?? in
any 82-month period# or who !oluntarily register e!en if
their turno!er does not e"ceed P8#<??#???.?? 0e"cept
franchise grantees of radio and tele!ision broadcasting
whose threshold is P8?#???#???.??1 shall be entitled to a
transitional input ta" on the in!entory on hand as of the
effecti!ity of their @A. registration# on the following/
081 goods purchased for resale in their present
condition$
021 materials purchased for further processing# but
which ha!e not yet undergone processing$
0,1 goods which ha!e been manufactured by the
ta"payer$
041 goods in process for sale$ or
0<1 goods and supplies for use in the course of the
ta"payerNs trade or business as a @A.-registered
person.
.he transitional input ta" shall be two percent 02=1 of
the !alue of the beginning in!entory on hand or actual
@A. paid on such# goods# materials and supplies#
whiche!er is higher# which amount shall be creditable
against the output ta" of @A.-registered person. .he
!alue allowed for income ta" purposes on in!entories
shall be the basis for the computation of the 2=
transitional input ta"# e"cluding goods that are e"empt
from @A. under Sec. 8?: of the .a" *ode.
.he threshold amount of P8#<??#???.?? shall be
ad(usted# not later than >anuary ,8# 2??: and e!ery
three years thereafter# to its present !alue using the
*onsumer Price Inde" as published by the )SK.
0b1 Presumpti!e Input .a" *redits
Persons or firms engaged in the processing of sardines#
mac&erel# and mil&# and in manufacturing refined sugar#
coo&ing oil and pac&ed noodle-based instant meals#
shall be allowed a presumpti!e input ta"# creditable
against the output ta"# e%ui!alent to four percent 04=1 of
the gross !alue in money of their purchases of primary
agricultural products which are used as inputs to their
production.
As used in this paragraph# the term processing shall
mean pasteuriation# canning and acti!ities which
through physical or chemical process alter the e"terior
te"ture or form or inner substance of a product in such
manner as to prepare it for special use to which it could
1"&
not ha!e been put in its original form or condition.
82.<.< Apportioning of Input @A. in Bi"ed .ransactions
RR (o) 1*+,9 #)11,+# (amended b1 RR (o) ,#+,% 1%)
A @A.- registered person who is also engaged in
transactions not sub(ect to @A. shall be allowed to recognie
input ta" credit on transactions sub(ect to @A. as follows/
8. All the input ta"es that can be directly attributed to
transactions sub(ect to @A. may be recognied for input
ta" credit$ Pro!ided# that input ta"es that can be directly
attributable to @A. ta"able sales of goods and ser!ices
to the 'o!ernment or any of its political subdi!isions#
instrumentalities or agencies# including go!ernment-
owned or controlled corporations 0'K**s1 shall not be
credited against output ta"es arising from sales to non-
'o!ernment entities.
*laims for @A. refundF.a" *redit *ertificate 0.**1 with
the 2ureau of Internal Re!enue# 2oard of In!estment#
and Kne-Stop-Shop and 3uty 3rawbac& *enter of the
3ept. of 4inance should be deducted from the allowable
input ta" that are attributable to ero-rated sales.
2. If any input ta" cannot be directly attributed to either a
@A. ta"able or @A.- e"empt transaction# the input ta"
shall be pro-rated to the @A. ta"able and @A.-e"empt
transactions and only the ratable portion pertaining to
transactions sub(ect to @A. may be recognied for input
ta" credit.
Illustration/ -RA *orporation has the following sales during
the month/
Sale to pri!ate entities
sub(ect to 8?=
- P 8??#???.??
Sale to pri!ate entities
sub(ect to ?=
- 8??#???.??
Sale of e"empt goods - 8??#???.??
Sale to go!Nt. sub(ected to <=
final @A. Iithholding
- 8??#???.??
.otal sales for the month - P 4??#???.??
.he following input ta"es were passed on by its @A.
suppliers/
Input ta" on ta"able goods
08?=1
- P <#???.??
Input ta" on ero-rated sales - ,#???.??
Input ta" on sale of e"empt
goods
- 2#???.??
Input ta" on sale to go!ernment - 4#???.??
Input ta" on depreciable capital
good not attributable to any
specific acti!ity 0monthly
amortiation for M? months1
- P 2?#???.??
1#0
A. .he creditable input ta" for the month shall be computed
as follows/
Input ta" on ta"able goods 08?=1 - P <#???.??
Input ta" on ero-rated sales - ,#???.??
Ratable portion of the input ta" not directly
attributable to any acti!ity/
.a"able sales 0?= and 8?=1 " Amount of input
.otal Sales ta" not directly
Attributable
P 2??#???.?? " P 2?#???.??
4??#???.?? - 8?#???.??
.otal creditable input ta" for the month - P 88#???.??
2. .he input ta" attributable to sales to go!ernment for the
month shall be computed as follows/
Input ta" on sale to go!Nt. - P 4#???.??
.a"able sales to go!ernment " Amount of input
Attributable
P 8??#???.?? " P 2?#???.??
4??#???.?? - <#???.??
.otal creditable input ta" for the month - P :#???.??
*. .he input ta" attributable to @A.-e"empt sales for the
month shall be computed as follows/
Input ta" on @A.-e"empt sales - P 2#???.??
@A.-e"empt sales " Amount of input
Attributable
P 8??#???.?? " P 2?#???.??
4??#???.?? - <#???.??
.otal creditable input ta" for the month - P ;#???.??
.he table below shows a summary of the foregoing
transactions of -RA *orporation/
QuickTime and a
decompressor
are needed to see this picture.
\ .hese amounts are not a!ailable for input ta" credit but
may be recognied as cost or e"pense.
\\ Standard input @A. of <= on sales to 'o!ernment as
pro!ided in S-*. 4.884-20a1
\\\ Iithheld by 'o!ernment entity as 4inal Iithholding @A.
.he input ta" attributable to @A.-e"empt sales shall not be
allowed as credit against the output ta" but should be treated
as part of cost or e"pense.
)otwithstanding the foregoing pro!isions# for persons
engaged in both ero-rated sales under Sec. 8?80210M1 of
the .a" *ode and non-ero rated sales# the aggregate input
ta"es shall be allocated ratably between the ero-rated sale
and non-ero-rated sale.
1#1
-IR Ruling (o) 8A+*#*+,* (Ilo .and)
As represented# Ilo Eand# Inc. is a P-9A-registered -coone
4acilities -nterprise with P-9A Registration *ertificate )o.
:;-??M-4 dated August 8<# 8::;# engaged in the leasing of
real properties. It is registered with the 2IR as a @A.
registered entity.
.he company has purchased materials for the construction
of a building classified as capital asset. Said building is not
intended for sale but as an in!estment. .his capital asset is
li&ewise not related to @A.able products# hence# you
decided to capitalie the @A. amounting to P2#:;<#28:.8;.
In reply# please be informed that pursuant to Section 882#
.a" *ode of 8::;# a @A.-registered person may# to the
e"tent such input ta"es ha!e not been applied against output
ta"es# apply for the issuance of a ta" credit certificate or
refund of input ta"es which are 081 directly attributable to
ero-rated or effecti!ely ero-rated sales# the ac%uisition of
capital goods# purchase of land# or cancellation of @A.
registration due to retirement# change or cessation of status
as a @A.-registered person and 021 paid on imported or
locally purchased capital goods.
In case a person is engaged in ta"able as well as e"empt
sales of goods# properties and ser!ices# only the input ta"es
on purchases directly attributable to ta"able transactions#
i.e.# ero-rated and ac%uisition of capital goods# are eligible
for refund or issuance of ta" credit certificate. .he input
ta"es directly attributable or allocable to e"empt transactions
become part of the cost of capital goods purchased or of
operating e"penses 0cited in 2IR Ruling )o. 3A2,4-2??4
dated Bay ;# 2??41 In other words# only the input ta"
attributable to @A.-e"empt sales shall not be allowed as
credit against the output ta" but should be treated as part of
cost or e"pense 0Sec. 4.88?-4# Re!. Regs. )o. 8M-2??<1.
)owhere is it pro!ided that input ta"es on purchases directly
attributable to ta"able transactions# cannot be treated as part
of the cost of capital goods purchased. Ihat the law
pro!ides is that said input ta"es are eligible for refund or
issuance of ta" credit certificate.
In !iew of the foregoing# this Kffice poses no ob(ection to the
input @A. being added to cost of the building# pro!ided# that
input ta"es deducted shall not be reportedFreflected in the
@A. return and pro!ided# further# that such input ta"es shall
not be claimed as input ta" credit in any future @A. returns.
Boreo!er# the input ta" treated as part of the cost of capital
goods purchased shall be remo!ed from the company6s
in!entory of input ta"es and should be clearly reflected in the
company6s financial record. 4urthermore# the company is
re%uired to attach in its %uarterly @A. returns a separate
sheet containingFreflecting the amount of input @A. applied
as deduction against its gross income.
In case# howe!er# a claim for refund or credit has already
been resorted to# simultaneous with or subse%uent to the
deduction# and such claim for refund or credit is granted# the
amount so deducted should be considered and declared as
income sub(ect to the ordinary income ta" prescribed under
Section 2; of the .a" *ode of 8::;# as amended. 0Section
,40*1081# 8::; .a" *ode# as amended$ 2IR Ruling )o. 3A-
,8:-?< dated >uly 8<# 2??<$ and 2IR Ruling )o. ??8-;??M
dated September 8# 2??M1.
82.<.M Substantiation of Input .a" *redits# In!oicing
(IR! 113(A) @ (-)
0A1 In!oicing Re%uirements. - A @A.-registered person
shall# for e!ery sale# issue an in!oice or receipt. In
addition to the information re%uired under Section 2,;#
the following information shall be indicated in the in!oice
or receipt/
081 A statement that the seller is a @A.-registered
person# followed by his ta"payer6s identification
number 0.I)1$ and
021 .he total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the !alue-added ta".
1#2
021 Accounting Re%uirements. - )otwithstanding the
pro!isions of Section 2,,# all persons sub(ect to the
!alue-added ta" under Sections 8?M and 8?8 shall# in
addition to the regular accounting records re%uired#
maintain a subsidiary sales (ournal and subsidiary
purchase (ournal on which the daily sales and purchases
are recorded. .he subsidiary (ournals shall contain such
information as may be re%uired by the Secretary of
4inance.
RR (o) 1*+,9 #)11,+$ @ #)113+1
S-*. 4.88?-8. Substantiation of Input .a" *redits. --
0a1 Input ta"es for the importation of goods or the domestic
purchase of goods# properties or ser!ices is made in the
course of trade or business# whether such input ta"es
shall be credited against ero-rated sale# non-ero-rated
sales# or sub(ected to the <= 4inal Iithholding @A.#
must be substantiated and supported by the following
documents# and must be reported in the information
returns re%uired to be submitted to the 2ureau/
081 4or the importation of goods - import entry or other
e%ui!alent document showing actual payment of
@A. on the imported goods.
021 4or the domestic purchase of goods and properties
C in!oice showing the information re%uired under
Secs. 88, and 2,; of the .a" *ode.
0,1 4or the purchase of real property C public instrument
i.e.# deed of absolute sale# deed of conditional sale#
contractFagreement to sell# etc.# together with @A.
in!oice issued by the seller.
041 4or the purchase of ser!ices C official receipt
showing the information re%uired under Secs. 88,
and 2,; of the .a" *ode.
A cash register machine tape issued to a registered
buyer shall constitute !alid proof of substantiation of ta"
credit only if it shows the information re%uired under
Secs. 88, and 2,; of the .a" *ode.
0b1 .ransitional input ta" shall be supported by an in!entory
of goods as shown in a detailed list to be submitted to
the 2IR.
0c1 Input ta" on Tdeemed saleU transactions shall be
substantiated with the in!oice re%uired under Sec.
4.88,-2 of these Regulations.
0d1 Input ta" from payments made to non-residents 0such as
for ser!ices# rentals and royalties1 shall be supported by
a copy of the Bonthly Remittance Return of @alue
Added .a" Iithheld 02IR 4orm 8M??1 filed by the
resident payor in behalf of the non-resident e!idencing
remittance of @A. due which was withheld by the payor.
0e1 Ad!ance @A. on sugar shall be supported by the
Payment Krder showing payment of the ad!ance @A..
S-*. 4.88,-8. In!oicing Re%uirements. --
0A1 A @A.-registered person shall issue/ --
081 A @A. in!oice for e!ery sale# barter or e"change of
goods or properties$ and
021 A @A. official receipt for e!ery lease of goods or
properties# and for e!ery sale# barter or e"change of
ser!ices.
Knly @A.-registered persons are re%uired to print their
.I) followed by the word T@A.U in their in!oice or official
receipts. Said documents shall be considered as a T@A.
In!oiceU or @A. official receipt. All purchases co!ered by
in!oicesFreceipts other than @A. In!oiceF@A. Kfficial
Receipt shall not gi!e rise to any input ta".
@A. in!oice Fofficial receipt shall be prepared at least in
duplicate# the original to be gi!en to the buyer and the
duplicate to be retained by the seller as part of his
accounting records.
1#
021 Information contained in @A. in!oice or @A. official
receipt. C .he following information shall be indicated in
@A. in!oice or @A. official receipt/
person# followed by his .I)$
such amount includes the @A.$ Pro!ided# .hat/
0a1 .he amount of ta" shall be shown as a separate
item in the in!oice or receipt$
0b1 If the sale is e"empt from @A.# the term T@A.-
e"empt saleU shall be written or printed
prominently on the in!oice or receipt$
0c1 If the sale is sub(ect to ero percent 0?=1 @A.#
the term Tero-rated saleU shall be written or
printed prominently on the in!oice or receipt$
0d1 If the sale in!ol!es goods# properties or ser!ices
some of which are sub(ect to and some of which
are @A. ero-rated or @A.-e"empt# the in!oice
or receipt shall clearly indicate the brea&-down
of the sale price between its ta"able# e"empt
and ero-rated components# and the calculation
of the @A. on each portion of the sale shall be
shown on the in!oice or receipt. .he seller has
the option to issue separate in!oices or receipts
for the ta"able# e"empt# and ero-rated
components of the sale.
0,1 In the case of sales in the amount of one thousand
pesos 0P8#???.??1 or more where the sale or
transfer is made to a @A.-registered person# the
name# business style# if any# address and .I) of the
purchaser# customer or client# shall be indicated in
addition to the information re%uired in 081 and 021 of
this Section.
82.<.; *laims for Refund
(IR! 110 @ 009
S-*. 882. Refunds or .a" *redits of Input .a". -
0A1 9ero-Rated or -ffecti!ely 9ero-Rated Sales. - any @A.-
registered person# whose sales are ero-rated or
effecti!ely ero-rated may# within two 021 years after the
close of the ta"able %uarter when the sales were made#
apply for the issuance of a ta" credit certificate or refund
of creditable input ta" due or paid attributable to such
sales# e"cept transitional input ta"# to the e"tent that
such input ta" has not been applied against output ta"/
Pro!ided# howe!er# .hat in the case of ero-rated sales
under Section 8?M0A10210a1081# 021 and 021 and Section
8?8 021081 and 021# the acceptable foreign currency
e"change proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the
2ang&o Sentral ng Pilipinas 02SP1/ Pro!ided# further#
.hat where the ta"payer is engaged in ero-rated or
effecti!ely ero-rated sale and also in ta"able or e"empt
sale of goods of properties or ser!ices# and the amount
of creditable input ta" due or paid cannot be directly and
entirely attributed to any one of the transactions# it shall
be allocated proportionately on the basis of the !olume
of sales.
021 *apital 'oods. - A @A.-registered person may apply for
the issuance of a ta" credit certificate or refund of input
ta"es paid on capital goods imported or locally
purchased# to the e"tent that such input ta"es ha!e not
been applied against output ta"es. .he application may
be made only within two 021 years after the close of the
ta"able %uarter when the importation or purchase was
made.
0*1 *ancellation of @A. Registration. - A person whose
registration has been cancelled due to retirement from or
cessation of business# or due to changes in or cessation
of status under Section 8?M0*1 of this *ode may# within
two 021 years from the date of cancellation# apply for the
1#!
issuance of a ta" credit certificate for any unused input
ta" which may be used in payment of his other internal
re!enue ta"es.

031 Period Iithin Ihich Refund or .a" *redit of Input .a"es
Shall be Bade. - In proper cases# the *ommissioner
shall grant a refund or issue the ta" credit certificate for
creditable input ta"es within one hundred twenty 082?1
days from the date of submission of compete documents
in support of the application filed in accordance with
Subsections 0A1 and 021 hereof.

In case of full or partial denial of the claim for ta" refund
or ta" credit# or the failure on the part of the
*ommissioner to act on the application within the period
prescribed abo!e# the ta"payer affected may# within
thirty 0,?1 days from the receipt of the decision denying
the claim or after the e"piration of the one hundred
twenty day-period# appeal the decision or the unacted
claim with the *ourt of .a" Appeals.-

0-1 Banner of 'i!ing Refund. - Refunds shall be made upon
warrants drawn by the *ommissioner or by his duly
authoried representati!e without the necessity of being
countersigned by the *hairman# *ommission on audit#
the pro!isions of the Administrati!e *ode of 8:8; to the
contrary notwithstanding/ Pro!ided# .hat refunds under
this paragraph shall be sub(ect to post audit by the
*ommission on Audit.
S-*. 22:. Reco!ery of .a" -rroneously or Illegally
*ollected. - no suit or proceeding shall be maintained in any
court for the reco!ery of any national internal re!enue ta"
hereafter alleged to ha!e been erroneously or illegally
assessed or collected# or of any penalty claimed to ha!e
been collected without authority# of any sum alleged to ha!e
been e"cessi!ely or in any manner wrongfully collected
without authority# or of any sum alleged to ha!e been
e"cessi!ely or in any manner wrongfully collected# until a
claim for refund or credit has been duly filed with the
*ommissioner$ but such suit or proceeding may be
maintained# whether or not such ta"# penalty# or sum has
been paid under protest or duress.
In any case# no such suit or proceeding shall be filed after
the e"piration of two 021 years from the date of payment of
the ta" or penalty regardless of any super!ening cause that
may arise after payment/ Pro!ided# howe!er# .hat the
*ommissioner may# e!en without a written claim therefor#
refund or credit any ta"# where on the face of the return upon
which payment was made# such payment appears clearly to
ha!e been erroneously paid.
RR (o) 1*+,9 #)110+1
S-*. 4.882-8. *laims for RefundF.a" *redit *ertificate of
Input .a". C
0a1 9ero-rated and -ffecti!ely 9ero-rated Sales of 'oods#
Properties or Ser!ices
A @A.-registered person whose sales of goods#
properties or ser!ices are ero-rated or effecti!ely ero-
rated may apply for the issuance of a ta" credit
certificateFrefund of input ta" attributable to such sales.
.he input ta" that may be sub(ect of the claim shall
e"clude the portion of input ta" that has been applied
against the output ta". .he application should be filed
within two 021 years after the close of the ta"able %uarter
when such sales were made.
In case of ero-rated sales under Secs. 8?M0A10210a1081
and 021# and Sec. 8?M0A10210b1 and Sec. 8?8021081 and
021 of the .a" *ode# the payments for the sales must
ha!e been made in acceptable foreign currency duly
accounted for in accordance with the 2SP rules and
regulations.
Ihere the ta"payer is engaged in both ero-rated or
effecti!ely ero-rated sales and in ta"able 0including
sales sub(ect to final withholding @A.1 or e"empt sales
of goods# properties or ser!ices# and the amount of
creditable input ta" due or paid cannot be directly and
entirely attributed to any one of the transactions# only the
1#"
proportionate share of input ta"es allocated to ero-rated
or effecti!ely ero-rated sales can be claimed for refund
or issuance of a ta" credit certificate.
In the case of a person engaged in the transport of
passenger and cargo by air or sea !essels from the
Philippines to a foreign country# the input ta"es shall be
allocated ratably between his ero-rated sales and non-
ero-rated sales 0sales sub(ect to regular rate# sub(ect to
final @A. withholding and @A.-e"empt sales1.
0b1 *ancellation of @A. registration
A @A.-registered person whose registration has been
cancelled due to retirement from or cessation of
business# or due to changes in or cessation of status
under Sec. 8?M 0*1 of the .a" *ode may# within two 021
years from the date of cancellation# apply for the
issuance of a ta" credit certificate for any unused input
ta" which he may use in payment of his other internal
re!enue ta"es$ Pro!ided# howe!er# that he shall be
entitled to a refund if he has no internal re!enue ta"
liabilities against which the ta" credit certificate may be
utilied.
0c1 Ihere to file the claim for refundFta" credit certificate
*laims for refundsFta" credit certificate shall be filed with
the appropriate 2IR office 0Earge .a"payers Ser!ice
0E.S1 or Re!enue 3istrict Kffice 0R3K11 ha!ing
(urisdiction o!er the principal place of business of the
ta"payer$ Pro!ided# howe!er# that direct e"porters may
also file their claim for ta" credit certificate with the Kne
Stop Shop *enter of the 3epartment of 4inance$
Pro!ided# finally# that the filing of the claim with one
office shall preclude the filing of the same claim with
another office.
0d1 Period within which refund or ta" credit certificateFrefund
of input ta"es shall be made
In proper cases# the *ommissioner of Internal Re!enue
shall grant a ta" credit certificateFrefund for creditable
input ta"es within one hundred twenty 082?1 days from
the date of submission of complete documents in
support of the application filed in accordance with
subparagraph 0a1 abo!e.
In case of full or partial denial of the claim for ta" credit
certificateFrefund as decided by the *ommissioner of
Internal Re!enue# the ta"payer may appeal to the *ourt
of .a" Appeals 0*.A1 within thirty 0,?1 days from the
receipt of said denial# otherwise the decision shall
become final. Jowe!er# if no action on the claim for ta"
credit certificateFrefund has been ta&en by the
*ommissioner of Internal Re!enue after the one
hundred twenty 082?1 day period from the date of
submission of the application with complete documents#
the ta"payer may appeal to the *.A within ,? days from
the lapse of the 82?-day period.
0e1 Banner of gi!ing refund
Refund shall be made upon warrants drawn by the
*ommissioner of Internal Re!enue or by his duly
authoried representati!e without the necessity of being
countersigned by the *hairman# *ommission on Audit
0*KA1# the pro!ision of the Re!ised Administrati!e *ode
to the contrary notwithstanding$ Pro!ided# that refunds
under this paragraph shall be sub(ect to post audit by the
*KA.
!IR v 6irant /agbilao !orp)
!IR v Aic'i Forging !o)
82.<.8 *onse%uences
82.<.8.8 Issuing rroneous :A& Invoice or :A& Receipt b1 a
non+:A& "R
1##
(IR! 113
In!oicing and Accounting Re%uirements for @A.-Registered
Persons. -
0A1 In!oicing Re%uirements. - A @A.-registered person
shall# for e!ery sale# issue an in!oice or receipt. In
addition to the information re%uired under Section 2,;#
the following information shall be indicated in the in!oice
or receipt/
person# followed by his ta"payer6s identification
number 0.I)1$ and
such amount includes the !alue-added ta".
021 Accounting Re%uirements. - )otwithstanding the
pro!isions of Section 2,,# all persons sub(ect to the
!alue-added ta" under Sections 8?M and 8?8 shall# in
addition to the regular accounting records re%uired#
maintain a subsidiary sales (ournal and subsidiary
purchase (ournal on which the daily sales and purchases
are recorded. .he subsidiary (ournals shall contain such
information as may be re%uired by the Secretary of
4inance.
RR (o) 1*+,9 #)113+#
*onse%uences of Issuing -rroneous @A. In!oice or @A.
Kfficial Receipt. --
0A1 Issuance of a @A. In!oice or @A. Receipt by a non-@A.
person. C If a person who is not @A.-registered issues
an in!oice or receipt showing his .I)# followed by the
word T@A.U# the erroneous issuance shall result to the
following/
081 .he non-@A. person shall be liable to/
0i1 the percentage ta"es applicable to his
transactions$
0ii1 @A. due on the transactions under Sec. 8?M or
8?8 of the .a" *ode# without the benefit of any
input ta" credit$ and
0iii1 a <?= surcharge under Sec. 248 021 of the .a"
*ode$
021 @A. shall be recognied as an input ta" credit to the
purchaser under Sec. 88? of the .a" *ode# pro!ided
the re%uisite information re%uired under Subsection
4.88, 021 of these Regulations is shown on the
in!oice or receipt.
021 Issuance of a @A. In!oice or @A. Receipt on an -"empt
.ransaction by a @A.-registered Person C If a @A.-
registered person issues a @A. in!oice or @A. official
receipt for a @A.-e"empt transaction# but fails to display
prominently on the in!oice or receipt the words T@A.-
e"empt saleU# the transaction shall become ta"able and
the issuer shall be liable to pay @A. thereon. .he
purchaser shall be entitled to claim an input ta" credit on
his purchase.
82.<.8.2 -IR Aut'orit1 to /rint Receipt
Intel &ec'nolog1 v !IR
82.<.8., <ritten !laim for Refund
!IR v Rosemarie Acosta
"------------------------------------"
1'. CORPORATE TAX MAANGEMENT
1'.1 R"9$%)#a)$., R"=($#"/",)%B $, 9","#a! (NIRC 2'3)
1#$
0A1 Re%uirements. - -!ery person sub(ect to any internal
re!enue ta" shall register once with the appropriate
Re!enue 3istrict Kfficer/
081 Iithin ten 08?1 days from date of employment# or
021 Kn or before the commencement of business#or
0,1 2efore payment of any ta" due# or
041 Hpon filing of a return# statement or declaration as
re%uired in this *ode.
.he registration shall contain the ta"payer6s name# style#
place of residence# business and such other information
as may be re%uired by the *ommissioner in the form
prescribed therefor.
A person maintaining a head office# branch or facility
shall register with the Re!enue 3istrict Kfficer ha!ing
(urisdiction o!er the head office# brand or facility. 4or
purposes of this Section# the term 5facility5 may include
but not be limited to sales outlets# places of production#
warehouses or storage places.
021 Annual Registration 4ee. - An annual registration fee in
the amount of 4i!e hundred pesos 0P<??1 for e!ery
separate or distinct establishment or place of business#
including facility types where sales transactions occur#
shall be paid upon registration and e!ery year thereafter
on or before the last day of >anuary/ Pro!ided# howe!er#
.hat cooperati!es# indi!iduals earning purely
compensation income# whether locally or abroad# and
o!erseas wor&ers are not liable to the registration fee
herein imposed.
.he registration fee shall be paid to an authoried agent
ban& located within the re!enue district# or to the
Re!enue *ollection Kfficer# or duly authoried .reasurer
of the city of municipality where each place of business
or branch is registered.
0*1 Registration of -ach .ype of Internal Re!enue .a". -
-!ery person who is re%uired to register with the 2ureau
of Internal Re!enue under Subsection 0A1 hereof# shall
register each type of internal re!enue ta" for which he is
obligated# shall file a return and shall pay such ta"es#
and shall updates such registration of any changes in
accordance with Subsection 0-1 hereof.
031 .ransfer of Registration. - In case a registered person
decides to transfer his place of business or his head
office or branches# it shall be his duty to update his
registration status by filing an application for registration
information update in the form prescribed therefor.
0-1 Kther Hpdates. - Any person registered in accordance
with this Section shall# whene!er applicable# update his
registration information with the Re!enue 3istrict Kffice
where he is registered# specifying therein any change in
type and other ta"payer details.
041 *ancellation of Registration. - .he registration of any
person who ceases to be liable to a ta" type shall be
cancelled upon filing with the Re!enue 3istrict Kffice
where he is registered an application for registration
information update in a form prescribed therefor.
0'1 Persons *ommencing 2usiness. - Any person# who
e"pects to realie gross sales or receipts sub(ect to
!alue-added ta" in e"cess of the amount prescribed
under Section 8?:01 of this *ode for the ne"t 82-month
period from the commencement of the business# shall
register with the Re!enue 3istrict Kffice which has
(urisdiction o!er the head office or branch and shall pay
the annual registration fee prescribed in Subsection 021
hereof.
0J1 Persons 2ecoming Eiable to the @alue-added .a". - Any
person# whose gross sales or receipts in any 82-month
period e"ceeds the amount prescribed under Subsection
8?:01 of this *ode for e"emption from the !alue-added
ta" shall register in accordance with Subsection 0A1
hereof# and shall pay the annual registration fee
prescribed within ten 08?1 days after the end of the last
month of that period# and shall be liable to the !alue-
1#%
added ta" commencing from the first day of the month
following his registration.
0I1 Kptional Registration of -"empt Person. - Any person
whose transactions are e"empt from !alue-added ta"
under Section 8?:01 of this *ode$ or any person whose
transactions are e"empt from the !alue-added ta" under
Section 8?:0a1# 0b1# 0c1# and 0d1 of this *ode# who opts to
register as a @A. ta"payer with respect to his e"port
sales only# may update his registration information in
accordance with Subsection 0-1 hereof# not later than
ten 08?1 days before the beginning of the ta"able %uarter
and shall pay the annual registration fee prescribed in
Subsection 021 hereof.
In any case# the *ommissioner may# for administrati!e
reasons# deny any application for registration including
updates prescribed under Subsection 0-1 hereof.
4or purposes of .itle I@ of this *ode# any person who
has registered !alue-added ta" as a ta" type in
accordance with the pro!isions of Subsection 0*1 hereof
shall be referred to as @A.-registered person who shall
be assigned only one .a"payer Identification )umber.
0>1 Supplying of .a"payer Identification )umber 0.I)1. - Any
person re%uired under the authority of this *ode to
ma&e# render or file a return# statement or other
document shall be supplied with or assigned a .a"payer
Identification )umber 0.I)1 which he shall indicate in
such return# statement or document filed with the 2ureau
of Internal Re!enue for his proper identification for ta"
purposes# and which he shall indicate in certain
documents# such as# but not limited to the following/
081 Sugar %uedans# refined sugar release order or
similar instruments$
021 3omestic bills of lading$
0,1 3ocuments to be registered with the Register of
3eeds of Assessor6s Kffice$
041 Registration certificate of transportation e%uipment
by land# sea or air$
0<1 3ocuments to be registered with the Securities and
-"change *ommission$
0M1 2uilding construction permits$
0;1 Application for loan with ban&s# financial institutions#
or other financial intermediaries$
081 Application for mayor6s permit$
0:1 Application for business license with the 3epartment
of .rade W Industry$ and
08?1Such other documents which may hereafter be
re%uired under rules and regulations to be
promulgated by the Secretary of 4inance# upon
recommendation of the *ommissioner.
In cases where a registered ta"payer dies# the
administrator or e"ecutor shall register the estate of the
decedent in accordance with Subsection 0A1 hereof and
a new .a"payer Identification )umber 0.I)1 shall be
supplied in accordance with the pro!isions of this
Section.
In the case of a nonresident decedent# the e"ecutor or
administrator of the estate shall register the estate with
the Re!enue 3istrict Kffice where he is registered/
Pro!ided# howe!er# .hat in case such e"ecutor or
administrator is not registered# registration of the estate
shall be made with the .a"payer Identification )umber
0.I)1 supplied by the Re!enue 3istrict Kffice ha!ing
(urisdiction o!er his legal residence.
Knly one .a"payer identification )umber 0.I)1 shall be
assigned to a ta"payer. Any person who shall secure
more than one .a"payer Identification )umber shall be
criminally liable under the pro!ision of Section 2;< on
6@iolation of Kther Pro!isions of this *ode or Regulations
in 'eneral6.
1'.2 A&&.(,)$,9 R"=($#"/",)% ;.# GAT
8,.2.8 Registration Re%uirements
RR (o) 1*+,9 03*+1 to 03*+* (amended b1 RR (o) ,#+,% 0# @ 09)
1#&
S-*. :.2,M-8. Registration of @A. .a"payers. --
0a1 In general. R Any person who# in the course of trade or
business# sells# barters# e"changes goods or properties#
or engages in the sale of ser!ices sub(ect to @A.
imposed in Secs. 8?M and 8?8 of the .a" *ode shall
register with the appropriate R3K using the appropriate
2IR forms and pay an annual registration fee in the
amount of 4i!e Jundred Pesos 0P<??1 using 2IR 4orm
)o. ?M?< for e!ery separate or distinct establishment or
place of business 0sa!e a warehouse without sale
transactions1 before the start of such business and e!ery
year thereafter on or before the ,8st day of >anuary.
TSeparate or distinct establishmentU shall mean any
branch or facility where sale transactions occur.
T2ranchU means a fi"ed establishment in a locality which
conducts sales operation of the business as an
e"tension of the principal office.
TPrincipal place of businessU refers to the place where
the head or main office is located as appearing in the
corporationNs Articles of Incorporation. In the case of an
indi!idual# the principal place of business shall be the
place where the head or main office is located and
where the boo&s of accounts are &ept.
TIarehouseU means the place or premises where the
in!entory of goods for sale are &ept and from which such
goods are withdrawn for deli!ery to customers# dealers#
or persons acting in behalf of the business.
Any person who maintains a head or main office and
branches in different places shall register with the R3K
which has (urisdiction o!er the place wherein the main or
head office or branch is located. Jowe!er# the
registration fee shall be paid to any accredited ban& in
the Re!enue 3istrict where the head office or branch is
registered pro!ided that in areas where there are no
accredited ban&s# the same shall be paid to the R3K#
collection agent# or duly authoried treasurer of the
municipality where each place of business or branch is
situated.
-ach @A.-registered person shall be assigned only one
.I). .he branch shall use the :-digit .I) of the Jead
Kffice plus a ,-digit 2ranch *ode.
T@A.-registered personU refers to any person registered
in accordance with this section.
T@A.-registrable personU refers to any person who is
re%uired to register under the pro!isions of this section
but failed to register.
0b1 Bandatory/
Any person who# in the course of trade or business#
sells# barters or e"changes goods or properties or
engages in the sale or e"change of ser!ices shall be
liable to register if/
i. Jis gross sales or receipts for the past twel!e 0821
months# other than those that are e"empt under Sec.
8?: 0810A1 to 0H1 of the .a" *ode# ha!e e"ceeded
Kne million fi!e hundred thousand pesos
0P8#<??#???.??1$ or
ii. .here are reasonable grounds to belie!e that his
gross sales or receipts for the ne"t twel!e 0821
8?: 0810A1 to 0H1 of the .a" *ode# will e"ceed Kne
million fi!e hundred thousand pesos
0P8#<??#???.??1.
-!ery person who becomes liable to be registered under
paragraph 081 of this subsection shall register with the
R3K which has (urisdiction o!er the head office or
branch of that person# and shall pay the annual
registration fee prescribed in subsection :.2,M-80a1
hereof. If he fails to register# he shall be liable to pay the
output ta" under Secs. 8?M andFor 8?8 of the .a" *ode
as if he were a @A.-registered person# but without the
benefit of input ta" credits for the period in which he was
1$0
not properly registered.
Boreo!er# franchise grantees of radio and tele!ision
broadcasting# whose gross annual receipt for the
preceding ta"able year e"ceeded P8?#???#???.?? shall
register within thirty 0,?1 days from the end of the
ta"able year.
0c1 Kptional @A. Registration. R
081 Any person who is @A.-e"empt under Sec. 4.8?:-8
021 081 0@1 not re%uired to register for @A. may# in
relation to Sec. 4.8?:-2# elect to be @A.-registered
by registering with the R3K that has (urisdiction o!er
the head office of that person# and pay the annual
registration fee of P<??.?? for e!ery separate and
distinct establishment.
021 Any person who is @A.-registered but enters into
transactions which are e"empt from @A. 0mi"ed
transactions1 may opt that the @A. apply to his
transactions which would ha!e been e"empt under
Section 8?:081 of the .a" *ode# as amended. OSec.
8?:021P
0,1 4ranchise grantees of radio andFor tele!ision
broadcasting whose annual gross receipts of the
preceding year do not e"ceed ten million pesos
0P8?#???#???.??1 deri!ed from the business co!ered
by the law granting the franchise may opt for @A.
registration. .his option# once e"ercised# shall be
irre!ocable. 0Sec. 88:# .a" *ode1
Any person who elects to register under this subsections
081 and 021 abo!e shall not be allowed to cancel his
registration for the ne"t three 0,1 years.
.he abo!e-stated ta"payers may apply for @A.
registration not later than ten 08?1 days before the
beginning of the ta"able %uarter and shall pay the
registration fee prescribed under sub-paragraph 0a1 of
this Section# unless they ha!e already paid at the
beginning of the year. In any case# the *ommissioner of
Internal Re!enue may# for administrati!e reason deny
any application for registration. Knce registered as @A.
person# the ta"payer shall be liable to output ta" and be
entitled to input ta" credit beginning on the first day of
the month following registration.
S-*. :.2,M-2. Registration of )on-@A. or -"empt .a"payer.
C -!ery person# other than those re%uired to be registered
as @A. persons# engaged in any business# shall# on or
before the commencement of his business# or whene!er he
transfers to another re!enue district# register with the R3K
concerned within 8? days from the commencement of
business or transfer in the manner prescribed under this
Section and shall pay the applicable registration fee of 4i!e
Jundred Pesos 0P<??.??1 for e!ery separate or distinct
establishment or place of business# if he has not paid the
registration fee in the beginning of the ta"able year. .he fee
shall be paid to any AA2# where each place of business or
branch is situated. In areas where there is no AA2# such
person shall pay the fee prescribed herein with the R3K#
R*K# or authoried municipal treasurer. .he registration
shall contain his name or style# place of residence# business#
the place where such business is carried on# and such
information as may be re%uired by the *ommissioner of
Internal Re!enue in the form prescribed therefor.
.he following are re%uired to register as non-@A. persons
and pay the applicable registration fee/
81 @A.-e"empt persons under Sec. 8?: of the .a" *ode
who did not opt to register as @A. ta"payers$
21 Indi!iduals engaged in business where the gross sales
or receipts do not e"ceed Kne Jundred .housand
Pesos P8??#???.?? during any 82-month period. .hey
are re%uired to register but will not be made to pay the
registration fee of 4I@- JH)3R-3 P-SKS 0P<??.??1.
,1 )on-stoc&# non-profit organiations and associations
engaged in trade or business whose gross sales or
receipts do not e"ceed P8#<??#???.?? for any 82-month
period or in an amount as ad(usted thereafter e!ery
1$1
three 0,1 years depending on the annual *onsumer
Price Inde" as published by the )SK$
41 *ooperati!es other than electric cooperati!es. Jowe!er#
they are not re%uired to pay the registration fee imposed
in these Regulations.
<1 Radio and .@ broadcasting whose gross annual receipts
do not e"ceed ten million pesos 0P8?#???#???1 and
which do not opt to be @A. registered$
M1 P-9A and other ecoone registered enterprises en(oying
the preferential ta" rate of <= in lieu of all ta"es$
;1 S2BA and other free port one-registered enterprises
en(oying the preferential ta" rate of <= in lieu of all
ta"es.
S-*. :.2,M-,. Application for Registration. -- .he application
shall be filed with the R3K where the principal place of
business# branch# storage place or premises is located# as
the case may be# before commencement of business or
production or %ualification as a withholding agent. In the
case of storage places# the application shall be filed within
thirty 0,?1 days from the date the aforesaid premises ha!e
been used for storage.
In any case# the *ommissioner of Internal Re!enue may# for
administrati!e and meritorious reasons# deny or re!o&e any
application for registration.
S-*. :.2,M-4. *ertificate of Registration. -- .he certificate
shall be issued to the applicant by the 2IR office concerned
upon compliance with the re%uirements for registration.
S-*. :-2,M-<. Posting of Registration *ertificate. -- -!ery
registered ta"payer shall post or e"hibit his Registration
*ertificate and duly !alidated Registration 4ee Return at a
conspicuous place in his principal place of business and at
each branch in such a way that is clearly and easily !isible to
the public.
S-*. :.2,M-M. *ancellation of @A. Registration. -- A @A.-
Registered person may cancel his registration for @A. if/
a. Je ma&es written application and can demonstrate to
the *ommissioner of Internal Re!enueNs satisfaction that
his gross sales or receipts for the following twel!e 0821
8?: 081 0A1 to 0H1 of the .a" *ode# will not e"ceed Kne
Billion 4i!e Jundred .housand pesos 0P8#<??#???.??1$
or
b. Je has ceased to carry on his trade or business# and
does not e"pect to recommence any trade or business
within the ne"t twel!e 0821 months.
Some other instances where a @A.-registered person
may apply for cancellation of registration are/
8. A change of ownership# in the case of a single
proprietorship$
2. 3issolution of a partnership or corporation$
,. Berger or consolidation with respect to the dissol!ed
corporation0s1$
4. A person who has registered prior to planned
business commencement# but failed to actually start
his business$
Some instances where ta"payer will update his
registration by submitting a duly accomplished
Registration Hpdate 4orm 02IR 4orm )o. 8:?<1/
8. A personNs business has become e"empt in
accordance with Sec. 4.8?:-8021 081 of these
Regulations#
2. A change in the nature of the business itself from
sale of ta"able goods andFor ser!ices to e"empt
sales andFor ser!ices$
,. A person whose transactions are e"empt from @A.
who !oluntarily registered under @A. system# who
after the lapse of three years after his registration#
applies for cancellation of his registration as such$
and
1$2
4. A @A.-registered person whose gross sales or
receipts for three consecuti!e years did not e"ceed
P8#<??#???.?? beginning )o!ember 8# 2??<# which
amount shall be ad(usted to its present !alue e!ery
three years using the *onsumer Price Inde"# as
published by the )SK. Hpon updating his
registration# the ta"payer shall become liable to the
percentage ta" imposed in Sec. 88M of the .a"
*ode. A short period return for the remaining period
that he was @A.-registered shall be filed within
twenty fi!e 02<1 days from the date of cancellation of
his registration.
4or purposes of the percentage ta"# the ta"payer shall
file a monthly return. An initial return shall be filed for the
month following the month of cancellation F update of his
registration.
All applications for cancellation of registration due to
closureFcessation or termination of business shall be
sub(ected to immediate in!estigation by the 2IR office
concerned to determine the ta"payerNs ta" liabilities.
Any minor change in the original registration 0such as
change of address within the same R3K# typographical
errors# and etc.1 which may not necessitate cancellation
of the registration shall be effected by accomplishing the
Registration Hpdate 4orm 02IR 4orm )o. 8:?<1.
Any person# who opted to be registered as a @A.
ta"payer# may apply for cancellation of such registration.
Jowe!er# the optional registration as a @A. ta"payer of
a franchise grantee of radio andFor tele!ision
broadcasting whose gross receipts for the preceding
year did not e"ceed P8?#???#???.?? shall not be
re!ocable.
8,.2.2 Subsidiary >ournals
(IR! 113(!)
)otwithstanding the pro!isions of Section 2,,# all persons
sub(ect to the !alue-added ta" under Sections 8?M and 8?8
shall# in addition to the regular accounting records re%uired#
maintain a subsidiary sales (ournal and subsidiary purchase
(ournal on which the daily sales and purchases are recorded.
.he subsidiary (ournals shall contain such information as
may be re%uired by the Secretary of 4inance.
RR (o) 1*+,9 113+3
)otwithstanding the pro!isions of Sec. 2,,# all persons
sub(ect to @A. under Sec. 8?M and 8?8 of the .a" *ode
shall# in addition to the regular accounting records re%uired#
maintain a subsidiary sales (ournal and subsidiary purchase
(ournal on which e!ery sale or purchase on any gi!en day is
recorded. .he subsidiary (ournal shall contain such
information as may be re%uired by the *ommissioner of
Internal Re!enue.
A subsidiary record in ledger form shall be maintained for the
ac%uisition# purchase or importation of depreciable assets or
capital goods which shall contain# among others# information
on the total input ta" thereon as well as the monthly input ta"
claimed in @A. declaration or return.
8,.2., Returns
(IR! 11#
0A1 In 'eneral. - -!ery person liable to pay the !alue-added
ta" imposed under this .itle shall file a %uarterly return of
the amount of his gross sales or receipts within twenty-
fi!e 02<1 days following the close of each ta"able %uarter
prescribed for each ta"payer/ Pro!ided# howe!er# .hat
@A.-registered persons shall pay the !alue-added ta"
on a monthly basis.
Any person# whose registration has been cancelled in
accordance with Section 2,M# shall file a return and pay
the ta" due thereon within twenty-fi!e 02<1 days from the
date of cancellation of registration/ Pro!ided# .hat only
one consolidated return shall be filed by the ta"payer for
his principal place of business or head office and all
branches.
1$
021 Ihere to 4ile the Return and Pay the .a". - -"cept as
the *ommissioner otherwise permits# the return shall be
filed with and the ta" paid to an authoried agent ban&#
Re!enue *ollection Kfficer or duly authoried city or
municipal .reasurer in the Philippines located within the
re!enue district where the ta"payer is registered or
re%uired to register.
0*1 Iithholding of *reditable @alue-Added .a". - .he
owned or -controlled corporations 0'K**s1 shall# before
ma&ing payment on account of each purchase of goods
from sellers and ser!ices rendered by contractors which
are sub(ect to the !alue-added ta" imposed in Sections
8?M and 8?8 of this *ode# deduct and withhold the
!alue-added ta" due at the rate of three percent 0,=1 of
the gross payment for the purchase of goods and si"
percent 0M=1 on gross receipts for ser!ices rendered by
contractors on e!ery sale or installment payment which
shall be creditable against the !alue-added ta" liability of
the seller or contractor/ Pro!ided# howe!er# .hat in the
case of go!ernment public wor&s contractors# the
withholding rate shall be eight and one-half percent
08.<=1/ Pro!ided# further# .hat the payment for lease or
use of properties or property rights to nonresident
owners shall be sub(ect to ten percent 08?=1 withholding
ta" at the time of payment. 4or this purpose# the payor or
person in control of the payment shall be considered as
the withholding agent.
.he !alue-added ta" withheld under this Section shall be
remitted within ten 08?1 days following the end of the
month the withholding was made.
RR (o) 1*+,9 11#+1 (amended b1 RR (o) ,#+,% 01)A 11#+0 (amended
b1 RR (o) ,#+,% 00)A
0A1 4iling of Return. C -!ery person liable to pay @A. shall
file a %uarterly return of the amount of his %uarterly gross
sales or receipts within twenty fi!e 02<1 days following
the close of ta"able %uarter using the latest !ersion of
7uarterly @A. Return. .he term Tta"able %uarterU shall
mean the %uarter that is synchronied to the income ta"
%uarter of the ta"payer 0i.e.# the calendar %uarter or
fiscal %uarter1.
Amounts reflected in the monthly @A. declarations for
the first two 021 months of the %uarter shall still be
included in the %uarterly @A. return which reflects the
cumulati!e figures for the ta"able %uarter. Payments in
the monthly @A. declarations shall# howe!er# be
credited in the %uarterly @A. return to arri!e at the net
@A. payable or e"cess input ta"Fo!er-payment as of the
end of a %uarter.
-"ample. R Suppose the accounting period adopted by
the ta"payer is fiscal year ending Kctober 2??,# the
ta"payer has to file monthly @A. declarations for the
months of )o!ember 2??2# 3ecember 2??2# and for the
months of 4ebruary# Barch# Bay# >une# August# and
September for Lear 2??,# on or before the 2?th day of
the month following the close of the ta"able month. Jis
%uarterly @A. returns corresponding to the %uarters
ending >anuary# April# >uly# and Kctober 2??, shall# on
the other hand# be filed and ta"es due thereon be paid#
after crediting payments reflected in the Bonthly @A.
declarations# on or before 4ebruary 2<# Bay 2<# August
2<# and )o!ember 2<# 2??,# respecti!ely.
.he monthly @A. 3eclarations 02IR 4orm 2<<?B1 of
ta"payers whether large or non- large shall be filed and
the ta"es paid not later than the 2?th day following the
end of each month.
4or purposes of filing returns under the -lectronic 4iling
and Payment System 0-4PS1 the ta"payers classified
under the following business industries shall be re%uired
to file Bonthly @A. 3eclarations on or before the dates
prescribed as follows/
'roup A
1$!
0Period for filing of Bonthly @A. 3eclarations
2< days following the end of the month1
Insurance and Pension 4unding
Acti!ities Au"iliary to 4inancial Intermediation *onstruction
Iater .ransport
Jotels and Restaurants
Eand .ransport
'roup 2
24 days following the end of the month1
Banufacture W Repair of 4urniture
Banufacture of 2asic Betals
Banufacture of *hemicals and *hemical Products
Banufacture of *o&e# Refined Petroleum W 4uel Products
-lectrical Bachinery W Apparatus ).-.*. 4abricated Betal
Products
Banufacture of 4ood# Products W 2e!erages
Banufacture of Bachinery W -%uipment )-*
Banufacture of Bedical# Precision# Kptical Instruments
Banufacture of Botor @ehicles# .railers W Semi-.railers
Banufacture of Kffice# Accounting W *omputing Bachinery
Banufacture of Kther )on-Betallic Bineral Products
Banufacture of Kther .ransport -%uipment
Banufacture of Kther Iearing Apparel
Banufacture of Paper and Paper Products
Banufacture of Radio# .@ W *ommunication
-%uipmentFApparatus Rubber W Plastic Products
Banufacture of .e"tiles
Banufacture of .obacco Products
Banufacture of Iood W Iood Products Banufacturing
).-.*.
Betallic Kre Bining
)on-Betallic Bining W 7uarrying
'roup *
2, days following the end of the month1
Retail Sale
Iholesale .rade and *ommission .rade Sale#
Baintenance# Repair of Botor @ehicle#
Sale of Automoti!e 4uel
*ollection# Purification And 3istribution of Iater *omputer
and Related Acti!ities
Real -state Acti!ities
'roup 3
Air .ransport
-lectricity# 'as# Steam W Jot Iater Supply
Postal W .elecommunications
Publishing# Printing W Reproduction of Recorded Bedia
Recreational# *ultural W Sporting Acti!ities
Recycling
Renting of 'oods W -%uipment
Supporting W Au"iliary .ransport Acti!ities
'roup -
Acti!ities of Bembership Krganiations Inc.
Jealth and Social Ior&
Public Admin W 3efense *ompulsory Social Security
Research and 3e!elopment
Agricultural# Junting# and 4orestry
4arming of Animals
4ishing
Kther Ser!ice Acti!ities
Biscellaneous 2usiness Acti!ities
Hnclassified
It is reiterated and clarified# howe!er# that the return for
withholding of @A. shall be filed on or before the tenth 08?th1
day of the following month# which is li&ewise the due date for
1$"
the payment of this type of withholding ta".
.o erase any doubt and to ensure receipt by the 2IR before
midnight of the due dates prescribed abo!e for the filing of a
return# the electronic return shall be filed on or before 8?/??
p.m. of the abo!e prescribed due dates.
4or the electronic payment of ta" for the returns re%uired to
be filed earlier under the staggered filing system# the
ta"payer upon e-filing shall# still using the facilities of -4PS#
li&ewise gi!e instruction to the Authoried Agent 2an& 0AA21
to debit its account for the amount of ta" on or before the
due date for payment thereof as prescribed under the
pre!ailingFapplicable lawsFregulations.
4or purposes of these Regulations# the industry of the
ta"payer is its primary line of business or the primary
purpose of its e"istence as stated in the Articles of
Incorporation# for corporate ta"payers.
021 Payment of @A.
I. Ad!ance Payment C .he following are sub(ect to the
ad!ance payment of @A./
8. Sale of Refined Sugar.R
a. Re%uirement to Pay Ad!ance @A. on Sale of
Refined Sugar. C An ad!ance @A. on the sale of
refined sugar shall be paid by the ownerFseller to
the 2IR through an AA2 or to the Re!enue
*ollection Kfficer 0R*K1 or deputied *ity or
Bunicipal .reasurer in places where there are
no AA2s before any refined sugar can be
withdrawn from any sugar refineryFmill.
b. Prohibition of IithdrawalF.ransfer of Kwnership.
C .he proprietor or operator of a sugar
millFrefinery shall not allow any withdrawal of
refined sugar from its premises without the
ad!ance payment of @A. and submission of
proof of such payment# e"cept when the refined
sugar is owned and withdrawn by the
cooperati!e# in which case the e!idence of
ownership# Authoriation Allowing the Release
and Sworn Statements pro!ided in these
Regulations must be presented.
.he Regional 3irector# upon the
recommendation of the R3K of the district
ha!ing (urisdiction o!er the physical location of
the sugar millFrefinery# may direct an internal
re!enue officer to be present during the
withdrawal of refined sugar from the premises of
the sugar millFrefinery in order to confirm andFor
!erify that the re%uirements of this Section are
complied with.
c. 2asis for 3etermining the Amount of Ad!ance
@A. Payment. C
i. 2ase Price. - .he amount of ad!ance @A.
payment shall be determined by applying
@A. rate of 8?= on the applicable base
price of P8<?.?? per <? &g. bag for refined
sugar produced by a sugar refinery# and P
;M?.?? per <? &g. bag for refined sugar
produced by a sugar mill.
ii. Subse%uent 2ase Price Ad(ustments. C .he
base price upon which the ad!ance payment
of @A. will be computed under the
preceding paragraph shall be ad(usted when
deemed necessary by the *ommissioner of
Internal Re!enue# upon consultation with the
*hairman of the Sugar Regulatory
Administration.
d. Proof of Ad!ance Payment. C .he R3K
concerned or the duly constituted unit in its
place such as the Regional .as& 4orce on
Sugar# as the Regional 3irector may decide#
shall issue a *ertificate of Ad!ance Payment of
@A.. .his certificate shall ser!e as the authority
of the sugar millFrefinery to release the refined
sugar described therein# and together with the
1$#
payment form 02IR 4orm )o. ?M?< or its
e%ui!alent1 and the 2IR-prescribed deposit slip
duly !alidated by the AA2# or the Re!enue
Kfficial Receipt 0RKR1 issued by the R*K or the
duly authoried *ity or Bunicipal .reasurer# as
the case may be# shall ser!e as proof of the
payment for the ad!ance @A. which can be
credited against @A. liabilityFpayable in @A.
returnFs to be filed.
e. Proof of e"emption from the ad!ance payment.
C If a duly-registered agricultural cooperati!e
claims ownership of refined sugar stoc&ed in the
sugar millFrefinery# the latter shall not release the
said refined sugar unless an Authoriation
Allowing the Release of Refined Sugar is first
secured from the R3K or any duly constituted
unit in its place such as the Regional .as& 4orce
on Sugar created by the Regional 3irector as
the latter may decide# of the 2IR office ha!ing
(urisdiction o!er the physical location of the
sugar millFrefinery. In securing such
authoriation# the cooperati!e shall# in addition
to that of satisfying @A.-e"emption
re%uirements under RR )o. 2?-2??8# submit to
the R3K or Regional .as& 4orce concerned a
Sworn Statement to the effect that-
081 .he sugar has not been bid# sold or
otherwise transferred in ownership# at
anytime prior to the remo!al from the
refinery# to a trader or another entity$ and
021 .he refined sugar is the property of the
cooperati!e at the time of remo!al and it will
not charge ad!ance @A. or any other ta" to
the future buyer.
If the cooperati!e in!o&es ownership o!er the
sugar cane and the milledFrefined sugar# the
sugar %uedans must be in the name of the
cooperati!e.
In the e!ent the refined sugar is owned
andFor withdrawn from the millFrefinery by a
duly accredited and registered agricultural
cooperati!e of good standing and said
cooperati!e presents the TAuthoriation
Allowing the Release of Refined SugarU# the
millFrefinery shall release the same but only
after notifying the R3K or the assigned duty
officer with (urisdiction o!er the mill of the
time and date of the release from the mill
and the names and plate numbers of the
carrying truc&s so that the release can be
gi!en proper super!ision and that ad!ance
@A. is collected from the
transfereeFbuyerFcustomer should e!idence
show that the refined sugar has already
been sold by the cooperati!e.
f. Information Returns to be 4iled by the Proprietor
or Kperator of a Sugar Refinery and
*ooperati!es.
-!ery proprietor or operator of a sugar refinery
or mill with production line accredited by the 2IR
to be capable of producing sugar with a
polarimeter reading of ::.<o or abo!e# or mill
producing sugar with polarimeter reading of
::.<o or abo!e shall render an Information
Return to the R3K ha!ing (urisdiction o!er the
physical location of the said sugar refineryFmill
which issues the *ertificate of Ad!ance
Payment of @A. or Authoriation Allowing the
Release of Refined Sugar not later than the 8?th
day following the end of the month. .he
aforesaid Information Return shall reflect the
following information/
i. )ame# .I) and R3K number of the Kwner
of the Refined Sugar$
ii. )umber of bags of refined sugar released$
iii. Amount of Ad!ance @A. Paid.
1$$
Ei&ewise# e!ery cooperati!e shall submit to R3K
where it is registered a Eist of 2uyers of Sugar
together with a copy of the *ertificate of Ad!ance
Payment of @A.# made by each of the respecti!e
buyer appearing in the list# not later than the 8?th
day following the end of the month with the following
information/
i. )ame# address# .I) and R3K )o. of the 2uyer$
ii. )umber of bags of refined sugar soldFEG'$
iii. Amount of sales.
i!. Amount of Ad!ance @A. paid by the buyer.
2. Sale of 4lour. --
Re%uirement to Pay in Ad!ance @A. on Sale of 4lour
and .ime of Payment of Ad!ance @A.. C
i. release from the 2ureau of *ustomNs custody of the
wheat# which is imported and declared for flour milling.
@A. on the sale of flour milled from imported wheat shall
be paid prior to the
ii. Purchases by flour millers of imported wheat from
traders shall also be sub(ected to ad!ance @A. and shall
be paid by the flour miller prior to deli!ery.
b. Prohibition of Iithdrawal of Shipment 2efore Payment
of Ad!ance @A..-
Iithdrawal# either partial or full of imported wheat to be
used in the milling of flour from customNs custody shall
not be allowed prior to payment of the Ad!ance @A. and
submission of documentary proof of payment such as
the Authority to Release Imported 'oods 0A.RI'1
issued by the 2IR and the 2IR Payment 4orm )o. ?M?<
together with the deposit slip issued by the AA2 or the
RKR issued by the R*K in the absence of an AA2.
Importation of wheat by any trader shall still be e"empt
from the payment of @A.. Jowe!er# in order to monitor
all importation of wheat regardless of its intended use#
the importer# whether miller or trader# shall be re%uired
to secure A.RI' from the 2IR.
.he 2K* will re%uire the submission of the A.RI' by
the importer before releasing the imported wheat from its
custody. 4or this purpose# importation of wheat shall be
treated as an e"ception to the list of imported articles
e"empted from the issuance of A.RI' as contained in
the 2IR-2K* >oint Bemorandum *ircular )o. 8-2??2
dated September 8M# 2??2.
c. Securing the A.RI' and the Payment 4orm of the
Ad!ance @A.. C
.o afford e"pediency and to minimie delay in the
processing of A.RI'# the flour miller shall compute the
Ad!ance @A. payable and fill up the Payment 4orm
Krder 02IR 4orm )o. ?M?<1. .he flour miller shall pay the
amount indicated in the Payment Krder to the AA2 of
the E.SFEarge .a"payers 3istrict Kffice 0E.3K1FR3K
where the flour miller is registered. In the absence of an
AA2 in the R3K where the flour miller is registered# the
payment shall be made to the R*K of said district.
Hpon payment# the flour miller will then present a copy of
the duly !alidated payment form to the R3K ha!ing
(urisdiction o!er the port of entry. Hpon receipt of the
properly !alidated and stamped Payment Krder# the
R3K ha!ing (urisdiction o!er the port of entry shall issue
the A.RI' co!ering the importation of wheat by the flour
miller in accordance with Re!enue Bemorandum Krder
)o. ,<-2??2# which prescribes the guidelines for the
issuance of A.RI' for -"cise and @A. purposes.
4or purchases of wheat from traders# the flour miller
shall be re%uired to present proof of payment of ad!ance
@A. to the trader prior to deli!ery or withdrawal of wheat
from the latterNs premises.
d. 2asis for 3etermining the Amount of Ad!ance @A.
Payment. C
i. 3etermination of ad!ance @A.. C .he amount of
1$%
ad!ance @A. payment shall be determined by
applying @A. rate of 8?= on the ta" base.
ii. .a" 2ase C *onsidering that in the course of the
milling process# not all wheat is turned into flour# the
ta" base shall be as follows/
4or wheat imported by the flour millers C ;<= of the
sum of/ 0a1 the in!oice !alue multiplied by the
currency e"change rate on the date of payment$ 0b1
estimated customs duties and other charges prior to
the release of the imported wheat from customs
custody# e"cept for the ad!ance @A.$ and 0c1 4i!e
percent 0<=1 on the sum of 0a1 and 0b1.
iii. Subse%uent ta" base ad(ustments C .he ta" base
shall be ad(usted whene!er deemed necessary by
the *ommissioner of Internal Re!enue# after proper
prior consultations with the flour milling industry
associations and upon appro!al by the Secretary of
4inance.
e. *redit for Ad!ance @A. Payments C .he amount of
ad!ance @A. payments made by the flour miller shall be
allowed as ta" credit against @A. liabilityFpayable of the
flour miller. .he Payment Krder# together with the
deposit slip issued by the AA2 or the RKR issued by the
R*K# shall ser!e as proof for the credit of such ad!ance
payment.
f. Reporting Re%uirements C All importers of wheat
regardless of use# whether miller or trader# shall submit
%uarterly summary list of sales# purchases and
importations.
0*1 Short Period Return
Any person who retires from business with due notice to
the 2IR office where the ta"payer 0head office1 is
registered or whose @A. registration has been cancelled
shall file a final %uarterly return and pay the ta" due
thereon within twenty fi!e 02<1 days from the end of the
month when the business ceases to operate or when
@A. registration has been officially cancelled$ Pro!ided#
howe!er# that subse%uent monthly declarationsF%uarterly
returns are still re%uired to be filed if the results of the
winding up of the affairsFbusiness of the ta"payer re!eal
ta"able transactions. All persons first registered under
Secs. :.2,M-8 of these Regulations shall be liable to
@A. on the effecti!e date of registration stated in their
*ertificates of Registration$ i.e.# the first day of the month
following their registration. If the effecti!e date of
registration falls on the first or second month of the
ta"able %uarter# initial monthly @A. declaration shall be
filed within twenty 02?1 days after the end of the month#
and the initial %uarterly return shall be filed on or before
the 2<th day after the end of the ta"able %uarter. Kn the
other hand# if the effecti!e date of registration falls on the
third month of the ta"able %uarter the %uarterly returns
shall be filed on or before the 2<th day of the month
following the end of the ta"able %uarter# and no monthly
@A. declaration need be filed for the initial %uarter.
031 Ihere to 4ile and Pay
.he monthly @A. declaration and %uarterly return shall
be filed with# and @A. due thereon paid to# an AA2
under the (urisdiction of the Re!enue 3istrictF2IR Kffice
where the ta"payer 0head office of the business
establishment1 is re%uired to be registered.
In cases where there are no duly accredited agent ban&s
within the municipality or city# the monthly @A.
declaration and %uarterly @A. return# shall be filed with
and any amount due shall be paid to the R3K#
*ollection Agent or duly authoried .reasurer of the
BunicipalityF*ity where such ta"payer 0head office of the
business establishment1 is re%uired to be registered.
.he %uarterly @A. return and the monthly @A.
declaration# where no payment is in!ol!ed# shall be filed
with the R3KFE.3KFEarge .a"payers Assistance
3i!ision 0E.A31# *ollection Agent# duly authoried
BunicipalF*ity .reasurer of BunicipalityF*ity where the
ta"payer 0head office of the business establishment1 is
1$&
registered or re%uired to be registered.U
.a"payers filing !ia -4PS shall comply with the
pro!isions of the -4PS Regulations.
Knly one consolidated %uarterly @A. return or monthly
@A. declaration co!ering the results of operation of the
head office as well as the branches for all lines of
business sub(ect to @A. shall be filed by the ta"payer#
for e!ery return period# with the 2IR office where said
ta"payer is re%uired to be registered.
1'.' C.#4.#a)" R")(#,%
(IR! 90, %9, %*, %%
S-*. <2. *orporation Returns. -
0A1 Re%uirements. - -!ery corporation sub(ect to the ta"
herein imposed# e"cept foreign corporations not
engaged in trade or business in the Philippines# shall
render# in duplicate# a true and accurate %uarterly
income ta" return and final or ad(ustment return in
accordance with the pro!isions of *hapter AII of this
.itle. .he return shall be filed by the president# !ice-
president or other principal officer# and shall be sworn to
by such officer and by the treasurer or assistant
treasurer.
021 .a"able Lear of *orporation. - A corporation may
employ either calendar year or fiscal year as a basis for
filing its annual income ta" return/ Pro!ided# .hat the
corporation shall not change the accounting period
employed without prior appro!al from the *ommissioner
in accordance with the pro!isions of Section 4; of this
*ode.
0*1 Return of *orporation *ontemplating 3issolution or
Reorganiation. - -!ery corporation shall# within thirty
0,?1 days after the adoption by the corporation of a
resolution or plan for its dissolution# or for the li%uidation
of the whole or any part of its capital stoc&# including a
corporation which has been notified of possible
in!oluntary dissolution by the Securities and -"change
*ommission# or for its reorganiation# render a correct
return to the *ommissioner# !erified under oath# setting
forth the terms of such resolution or plan and such other
information as the Secretary of 4inance# upon
recommendation of the commissioner# shall# by rules
and regulations# prescribe.
.he dissol!ing or reorganiing corporation shall# prior to
the issuance by the Securities and -"change
*ommission of the *ertificate of 3issolution or
Reorganiation# as may be defined by rules and
regulations prescribed by the Secretary of 4inance# upon
recommendation of the *ommissioner# secure a
certificate of ta" clearance from the 2ureau of Internal
Re!enue which certificate shall be submitted to the
Securities and -"change *ommission.
031 Return on *apital 'ains Realied from Sale of Shares of
Stoc& not .raded in the Eocal Stoc& -"change. - -!ery
corporation deri!ing capital gains from the sale or
e"change of shares of stoc& not traded thru a local stoc&
e"change as prescribed under Sections 24 0c1# 2< 0A10,1#
2; 0-1021# 280A10810c1 and 28 0210<10c1# shall file a return
within thirty 0,?1 days after each transactions and a final
consolidated return of all transactions during the ta"able
year on or before the fifteenth 08<th1 day of the fourth
04th1 month following the close of the ta"able year.
S-*. ;<. 3eclaration of 7uarterly *orporate Income .a". -
-!ery corporation shall file in duplicate a %uarterly summary
declaration of its gross income and deductions on a
cumulati!e basis for the preceding %uarter or %uarters upon
which the income ta"# as pro!ided in .itle II of this *ode#
shall be le!ied# collected and paid. .he ta" so computed
shall be decreased by the amount of ta" pre!iously paid or
assessed during the preceding %uarters and shall be paid
not later than si"ty 0M?1 days from the close of each of the
first three 0,1 %uarters of the ta"able year# whether calendar
or fiscal year.
1%0
S-*. ;M. 4inal Ad(ustment Return. - -!ery corporation liable
to ta" under Section 2; shall file a final ad(ustment return
co!ering the total ta"able income for the preceding calendar
or fiscal year. If the sum of the %uarterly ta" payments made
during the said ta"able year is not e%ual to the total ta" due
on the entire ta"able income of that year# the corporation
shall either/
0A1 Pay the balance of ta" still due$ or
021 *arry-o!er the e"cess credit$ or
0*1 2e credited or refunded with the e"cess amount paid# as
the case may be.
In case the corporation is entitled to a ta" credit or refund of
the e"cess estimated %uarterly income ta"es paid# the
e"cess amount shown on its final ad(ustment return may be
carried o!er and credited against the estimated %uarterly
income ta" liabilities for the ta"able %uarters of the
succeeding ta"able years. Knce the option to carry-o!er and
apply the e"cess %uarterly income ta" against income ta"
due for the ta"able %uarters of the succeeding ta"able years
has been made# such option shall be considered irre!ocable
for that ta"able period and no application for cash refund or
issuance of a ta" credit certificate shall be allowed therefor.
S-*. ;;. Place and .ime of 4iling and Payment of 7uarterly
*orporate Income .a". -
0A1 Place of 4iling. - -"cept as the *ommissioner other wise
permits# the %uarterly income ta" declaration re%uired in
Section ;< and the final ad(ustment return re%uired in
Section ;M shall be filed with the authoried agent ban&s
or Re!enue 3istrict Kfficer or *ollection Agent or duly
authoried .reasurer of the city or municipality ha!ing
(urisdiction o!er the location of the principal office of the
corporation filing the return or place where its main
boo&s of accounts and other data from which the return
is prepared are &ept.
021 .ime of 4iling the Income .a" Return. - .he corporate
%uarterly declaration shall be filed within si"ty 0M?1 days
following the close of each of the first three 0,1 %uarters
of the ta"able year. .he final ad(ustment return shall be
filed on or before the fifteenth 08<th1 day of April# or on or
before the fifteenth 08<th1 day of the fourth 04th1 month
following the close of the fiscal year# as the case may
be.
0*1 .ime of Payment of the Income .a". - .he income ta"
due on the corporate %uarterly returns and the final
ad(ustment income ta" returns computed in accordance
with Sections ;< and ;M shall be paid at the time the
declaration or return is filed in a manner prescribed by
the *ommissioner.
!IR v 6irant (/'ils) "perations
1'.* Ex4a,+"+ 7$)88.!+$,9 Tax
(IR! 9%(A) @ (-)
0A1 Iithholding of 4inal .a" on *ertain Incomes. - Sub(ect
to rules and regulations the Secretary of 4inance may
promulgate# upon the recommendation of the
*ommissioner# re%uiring the filing of income ta" return
by certain income payees# the ta" imposed or prescribed
by Sections 24021081# 24021021# 240*1# 24031081$ 2<0A1021#
2<0A10,1# 2<021# 2<0*1# 2<031# 2<0-1# 2;0310^1# 2;031021#
2;0310,1# 2;0310<1# 28 0A1041# 280A10<1# 280A10;10a1# 280A1
0;10b1# 280A10;10c1# 28021081# 28021021# 280210,1# 28021041#
280210<10a1# 280210<10b1# 280210<10c1$ ,,$ and 282 of this
*ode on specified items of income shall be withheld by
payor-corporation andFor person and paid in the same
manner and sub(ect to the same conditions as pro!ided
in Section <8 of this *ode.
021 Iithholding of *reditable .a" at Source. - .he Secretary
of 4inance may# upon the recommendation of the
*ommissioner# re%uire the withholding of a ta" on the
items of income payable to natural or (uridical persons#
residing in the Philippines# by payor-corporationFpersons
as pro!ided for by law# at the rate of not less than one
1%1
percent 08=1 but not more than thirty-two percent 0,2=1
thereof# which shall be credited against the income ta"
liability of the ta"payer for the ta"able year.
RR (o) 0+9$ 0)9%)0A 0)9%)# (amended b1 RR (o) 3,+,3, RR (o) 10+,1,
RR (o) ,3+,#, RR (o) ,*+,9)
-IR Ruling (o) 11,+0,11 (6asinloc /oCer /artners)
4acts/
A *o. and 2 *o. are domestic limited partnerships. 2 *o. is
a Earge .a"payer. A *o. e"tended a loan to 2 *o. with
interest at 8= per annum. A *o.Ns only transaction with 2
*o. is the e"tension of the loan.
Issues/
8. Are the interest payments to be made by 2 *o. to A *o.
sub(ect to the 2= *I. on income payments by .op
8?#???\ pri!ate corporations to localFresident suppliers of
goods or ser!icesQ
2. Are the interest payments sub(ect to the 2= *I. on
interest payments made to ban&s# %uasi-ban&s# financial
institutions or lending in!estorsQ
Ruling/
8. )o. .he interest payments are not sub(ect to the 2=
*I. by .op 8?#??? pri!ate corporations. Section 2.<;.2
of RR )o. 2-:8# as amended# pro!ides that income
payments made by .op 8?#??? pri!ate corporations#
including corporate ta"payers who ha!e been classified
as Earge .a"payers# to their localFresident suppliers of
goods or ser!ices are sub(ect to the 8= *I. for
suppliers of goods and 2= *I. for suppliers of
ser!ices. .he same section defines a TlocalFresident
supplierU as a supplier from whom any of the .op 8?#???
pri!ate corporations regularly purchases goods. .he
term Tregular suppliers#U on the other hand# refers to
suppliers with whom the ta"payer-buyer has transacted
at least si" transactions# regardless of the amount per
transaction# either in the pre!ious or the current year.
Since A *o.Ns only transaction with 2 *o. is the
e"tension of the loan# A *o. cannot be considered a
regular supplier of goods or ser!ices to 2 *o. .hus# the
interest payments to be made by 2 *o. to A *o. are not
sub(ect to the 2= *I..
2. )o. .he interest payments are not sub(ect to the 2=
*I. on payments to ban&s# %uasi-ban&s and so on. It is
e!ident from the business purpose of A. *o.# as stated in
its Articles of Partnership# that A *o. is not a ban&#
%uasi-ban&# financial institution or lending in!estor.
Jence# the interest payments made to it by 2 *o. are not
sub(ect to the 2= *I. under RB* )o. ;2-?4# which
applies only to payments to ban&s# %uasi-ban&s#
financial institutions and lending in!estors.
1'.0 I,C",).#$"%
(IR! #1
In!entories. - Ihene!er in the (udgment of the
*ommissioner# the use of in!entories is necessary in order
to determine clearly the income of any ta"payer# in!entories
shall be ta&en by such ta"payer upon such basis as the
*ommissioner# may# by rules and regulations# prescribe as
conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly
reflecting the income.
If a ta"payer# after ha!ing complied with the terms and a
conditions prescribed by the *ommissioner# uses a
particular method of !aluing its in!entory for any ta"able
year# then such method shall be used in all subse%uent
ta"able years unless/
0i1 with the appro!al of the *ommissioner# a change to a
different method is authoried$ or
1%2
0ii1 the *ommissioner finds that the nature of the stoc& on
hand 0e.g.# its scarcity# li%uidity# mar&etability and price
mo!ements1 is such that in!entory gains should be
considered realied for ta" purposes and# therefore# it is
necessary to modify the !aluation method for purposes
of ascertaining the income# profit# or loss in a more
realistic manner/ Pro!ided# howe!er# .hat the
*ommissioner shall not e"ercise his authority to re%uire
a change in in!entory method more often than once
e!ery three 0,1 years/ Pro!ided# further# .hat any change
in an in!entory !aluation method must be sub(ect to
appro!al by the Secretary of 4inance.
-IR Ruling 8A+191+,% (/&& /'ilippines &rading)
.his refers to your letter dated Barch 22# 2??; re%uesting on
behalf of your client# P.. PJIEIPPI)-S .RA3I)'
*KRPKRA.IK) 0hereinafter referred to as 5P..P.*51 for
an authority to change its accounting method on in!entory
costing from first-in-first-out method to weighted a!erage
method.
Since it started business operations# P..P.* has been
using the first-in-first-out 04I4K1 method in the costing of its
in!entories. .hereafter# P..P.* changed its method for
determination of the cost of in!entories from 4IPK method to
weighted a!erage method to fully comply with the
Accounting Policies of P.. Public *ompany Eimited
05P..P*E51. Such change also coincided with the change in
the *omputeried Accounting System Program of the
company from Sun System to Bicrosoft 2usiness Solutions-
Solomon# which is integrated with A!erage In!entory
!aluation method.
In reply# please be informed that on the basis of the abo!e
representations# P..P.* is hereby granted permission to
change its accounting method from first-in-first-out 04I4K1
method to weighted a!erage method pursuant to the
pro!isions of Section 48 of the .a" *ode of 8::;# as
amended# in relation to Section 84< of Re!enue Regulations
)o. 2.
*onsidering that the purpose of P..P.* change of its
accounting method is for the company to fully comply with
the Accounting Policies of its parent company# P.. Public
*ompany Eimited 05P..P*E51 and li&ewise to coincide with
the change in the *omputeried Accounting System
Program# this Kffice hereby grants P..P.* authority to use
the weighted a!erage method in its in!entory costing.
1'.3 I,C.$&$,9 R"=($#"/",)% ;.# GAT #"9$%)"#"+ 4"#%.,%: E;;"&)
.; Fa$!(#" .; )8" BIR A()8.#$)- ). P#$,) R"&"$4)
1'.2 R")(#, a,+ Pa-/",) .; Ga!(" A++"+ Tax
(IR! 11#(A) @ (!), 119
0A1 In 'eneral. - -!ery person liable to pay the !alue-added
ta" imposed under this .itle shall file a %uarterly return of
the amount of his gross sales or receipts within twenty-
fi!e 02<1 days following the close of each ta"able %uarter
prescribed for each ta"payer/ Pro!ided# howe!er# .hat
@A.-registered persons shall pay the !alue-added ta"
on a monthly basis.
Any person# whose registration has been cancelled in
accordance with Section 2,M# shall file a return and pay
the ta" due thereon within twenty-fi!e 02<1 days from the
date of cancellation of registration/ Pro!ided# .hat only
one consolidated return shall be filed by the ta"payer for
his principal place of business or head office and all
branches.
0*1 Iithholding of *reditable @alue-Added .a". - .he
owned or -controlled corporations 0'K**s1 shall# before
ma&ing payment on account of each purchase of goods
from sellers and ser!ices rendered by contractors which
are sub(ect to the !alue-added ta" imposed in Sections
8?M and 8?8 of this *ode# deduct and withhold the
!alue-added ta" due at the rate of three percent 0,=1 of
the gross payment for the purchase of goods and si"
percent 0M=1 on gross receipts for ser!ices rendered by
1%
contractors on e!ery sale or installment payment which
shall be creditable against the !alue-added ta" liability of
the seller or contractor/ Pro!ided# howe!er# .hat in the
case of go!ernment public wor&s contractors# the
withholding rate shall be eight and one-half percent
08.<=1/ Pro!ided# further# .hat the payment for lease or
use of properties or property rights to nonresident
owners shall be sub(ect to ten percent 08?=1 withholding
ta" at the time of payment. 4or this purpose# the payor or
person in control of the payment shall be considered as
the withholding agent.
.he !alue-added ta" withheld under this Section shall be
remitted within ten 08?1 days following the end of the month
the withholding was made.
Power of the *ommissioner to Suspend the 2usiness
Kperations of a .a"payer. - .he *ommissioner or his
authoried representati!e is hereby empowered to suspend
the business operations and temporarily close the business
establishment of any person for any of the following
!iolations/
0a1 In the case of a @A.-registered Person. -
081 4ailure to issue receipts or in!oices$
021 4ailure to file a !alue-added ta" return as re%uired
under Section 884$ or
0,1 Hnderstatement of ta"able sales or receipts by thirty
percent 0,?=1 or more of his correct ta"able sales or
receipts for the ta"able %uarter.

0b1 4ailure of any Person to Register as Re%uired under
Section 2,M. -
.he temporary closure of the establishment shall be for
the duration of not less than fi!e 0<1 days and shall be
lifted only upon compliance with whate!er re%uirements
prescribed by the *ommissioner in the closure order.
RR (o) 0+9$ #)11# 1
st
7 (amended b1 RR (o) *+,1)
S-*.IK) 4.884. Iithholding of *reditable @alue-Added
.a"
In general# !alue-added ta" due on sales of goods and
ser!ices are not sub(ect to withholding since the ta" is not
determinable at the time of sale. Jowe!er# sale of goods and
ser!ices to the go!ernment sub(ect to @A. shall be sub(ect
to withholding pursuant to Sec. 884 0*1 of RA 8424.
1'.6 P.<"# .; C.//$%%$.,"# ). S(%4",+ .# T"/4.#a#$!- C!.%"
B(%$,"%% O4"#a)$.,% .; )8" Tax4a-"# ;.# Fa$!(#" ). I%%("
R"&"$4)
(IR! 119
Power of the *ommissioner to Suspend the 2usiness
Kperations of a .a"payer. - .he *ommissioner or his
authoried representati!e is hereby empowered to suspend
the business operations and temporarily close the business
establishment of any person for any of the following
!iolations/
0a1 In the case of a @A.-registered Person. -
081 4ailure to issue receipts or in!oices$
021 4ailure to file a !alue-added ta" return as re%uired
under Section 884$ or
0,1 Hnderstatement of ta"able sales or receipts by thirty
percent 0,?=1 or more of his correct ta"able sales or
receipts for the ta"able %uarter.

0b1 4ailure of any Person to Register as Re%uired under
Section 2,M. -
.he temporary closure of the establishment shall be for
the duration of not less than fi!e 0<1 days and shall be
lifted only upon compliance with whate!er re%uirements
prescribed by the *ommissioner in the closure order.
RR (o) 1*+,9 #)119+1
Administrati!e and Penal Pro!isions. --
0a1 Suspension of business operations. C In addition to other
administrati!e and penal sanctions pro!ided for in the
1%!
.a" *ode and implementing regulations# the
*ommissioner of Internal Re!enue or his duly authoried
representati!e may order suspension or closure of a
business establishment for a period of not less than fi!e
0<1 days for any of the following !iolations/
081 4ailure to issue receipts and in!oices.
021 4ailure to file @A. return as re%uired under the
pro!isions of Sec. 884 of the .a" *ode.
0,1 Hnderstatement of ta"able sales or receipts by ,?=
or more of his correct ta"able sales or receipt for the
ta"able %uarter.
041 4ailure of any person to register as re%uired under
the pro!isions of Sec. 2,M of the .a" *ode.
0b1 Surcharge# interest and other penalties. C .he interest
on unpaid amount of ta"# ci!il penalties and criminal
penalties imposed in .itle AI of the .a" *ode shall also
apply to !iolations of the pro!isions of .itle I@ of the .a"
*ode.
1'.5 O, R.-a!)$"%B S"#C$&"% & L"a%" .; P#.4"#)$"% (NIRC 1:6)
properties.

.he phrase 5sale or e"change of ser!ices5 means the
performance of all &inds or ser!ices in the Philippines for
others for a fee# remuneration or consideration# including
those performed or rendered by construction and ser!ice
contractors$ stoc&# real estate# commercial# customs and
immigration bro&ers$ lessors of property# whether
personal or real$ warehousing ser!ices$ lessors or
distributors of cinematographic films$ persons engaged
in milling processing# manufacturing or repac&ing goods
for others$ proprietors# operators or &eepers of hotels#
motels# resthouses# pension houses# inns# resorts$
proprietors or operators of restaurants# refreshment
and caterers$ dealers in securities$ lending in!estors$
transportation contractors on their transport of goods or
cargoes for hire another domestic common carriers by
land# air and water relati!e to their transport of goods or
cargoes$ ser!ices of franchise grantees of telephone and
telegraph# radio and tele!ision broadcasting and all other
franchise grantees e"cept those under Section 88: of
this *ode$ ser!ices of ban&s# non-ban& financial
intermediaries and finance companies$ and non-life
insurance companies 0e"cept their crop insurances1#
including surety# fidelity# indemnity and bonding
companies$ and similar ser!ices regardless of whether
or not the performance thereof calls for the e"ercise or
use of the physical or mental faculties. .he phrase 6sale
or e"change of ser!ices6 shall li&ewise include/
081 .he lease or the use of or the right or pri!ilege to
use any copyright# patent# design or model# plan
secret formula or process# goodwill# trademar&# trade
brand or other li&e property or right$
021 .he lease of the use of# or the right to use of any
industrial# commercial or scientific e%uipment$
0,1 .he supply of scientific# technical# industrial or
041 .he supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of
enabling the application or en(oyment of any such
property# or right as is mentioned in subparagraph
021 or any such &nowledge or information as is
mentioned in subparagraph 0,1$
0<1 .he supply of ser!ices by a nonresident person or
his employee in connection with the use of property
or rights belonging to# or the installation or operation
of any brand# machinery or other apparatus
purchased from such nonresident person.
0M1 .he supply of technical ad!ice# assistance or
ser!ices rendered in connection with technical
1%"
pro(ect or scheme$
0;1 .he lease of motion picture films# films# tapes and
discs$ and
081 .he lease or the use of or the right to use radio#
tele!ision# satellite transmission and cable tele!ision
time.
Eease of properties shall be sub(ect to the ta" herein
imposed irrespecti!e of the place where the contract of
lease or licensing agreement was e"ecuted if the
property is leased or used in the Philippines.
.he term 5gross receipts5 means the total amount of
money or its e%ui!alent representing the contract price#
compensation# ser!ice fee# rental or royalty# including
the amount charged for materials supplied with the
ser!ices and deposits and ad!anced payments actually
or constructi!ely recei!ed during the ta"able %uarter for
the ser!ices performed or to be performed for another
person# e"cluding !alue-added ta".

021 .ransactions Sub(ect to 9ero Percent 0?=1 Rate. - .he
rate.
081 Processing# manufacturing or repac&ing goods for
other persons doing business outside the Philippines
which goods are subse%uently e"ported# where the
ser!ices are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
021 Ser!ices other than those mentioned in the
preceding paragraph# the consideration for which is
paid for in acceptable foreign currency and
effecti!ely sub(ects the supply of such ser!ices to
ero percent 0?=1 rate$
041 Ser!ices rendered to !essels engaged e"clusi!ely in
international shipping$ and
0<1 Ser!ices performed by subcontractors andFor
contractors in processing# con!erting# of
manufacturing goods for an enterprise whose e"port
sales e"ceed se!enty percent 0;?=1 of total annual
production.
0*1 3etermination of the .a". - .he ta" shall be computed by
multiplying the total amount indicated in the official
receipt by one-ele!enth 08F881.
T#"a)/",) .; R.-a!)$"% $, 9","#a! ;.# ,.,1#"%$+",) &.#4.#a)$.,%
I&A8 Ruling (o) %$+,# (!&S Australia)
.his refers to your application for relief from double ta"ation
dated Bay 88# 2??4# on behalf of your client *omputershare
.echnology Ser!ices Pty Etd. 0*.S Australia1 re%uesting
confirmation that the royalty payments made by
*omputershare .echnology Ser!ices 0Philippines1 Inc. 0*.S
Philippines1 to *omputershare Australia# is sub(ect only to a
2<= preferential ta" rate# pursuant to the Philippines-
Australia ta" treaty.
It is represented that *.S Australia# is nonresident foreign
corporation organied and e"isting under the laws of
Australia with principal office at 88-M2 .renerry *rescent#
Abbotsford# @ictoria# ,?M;# Australia$ that it is not registered
either as a corporation or as a partnership engaged in trade
or business in the Philippines per certification issued by the
Securities and -"change *ommission dated 4ebruary 4#
2??4$ that *.S Philippines is a corporation duly organied
and e"isting under the laws of the Philippines with principal
1%#
office address at Hnit 8;-M2 *ititower# 8;48 Paseo de
Ro"as# Ba&ati *ity# Philippines$ that *.S Australia owns a
software &nown as 5*omputershare A-Stream5 0Software1
and all its updates$ that on Kctober 2?# 2??,# *.S Australia
and *.S Philippines entered into an agreement wherein
*.S Australia agreed to grant *.S Philippines a non-
e"clusi!e license to mar&et the Software in the Philippines
and to license any person to use the Software in the
Philippines$ and that *.S Philippines agreed to pay *.S
Australia the amount of ;?= of the re!enue# net of ta"#
recei!ed by *.S Philippines from the licensed users of the
Software$
2ased on the abo!e# royalties arising in the Philippines and
paid to a resident of Australia may be sub(ect to Philippine
income ta" at a rate not to e"ceed 8< per cent of the gross
amount of the royalties where such are paid by an enterprise
registered with the Philippine 2oard of In!estments and
engaged in preferred areas of acti!ities# or 2< per cent of the
gross amount of the royalties in all other cases# where the
recipient is the beneficial owner of the royalties.
.he license fees to be paid by *.S Philippines to *.S
Australia are considered 5payments of any &ind recei!ed as
a consideration for the use of# or the right to use information
concerning industrial# commercial or scientific e"perience5
and as such are royalties within the meaning of the
afore%uoted Article. Since *.S Philippines is not an
enterprise registered with the Philippine 2oard of
In!estments and engaged in preferred areas of acti!ities#
this Kffice is of the opinion and so holds that the sub(ect
license fees are sub(ect to the preferential ta" rate of 2< per
cent of the gross amount of royalties pursuant to the
Philippines-Australia ta" treaty.
Boreo!er# the royalty payments by *.S Philippines to *.S
Australia pursuant to the Software license granted are
sub(ect to the 8?= !alue-added ta" 0@A.1 pursuant to Sec.
8?8 of the .a" *ode of 8::;. Accordingly# *.S Philippines#
being the resident withholding agent and payor in control of
the payment# shall be responsible for the withholding of the
8?= final @A. before ma&ing any payment to *.S Australia.
In remitting the @A. withheld# *.S Philippines shall use 2IR
4orm )o. 8M?? 0Bonthly Remittance Return of @alue-Added
.a" and Kther Percentage .a"es Iithheld1. .he duly filed
2IR 4orm 8M?? and proof of payment thereof shall ser!e as
documentary substantiation for the claim of input ta" by *.S
Philippines upon filing its own @A.# if it is a @A.-registered
ta"payer. In case *.S Philippines in a non-@A. registered
ta"payer# the passed on @A. withheld shall form part of the
cost of the ser!ice purchased which may be treated as
5e"pense5 or 5asset5 whiche!er is applicable. In addition#
*.S Philippines is re%uired to issue the *ertificate of 4inal
.a" Iithheld at Source 02IR 4orm 2,?M1 in %uadruplicate
upon re%uest of *.S Australia# the first three copies thereof
to be gi!en to *.S Australia and the fourth copy to be
retained by *.S Philippines as its file copy.
I&A8 Ruling (o) 1,9+,9 (/uratos SA)
.his refers to your application for relief from double ta"ation
dated Bay 8,# 2??<# on behalf of your client# Puratos S.A.
0Puratos ).@.1# hereinafter Puratos S.A.# re%uesting
confirmation of your opinion that the royalty payments to be
made by Puratos 0Philippines1# Inc. 0PuratosPhils.1 to
Puratos S.A. pursuant to their Production *ontract is entitled
to the preferential ta" rate of 8<= under Article @ of .he
Protocol Amending the Philippines-2elgium ta" treaty.
It is represented that Puratos S.A. is a nonresident foreign
corporation organied and e"isting under the laws of .he
Gingdom of 2elgium with principal office at Industrialaan 2<-
9one Baalbee& 2-8;?2# 'root-2i(gaarden# 2elgium$ that it is
not registered either as a corporation or partnership licensed
to do business in the Philippines per certification issued by
the Securities and -"change *ommission dated April 88#
2??<$ that PuratosPhils. is a corporation duly organied and
e"isting under the laws of the Philippines with principal office
at Bangosteen Street# corner 32P A!e.# 4.I *omple" R
.aguig# Betro Banila$ that Puratos S.A. entered into a
Production *ontract 0*ontract1 with PuratosPhils.# the
effecti!e date of which is >anuary 8# 2??,# wherein the
former authoried the latter to manufacture and sell its
products as stipulated therein pro!ided that royalties are
1%$
paid therefor# in accordance with the said *ontract.
*onsidering that Puratos S.A. is the beneficial owner of the
royalties arising in the Philippines under the sub(ect
*ontract# the royalty fees paid by PuratosPhils. toPuratos
S.A. are sub(ect to Philippine income ta" at the preferential
rate of 8<= of the gross amount thereof# pursuant to Article
@ of the Superceding Protocol on Article 82 of the
Philippines-2elgium ta" treaty.
4inally# Section 8?80A1081 of the .a" *ode of 8::; states
that 5the lease or the use of the right or pri!ilege to use any
copyright# patent# design or model# plan# secret formula or
process# goodwill# trademar&# trade brand or other li&e
property or right5 falls within the definition of 5sale or
e"change of ser!ices5 sub(ect to the 8? percent !alue-added
ta" 0@A.1. Accordingly# the royalties paid by PuratosPhils.
toPuratos S.A. shall be sub(ect to 8? percent @A..
Boreo!er# PuratosPhils.# being the resident withholding
agent and payor in control of the payment# shall be
responsible for the withholding of the 8? percent @A. on
such royalty payment before paying them to Puratos S.A. In
remitting the @A. withheld# PuratosPhils. shall use 2IR 4orm
)o. 8M?? 0Bonthly Remittance Return of @alue-Added .a"
and Kther Percentage .a"es Iithheld1. If PuratosPhils. is a
@A.-registered ta"payer# the duly filed 2IR 4orm )o. 8M??
and proof of payment thereof shall ser!e as documentary
substantiation for the claim of input @A. by the PuratosPhils.
upon filing its own @A. return. Kn the other hand# if
PuratosPhils. is not a @A.-registered ta"payer# the passed-
on @A. withheld shall form part of the cost of the ser!ice
purchased which may be treated as an 5e"pense5 or 5asset5
on the part of the PuratosPhils.# whiche!er is applicable. In
addition# the PuratosPhils.is re%uired to issue the *ertificate
of 4inal .a" Iithheld at Source 02IR 4orm )o. 2,?M1 in
%uadruplicate# upon the re%uest of Puratos S.A.# the first
three copies to be &ept by the Puratos S.A. and the fourth
copy by PuratosPhils. as its file copy.
I&A8 Ruling (o) ,0#+,9 (A!I <orldCide)
.his refers to your letter dated 2M >une 2??8# on behalf of
A*I Iorldwide *orp. 0A*I Iorldwide1# applying for a
preferential ta" rate of 8?= in connection with the royalty
fees arising from the 3istribution Agreement to be paid by
A*I Iorldwide Philippine Islands# Inc. 0A*I Philippines1 to
A*I Iorldwide# pursuant to the *on!ention between the
'o!ernment of the Republic of the Philippines and the
'o!ernment of the Hnited States of America with Respect to
.a"es on Income 0Philippines-Hnited States ta" treaty1.
It is represented that A*I Iorldwide# formerly &nown as A*I
Iorldwide Inc.# is a nonresident foreign corporation
organied and e"isting under the laws of the Hnited States of
America with .I) )o. 4;-?<M;28<# as e!idenced by a
certification issued by the 3epartment of the .reasury#
Internal Re!enue Ser!ice# Philadelphia# dated < Bay 2??8$
that A*I Iorldwide is not registered either as a corporation
or as a partnership in the Philippines as shown in the
*ertification of )on-Registration issued by the Securities and
-"change *ommission on 2< >une 2??8$ that A*I
Iorldwide is engaged worldwide in the business of design#
manufacturing# mar&eting# licensing and distribution of
computer software# and has de!eloped substantial e"pertise#
&now-how and technical information relating to such
products and is engaged in continuing research and
de!elopment to impro!e its products and de!elop new
products$ that A*I Philippines is a domestic corporation
organied and e"isting under the laws of the Philippines.
It is further represented that on 28 4ebruary 2??; A*I
Iorldwide and A*I Philippines entered into a 3istribution
Agreement whereby A*I Iorldwide grants to A*I
Philippines the following licenses/
81 Intellectual Property R a limited# non-e"clusi!e# non-
transferable right and license to utilie the Intellectual
Property and *onfidential Information 8 within the .erritory 2
to 0i1 manufacture# mar&et# distribute# sell and license
Product0s1 , utiliing# embodying or incorporating the
Intellectual Property and 0ii1 pro!ide technical support#
training# consulting and other ser!ices with respect to the
Products.
1%%
21 .rademar&s R a limited# non-e"clusi!e# non-transferable
right and license to utilie the .rademar&s 4 solely in
con(unction with A*I Philippines manufacturing# mar&eting#
distribution# sale# licensing# use and support of the Products#
and such other products as may be authoried in writing by
A*I Iorldwide from time to time during the continuance of
the Agreement within the .erritory# < solely in accordance
with the terms and conditions of the Agreement.
,1 Eocaliation R with the appro!al of A*I Iorldwide and
sub(ect to its customary procedures# A*I Philippines shall
ha!e the right 0i1 to translate any product0s1 into any
languages A*I Iorldwide may authorie that are applicable
to the .erritory and 0ii1 to conform any Product0s1 to re%uired
customer specifications that are applicable to particular
re%uirements in the .erritory to create Eocalied Product0s1#
M which Eocalied Product0s1 may be reproduced and may
be licensed# pac&aged# distributed and sublicensed by A*I
Iorldwide sub(ect to the Agreement$
that the Agreement shall become effecti!e on 28 4ebruary
2??; and shall remain in full force and effect for a period of
one 081 year thereafter# unless terminated$ that in
consideration of the rights and licenses granted by A*I
Iorldwide# A*I Philippines shall pay royalty fees e%ui!alent
to M<= of net re!enues$ that the A*I Iorldwide and A*I
Philippines agree that the royalty rate may be ad(usted
periodically in order to conform with the arm6s length
standard as articulated by section 482 of the Hnited States
Internal Re!enue *ode and .reasury regulations
thereunder$ and that the issue or transaction sub(ect of the
abo!e application is not under in!estigation# on-going audit#
administrati!e protest# claim for refund or issuance of a ta"
credit certificate# collection proceedings# or a (udicial appeal.
According to paragraph 2 0b1# royalties arising in the
Philippines deri!ed by a resident of the Hnited States are
sub(ect to either 0a1 2<= of the gross amount of royalties for
royalties in general# 0b1 8<= of the gross amount of the
royalties if they are paid by a corporation registered with the
Philippine 2oard of In!estments and engaged in preferred
areas of acti!ities# or 0c1 the lowest rate of Philippine ta" that
may be imposed on royalties of the same &ind paid under
similar circumstances to a resident of the third States.
2eing royalties# the payments to A*I Iorldwide by A*I
Philippines under the 3istribution Agreement are sub(ect to
the income ta" rates mentioned in paragraph 2 0b1# Article 8,
of the Philippines-Hnited States ta" treaty$ subparagraph 0iii1
thereof pro!ides that the payments are sub(ect to the lowest
rate of income ta" that may be imposed on the royalties of
the same &ind paid under similar circumstances to a resident
of a third State 0commonly &nown as the most-fa!ored-
nation ta" treatment of royalties1.
In relation to the most-fa!ored-nation ta" treatment of
royalties# the Supreme *ourt# in *ommissioner of Internal
Re!enue !s. S.*. >ohnson and Son# Inc. and *ourt of
Appeals 0'.R. )o. 82;8?< dated >une 2<# 8:::1# has cited
two conditions for royalties arising in the Philippines and
deri!ed by a resident of another country 0in this case# the
Hnited States1 to be sub(ect to a most-fa!ored-nation ta"
treatment. 4irst# the royalties in %uestion deri!ed by a
resident of the other country 0the Hnited States1 must be of
the same &ind as those deri!ed by a resident of the third
country which are sub(ect to a most-fa!ored-nation ta"
treatment under the e"isting ta" treaty between the
Philippines and the third country. Secondly# the mechanism
employed by the other country 0the Hnited States1 in
mitigating the effects of double ta"ation of foreign-sourced
income deri!ed by its residents must be the same with that
employed by the third country# which can be determined by
ta&ing into account and comparing the respecti!e articles on
-limination of 3ouble .a"ation of the other country 0the
Hnited States1 and the third country under their respecti!e
ta" treaties with the Philippines.
According to paragraph 2# royalties arising in the Philippines
and deri!ed by a resident of *ech are sub(ect to income ta"
at the rate of 0a1 8?= of the gross amount of the royalties
arising from the use of# or the right to use# any copyright of
literary# artistic or scientific wor& 0e"cept those for
cinematograph films# and films or tapes for tele!ision or radio
broadcasting1# any patent# trade mar&# design or model#
1%&
plan# secret formula or process# or from the use of# or the
right to use# industrial# commercial or scientific e%uipment# or
for information concerning industrial# commercial or scientific
e"perience# or 0b1 8<= of the gross amount of the royalties
for royalties arising from the use of# or the right to use# any
copyright of cinematograph films# and films or tapes for
tele!ision or radio broadcasting.
Applying the Philippines-*ech ta" treaty in relation to the
most-fa!ored-nation clause of the Philippines-Hnited States
ta" treaty# the royalty fee to be paid by A*I Philippines to
A*I Iorldwide for the use or the right to use of intellectual
properties# patents and trademar&s# may be sub(ect to 8?=
based on the gross amount thereof# pro!ided the two
conditions for the most-fa!ored-nation ta" treatment of
royalties 0as described abo!e1 are both satisfied.
In the same manner# although lac&ing a separate paragraph
for the definition of royalties in its article# paragraph 2 0a1#
Article 82 of the Philippines-*ech ta" treaty# as %uoted
abo!e# pro!ides that royalties arising from the use or the
right to use of patents# information concerning industrial#
commercial or scientific e"perience 0&now-how1# and
copyright of literary# artistic or scientific wor&# among others#
are sub(ect to income ta" rate of 8?= of the gross amount
thereof. .his being the case# the first condition for the most-
fa!ored-nation ta" treatment of royalties is satisfied# which
re%uires that royalties deri!ed by a resident of the Hnited
States must be of the same &ind as those deri!ed by a
resident of *ech.
Hnder the ordinary credit method# the Hnited States 0as
country of residence1 would limit a ta"payer6s allowable ta"
credit to that portion of the ta"payer6s ta" liability in the
Hnited States that is attributable to the income that is ta"ed
in the Philippines 0the country of source or country of situs1.
As a result of this limitation# if the Philippines has an
effecti!e ta" rate that e"ceeds the effecti!e ta" rate of the
Hnited States on a particular income# the Hnited States
would not grant the ta"payer a full credit for the income ta"
imposed by the Philippines on such income.
Iith regard to the procedures for withholding and paying the
@A.# pursuant to Section 4 and M of Re!enue Regulations
)o. 4-2??2# Section , or Re!enue Regulations )o. 8-2??2#
and Section ; of Re!enue Regulations )o. 84-2??2# A*I
Philippines shall be responsible for the withholding of @A.
on the royalties fee before remitting it to A*I Iorldwide. In
remitting to the 2ureau of Internal Re!enue the @A.
withheld# A*I Philippines shall use 2IR 4orm )o. 8M??
0Bonthly Remittance Return of @alue-Added .a" W Kther
Percentage .a"es Iithheld1. If it is a @A.-registered
ta"payer# A*I Philippines may use as documentary
substantiation for its claim of input @A. the duly filed 2IR
4orm )o. 8M?? and the proof of payment accompanying
such form. Kn the other hand# if it is a non-@A.-registered
ta"payer# A*I Philippines may include as part of the cost of
the royalty fees it paid to A*I Iorldwide the @A.
conse%uently shifted or passed on to it. In addition# A*I
Philippines is re%uired to issue the *ertificate of 4inal .a"
Iithheld at Source 02IR 4orm )o. 2,?M1 in %uadruplicate#
the first three copies for A*I Iorldwide and the fourth copy
for A*I Philippines as its file copy.
1&0

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Atty. Jose Cochingyan III AY 2011-2012

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