TAXATION LAW REVIEW

NOTES
COVERAGE OF TAXATION LAW
REVIEW
I. Basic Principles of
Constitutional
Limitation
s
a) Due process clause which
could
be
either
substantive due process
and
procedural
due
process clause
b) Equal protection clause
Read:
Ormoc Sugar Central
vs.
City Treasurer 22
SCRA
603
Tiu vs. CA 301 SCRA 178
c) Article III sec. 1 of
the
1987 Constitution nonimpairment clause
d)
Article III sec. 5
freedom of religion
e) Article III sec. 20
nonpayment of poll tax
f) Article VI sec. 28 par. 2
flexible tariff clause
g) Article VI sec. 28 par. 3

exemption
from
real
property tax
Read:
Herrera vs. Quezon City
3
SCRA 186
Abra vs. Hernando 107
SCRA
104
Abra Valley vs. Aquino
52
SCRA 106
Philippine Lung Center
vs.
Quezon City 433 SCRA
119 h) Article VI sec. 28
par. 4 qualified majority
in tax
exemption
i) International
double
taxation
CIR vs. Johnson 309 SCRA

k)

8
7
j) Doctrine of equitable
recoupment
Doctrine of Set-off or compensation
in taxation
Republic vs. Mambulao 4 SCRA
622
Domingo vs. Garlitos 8 SCRA 443
Francia vs. IAC 162 SCRA
753
Caltex vs. COA 208 SCRA
726
Philex vs. CIR 294 SCRA
687

II. Income Tax Law

TAXATION LAW REVIEW

NOTES
Section 22-26 of the National Internal
Banking Units sec 25 (D)
Revenue Code
a) Read in the commentaries or
magic notes the diferent kinds of:
1. Income Taxpayers
2. Income Taxes
3. Sources of Income sec. 42 of NIRC
- Income Taxpayers
a) Individuals
b) Corporation
c) Estates and Trusts
-Individuals are classified
Resident Citizens sec. 23 (A), sec
24 (A) (a)
Non-Resident Citizens sec 23 (B),
24 (A) (b) 22 (E)
Overseas Contract Workers Sec.
23 (C), 24 (A) (b)
Resident Aliens Rev. Reg. sec 5,
23 (D), 24 (A) (c)
Non-Resident Aliens Engaged in
trade or business sections 25 (A)
(1)
Non-Resident Aliens Not Engaged
in trade or business sec. 25 (B)
Aliens Employed in MultiNational Corporations sec. 25 (C)
and Rev. Reg. 12-2001
Aliens Employed in Ofshore

Aliens Employed in
petroleum
Service Contractors &
Subcontractors sec. 25
(E)
-Corporate Income Taxpayers
Domestic Corporations sec. 23
(E), and sec 27 of NIRC
Resident Foreign Corporations sec.
22 (H) and (28)A
Non-Resident Foreign
Corporations sec. 22 (1) and 28
(B)
-Estates and Trusts sec. 60-66 of NIRC

Diferent Kinds of Income Tax

1. Net Income Tax secs. 24 (A), 25
(A) (1), 26, 27 (A) (B) (C), 28 (A)
up to 3rd par. 31 and 32 (A)
2. Gross Income Tax secs. 25 (B) first
part and 28 (B)
(1)
3. Final Income Taxes sec. 57 (A)
4. Minimum Corporate Income
Tax of 2% of the Gross Income
secs.
27 (E), 28 (A)
(2)

5. Improperly Accumulated
Earnings Tax of 10% of its
taxable income sec. 29 NIRC
Rev. Reg. 2-2001
Optional Corporate Income Tax of
15% of its gross income sections
27 (A) 4th to 10th par. And 28 A(1)
but only up to the 4th
paragraph
-Proceed to section 42 and 23 of the
NIRC
NDC vs. Comm 151 SCRA 472
Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25
(A) (1), 25 B,C,D,E, 27 A,B,C; 28
(A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
Comm. Vs. Manning 66 SCRA 14
Anscor vs. Comm. 301 SCRA 152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D)
(4);
28 (A) (7) (D); 32 B (7) (a)
Then you go to sec. 24 C, 25A (3); 25
B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B
(5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A)
(3);
25 (B) last par. 27 (D)
(5)
China Bank vs. Court of Appeals 336
SCRA
; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 131999
-

-Upon reading sec. 27 (A) go to sec. 22 (B)

Batangas vs. Collector 102 Phil. 822
Evangelista vs. Collector 102 Phil 140
Reyes vs. Comm. 24 SCRA 198
Ona vs. Bautista 45 SCRA 74
Obillos vs. Comm 139 SCRA 436
Pascua vs. Comm. 166 SCRA 560
Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the
LGC.

Pagcor vs. Basco 197 SCRA 52

Mactan vs. Cebu 261 SCRA 667
LRT vs. City of Manila 342 SCRA 692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28
(B)

(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B)

(5) (b)
Marubeni vs. CIR 177 SCRA 500
Proctor & Gamble vs. Comm 160 SCRA
560
Same case Proctor and Gamble on the
Motion for Reconsideration 204 SCRA
377
Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni
vs. Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32
(B) (7) (a)
Read Mitsubishi vs. Comm 181 SCRA
214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read sec.
85 par (e), sec. 108A and sec. 123 of the
NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see
Aguinaldo vs. Comm. 112 SCRA 136, RR
10-2002

-Under Sec. 34 (B) read RR 13-2000

-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona
vs. Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read
Vidal de Roces vs. Posadas 58 Phil.
108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos
vs. Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing
donors tax returns sections 99 (A),
103 (A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
- Sections 105-115

-Read
RA
9337
-Read ABAKADA vs
Comm. GR 168056, Sept.
1, 2005
VI. Remedies Under the Internal
Revenue
Code
-Sections
202229
-RR 12-99

Phoenix vs Comm 14 SCRA

52
Basilan vs. Comm. 21 SCRA

17

Yabut vs. Flojo 115 SCRA

278

Union Shipping vs. Comm 185

SCRA
547

Comm. vs. TMX 205 SCRA

184

Comm. vs. Philamlife 244

SCRA
Comm. vs. CA & BPI 301 SCRA

435

BPI vs. Comm. 363 SCRA

840
-Prescription sections 203 and 222
of
NIRC, sec. 194 of the LGC, sec. 270
of the LGC, sec. 1603 of Tariff and
Customs Code
-Protest sec. 228 of NIRC and RR 1299 sec. 195 of LGC, 252 LGC, sec.
2313 of Tariff & Customs Code and
RA 7651
VII.
Local
Taxation
- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read
Bulacan vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma
vs. Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings
Co. vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs.
LTO

322 SCRA 805

-Under 137 read sec. 193 of LGC
Misamis vs. Cagayan de Oro 181
SCRA 38
Reyes vs. San Pablo City 305
SCRA 353
Meralco vs. Laguna 306 SCRA
750
PLDT vs. Davao City 363 SCRA
522
- Co-relate sec. 139 and 147 of LGC
- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code

- Under sec. 150 of the LGC read

the following:
Phil. Match vs. Cebu 81 SCRA
99
Allied Thread vs. Manila 133
SCRA 338
Sipocat vs. Shell 105 Phil. 1263
Iloilo Bottles vs. Iloilo City 164
SCRA 607
VIII. Real Property Tax
- Sections 197-294

Sec. 235
LRT vs. Manila 342 SCRA 692
Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code

- Special Customs Duty sec. 301-304 of
TCC
- Regukar Customs Duty sec. 104 of TCC
- RA 7631
X. Court of Tax Appeals
- RA 1125 as amended by RA 9282

TAXATION LAW REVIEW NOTES

- ATTY. FRANCIS J. SABABAN -

TAXATION LAW REVIEW

NOTES
Rules
in
the
Classroom:
1.
do not be
absent
if you are absent, you have to
transcribe what happened in class
when
you
were
out.
The next meeting you attend class,
consider yourself a resident of balicbalic, babalikbalikan ka sa recit.

Exception: if you get

married.
2. read the assignment. Wag zapote
ang aral.
3. holiday make up class probably on
a
Sunda
y
4. allowed to glance at your notes, wag
lang pahalata/garapal
5.
materials:

codal

commentaries (any author will

do)

magic notes (Sababan Lecture

and
Q&A)

Book
stand
Coverage of Taxation Law
Review:
1.
Basic
Principles
including
Constitutional
Provisions
2. Income Tax
3.
Estate
Tax
4. Donors Tax
5.
Remedies
6. Local Tax
7.
Real Property
Tax
8.
Tariff and Customs
Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage
of the Bar Exams, questions have been
asked since 1999)

Title 5,6 and 7 are always included in

the coverage

No computations in the
bar
There are only 1 or 2 questions in the
Bar about Basic Principles

What are the favorite topics in the

Bar?

12 questions on Income
Tax

8-10 questions on
remedies

8-10 questions allocated to the 7

topics
BASIC
PRINCIPLES:

Taxation
the
State
.

is

an

Q:
What
INHERENT?

do

you

inherent

mean

power

by

of

TAXATION LAW REVIEW

NOTES
is not provided for

A: The power to tax

in the law, statute or constitution; it
depends on the existence of the state. No
law or legislation for the exercise of the
power to tax by the national government.

Q: Do local governments exercise this

inherent power?
A:
No.
Only
the
National
Government
exercises
the
inherent
power
to
impose taxes.
Q: The taxing power of local governments
is a DELAGATED power. Delegated by
whom?
A: Delegated by Congress through law
in case of autonomous regions, and
delegated
by the constitution in case of LGUs
not
considered
an
autonomous
region.
Cities, provinces and municipalities
power granted under Art. X Sec. 5&6 of
the Constitution

Autonomous Regions
power
conferred by Congress through law. Art. X
Sec. 20 #2 of the Constitution is a non-selfexecuting provision. Thus the power is
granted by Congress because said provision
requires an enabling law.

Article X, Section 5 is self-executing

thus the power is granted by the
constitution.
CONSTITUTIONAL
LIMITATIONS
Due
Clause

Process

Q: why is it a limitation to the power to

tax?
A: The due process clause as a limitation
to the power to tax refers both to
substantive
and procedural due process. Substantive
due process requires that a tax statute must
be within the constitutional authority of
Congress to pass and that it be
reasonable,
fair and just.
Procedural due process, on the other
hand, requires notice and hearing or at
least the opportunity to be heard.
Ex: On Substantive Due Process- when
the Congress passes a law exempting the
13th month pay from tax but with the
concurrence
only of the majority of the quorum law
would be invalid because the Constitution
provides
that
any
grant
of
tax
exemption

shall be passed with the concurrence of

the majority of all the members of the
Congress.
Q: Does it follow that the adverse party
must always be notified?
A: No. As a rule, notice and hearing or
the
opportunity to be heard is necessary only
when expressly required by law. Where
there is no such requirement, notice and
the opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure
a TRO without notifying the adverse party.
If you are a suspect in a criminal case, you
have
the right to have an opportunity to be
heard
(if there is a
law).
Before July 1, 1998, no notice need
be given to a party declared in default.
After the
amendment, the party declared in default
has
to
be
notified
of
subsequent
proceedings albeit without the right to
participate therein.
In the case of a search warrant,
the person to be searched was not notified.
The person searched cannot claim that
there was a violation of due process
because there is no
law requiring that the person to be
searched should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON
:
No provision of law requires notice to
the adverse party. If the adverse party is
notified,
he
may
abscond.
Thus,
in
adversarial
proceedings, in connection with procedural
due process, the adverse party need not
be notified all the time.
Equal
Clause

Protection

As a rule, taxpayers of the same footing

are treated alike, both as to privileges
conferred
and
liabilities
imposed.
Diference in treatment is allowed only

when based on substantial distinction.

Diference in treatment
not
based
on
substantial

1)

There must be substantial

distinctions that make a real
diference.
2) It must be germane or relevant to
the
purpose of the law.
3)
The distinction or classification
must apply not only to the present
but also to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex:
In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary.
The SC said
that the ordinance was invalid because of
the failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA
278)
Q: what happened in the city of
Olonggapo?
distinction is frowned upon as class
legislation. This is violated when taxpayers
belonging to the same classification are
treated diferently form one another; and
taxpayers belonging different classifications
are treated alike.
Requirements
Cl assification:

of

Reasonable

A: The Congress, with the approval of the

President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that
time?
A:
President
Ramos
Q:
What
were
signed?
A: RA 7227, EO 97 and EO 97A
The first led to the creation of
the
Subic Special Economic Zone (SSEZ).
The latter set the limitations and
boundaries of the application of the
incentives (no taxes,
local
and
national,
shall
be imposed within
SSEZ. In lieu thereof, 3% of the Gross
Income shall be remitted to the national
govt)
to
those
operating their
businesses within the said area.
Q: Who are the petitioners and what
was their contention?
A:
The
petitioners
are
Filipino
businessmen
who are operating their business outside
the secured area. The petitioners
contended that the law in question was
violative of their right to equal
protection of laws since they are also
Filipino businessmen.
H:
The Supreme Court ruled that
there was no violation since the
classification was based on a substantial
distinction.

The element invoked here is

element
#1 that there must be substantial
distinction
in
the
classification
of
taxpayers on whom the tax will be
imposed.
The Court observed that those
foreign businessmen operating within
the secured area have to give a larger
capital to operate in the secured area
(to spur economic
growth
and
guarantee
employment)
.
ORMOC SUGAR CENTRAL vs.
CIR
Q: What did the municipality of Ormoc
do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing upon
any and all centrifugal sugar milled at
the Ormoc Sugar Central a municipal
tax on the net sale of the same to the
United
States
and
other
foreign
countries.
Q:
Did the owner accept this
imposition?
A:
No. the tax due was paid under
protest, then filed a complaint against
the City of Ormoc.
H:
The Supreme Court said there was
a violation of the equal protection
clause. The element invoked here was
element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at
bar,
there was a violation of element #3
because the law was worded in such
a way that it only applies to Ormoc
Sugar Central alone and to the exclusion
of all other sugar centrals to be
established in the future.
TAKE NOTE: People vs.
Cayat
Freedom
Religion

of

It
Involves
Things:

1.
freedom to choose
religion
2.
freedom to exercise ones
religion
3. prohibition
upon
the
national
government to establish a national religion
Q: Which one limits the power to
tax?
A:
Prohibition upon
the
national
government to establish a national religion
because
this will require a special
appropriation of money coming from the
national treasury which is funded by the
taxes paid by the people.

Non-impairment
Clause
Q: What are the sources of obligation in
the
Civil
Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Q: What is the obligation contemplated
in this limitation?
A:
Those obligations arising from
contracts.
General Rule:
The power to tax is
pursuant to law, therefore, the obligation to
pay taxes is imposed by law, thus the nonimpairment clause does not apply.
You have to determine first the source
of obligation:
1. If the law merely provides for the
fulfillment of the obligation then the law
is not the source of the obligation.
2. When the law merely recognizes
or
acknowledges
the
existence
of
an
obligation created by an act which may
constitute a contract, quasi-contract, delict,
and quasi- delict, and its only purpose is
to regulate such obligation, then the act
itself is the
source of the obligation, not the
law.

When the law establishes the obligation

and also provides for its fulfillment, then
the law itself is the source of the obligation
Q: So, in what instance does the nonimpairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise
agreement
with
the
government.
In this instance, the obligation to pay the
tax
is now based on the contract between the
taxpayer and the government pursuant
to
their
compromise
agreement.
Take Note: the requirement for its
application: the parties are the government
and private individual.
Poll
Tax
Q:
What is a poll
tax?
A: It is a tax of a fixed amount on
individuals residing within a particular
territory, whether
citizens
or
not,
without
regard
to
their
property or to the occupation in which
they may be engaged.

It is a tax imposed on persons

without any qualifications. persons may be
allowed to pay even if they are not qualified
as to age or property ownership.
Example of Poll Tax: Community Tax
Certificate under Section 162 of the Local
Government Code.
Q: Why is it a limitation to the power to
tax? A: It is a limitation to the power
to tax because Congress is prohibited from
passing a law penalizing with imprisonment
a person who does not pay poll tax. (funds
for sending a person to jail is taken from
the national treasury which is funded by
the taxes paid by the people)
Exemption
Estate
Tax

from

payment

of

Real

Q: What is the requirement for exemption

from payment of real property tax under
the
1935,
1973
and
1987
Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution

Cemeteries, churches and parsonages or

convents appurtenant thereto, and all
lands, buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for
taxation.
Art. 8, Sec. 17 (3), 1973 Constitution
charitable
institutions,
churches,
parsonages or
convents
appurtenant
thereto,
mosque,
and
non-profit
cemeteries, and all lands, buildings, and
improvements ACTUALLY, DIRECTLY, and
EXCLUSIVELY used for RELIGIOUS
and
CHARITABLE purposes
shall be exempt
from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution

charitable
institutions,
churches,
and
parsonages
or
convents
appurtenant
thereto, mosque, non-profit cemeteries, and
all lands, buildings, and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY used
for
RELIGIOUS,
EDUCATIONAL
and
CHARITABLE purposes shall be exempt from
taxation.

HERRERA
v.
QC-BOARD
OF
ASSESSMENT
(1935
Constitution)
Q:
What is involved in this
case?
A:
A
charitable
institution,
St.
Catherines Hospital. The hospital
was
previously exempt from taxation until
it

was
reclassified and
subsequently
assessed for the payment of real
property tax.
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school
for midwifery and nursing, and a
dormitory. Since it is not exclusively
used for charitable purposes it is not
exempt from
taxation.
H:
The Court ruled that petitioner is
not liable for the payment of real
estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because
they
are incidental to the primary purpose
of the hospital.
NOTE:
this
arose
during
the
1935
Constitution.
Exempted by virtue of incidental
purpose was merely coined by the
Supreme Court. Thus, it does not apply to
other taxes
except Real Estate
Tax.

PROVINCE
OF
A BR A
v.
HERNANDO
Q:
What is involved in this
case?
A
A religious institution was involved
in this case, the Roman Catholic Bishop
of
Bangued,
Inc.
(bishop
filed
declaratory relief after assessed for
payment of tax). The respondent judge
granted the exemption from taxes of
said church based only on the
allegations of the complaint without
conducting a hearing/trial. The assistant
prosecutor filed a complaint contending
that petitioner was deprived of its right
to due process.
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause
action
arose
under
the
1973
Constitution,
not
under
the
1935
Constitution (note the diference). Tax
exemption is not presumed. It must
be strictly construed against the taxpayer
and liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC.
AQUINO
Q:
What is involved in this
case?

v.

A:

An
educational
institution
is
involved in this case. The ground floor of
the school was leased to Northern
Marketing
Corp.,
a
domestic
corporation. The 2nd floor thereof was
used as the residence of the school
director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the
school is now liable to pay real estate
tax.
H:
The Court held that the school
is
PARTIALLY liable for real estate
tax.
1. Residence exempt by virtue of
incidental
purpose;
justified
because
it is necessary.
2. Commercial not exempt because
it isnot
pursuant
to
the
primary
purpose;
not
for
educational purposes.
Q: is the doctrine in the case of Herrera the
same with this case?
A:
NO. in the Herrera case, the
exemption
was granted to all the real property
(hospital, school and dorm). But in this
case, the Supreme
Court
made
a
qualification. The Supreme Court said it
depends.
NOTE: both cases arose under the
1935
Constitution despite having been decided
in
1988.
Q: At present, do we still apply the
exemption from tax by virtue of the
Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in
said
case
arose
under
the
1935
Constitution and
it does not apply to the provisions of
the
1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON
CITY
Q:
What is involved in this
case?

A:

A charitable institution, a hospital.

It is provided in the charter of the
Lung
Center
of
the
Philippines
is
a
charitable
institution.
However,
part
of
its
building
was
leased
to
private
individuals and the vacant portion of its
lot was rented out to
Elliptical Orchids. Respondent contends
that
since
the
hospital
is
not
used actually, directly, an d exclusively
for charitable purposes, it is liable to pay
real estate taxes.

H:

The Supreme Court held that the

petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of
the hospital used for charitable purposes
(whether for pay or non-pay patients),
petitioner is exempt from payment of
real estate tax.

NOTE: petitioner contended that the profits

derived from the lease of its premises
were used for the operation of the hospital.
The Court held that the use of the profits
does not determine exemption, rather it is
the use of the property that determines
exemption.
The case of Herrera does not
apply because said case arose under
the 1935
Constitution
and
the
present
case
arose under the 1987 Constitution. The
requirements for exemption are diferent. In
the 1935 Constitution, the property must
be EXCLUSIVELY
used
for
religious,
educational or
charitable
purposes.
Under the 1987
Constitution,
the
property
must
be
used
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
religious,
educational
and
charitable
purposes.

Q: Was the doctrine laid down in Abra

Valley affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the
1935
Constitution.
The
Supreme
Court
reiterated
the ruling in the Abra Valley case which
arose under the 1935 Constitution. The
Supreme Court made a qualification, it held
that it depends on whether or not the use is
incidental to the primary purpose of
the
institution.
NOTE: at present, exemption from tax by
virtue of incidental purpose is not
applicable to all taxes including real estate
tax.
COMM v. SC JOHNSON and SONS,
INC.
Important
:
1. international double taxation
2. importance of international tax treaty
3. implication of most favored
nation clause
Q: What is the corporation involved in
this
case?
A:
A domestic corporation
(DC).

SC Johnson and Sons, Inc. entered

into a license agreement with SC
Johnson and Sons U.S.A (Non-Resident
Foreign Corp, NRFC) whereby the former
was allowed to use the latters
trademark and facilities to manufacture
its products. In return, the DC will pay
the NRFC royalties as well as payment of
withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently,
the
DC should have paid only 10% under the
most favored nation clause.
H:
The Supreme Court coined the
term
International
Double
Taxation
or
International
Juridical
Double
Taxation.
Q:
What prompted the SC to coin
such term?
A:
Because a single income (tax
royalties
paid by a DC) was subjected to tax by
two countries, the Philippines income
tax and the U.S. tax.
International
Juridical
Double
Taxation applies only to countries where
the tax liabilities of its nationals are
imposed on
income
derived
from
sources
coming from within and without.
Q:
Is
there
an
instance
where
international double taxation does not
apply?
A:
Yes. If it involves nationals of
countries wherein the tax liability
is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex:
Switzerland)
The controversy in the case at
bar
involves the income tax paid in
the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to
10%
under
the
most
favored
nation
clause.

The question is: was the tax paid

under similar circumstances with that of
the RP- West Germany Treaty?
The CTA and Court of Appeals
ruled that it was paid under similar
circumstances. The phrase referred to
the royalties in payment of income tax.
The
Supreme
Court
ruled
that
the
lower courts interpretation of the
phrase was erroneous. Rather, the
phrase applies to the application of
matching credit.
Q: What is matching tax credit?

A:
RP-Germany Treaty provides for
that
20%
of
the
tax
paid
in
the
Philippines shall be credited to their tax
due to be paid in Germany.
The 10% does not apply because
there is no matching credit. Thus,
there is no
similarity
in
the
circumstances.
EQUITABLE RECOUPMENT AND
DOCTRINE OF SET-OFF
Equitable
Recoupment
This doctrine provides that a claim for
refund barred by prescription may be
allowed to offset unsettled tax liabilities.
This is not allowed in this jurisdiction,
because of common law origin. If allowed,
both the collecting agency and the taxpayer
might be tempted to delay and neglect the
pursuit of their respective claims within the
period prescribed by law.
Q:
What
is
the
doctrine
of
Equitable
Recoupment
?
A: When the claim for refund is barred
by prescription, the same is allowed to
be

credited
liabilities.

to

unsettled

tax

(Sir gives an illustration found in page 3

of magic notes)
Q:
Is the rule absolute?
Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government oficial from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for
this to work, hence, the government is
preventing corruption)
There is no exception at all otherwise,
the
BIR would be flooded with so many
claims.
Setoff
Presupposes mutual obligation between
the parties. In taxation, the concept of
set- off arises where a taxpayer is liable
to pay tax but the government, for one
reason or another, is indebted to the said
taxpayer.
Q: What do you mean by SETOFF?
A: This presupposes mutual obligations
between the parties, and that they are
mutual

creditors and debtors of each other. In

taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but
the government, for one reason or another,
is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER
CO.
Q:
What is the liability of
Mambulao?
A:
They are liable to pay forest
charges
(under the old tax
code).
NOTE: under our present tax code, the
NIRC, we do not have forest charges
as the same was abolished by President
Aquino.
Q: What did the lumber company
do?
A:
The
lumber
company
claimed
that since the government did not use
the reforestation charges it paid for
reforestation of the denuded land
covered by its license, the amount paid
should be reimbursed to them or at
least compensated or applied to their
liability to pay forest charges.
H:
The
Court
ruled
that
the
reforestation charges paid is in the
nature of taxes.
The principle of compensation does
not apply in this case because the
parties are not mutually creditors and
debtors of
each other. A claim for taxes is not
a debt, demand, contract or judgment
as is allowed to be set-off under the
statute of set-off which is construed
uniformly, in
the light of public policy, to exclude the
remedy
in
connection
or
any
indebtedness of the State or any
municipality to one who is liable
for taxes. Neither are they a proper
subject for recoupment since they do
not arise out of contract or the same
transaction
sued on.
General Rule: no set-off is admissible
against demands for taxes levied in general
or local governmental purposes.

Reason: Taxes are not in the nature

of contracts or debts between the taxpayer
and the government, but arises out of a
duty to, and are positive acts of the
government to the making and enforcing
of which, the consent of the individual is
not required. Taxes cannot be the
subject matter of compensation.
DOMINGO
GARLITOS

v.

Q: What is being collected in this case?

A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was
abolished
by
Lolo
Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A:
The surviving spouse suggested
that the compensation to which the
decedent was entitled to as an
employee of the Bureau of Lands be setoff from the estate and inheritance
taxes imposed upon the estate of the
deceased.
H:
Both the claim of the government
for estate and inheritance taxes and
the claim of the (intestate) for the
services
rendered have already become overdue
hence demandable as well as fully
liquidated,
compensation
therefore
takes place by operation of law, in
accordance with Art. 1279 and 1290 of
the Civil Code and both debts are
extinguished to the concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain
sum of money to the estate of the
deceased.

FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A:
Payment for real estate taxes for
the
property of Francia. It appears that
petitioner was
delinquent in
the
payment of his real estate tax liability.
The same is being collected by the
Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A:
Suggested
that
the
just
compensation for
the
payment
of
his expropriated
property be set-off from his unpaid
real
estate taxes. (the other part of his
property was sold at a public auction)
H:
The factual milieu of the case
does not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer
may have against the government. A
taxpayer cannot refuse to pay a tax on
the ground
that the government owes him an
amount.

TAXATION LAW REVIEW

NOTES
Internal Revenue taxes cannot be
the of compensation because the
subject
government and the taxpayer are not
mutually creditors and debtors of each
other, and a claim for taxes is not a
debt, demand, contract or judgment as
is allowed to be compensated or set-of.
Furthermore, the payment of just
compensation was already deposited
with PNB Pasay, and the taxes were
collected
by a local government, the property
was expropriated by the national
government. (diff parties, not mutual
creditors and
debtors
of
each
other.)
CALTEX PHIL v. COA
Q: What is being collected?
A:
Caltexs contribution to the Oil
Price
Stabilization
Fund
(OPSF).
COA sent a letter to Caltex asking
the latter to settle its unremitted
collection stating that until the same is
paid, its claim for reimbursement from
the OPSF will be held in abeyance.
Q: Why is Caltex entitled to
reimbursement?
A:
Because of the fluctuation of the
oil prices in the Middle East and
Europe.
Caltex
wanted to
of-set
its
unremitted
collection
from
its
reimbursements.
H:
The Court did not allow the setof, and reiterated its ruling in the
case of
Mambulao and Francia. Furthermore,
RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely
acted
as
agent
of
the
government in collecting contributions
for the OPSF because such is being
shouldered by the
consumers
when
they
purchase
petroleum
products
of
oil
companies,
such
as
Caltex.

from its pending claim for a VAT Input

Taxation is no longer envisioned as a
measure merely to raise revenues to
support
the
existence
of
the
government. Taxes may be levied
for regulatory
purposes such as to provide means
for the rehabilitation and stabilization of
a threatened industry which is vested
with public interest, a concern which is
within the police power of the State to
address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment
of excise taxes, which it wanted to be
set-off

TAXATION LAW REVIEW

NOTES
Internal Revenue taxes cannot be
credit/refund.
the
The Court did not allow set-of. Taxes
cannot be the subject of compensation
for
the simple reason that the government
and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case,
the claim for VAT refund is still pending.
The collection of a tax cannot await the
results of
a
lawsuit
against
the
government.
DOUBLE
TAXATION
Double taxation is allowed because
there is no prohibition in the Constitution or
statute.
Obnoxious double taxation
synonym of double taxation.

is

the

Elements
of
Double
Taxation:
1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose

from its pending claim for a VAT Input

There is no double taxation if the tax
is levied by the LGU and another by the
national government.
The two (2) are
diferent taxing authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government;
(2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant
to the provisions of RA 8424 of the Tax
Reform Act of 1997, can levy tax upon
GOCCs,
agencies and instrumentalities (Section
27 c)), although income received by the
Government form:
1) any public utility or
2) the exercise of
any essential
governmental function
is exempt from tax.
KINDS
OF
TAXPAYERS

INCOME

Q: Generally, how many kinds of

income taxpayers are there?
A: Under section 22A of NIRC, there
are three (3), namely:

TAXATION LAW REVIEW

NOTES
1. individual;
2. corporate;
3. estate and trust.
I.
TAXPAYER

INDIVIDUAL

Q:
How many kinds of individual
taxpayers are there?
A:
There are seven (7).
Namely:
1. Resident Citizen (23A and 24A);
2. Nonresident Citizen (23B and 24A);
3. OCW and Seaman (23C and 24A);
4. Resident Alien (22F, 23D and 24A);
5.
Nonresident Alien Engaged in
Trade or Business (22G, 23D and
25A)
6. Nonresident Alien NOT Engaged
in
Trade or Business (22G, 23D
and
25B)
7. Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum
Service
Contractors
(25C,D and E)

Consequently, if he is not a member

the ofcomplement or even if he is but
the vessel where he works is not exclusively
engaged in international trade, said
seaman is not deemed to be an OCW. He
is either a RC or a NRC depending on where
he stays most of the time during the taxable
year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.
The
importance
of
ascertaining
whether or not a seaman is a RC or a NRC,
is that if he is a RCm he is taxable on ALL
income derived from all sources within and
without. If he is a NRC, he is taxable only
on income derived form sources within the
Philippines.
Q: What is the significance of using
OCW?
A:
It only covers Filipinos who works
abroad with a contract. It does not cover
TNTs.

Resident Citizen (RC)

Q: How many types of
RC?
A:
There are two (2),
namely:
1. RC residing in the Philippines; and
2. Filipino living
abroad with
no
intention to reside permanently
therein.

Q: What is the status of a

TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a
contract and they have not manifested their
intention to permanently reside abroad.
(distinguish from an immigrant)

Q: If you are abroad, and you have the

intention to permanently reside therein,
can you still be considered a RC?
A:
Yes.
If
such
intention
to
permanently reside therein was
not
manifested to the Commissioner and the
fact of your physical
presence therein, you may still be
considered a RC.

Requirements for a seaman to be

considered an OCW:
1. must be a member of the compliment
of a vessel;
2. the vessel must be exclusively engaged
in international trade or commerce.
Resident Alien (RA)

OCW and Seamen

OCW was used and not OFW in the
CTRP, because the classification shall cover
only those Filipino citizens working abroad
with a contract. TNTs are not covered.

A Filipino seaman is deemed to be

an OCW for purposes of taxation if he
receives
compensation
for
services
rendered abroad as a member of the

TAXATION LAW REVIEW

NOTES
1. individual;
complement
of
a
vessel
exclusively in international trade.

engaged

Consequently, if he is not a member

of
An
individual whose residence is
within the Philippines and who is not a
citizen thereof.
Intention to reside permanently in the
Philippines is not a requirement on the
part of the alien.
The requirement under RR#2 is that he
is actually present in the Philippines, neither
a sojourner, a traveler, not a tourist.

TAXATION LAW REVIEW

NOTES
Whether hes a transient or not is
determined by his intent as to the nature
and length of his stay.
Q: Is the intention to permanently reside
in the Philippines necessary?
A: No, so long as he is not a
sojourner, tourist or a traveler.
Non-Resident Alien Engaged in
T r a d e or
Business (NRAETB)
A foreigner not residing in the
Philippines but who is engaged in trade or
business here.
RR 2-98 has expanded the coverage
of the term, engaged in trade or
business to include the exercise of a
profession. Furthermore, by the express
provision of the law, a NRA who is neither a
businessman nor a professional but who
come to and stays in the Philippines for an
aggregate period of more than 180 days
during any calendar year is deemed to a
NRAETB in the Philippines.
Q:
How many
types?
A:
There are three (3) types,
namely:
1. NRA engaged in trade or
business
(25a1);
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in
the Philippines for an aggregate
period of MORE THAN 180 days
during any calendar year.
Q: What is the status of a Chinese who
stays here for 200 days in 2001?
A:
NRAETB
Q: Suppose he stayed here for 100 days
in
2000 and another 100 days in
2001?
A: He is not a NRAETB. To be considered
as such, he must stay for an aggregate
period of more than 180 days during a
calendar year.

Q: What is the income tax applicable to

said taxpayer?
A:
Net Income Tax (NIT) on all its
income
derived
form
sources
within
the
Philippines.
Non-Resident Alien
in
Trade or Business

Not

Engaged

Q:
How many
kinds?
A:
Only
one.

TAXATION LAW REVIEW

NOTES Income earned

The reason why the NRANETB are

included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.
Aliens Employed by Regional or
Area Headquarters &
Regional
Operating
Headquarters
of
Multinational
Companies/
Aliens
Employed by Ofshore Banking
Units (Aliens Employed by MOP)
Status: either a RA or NRA depending on
their stay here in the Philippines.
Their status may either be RA or NRA
because Section 25 C and D does not
distinguish.
Liable to pay 15% from Gross Income
received from their employer

from all
OTHER
sources shall be subject to the pertinent
income tax, as the case may be.
Aliens Employed in
and
Ofshore
Banking
Units

Multinational

Q:
How
are
they
classified?
A:
If they derived income from other
sources aside from their employer, you
may classify them either as RA, NRAETB, or
NRANETB.
Aliens
Employed
Service
Contractors
S ubcontractors

in

Petroleum
and

Status:
ALWAYS
NRA.
If
they
derive income from other sources, such
income shall be subject to the pertinent
income tax, as the case may be.
Income derived or coming from their
employer shall be subject to a tax of 15% of
the gross.
II.
TAXPAYER

CORPORATE

1.

Domestic Corporation (DC)

created or organized under Philippine
laws.
2. Resident Foreign Corporation (RFC)

corporation created under foreign

law, and engaged in trade or
business.
3. Nonresident
Foreign
Corporation
(NRFC) created under foreign law,
and NOT engaged in trade or
business.
Q: What are deemed corporations under
the
NIRC?
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts,
associations,
or
insurance
companies, but DOES NOT includes general
professional partnerships and a joint
venture or consortium formed of the
purpose
of
undertaking
construction
projects or operations pursuant to or
engaging in petroleum, coal, geothermal or
consortium agreement under a service
contract with the Government.
1. Partnerships and others no matter
how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR
v.
COURT
OF
APPEALS
The phrase no matter how created
or organized was interpreted.
Even if the partnership was pursuant
to law or not, whether nonstick, nonprofit,
it is
still
deemed
a
corporation.
Reason: because of the possibility
of earning profits form sources within
the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule:
a partnership is a
corporation.

Exception:
Partnerships
(GPP
)

General

Professional

Q:
What is a
GPP?
A: It is a partnership formed by persons
for the
sole
purpose
of
exercising
their

profession, no part of the income of which

in derived from any trade or business. (what
if a partner has other businesses not related
to the GPP? > read section 26 quoted
hereunder)
Two (2) Kinds of GPP formed
for:
1) Exercise of a profession not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and engaged
in trade or business a corporation;
subject to CIT
TAN
v.
DEL
ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to
pay corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to
NET
INCOME TAX, it is not exempt and it
is
considered
a
corporation.

2. if the income is derived from other

sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is
not deemed a corporation. ( separate
return for
this. It will not reflect in the GPPs
ITR)

This is pursuant to the fact that FIT

will not reflect in the ITR of the GPP since
the withholding agent is liable for the
payment of the FIT.
Q: What
is
the
importance
of
knowing whether the corporation is exempt
or not?
A: To determine their tax liability. This
is
important to determine the tax liability of
the individual partners of the GPP.
Section 26 (1st paragraph) provides:
a GPP as such shall not be subject to the
Net Income Tax however, persons
engaging in business as partners in a
GPP shall be liable for income tax only in
their separate and individual capacities.
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP
will be included in the gross income of the
partner.

Q: If the GPP is deemed a corporation, will

the partners have to pay for the income
tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend
which is subject to
FIT.
Q:
Is a joint venture a
corporation?
A:
Generally, yes, it is a
corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do
we have?
A: Three, namely Corporation X, Y, and
X+Y.
the joint venture has a separate and
distinct
personality
from
the
two
corporations.
Q: When is a joint venture not considered
a corporation?
A: It is not deemed a corporation when it
is
formed for the purpose of undertaking a
(construction?) project or engaging in
petroleum,
gas,
and
other
energy
operations pursuant to ? or consortium
agreement under a service contract with
the government.
Domestic Corporation
Is one created or organized in the
Philippines or under its
laws.
Taxable on all income derived
from sources within or without the
Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade
or business in the Philippines.
Taxable for income derived within
the
Philippines.
Non-Resident Foreign Corporation

Foreign corporations not engaged in

trade or business in the Philippines.
Taxable for income derived within the
Philippines.
Both DC and RFC are liable for
the payment of the following:
1) NIT Net Income Tax

2) FIT Final Income Tax

3) 10% income tax on corporations
with properly accumulated earnings.
4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross
Income
5) Optional Corporate Income Tax of
15% of the Gross
Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT Final Income Tax
III.

TRUST AND

ESTATE Q: How many for

each?
A: Seven (7) kinds for each because the
trust
or estate will be determined by the status
of the trustor, grantor, or creator, or of
the
decedent.
The status of the estate is determined
by the status of the decedent at the time of
his death; so an estate, as an income
taxpayer can be a citizen or an alien.

When a person who owns property

dies, the following taxes are payable under
the provision of income tax law:
1)
Income Tax for Individuals to
cover the
period
beginning
January to the time of death.
2) Estate Income Tax if the property
is transferred to the heirs.
3) If no partition is made, Individual or
Corporate
Income
Tax,
depending on whether there is or
there is no settlement of the
estate. If there is,
depending
on whether the
settlement
is
judicial
or
extrajudicial.
Judicial Settlement
1) During
the
pendency of
the
settlement, the estate
the
through
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2)
If upon the termination of the
judicial
settlement,
when
the
decision of the court shall have
become final and
executory, the heirs still do not
divide the property, the following
possibilities may arise:

a)

If the heirs contribute to

the estate money, property or
industry with the intention to
divide the profits between and
among
themselves,
an
UNREGISTERED PARTNERSHIP is
created and the estate becomes
liable
for
payment of
CIT
(Evangelista vs. Collector (102
Phil 140))
b) If the heirs without contributing
money, property or industry
to
improve
the
estate,
simply
divide
the fruits thereof between
and
among
themselves,
a
COOWNERSHIP is
created
and
Individual Income Tax (IIC) is
imposed on the income derived
by
each of the heirs, payable in their
separate and individual capacity
(Pascual vs. COMM (165 scra
560) and Obillos vs. COMM (139
SCRA
436))
Extrajudicial
Settlement

Settlement

and

if

NO

Some possibilities may arise.

The
income tax liability depends on whether or
not the unregistered partnership or coownership is created.
Trust
Trusts can be created by will, by
contract or by agreement. The status of a
trust depends upon the status of the
grantor or trustor or creator of the trust.
Hence, a trust can also be a citizen or an
alien.
Q: Where the trust earns income and such
income is not passive, who among the
parties mentioned is liable for payment of
income tax thereon?
A: The TRUST itself, through the trustee
or fiduciary but only if the trust is
irrevocable.
If it is revocable, or for the benefit of
the

grantor, the liability for the payment of

income tax devolves upon the trustor
himself in his capacity as individual
taxpayer.
KINDS
TAX

OF

INCOME

Q: How many kinds of income

tax?
A:
There are Six (6),
namely:

1.
2.
3.
4.

Net Income Tax (NIT);

Gross Income Tax (GIT);
Final Income Tax (FIT);
Minimum Corporate Income Tax of
2% of the Gross Income (MCIT)
5. Income
Tax
on
Improperly
Accumulated Earnings subject to
10% of the Taxable Income;
6. Optional Corporate Income Tax of
15% on the Gross Income
I.

NET INCOME

TAX Q: what is the

formula?
A: Gross Income Deductions and
Personal
Exemptions = Taxable Income
Taxable Income x Tax Rate =
Net
Income
Taxable Net Income Tax Credit
= Taxable Net Income Due
Net Income means Gross Income
less deductions and
Formula:
GI

- deductions
Net Income x
Tax Rate
Income Tax Due
Q: What is the rate?
A: Individual: 32%
Corporation:
35%
NOTE: the formula allows for
deduction, personal exemptions and tax
credit.
Q: What are the other terms for NIT?
A: NIRC:
a. taxable income
b. gross income (wlang kasunod)
only income tax from improperly
accumulated earnings does not use this
term.
1. CFA: to be included in the gross
income
2. Revenue Regulations and Statutes:
a. ordinary way of paying
income tax;
b. normal way of paying income tax .
Characteristics:

Q: Who are not liable to pay

NIT?
A:
1.
NRANETB (liable for
GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP,
if they derive income from other
sources;
Q: Is the taxable net income subject
to withholding tax?
A: It is subject to withholding tax if the
law says so.
Q:
What if the law is
silent?
A: If the law is silent, it is not subject
to withholding tax.
Q: What is another term for withholding
tax? A: It is
also
known
as
the creditable withholding tax system
under the income tax law.
Q: Do we have to determine if there is
an actual gain or loss?
A: Yes because the formula for
deductions, etc.
Q: If you fail to pay, will you be held
liable?
A:
Yes, you will be held
liable.
II.

GROSS INCOME TAX

(GIT) Q: What is the formula?

A:
Gross Income x
Rate
Q: How many taxpayers pay by way of
the gross?
A:
There are two
(2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax
credit.
Characteristic
s:

NRANETB and NRFC, though not

engaged in trade or business, are liable to
pay by way of the gross for any income
derived in the Philippines. While not
engaged in trade or business, there is a
possibility that they may earn income in the
Philippines.

Q: Is this subject to withholding

tax?
A: Yes, it is subject to withholding
tax because
the
persons
liable
are
foreigners. This rule is ABSOLUTE
NOTE: there are two (2) ways of paying
taxes depending on which side of the bench
you are.
III.

FINAL INCOME TAX

(FIT) Q: What is the formula?

A:
(Each Income) x (Particular
Rate)
Unlike in the gross income tax where
you add all the income from all the sources
and multiply the sum thereof by the rate
of 25% or 35%, as the case may be, in final
income tax, you cannot join all the income
in one group because each income has a
particular rate.
Q:
What is the
rate?
A: 35% as the case may
be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax
credit.
Characteristic
s:

Q: Who are liable to pay

FIT?
A: All taxpayers are liable to pay
FIT
provided the requisites for its application
are present.
Q: Do you still have to pay
NIT?
A: No. if you are liable for FIT, no need
to pay NIT or else there will be double
taxation.
NOTE: as time passed by, the number of
FIT
increased.
before 1979 proceeds from the sale of
real property not exempt, it is subject to
NIT or GIT, as the case may be.
after 1979 capital gains tax. Proceeds
from the sale of real property is
exempt.
Q: If you fail to pay, will you be
liable?
A: No. the withholding agent is liable to
pay
FIT.

Case of Juday, Richard and

Regine

 For one to be liable for the payment

of NIT, the income must be derived on the
basis
of
an
employer

employee
relationship.

Q:
Who pays this
tax?
A:
DC and RFC
only.

Employer

Relationship
(3 Cs):
1.
contract;
2. control;
3.
compensation;

Q: May it be applied simultaneous with

NIT? A: No. there must be a computation
of the NIT first then apply which ever is
higher. The MCIT is paid in lieu of the NIT.

Employee

However, in the case of celebrities,

there is
no
employer

employee
relationship, they are merely receiving
royalties. Royalties are subject to final
withholding tax, thus the agent is liable to
pay. (so, distinguish nature of income,
whether royalty or compensation)
RULE:
1. for NIT, whether or not subject to
Creditable Withholding Tax (CWT),
the taxpayer is always liable if he
fails to pay.
2. for GIT and FIT, absolute liability
to pay is upon the withholding agent.
Q: Why is it that the rate of withholding
is always lower, and why is it that the
rate of GIT and FIT is always equal?
A:
1. NIT allows deductions;
2. GIT and FIT do not allow
deductions.
Q: Do you have to determine whether
there is an actual loss or gain?
A: No need to determine because the
formula does not allow deductions. Gain
is
presumed.
No
liability
for
final
withholding
tax except for the sale of shares of stock.
(?)
IV.
MINIMUM CORPORATE INCOME
TAX (MCIT)
Q:
What is the
formula?
A:
Gross Income x
2%

Reason: to discourage corporations

from claiming too many deductions.
V. OPTIONAL CORPORATE INCOME
TAX Q: Under what section is this
found?
A: Section 27A 4th paragraph and Section
28
A(1)
4th
paragraph.
Q:
Is this applicable
now?
A:
No. this is not
implemented.

yet

Q:
To what kind of taxpayer does this
apply?
A:
To DC and
RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st
five individual
taxpayers?
A: Only two (2) kinds are applicable out
of the six (6) kinds of income taxes.
1. NIT;
2. FIT;
Q: What kind of income tax will apply
to
AEMOP
?

A: Generally, only one kind, 15% FIT

with respect to
income derived
from
their
employer.
Income
from
other
sources:
1. Determine the status of the AEMOP;
a. NIT
b. FIT
2. NRANETB
a. GIT
b. FIT
Q: What kind of income tax applies to
DC?
A: Only four (4) kinds will apply out of
the six (6)
1. NIT
2. FIT
3. MCIT
4. Improperly Accumulated Earnings
Q: May all
of
these
be
applied
simultaneously?
A:
No.
only
the
NIT,
FIT
and
Improperly
Accumulated
Earnings
be
applied
simultaneously. NIT and MCIT cannot be
applied simultaneously. Only one will
apply, whichever is higher between the two.
Q: What kind of tax will apply to
NRFC?

TAXATION LAW REVIEW

NOTES
A: Out of the six (6) kinds, only two (2)
will apply:
1. GIT
2. FIT
Q: What is the significance of knowing the
classification of these taxpayers?
A:
1. to determine the kind of income
tax applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable
for income within and income without?
A:
Only
1. RC
2. DC
The rest of the taxpayers will be liable
for income coming from sources within.

Income from sources without, no

liability, therefore exempt.
NOTE: The income taxpayer is not a RC or
a DC. Determine if the income came from
sources within or without to know the
taxpayers liability.

If the facts are specific, do not

qualify your answer. Answers must be
responsive to the question.
Q:
Is section 42 relevant to all the
taxpayers? A: NO. SECTION 42 IS NOT
MATERIAL TO ALL taxpayers, particularly
the RC and DC because these two are liable
for both income within and without.

Section 42 is applicable only to

taxpayers who are liable for income within,
the rest of the taxpayers are otherwise
exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A:
It establishes two (2) kinds of
interests,
namely
:
1. interest derived from sources
within the Philippines.
2. interest on bonds, notes or
other

Q: What is the determining factor in order

to
interest bearing
obligations of
residents, corporate or otherwise.

TAXATION LAW REVIEW

NOTES
know if
within?

the

income

is

from

A:
1.

location if the bank is from within

the Philippines (pursuant to a
Revenue Reg.)
2. residence of the obligor (whether an
individual or a corp.) contract
of loan
with
respect
to
the
interest earned thereon.

For example the borrower is a

NRAETB, he borrowed money from a RA.
The interest earned by the loan will be
considered as an income without. RA is
not liable to pay tax since RA is liable only
for income within, therefore exempt from
paying the tax.
NATIONAL DEVELOPMENT CO. v.
CIR
F:
The
National
Development
Company (NDC) entered into a contract
with several Japanese
shipbuilding
companies for the
construction of 12 ocean-going vessels.
The contract was made and executed
in Tokyo.
The payments were initially in
cash and irrevocable letters of credit.
Subsequently, four promissory notes
were signed
by
NDC
guaranteed
by the

Q: What is the determining factor in order

to Government
.
Later on, since no tax was withheld
from the interest on the amount due,
the BIR was collecting the amount from
NDC.
The NDC contended that the
income was not derived from sources
within the Philippines, and thus they
are not liable
to withhold anything. NDC said that
since the contract was entered into and
was executed in Japan, it is an
income
without.
H:
The governments right to levy
and collect income tax on interest
received by a foreign corporation not
engaged in
trade or business within the Philippines
is not planted upon the condition that
the activity or labor and the sale from
which the income flowed had its situs in
the Philippines. Nothing in the law
(Section
42(1)) speaks of the act or activity of
nonresident
corporations
in
the
Philippines, or place where the contract
is signed. The residence of the obligor
who pays the interest rather than the
physical

TAXATION LAW REVIEW

NOTES
location of the securities, bonds or notes
or the place of payment is the
determining factor of the source of the
income. Accordingly, if the obligor is a
resident of the Philippines, the interest
paid by him can have no other
source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two corporations,
a DC
and
a
RFC,
and
both
corporations declared dividends, what is the
liability of the Indonesian firm if the same
received the dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay taxes.
NRFC, under the law, is liable if the
income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firms liability will depend
on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources
within;
2. the 1st requisite is for the three (3)
preceding taxable years from the
time of declaration of the dividends.

In the absence of any or

both requisites, the
income
will
be
considered from sources without, thus
exempting the Indonesian firm from
payment of income tax.
Q: Same scenario, but this time the shares
of stock of the two corporations were being
disposed off. What is the tax liability of
the Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for
the payment of taxes because the
income is from sources within.
2. sale of shares of stock of RFC:
the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)

Q: Filipino
Executive,
assigned
to
Hong Kong, receiving two salaries, one from
the Philippines, the other from HK. The
performance of the job was in HK. Is he
liable for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working
in
HK under contract). The compensation
he
received is not subject to tax pursuant
to
Section 42(c). Compensation for labor or
personal
services
performed
in
the
Philippines is
considered an
income
within.
When it comes to services, it is the place
where the same is rendered which
is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective
of
the
place
of
payment.
Q:
Suppose a DC hired a NRFC to
advertise its products abroad. What is the
liability of the NRFC? Will there be a
withholding tax imposed?
A:
The
income
is
derived
from
sources without since the services in this
case were
performed abroad. As such, the NRFC is
not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to
NIT, then it is not also subject to
withholding tax.
Q:
What is the controlling
factor?
A:
The controlling factor is the place
where the services were performed and
not where
the
compensation
therefore
was
received.
RENTALS
AND
ROYALTIES
income from sources within
Q:
Granted
by
who?

A:
NRFC

TAXATION LAW REVIEW

NOTESQ: if the franchise is granted by RFC, how

Q: Suppose you are the franchise holder,

how much is the withholding?
A:
35%
(GIT)

much is the withholding?

A: 10% (NIT) and in some cases
15%
Section 42(4) MEMORIZE FOR
RECIT (CEKSTTM)
a. right of, or the right to
use copyright, patents, etc

b. industrial,
commercial,
scientific equipment
c. supply of knowledge
d. supply
of
services
by
nonresident
e. supply of technical
assistance f.
supply of
technical advice
g. right to use: motion
picture films, etc.
Q: What is the rule as regards the sale of
real property?
A: Gains, profits, and income from the
sale
of real property located within the
Philippines considered income within.
Q: What about the sale of personal
property, what is the rule?
A: Determine first if the property
produced or merely purchased.

is

1.

it the property is manufactured in

the Philippines and sold abroad, or
vice- versa, it is an income partly
within and partly without.
2. if
the
property
is
purchased,
considered derived entirely from the
sources within the country where it
is
sold.
EXCEPTION: shares of stock of domestic
corporation, it is an income within
wherever it is sold.
COMMISSIONER
v.
IAC
Q:
What is the issue
here?
A: They cannot determine if the
business expense was incurred in the
Philippines.
Q: if you are the BIR, and the taxpayer is
not sure, will you disallow the
deduction?
A:
No. determine it pro
rata.
Formula:
GI
from
within
GI from without
Example:
100,000

the

1,000,000
= 10%
Hence, 10% is the ratable share in
deduction. If the deduction being asked
is
100,000 not all of it will be allowed.
Only
10,000 or 10% of 100,000 will be
allowed as deduction.

CAPITAL
LOSSES

GAINS

AND

Section 39
Q:
What is capital
asset?
A: Capital asset is an asset held by
a taxpayer which is not an ordinary asset.
The
following
are
ordinary
assets:
1.
stock in trade of the taxpayer or
other property of a kind which would
properly
be
included
in
the
inventory
of the taxpayer if on hand at the
close of the taxable year;
2. property held by the taxpayer
primarily for sale to customers in
the ordinary course of trade or
business;
3. property used in trade or business
of a character which is subject to
the
allowance for depreciation provided
in subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a capital
loss?

A: Capital gains are gains incurred

or received from transactions involving
property which are capital assets. Capital
losses are losses incurred from transactions
involving capital assets.
Q: What is ordinary gain? Ordinary
loss?
A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C,
and
D apply to capital assets
only.
1. time when property was held (39B)
(holding
period
applies
only
to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I.
ASSETS

CAPITAL

Q:
What
period?

is

the

holding

A: If capital asset is sold or exchanged by

an individual taxpayer, only a certain
percentage of the gain is subject to income
tax.
It is the length of time or the duration of
the period by which the taxpayer held the
asset.
Q:
What
is
the
requirement?
A:
1. the taxpayer must be an
individual.
Section 39B states in case of
a
taxpayer, other than a
corporation..
2. property is capital in nature.
Q:
What is the
term?
A: 100% if the capital asset has been
held for not more than 12 months; (short
term)
50% if the capital asset has been held
for more than 12 months. (long term)
NOTE: the holding period applies to
both gains and losses.
Q: Do you include capital gains in your
ITR?
A: General rule: yes, include in
ITR.
EXCEPT:
1. gains in sales of shares of stock
not traded in stock exchange(section
24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
A:
1. property is an ordinary
asset
2. taxpayer is a corporation
3. sale of real property considered
as ordinary asset
II.
LIMITATION ON CAPITAL
LOSSES
synonymous to 34D & loss capital
rule
this applies to individual and
corporate taxpayer

A: If it is otherwise, it will run counter

with the rule that the loss should always be
connected with the trade or business,
capital losses are losses not connected to
the trade or business, thus it is not
deductible
Q:
what
is
your
remedy?
A: 39 D, net capital loss carryover
Q: What is the rationale in allowing ordinary
loss to be deducted from either
the capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it
already
carries with it the
deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except:
a.
34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRYOVER Q: What are the
requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately
succeeding year;
3. applies only to short term
capital gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: What is the loss limitation
rule?
A: Pursuant to Section 39 C, losses
from sales or exchange of capital assets
may be
deducted only from capital gains, but
losses
from the sale or exchange of ordinary
assets may be deducted from capital or
ordinary
gains.
(applies
to
individual
and
corporation)

Q: In connection with 34 D, Losses in

Allowable Deduction, what is the rationale
behind this rule?

Q: How does net capital loss carry-over

difer from net operating loss carry-over
under Section 34 D (3)?
A: Under the net capital loss carry-over
rule, the capital loss can be carried over
in the
immediate
succeeding
year.
In
net
operating
loss carry-over rule, capital loss can
be carried over to the next three (3)
succeeding calendar year following the
year when the loss was incurred.
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
In net operating loss carry-over there
is an exception to the 3 year carry-over
period. In case of mines other than oil and
gas wells, the period is up to 5 years.
Q:
What is a short
sale?

A: Sale of property by which the taxpayer

cannot come into the possession of the
property. EX: shares
CALAZANS
v.
CIR
F:
The
taxpayer
inherited
the
property fro her father and at the tie of
the inheritance it was considered a
capital asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale
of the lots.
I:
Was
the
property
converted
to ordinary asset?
H:
The conversion from capital asset
to
ordinary asset is allowed because
Section
39 is silent.
Q: Are you allowed to convert ordinary
asset to capital asset?
A: General rule: it is not allowed.
Read
Revenue Regulation 72003
The case at bar still applies despite of
the issuance of said Revenue Regulation.
Q: What is the conversion prohibited in
the
Revenue
Regulation?
A:
Conversion of real estate
property.
Q:
What is the
rationale?
A: Section 24 D final income tax of 6%
if the real estate is capital asset. If it is
an
ordinary asset, it will be subject to
income
tax of 32% for individual taxpayer, and 35%
if the taxpayer is a corporation.
Q: What are the properties involve in the
RR
7-2003?
A: 1. those property for sale by the
realtors
2. real property use in trade or
business not necessary realtors

Q: That is the conversion allowed by the

Revenue
Regulation?
Is
there
an
instance when an ordinary asset may be
converted to capital asset?
A: Yes, provided that the property is
an asset other the real property, and it has
been idle for two (2) years.
SECTION
24
TAX
INDIVIDUALS

ON

Q: What is the tax mentioned in section

24?

A:
NIT
Q:
What is taxable
income?
A:
(memorize section 31) it is the
pertinent items of gross income specified in
the NIRC, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by the
NIRC or other laws. It refers to NIT because
it allows deductions.
Q: What do you mean by the phrase
other
than B, C, and
D?
A: It means that if the elements of
passive income are present, the taxpayer
has to pay
FIT.
Q: Who are the taxpayers mentioned
in section 24?
A:
1. RC
2. NRC
3. OCW
4. RA

Additionally, under Section 25,

NRAETB
Q:
What is the tax liability of
NRAETB?

A: Section 25(1) NRAETB is subject to

income tax in the same manner as
those
individuals mentioned in Section
24.
Q:
What
about
Domestic
Corporations?
A:
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to
income tax.
Q: What
about
Resident
Foreign
Corporations
?
A:
Sec 28(l) it is subject to 35% Net
Income
Tax
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: Not Subject to Net Income Tax but
they are liable for Gross Income tax.
Q: Do legally married husband and wife
need to file separately or jointly?
A:
It depends
if:
1.
Pure
compensation
incomeseparate
2. Not Pure compensation incomejoint

Passive
Income
Interest,
winnings

Royalties,

prizes

and

Other

Interes
t
Q:
Bank Interest, what is the
requirement?
A: The bank must be located in the Phils.
because the income must be derived from
sources w/in.
Q: Do you include this in your
ITR?
A: No! because it is subject already to
FIT. The bank is the one liable for the
payment of
this.
NOTE: Liability for NIT, GIT, and MCIT
will depend on the elements present.
Q:
Who are liable for bank
interest?
A:
1. RC }
2. NRC} Sec. 24 B1
3. RA }
4. NRAETB
5. NRANETB Sec. 25 (25%)
6. AEMOP
7. DC
8. RFC
9. NRFC

Q: Does it apply to all individuals?

A: No! It does not apply to 10 NRFC and
NRA
and NRAETB because they are liable to GIT.
NOTE: if the depositary is a Non resident it
is exempt
Resident citizen is liable to pay tax
for bank interest earned abroad (NIT)
Q: If the money earns interest in abroad
who is liable?
A: RC and DC only by NIT, the rest
are exempt. No FIT abroad because we
do not
have withholding agent abroad.
Q: MCIT applies to DC and RFC in relation
to bank interest?
A: If the bank interest is derived abroad,
RFC
is exempt but DC is liable.
Impose NIT if it is higher than the MCIT,
otherwise apply MCIT if its higher than
the NIT
Prizes
Requirements:
1. Prizes must be derived from
sources w/in the Phils.
2. it must be more than P
10,000
Q: Who are liable? (FIT)
A:

Q:
What is the rate of
interest?
A:
FIT of
20%
Q: Is there a lower rate?
A: 7 % if under EFCDS
Q: What if the depositor is non
resident alien?
A:
-W/in FIT
- W/out- exempt
Q:
What is the rule on pretermination?
A: If it is pre terminated before 5th year a
FIT shall be imposed on the entire income

1.
2.
3.
4.
5.
6.

RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)

and shall be deducted and withheld by the

depositary bank from the proceeds of
the long term deposit based on the
remaining maturity thereof
a. 4 yrs to less than 5 yrs 5%
b. 3 yrs to less than 4 yrs- 12%
c. Less than 3 yrs- 20%

Not Liable
1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT)
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT

Q: When can we apply NIT in Prizes?

A: 1. When the taxpayer is RC, RFC and
DC
2. For DC and RC it must be
derived from income abroad RFC it
must be derived from income w/in
3. amount is more than P10,000

NOTE: If the prize is derived from sources

w/in but it is below P 10,000 it is not
subject to tax. If derived from sources
abroad, most of them are exempt except
for RC and DC who are liable w/in and
w/out.
Q; Is it possible for RC and DC to pay
MCIT?
A: Yes if MCIT is higher than
NIT.
Winnings
Q: Do we apply the P10, 000 req.?
A: No, we do not apply it only applies
to prizes.
It
must not
pertain to
illegal
gambling.
Thus, the only requirement is it must
be derived from income w/in.
Q: Who are liable? (FIT)
A:
1. RC
2. NRC
3. OCW
4. RA
5. NRAETB
6. AEMOP (RA, NRAETB)
Not liable to FIT?
1 NRANETB- GIT
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT
4 RFC- law is silent
5 NRFC- GIT
Q: When does NIT apply to winnings?
A:
1. If Taxpayer is DC or RC
2. Income is derived abroad
3. Taxpayer is RFC and income w/in.
NOTE: If income abroad, most TP are
exempt except DC and RC
Q: MCIT applies when?
A: It is higher than the NIT
Royalties
Requirement:

Q: You are a writer for Snoop Dogg are

you liable for FIT? What if for April Boy?
A: Liable for NIT if Income abroad like
a writer for Snoop. While FIT if for April Boy.
Q: Who are liable (FIT)?
A:

1.
2.
3.
4.
5.
6.

RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)

Not Liable?
1. NRANETB
2. AEMOP
3. DC
4. RFC
5. NRFC
NOTE: Lower rate of 10% applies to all
except
NRANETB
Q: When do we apply NIT to Royalties?
A:
The income is from w/in
Rate? 20%. Lower rate? 10% on
books, literary works and musical
compositions.

1. TP is RC or DC
2. Income is from w/out
3. TP is RF and income is w/in
If income is from sources abroad all
are exempt except RC and DC
Dividends
Confined with
dividends.

cash and/or

Q: What are dividends?

property

A: Any distribution made by Corporation

to its stockholders outside of its earnings
or
profits and payable to its stockholders
whether in money or in property (Sec. 73)
COMM. vs. MANNING
Q: Where did it come from?
A: shares come from another shareholder
Q: What are the dividends included?
A: Sec. 24 refers to cash or property
dividend
H: For stock Dividends to be exempt it must
come from the profit of the corporation.

Stock Dividends it is the transfer of the

surplus profit from the authorized capital
stocks.
Q:
Assuming
that
there
are
5
Incorporators, the Corporation has a P5
M Authorized Capital stock. It distributed 1
M stock dividends, is it taxable?
A: NO, the dividends did not go to the
Stock holder but to the Auth Capital
Stock. Only
cash and Prop Stock go to the Stock
holder.
Sec 24 B does not mention stock
dividends because it is not subject to FIT
but it is subject to NIT under Section 73.
Q: Is there an exception when stock
dividends are not taxable?
A:
YES, if the shares of stocks are
cancelled
and redeemed meaning it was reacquired
by the corp.
A NS CO R
CA S E
the
stockholders
the
payment
of
taxes

cannot

escape

Requirement
:
Gen Rule- the dividends must be
distributed by a DC.
Except- Regular operating- always a
foreign corp.

FIT

What rate: 10%

Q:
liable?
A:
1.
2.
3.
4.
5.
6.

Who

are

RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)

Not liable?
1. NRANETB
2. AEMOP
3. DC

Q: Determine the
following?
A:
4. RFC
5. NRFC

tax

liability

of

the

Shares of association and partnership

is taxable

1. DC a Stockholder of DC= Exempt

2. RFC stockholder of DC= Exempt also
3. DC stockholder of RF= Liable for NIT.

shares of stock in any DC and real prop

shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.

Capital Gains From Sale of Shares of

Stock
Not
Traded
(24C)

SEC. 24 B 1&2: If the elements

are present NRANETB and NRFC are liable to
pay GIT.

1.
2.

3.
4.

Subj to FIT
Determine whether there is a loss or
a gain because the tax is impose
upon
the net capital gains realized from
the sale, barter, or exchange or
other disposition of the shares of
stock in a domestic corp.
It is uniformly imposed on all
taxpayer
not subj to w/holding tax.

Requirements
:
1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the
stock market
25 R last part: Capital Gains realized
by NRANETB in the Phils. from the sale of

Except: under 24 C for NRANETB. What

do you mean by the phrase the
provisions of
39
notwithstanding?
It refers to the holding period. When it
comes to capital gains from sale of shares
of stock not traded and capital gains from
the sale of real prop. The holding period
does not apply because the basis will be
those provided in 24 C & D and not under
39B (GSP or FMV)
ELEMENT #1 The share is a share in
DC Q: What if the share is from foreign
corp?
A: Determine the income
If
income w/in read Sec. 42
(E)

considered.

 If the shares sold are that of a

foreign corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is
always considered an income w/in
regardless where
it was sold.

MCIT

If the shares are ordinary asset

Q: Shares of Foreign Corp sold in

Phils.
Whos liable? What tax?
A: Not subj to FIT because one of
the elements is not present . Shares not
being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB,
AEMOP (RA, NRAETB) will pay NIT. DC and
RFC
b) NRANETB and NRFC will pay
GIT
Q: Shares of Foreign Corporation
abroad?
A: It will be considered an income
w/out. Thus:
most of them will be exempt
except RC and DC liable to pay
NIT

a. Income within if sold in the Phils:

most
will
pay
except
NRANETB and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC

sold

ELEMENT # 2 NOT TRADED OR SOLD

IN THE STOCK MARKET
if sold in the stock market- it is not
subj to FIT
if sold in the stock market, it will be
subj to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital
asset.
Q: When is it considered an ordinary
asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the
ordinary course of trade or
business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will
be subj to FIT

1. Ordinary shares in DC- income w/in

a. Most of the taxpayer will pay
NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations

Q: When is a RFC subj to

NIT?
A:
1. Sale of shares of stock of a
Foreign corp in the Phil.
2. sale of shares of stock of DC
which are ordinary asset

2. It must be a capital
asset
3. The seller must be an
individual, estate or trust or a DC

DC and RFC are subj to MCIT which

may be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains
Property
(24D
)

From

Sale

of

Real

In 39 B the holding period does not

apply because the basis of income tax is
the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher- 6%
FIT
Requirements
:
1. The real prop must be sold w/in the
Phils and located in the
Phils.

RFC not liable for FIT but liable to pay

NIT
if all the elements are
present.
NRFC liable to pay GIT and not
FIT
NRANETB liable to
elements are present.

pay

FIT

are

all

ELEMENT # 3 The real prop must be a

capital asset
Q:
When considered a capital
asset?
A:
Read R.R. 72003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A:
Other property not mentioned are
capital asset.

Q:
What if all the elements are not
present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT

Q: What if the prop being sold was a

movie house, can he claim for the
exception?
A: the prop covered by the exemption is
a residential lot

Q: May a RC be liable to pay NIT even if

all the elements are present?
A: YES, disposition made to the Govt.
Thus, the taxpayer has the option of
paying 32%
NIT or 6%
FIT

Q:
Who can claim the
exemption?
A: Only the taxpayer mentioned in Sec.
24

Q:
Which
is
more
advantageous?
A: It depends determine first if theres a
loss or a gain.
If theres a gain choose to be taxed at
6%
FIT. In this case the gain is always
presumed.
If theres a loss choose to be taxed at
32% because losses may be considered an
allowable deduction .
Other
transactions
covered:
1. sale
2. barter
3. exchange
4. other disposition

are

NOTE: If the prop is under mortgage

contract and the mortgagee is a bank or
financial inst, the FIT does not apply
because the property is
not
yet
transferred because theres a period of
redemption
If after a year the mortgagor failed to
redeem the property that is the only time
that the FIT will apply because theres
now a
change of ownership. If redeemed w/in 1 yr
period FIT will not apply because theres
no change of ownership.
If the mortgagee is an individual the FIT
is imposed whether or not there is a
transfer of ownership.
Exceptions
(24(D2))

Requirements
:
1. The purpose of the seller is to
acquire new residential real prop

2. the privilege must be availed of w/in

18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with
the
intention to avail of the exemption
4. the adjusted basis or historical cost
of the residence sold shall be
carried over to the new residence.
5. the privilege must be availed
only once every 10 yrs
6.
Certification of the brgy. Capt
where the taxpayer resides that
indeed the prop sold is the principal
residence of
the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and
it was sold only for 2M, what will happen to
the unused portion or profit?
A: If the proceeds are not fully utilized,
the portions of the gain is subj to FIT
SEC. 27A RATES OF INCOME
TAX
Q: How many income taxes are paid by
a
DC?
A:
1. NIT

2. MCIT
3. FIT
4. 10%Improperly
Accumulated
Earnings
5. Optional corporate income tax of
15%
of the gross
DC liable for five, but the optional is
not yet applicable so only 4.
Q:
How
many
can
simultaneously?
A: ONLY 3
1. NIT, FIT and 10% IAE
2. MCIT, FIT, 10% IAE

be

applied

SEC. 27 (B) PROPRIETARY

EDUCATIONAL INST. & HOSP.
Who
are
the
taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is
non profit only, is it exempt?
A: No, subject to 10% on their
taxable income except those covered by
subsection
(D)

PROVIDED that gross income from

unrelated business, trade or activity must
not exceed 50% of its total gross income
derived by such educational inst or hospital
from all sources
Requirements
:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross income
derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS,
TESDA, or CHED
Q: What do you mean by unrelated trade
business or activity?
A:
It means any trade, Business, or
activity which is not substantially related to
the exercise or performance by such entity
of its primary purpose or performance
Q: May a school or hospital be exempt
from paying tax? What are the req?
A:
1. It must be non- stock and non- profit
2.
the
assets
property
and
revenues must be used actually,
directly, and exclusively fro the
primary purpose
Q: Under what law? Is it the constitution
or the NIRC which provides fro the
exemption?
A:
It is under Sec. 30 of NIRC and
not under Sec.4 Art. 14 of the Constitution.
The
provision of the NIRC is the specific
law
which prevails over the Constitution which
is the general law.
exempt from all taxes and
custom
duties
Q:
What about exemption from
real property tax?
A:
Art. 6 Sec. 28 of the
Constitution:
charitable institution churches, .and all
lands buildings, actually directly and
exclusively used for religious, charitable,

and educational purposes shall be exempt

from taxation.
Not Sec. 4 of Art. 14 of the
Constitution.

Q: You donated a property to a school

will
you be liable for donors
tax?
A: not liable if it falls under Sec. 101 (3)
of the NIRC
REQ. FOR EXEMPTION TO DONORS
TAX:
1. it
must
be
non-stock,
non-profit
educational inst.
2. not more than 30% of the prop donated
shall be used by such donee for
admin
purposes.
3.
paying
no
dividends
4.
governed by trustees who dont
receive
any compensation
5. devoting
all
its
income
to
the
accomplishment and promotion of the
purposes
stated
in
its
Articles
of
Incorporation
Q:
What about exemption from
VAT?
A: Sec. 109 (m) of RVAT
Q: What about exemption fro Loc Gov
Code? A: If its non-stock, non-profit
educational inst. It may be exempted from
local taxation.

Q:
Is Art 14 Sec. 4 of the Consti
obsolete?
A:
NO, if the law is silent apply the
Consti.
SEC. 23:
the
GOVT
.

GOCC, AGENCIES, INST of

GEN RULE: Subj to

tax. EXCEPTIONS:
1.
GSIS
2.
SSS
3. PHIC
4. PCSO

PAGCOR
included.

no

longer

Q: If the GOCC is not one of those

enumerated does it follow all of its income
is automatically subject to tax?
A: NO. Under Sec 32. B (7) income
derived from any public utility or from the
exercise of
essential government function accruing
to the Govt of the Phils or to any political
subd. Are therefore exempt from income
tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may
still

be exempt under Sec. 32 b7b

performing governmental function
NOTE:
case

Pagcor

vs.

if

its

Basco

Q: What is the diference between Sec. 27

C
and 32 b7b?
A:
1. Sec 27 C exempts those
enumerated without any
qualification.
2. Sec. 32b7b qualification must
concur before it may be exempted.
Q:
Can the government impose tax on
itself? A: It depends on who the taxing
authority is. If the taxing authority is the
National Govt. as a rule, YES.
Exceptions
1. those entities enumerated under 27
C
2.
those GOCC falling under
32b7b
If the taxing authority is the local
government units, as a rule NO. LGUs are
expressly prohibited from levying tax
against: (Sec 133(o)
1.
National
Govt.
2.
Its
agencies
and
instrumentalities
3.
local
government
units
Exception:
Sec 154 of LGC says that
LGUs may fix rate for the operation of
public utilities owned and maintained by the
within their jurisdiction.
PAL CASE July 20
2006
H:
The SC used 133 (o)an exception
to pay tax, real estate tax, imposed by
City of PAranaque on NAIA. The SC
said that the airport is not an agency or
GOCC but mere instrumentality of the
Govt.
This is Gross ignorance of the law
Sec.
133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.

NOTE:
case
SEC.
D(1)

Mactan-

Cebu

Airport

27

Q: How many possible incomes were

mentioned?
A:
Two (2): bank interest and
royalties
REQ:

1. Bank interest must be received by

a
Domestic Corp
2.
Royalties derived from sources
within
Q: When it comes to bank interest, what
is the diference if the taxpayer is an
individual or corporation?
A:
If individual, they may be exempt
from the payment of interest in case of long
term deposit except NRANETB
If DC, they are not exempt from long
tem deposit.
Q:
What
about
royalties?
A:
If individual, have a lower rate of
10%on books, other literary and musical
compositions.
DC
have
no
lower
preferential rate.
SEC 27 D2: CAPITAL GAINS FROM SALE
OF SHARES NOT TRADED
SEC
27
EFCDS

D3:

Q:
What is the expanded foreign
currency?
A: It is a bank authorized by the BSP to
transact
business
in
the
Philippine
Currency

as well as acceptable foreign currency

or
both.
Q: What is the tax to be
paid?
A: Normally it is NIT because it is subj
under
Sec 27 D3 and 28
A
Q:
Who is the income
earner?
A:
Depositary
banks
Q:
Exempt from what kind of
transaction?
A: From foreign currency transaction. If it
involves foreign currency transaction it is
not exempt but subject to 35 % NIT
Q:
Who are the other
parties?
A:
1. Off shore banking units
2. branches of foreign banks
3. local commercial bank
4. Other depositary banks under EFCDS
5. Non- residents

if the above enumeration are the

parties, then depositary bank will be
exempt from paying the NIT

Foreign Currency Loan

A: NO, imposed in lieu of the NIT,

whichever is higher.

Q: Who is the lender? Borrower?

A: LenderEFCDS
Borrower- RC

Q: What is the Rationale?

A: to prevent corporations from claiming
too many deductions

EXEMPT
Ofshore banking units
Other depositary banks under
EFCDS

Q: When will it be imposed?

A:
A: Individual can sell all
real property
DC can only dispose
buildings.

exemption of NR from
EFCDS:
Q:
Who is the income
earner?
A: Non Residents whether
or
Corporations
Q:
Derived from
whom?
A:
Depositary Bank
EFCDS

individual

under

Q: Can
with
NIT?

Q: What is the diference between 24

b1 from 27 D3
A: In 24 B1, NR is exempt only from bank
interst derived from EFCDS while 27D3
exempts
NR
from
any
income
from
transactions
with
depositary
bank
under
EFCD
S

27 D5
Real
Prop
.

D(4)-

Capital

Gains

Inter-corporate

from

sale

of

Q:
What is the
tax?
A:
6%
FIT
Q: What is the diference if the seller is
an individual and a DC?

land

and/or

(E)

Q:
Applicable
whom?
A:
DC and
RFC

NOTE: Sec. 24 B Nonresident exempt

from bank interest under EFCDS

SEC.
27
dividendsexempt

SEC
27
MCIT

kinds of

it

be

to

applied

simultaneously

On the 4th year immediately ff the

year in which such corp commenced
its business.
2. When the MCIT is higher than the NIT
1.

Q: What is the carry over

rule?
A: Sec 27 E2 states the carry over
rule.
In order to avail: only in the year
where the MCIT is greater than the NIT.
Sec
A1

28

Q: What Kinds of taxes are paid by the

RFC?
A: NIT
MCIT

Sec.
28
CARRIER

A3-

INTL

Kind:
1. Air carrier
2. ships
An intl. carrier doing business in the
Phils. shall pay 2 % on its Gross Phil
Billings (GPB)
Q:
Is 28 A3 the Gen. rule or the
Exception?
A: It is the general rule because it is
under
28 A3
GPB is in the nature of FIT, applies only
if all the requirements are present.

Sec. 28 B2 MCIT on
RFC

RFC will be liable for NIT, hence a RFC

engaged in common carriage does not pay
GPB but NIT

27

Income
EXEMPT

same with Sec.

without:

International
Carrier:

A: GPB does not apply, it must be to

another airline

GPB refers to the amount of revenue

derived from:
carriage
of
persons,
excess baggage, cargo and mail originating
from the Phils
in
a
continuous and
uninterrupted flight, irrespective of the
place of sale or issue and the place of
payment of the tickets or passage
document.

Q: What if it did not originate from

the
Phils.?
A: Determine if its income within or
without. if ticket was purchased in the
Phils. it is
income within hence apply
NIT

REQ:
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale
or issue and the place of the
payment of tickets or passage
document.
Q: Do you consider landing rights to
determine liability? (RR 15-2002)
A:
1. If originates from the Phils and has
landing rights- ONLINE- RFC
2. No landing rights- OFFLINENRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does
not
exceed 48 hrs.
Q: When will the place of sale of
tickets matter as to the taxpayers liability?
A: The place of tickets is material only if
the two other elements are not present to
be able
to know if its subj to NIT or
exempt.
Revalidated, exchanged or indorsed
tickets
REQ:
1.

The passenger boards a plane in

a port or point in the Phils.
2. The tickets must be revalidated,
exchanged, or indorsed to another
airline.

Q:
What if its the same airline but
diferent
plane
?

if purchased outside, it is income

without, hence exempt

GPB means gross revenue whether

from passenger, cargo, mail

Transshipme
nt

REQ:
it must originate from the
Phils. up to final destination
- regardless of the place of
payments of passenger or freight
documents

REQ:
flight originates from the Phils
transshipment of passenger takes
place
at any port outside the Phils.
the passenger transferred on
another airline

Sec28 A(4) OFF SHORE BANKING

UNITS

Q:
How do you apply
GPB?
A: Only the aliquot portion of the cost of
the ticket corresponding to the leg flown
from the Phils to the point of transshipment
shall from part of the GPB.
Q:
Is it liable for the whole
flight?
A:
From the Phils to the point
transshipment, it is income w/in
From transshipment to final
destination, its income w/outEXEMPT
International
Shipping

sale or

of

OBUs
1. only acceptable foreign currencies
2. always a foreign corporation (subj to
NIT) except #3
3. Exempt if income is derived by the
OBU from EFCDS
4. Parties:
a) local commercial
banks b) Foreign bank
branch
c) Non Residents
d) OBU in the Phils.
Diference with
EFCDS: EFCDS

1. Acceptable foreign currency, Phil.

Currency or both
2. Can be a domestic or foreign
corporation
3. Exempt if income derived by DC
or
RFC from EFCDS
4. Parties:
a) local commercial
banks b) Foreign bank
branch
c) Non Residents
d) OBU in the Phils
e) Other banks under EFCDS
FOREIGN CURRENCY LOAN

10% FIT
If: Lender- OBU
Borrower- Resident Citizen
EXCEPT:
1. OBU
2. Local Commercial Banks
Transactions of Non Residents:
1. Income earner: Non- Residents
2. Lender: OBUs
NOTE:
Non
resident
exempt
transactions with OBUs and EFCDS

from

SEC. 28 A5 TAX ON BRANCH

PROFITS, REMITTANCES
profits based on the total profits
applied
or earmarked fro remittance remitted by
a branch to its head ofice
Subj to 15% tax
Except: those activities which are registered
with PEZA
NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
profits, income and capital gains
received by a foreign corporation during
each taxable year from all sources
within shall not be treated as branch
profits UNLESS the same are efectively
connected with the conduct of its trade
or business.
Branch Profit Remittance

Two ways to receive income (FC)

1. Branch

2. Subsidiaries
NOTE:
1. When a FC establishes branch, it is
always a FC
2. When a FC establishes DC, it is a RFC
Q; It is in addition to NIT- Why?
A: NIT because it is RFC
Q; What kind of tax is imposed under 28
A5?
A: 15% FIT
Q: How do you apply the rate?
A: multiplied to the total profit applied
or earmarked for remittance w/o deductions
It applies for branches that are:
1. the profit remitted is effectively
connected with the conduct of
its trade or business in the Phils.
2. One not registered with PEZA
MARUBENI CASE
F: A branch was established with
AG&P, there was investment with AG&P
Q: Did the petitioner participate with
the negotiation?

A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax
(BPRT)
10% Intercorporate Dividends
Q: Whats the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same
was
asking for a refund of tax erroneously
paid.
Q: Is is subj to FIT?
A: NO, exempt if petitioner is
RFC H: -not correct to pay 15%
To be liable for BPRT
1. It is a RFC
2. Branch did not participate in negotiations

SEC. 28 A6a
Regional or area headquarters (Sec.
22
DD) shall not be subject to tax exempt
from income tax if the requisites are
present.

Q:
What
are
the
requisites?
A:
1. the HQ do not earn or derive
income from the Phils.
2. Acts
only
as
supervisory,
communications, coordinating
centre
for their affiliates, subsidiary or
branches in the Asia- Pacific Region
and other foreign markets.
SEC.
A6b

28

Regional Operating HQ are taxable

and liable to pay 10% taxable income.
Regional Operating HQ is a branch
established in the Phils by a multinational
company engaged in any of the services:
1. Gen. Administration and Planning
2. Business Planning and Coordination
3. Sourcing and procurement of
Raw materials and components.
4. Corporate Finance and Advisory
Service
s
5. Marketing
Control
and
sales
promotion
6. Training and personal management
7. logistic services
8. research and development
services and product development
9. technical support and maintenance
10. data processing and
communication and business
development
Rationale: Why liable? Because the claim
for exemption of resident airlines shall
be minimized
SEC.
28A7a
Royalties:

Interests

and

20%FIT
Interests under EFCDS= 7
%
Sec. 28A7b Income derived under
EFCDS

1. Income derived from foreign currency

transactions with:
a) Non
Residents b)
OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the
EFCD
S

 As a Gen Rule: the above transaction

is
Exempt
EXCEPTION:
Income from such
transaction as may be specified by the
secretary of Finance, upon recommendation
by the Monetary Board to be subject to
regular income tax payable by any banks.
2. Interest income from foreign
currency loans

granted by depository bank under

said
EFCDS to others shall be subject to 10%
FIT
Exempt if granted
to:
1. Other OBU in the Phils, and
2. Other depository bank under the
EFCDS
SEC.
28
A7c:
Capital
Gains
from Shares of Stocks not Traded in
the Stock exchange
5% or 10% as the case maybe
SEC
28A7d:
DIVIDENDS

INTERCORPORATE

DC- RFC= EXEMPT, not subj to

tax

SEC
B1

28

Q:
What kind of
tax?
A:
35% GIT on the ff
income
1. Interest
2. Dividends
3. Rents
4. Royalties
5. Salaries
6.
Premiums(
except
reinsurance
premiums)
7. annuities
8. emoluments
9. Other fixed and determinable Gains,
profits and income.
SEC 28 B2 Non Resident
Cinematographic film owner, lessor or
distributor

GIT

liable for 25%

SEC 28 B3 Non Resident owner or

lessor of
Vessels
chartered
by
Philippine
Nationals.

GIT

liable for 4

Elements
:
1. Chartered
to
or
Corporations
2.
Approved
MARINA

Filipino

Citizens

by

SEC. B(4) Non Resident Owner or

Lessor of Aircraft, Machiniries, and
other Equipments.

liable for 7 1/2 %

GIT
SEC 28 b5a Interest on Foreign
Loans

Must be read with Sec. 32

B7a
Interest on Foreign Loans, if the lender
is
1. NRFC liable to 20%
FIT
2. Foreign Govt. Exempt because it is
an exclusion (Sec 32 b7a: income
derived by a foreign govt from
investments in the Phils on loans,
stocks, bond, and other
domestic
securities or from
interest on deposits in banks by:
a) Foreign govt.
b) Financing inst owned controlled
or enjoying, refinancing from
foreign
govt; and
c) Inter nation or Regional
financial inst established by
foreign govt.
COMMISIONER OF INTERNAL REV. vs.
MITSUBISHI METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and
Sales Contract with Mitsubishi Metal
Corp. ( A Japanese Corp.) for the
purposes of projected expansion of the
productivity
capacity of the formers mines in Cebu.
The contract provides that Mitsibushi
will extend a loan to Atlas in the
amount 20

M dollar, so that Atlas will be able

install a new concentrator for copper
production.
-Mitsubishi to comply with its
obligation, applied for a loan from
Export- Import Bank of Japan (Exim
Bank) and from consortium of Japanese
banks.
Pursuant to the contract Atlas paid
interst
to
Mitsubishi
where
the
corresponding 15% tax thereon was
withheld and only remitted to the Govt.
Subsequently Mitsubishi filed a
claim for tax credit requesting that the
same be used as payment for its
existing liabilities

I:
of

despite having executed a waiver and

disclaimer of its interest in favor of Atlas
earlier on. It is the contention of
Mitsubishi that it was the mere agent
of Exim Bank which is a financing
inst owned and controlled by the
Japanese Govt.
The status of Eximbank as a
government controlled inst became the
basis of the claim fro exemption
by
Mitsubishi for the payment of interest on
loans.
WON Mitsubishi is a mere agent

Eximbank
H: NO. The contract between the parties
does not contain any direct reference
to Exim Bank, it is strictly between
Mitsubishi as
creditor and Atlas as the seller of
copper. The bank has nothing to do with
the sale of copper to Mitsubishi. Atlas
and
Mitsubishi
had
reciprocal
obligations- Mitsubishi in order to fulfill
its obligations had to obtain a loan, in
its independent capacity with Exim
bank. Laws granting
exemption from tax are construed
strictly against the taxpayer and
liberally in favor of the taxing authority.

SEC. 28
D5
DIVIDENDS:

INTERCORPORATE

FIT 15% imposed on the amount of

cash and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit
against the tax due from the NRFC taxes
deemed paid or deemed to have been
paid in the Phils.
Gen rule: 35 %
FIT
Exception: 15% under the tax deemed
paid
rule/ reciprocity rule/ tax sparring
rule
JHONSONS
CASE
2
Kinds
of
Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income
within.
MARUBENI
C a se :
2
Issues
1. Is the payment of 10% FIT
correct?

- No because it was a branch and RFC

but still Marubeni was NRFC under the old
law which is liable to pay 35%, but SC said
liable only to 25% because of the tax treaty

You cannot refund right away

15% BPRT
and
10%
Inter-corporate
Dividends tax has diferent basis
In
P&G
who
are
involved
DC (P&G Phil) and NRFC (P&G
US)
DC declares dividends to
NRFC
35% was withheld and remitted to the
BIR
What did they discover? (after
paying)
- they discovered that they are liable
only for 15% so they have a refund of 20%
Q: In the 1st case did the SC allowed
the refund?
A:
NO, denial anchored on 2
grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as
to the
existence of
the
tax
deemed paid rule
Q:
In 2nd case was there a
refund?
A:
YES, the SC reversed
itself
1.

Income
tax
is
FIT:
the
withholding agent is the proper
party because he is liable to pay
said taxes
2. actual proof
of
payment not
necessary, what is necessary is
the law of the domicile of the
country providing fro tax credit
equal to 20% of the tax deemed
paid.
Q: What is the rate if the law is
silent?
A:
35%
FIT

The rate will only be 15% if theres a

law recognizing the same but this refers to

the case of those belonging to the first

category.
WANDER
CA S E
Q:
Who are the
parties?
A:
DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35%
because
the law is totally silent about the
tax credit

H: The SC said that the tax should

15%
which applies 2
instances:
1. Foreign law do not provide for
credit- 35%
2. law provides but the law is silent15%
3. law is silent because there is no
law15%
4. law is silent because theres no
because the subj matter is
taxable- 15%
SEC.
IAET

be

tax

law
not

29

Q:
Why?
A: because if profits are distributed to the
shareholders, they will be liable for
the
payment of Dividends tax. Now, if the
profits
are undistributed the shareholders will not
incur liability on taxes with respect to
the
undistributed profits of the
Corp.
In a way it is in the form of deterrent
to the avoidance of tax upon shareholders
who are supposed to pay dividends tax on
the earnings distributed to them.

It is imposed upon the improperly

accumulated taxable
income
of
the
corporation

Q:
What is taxable
income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law

Q:
Applies to what
Corp?
A: to DC only under RR 2- 2001( classified
as closely held corporations)

Q:
When not liable to pay
IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)

Q:
Is it in the nature of
sanction?
A: Yes, it is imposed to compel the
corporation to declare dividends.

A)
Corporations
failure
to
declare
dividends because of reasonable needs of
business

Q:
What is the
rate?
A:
10% of the gross income (taxable
income)

TAXATION LAW REVIEW

NOTES
reasonable needs means are construed
to
mean immediate needs of the
business including reasonable anticipated
needs
Q: What constitutes reasonable
accumulation
of the corporations earnings? Examples?
A:
1. allowance for the increase in the
accumulation of earnings up to 100%
of the
paidup
capital
of
the corporation.
2. earnings reserved for the definite
corporate
expansion
projects
or
programs approved by the Board
3. Earnings reserved fro buildings,
plants,
or
equipment,
acquisition
approved by the Board
4.
Earnings reserved for compliance
with any loan agreement or preexisting obligations
5. Earnings required by law or other
applicable statutes to be retained.
6. In case of subsidiaries of foreign
corporation,
all
undistributed
earnings
or
profits
intended
or
reserved for investments
NOTE: the corporations belonging in the 1st
group are normally liable but they can show
that the accumulation of earnings is
justified for reasonable needs of business,
they incur no liability and exempt from
payments of the same.
B) Corporations which are exempt whether
or not it is for reasonable needs of the
business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered
with a) PEZA
b) Bases Conversion Devt Act of
1992 (RA 9227)

of the total combined voting power

all
classes
of stock entitled to vote is
owned directly, or indirectly by or for not
more than
20 individuals
NOTE: Publicly held Corp. has more than
20 shareholders

c) Special Economic Zone declared

by law
Q:
What is a closely- held
corporations?
A: Those corporation at least 50% in value
of the outstanding capital stock or at least
50%

TAXATION LAW REVIEW

NOTES
Q: What is the time for paying this
tax?
A: Calendar Year: Jan 25, 2005- Dec
31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable
year.
2006 is the grace period. You will pay
on
January
2007.
Q:
If youre not mentioned
exempted, will you still be liable?
A:
No,
if
you
invoke
adjustments

to

be

SEC 30. EXEEMPTIONS FROM TAX ON

CORPORATIONS

Determine
the
Corporations
exemptions
under Sec. 30 27 C and
22B.
1. Sec 30, the corporations shall not
be taxed under this title (tax on
income) in respect to income
receive by them
as such.

of the total combined voting power

Sec
27,
the
corporations
all 2.
enumerated are always exempt.
Thus exemption is unconditional
3. Sec 22B GPP, as a general rule is not
a corporation
4. except if it earns income from other
business
Joint Venture w/ service contract w/
government not a corporation, otherwise,
it is liable.
Assignment:
35

Sec.

August
21,
Midterms

2006

August 14, 2006

Q: What is the reason for not including
the corporations exempt under section 27C
and Section 22B under Section 30?
A: Because there is an exemption
which does not apply to all exempt
corporation.
The exemption under Section 30 is
not absolute while the exemption under
Section
27 C is absolute and without any
conditions.

TAXATION LAW REVIEW

NOTES
In addition, Section 22B provides that a
joint venture is generally taxable unless it
has
a
service
contract
with
the
government, a generally
taxable
corporation cannot be joined with the
group
as
generally
not taxable
corporation.
General
Professional
Partnership is exempt but the exemption
is not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section
30.
exemption to the exemption: income of
whatever kind and character of the
foregoing organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations
under Section 30; What is the requirement?
A:
1. Labor, agricultural or horticultural
organization
not
organized
principally for profit;
2. Mutual savings bank not having a
capital stock represented by shares,
and
cooperative
bank
without
capital stock organized and operated
for mutual purpose and without
profit;
3. a beneficiary society, order or
association,
operating
for
the
exclusive
benefit
of
the
members
such
as
fraternal
organization operating under lodge
system. (lodge system: operating
world wide) or a mutual old
association
or
a
non-stock
corporation:
a.
organized
by
employees;
b.
providing for the payment of
life, sickness, accident or other
exclusive benefits to its employees
and their dependents;
4. Cemetery (a) company owned and
(b) operated exclusively for the
benefit of its members;

5.

Non-stock
corporation
or
association organized and operated
exclusively for Religious, Charitable,
Scientific, Artistic
or
Cultural
purposes, or for the Rehabilitation
of Veterans (RCSACR), no part of its
net income or

TAXATION LAW REVIEW

NOTES The tax
asset shall belong ot or inure to the
benefit of any member, organizer,
oficer, or any specific person;
6. Business
league,
chamber
of
commerce, or Board of trade, (a)
not organized for profit and (b) no
part of the net income of which
inures to the benefit of any stock
holder or individual;
7. Civil
league
or
organization
not
organized for profit but operated
exclusively for the promotion of
social welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
A: last paragraph of Section 30,
because
YMCA was conducting an activity for
profit.
F:
the CTA and the CA invoked the
doctrine laid down in Herrera and Abra
Valley case which involves an exemption
from the payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the
last paragraph of Section 30.
YMCA Is exempt from the payment of
property tax, but not to income tax on
rentals from its property.

code
specifically
mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.
8.

a non-stock and non profit

educational institution;
9.
govt
educational
institution;
10. Farmers or other mutual typhoon
or fire insurance company, mutual
ditch or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members
for the sole purpose of meeting its
expenses;
11. Farmers,
fruit
growers
or
like
association
organized
and
operated as a sales agent for the
purpose of
marketing
the
products
of
its
members and turning back to
them

the proceeds of sales, less the

necessary selling expenses on the
basis of the quantity of produce
finished by them.
TAKE NOTE: income of sales agent is
exempt.
Section
INCOME

31:

TAXABLE

CHAPTER VI: COMPUTATION OF

GROSS INCOME
SECTION
INCOME

32:

GROSS

Q: What is the tax treatment? Are these

taxable income? Are these included in the
gross income? Is it included in the ITR? Is it
subject to NIT?
A:
Sec. 32 A answers the
questions.
Q: What is the income tax referred to
here?
A: NIT. The section refers only to
the payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32
A, does it follow that it is automatically
included in the GIT?
A: No, Section 32 A states Except
when otherwise provided in this title
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2.
Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32
A?
A:
it applies to all
except:
1. NRANETB
2. NRFC

they do not pay NIT, they pay by way

of
GIT.

Q:
What are included in the Gross
income?
A:
1. Compensation for services in
whatever form paid including but nor
limited to
fees, salaries, wages, commissions,
and
similar items. [Sec. 32 A (1)]

Q:
What
is
compensation?
A:
all
remuneration
for
services
performed by an employee for his employer
under an employer-employee relationship.
TAKE NOTE: compensation is included in
the ITR if the taxpayer is not liable for NIT.
Thus, if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries
of a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT,
like
when the RC is employed in Multinational,
ofshore
banking,
and
petroleum
companies.
2.
Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q:
What is the income tax
here?
A:
NIT, included in the
ITR.
3.
Gains derived from dealings in
property. [Sec. 32 A (3)]
Q:
Did
the
law
distinguished?
A:
No, the law did not distinguished
between real and personal property.
TAKE NOTE:

1.
Sale
of
real
property
2. Sale of shares of stock (personal
prop.)
if the elements are present, subject
to FIT. Thus, it is not included in the ITR,
the withholding agent will be responsible for
this.
Q: Income form the sale of property, do
you include this in the ITR?
A:
it
depends
a.
if
subject
to
FIT,
not
included.
Withholding agent accomplish the
forms
subject to FIT if the following
elements
are
present:
1.
it is a capital
asset;
2.
located in the Phil.:
and
3. sold by individual, trust, estate,
DC. b. if subject to NIT, included in the
ITR.

Elements are not present, like

when
the real prop. is an ordinary asset or when
it is capital asset if the taxpayer is RFC.
TAKE
2003

NOTE:

R-R

17-

 Real property sale subject to FWT,

the buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to
here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest
from bank deposit which does not constitute
passive income.
Bank interest from sources, without
or abroad.
Q: Bank interest from Solid Bank, is
it included in the ITR?
A: No, because it is included or
considered an income within, thus subject
to FIT. Thus,
not included in the
ITR.
5. Rents. [Sec. 32 A (5)]

subject to NIT, included in the

ITR.
6. Royalties; [Sec. 32 A (6)]
Q:
What is being referred to
here?
A: royalties which does not constitute
passive income. Royalties derived
from
income without. subject to NIT. Thus
not
included in the
ITR.
Q:
Who
are
the
taxpayers?
A: Liable from income w/in and w/out
and the rest are exempt.
1. RC
2. DC
7. Dividends. [Sec. 32 A (7)]
Q:
What
kind
of
dividends?
A: one that does not constitute a
passive income.
TAKE NOTE:

1. DC individual taxpayer =
FIT
2. DC DC & RFC =
EXEMPT
3. DC NRFC =
FWT
only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included
in the computation of the gross income.
Thus, included in the ITR.

8. Annuities. [Sec. 32 A (8)]

Q:
What
kind
of
annuities?
A: annuities which are not exempt from
tax are included in the computation of the
gross income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q:
What kind of prizes and
winnings?
A:
a.
those that does not constitute
passive income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive
Income
1. Prizes derived from sources within
and over 10,000.00
2.
Winnings

derived
from
sources within.
Exempt
:

a. winnings: PCSO and Lotto

winnings. b. prizes:
those primarily for recognition of
(1)religious,
(2)charitable,
(3)scientific,
(4)educational,
(5)artistic,
(6)literary,
(7)civic achievement are exempt PROVIDED:
1. the recipient was selected without
any
action on his part to enter the
contest or proceedings; and
2.
the recipient is not required to
render substantial future services as
a condition to receiving the prize or
award.
prizes and awards granted to athletes
are also exempted provided:
1. local
or
international
sports
competition or tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports
association.
Q: When is a prize subject to
NIT?
A:
1. when derived from income
without;
2. when less than 10,000.00;
3. when the income earner is a DC or RC.

Q: When is winning subject to

NIT?
A:
1. When derived from income
without;
2. when the income earner is a DC
or
RC.

Exception: amounts held by the insurer

under an agreement to pay interest
thereon, the interest payment shall be
included in the gross income.
2. Amount received by insured
as return of premium [Sec. 32 B (2)]

10. Pensions [Sec. 32 A (10)]

Q:
What kind of
pension?
A: Included in the gross income
not exempt

never subject to fit

(?)
11. Partners distributive share from
the net income of the general
professional
partnership (GPP).

if

Q: What is being referred

to?
A: GPP exempt from payment of corporate
income tax

shares of partners subject to NIT

Sec.
26
SEC 32 B EXCLUSIONS FROM GROSS
INCOME
Q: What do you mean by exclusions?
Are these exempt from income tax?
A: these are not included in the
gross income, THUS, exempt.
TAKE NOTE:
Exemptions, exclusions,
deductions, have the same characteristics
all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q:
What
is
the
requirement?
A: only one requirement for exemption:
that the proceeds of the life insurance be
payable upon the death of the insured.
Q: Does it matter who the beneficiary is
or paid in a lump sun or single sum?
A:
No. it does not
matter.

Q:
if the insurance is payable within a
certain time, say 10 years and thereafter
the insured did not die, how much will be
excluded?
A: only the amount received by the
insured as a return of the premiums.
Ex. 1 M 100 thousand =
capital
It
is
exempt
(100K)
900K is taxable.
Q:
Why
is
it
excluded?
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec.
85
E?
do
we
have
the
same
requirement?
A: no, the requirement for exemption is
not the same under Section 85 E.
3.
Proceeds of life insurance:
decedent insured himself, inclusion
or exclusion will depend on who the
beneficiary is.
a. the beneficiary is the
estate.

subject to Estate tax, included in

the gross estate regardless of whether

or not the designation of the beneficiary

is revocable or irrevocable.
b. the beneficiary is a third person other
than the estate.
b.1 Revocable Designation subject
to
estate tax, included in the gross estate.
Reason: because of the insureds
power to modify or change the
beneficiary.
b.2 Irrevocable Designation not
subject
to Estate tax, not included in the
gross estate.
Reason: the insured loses the power
to control, modify
and
change the
beneficiary
.
Q:
Is it subject to
VAT?
A: 1. Non-life insurance yes, subject
to
VAT under 108
(A).
2. Life insurance NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
4.
Gifts,
[Sec. 32
B
(3)]

Bequest

and

Devises

Q: Why is the donee exempt from

income tax?

A: Because the law classify it as an

exclusion, not important to know whether
property is real or personal.
What is exempted is the value of
property acquired by gift, bequest or
devise
TAKE NOTE:
A. GIFTS are excluded because they
are
subject to donors tax.
B. BEQUEST and DEVISE are
excluded because they are subject to
ESTATE tax.

6. Income exempt under a treaty

[Sec.
32 B (5)]
Q:
What
is
excluded?
A: income of any kind required by
treaty binding upon the Phil. Government.

Q:
what is included in the gross
income?
A:
income from such
property.

gift, bequest, devise or descent of

income from any property in case of
transfers of divided interest.
5. Compensation for
injuries
sickness [Sec. 32 B (4)]

Q:
Why is it considered an
exclusion?
A: because this is just an indemnification
for the injuries or damages sufered.

or

Q: is this the same as those provided

under
the workmens compensation act
(wca)?
A:
YES. There are 3
groups:
a. Health or accident insurance or
those
under workmens
compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q:
What does injury
include?
A: The term injury includes death, even
if not injured, if the person dies this will
be
available
.
Q: when will the damages recovered
be exempt?
A: General Rule: all damages awarded
are tax exempt.
Exception: damages representing loss
of income.

7.

Retirement benefits,
pensions, gratuities [Sec. 32 B

(6)]
Q:
Why do we need to distinguish
retirement pay, separation pay and terminal
leave pay?
A:
because
they
have
diferent
requirements
for exemption.
Q:
What is retirement
pay?
A:
the sum of money received upon
reaching the maximum age of employment.
a. Under RA4917 (with Retirement
Plan)
1.
the private benefit plan is
approved by the BIR (RR2-98);
2. the retiring oficial or employee has
been
in
the
service
of
the
same
employer for the last 10
years;
3. he is at least 50 years old at the
time of retirement; and
4. the oficial or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement
plan )

1.

the retiring oficial employee is

at least 60 years old but not more
than
65 years old;
2. the employee or oficial must have
served the company for at least 5
years;
entitled to 15 days salary and of

the
13th month pay for every year of
service.

TAKE NOTE: the retirement benefits under

RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
SEC. 32 B(6)
(c)
retirement benefits given by foreign
government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications automatic
exclusions.
SEC. 32
(d,e,f)

B(6)

retirement
benefits
given
by
the
Philippine Govt through the GSIS, SSS and
PVAO
are
exempt
without
further
qualifications = automatic exclusions.

August 21, 2006.

- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
ANSWERS =
MIDTERMS
Gross Income include both capital
and
ordinary gains, Sec. 31 says gross
income- deductions, that which is ordinary
loss.
- may be deducted from capital gains
and ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from
the service because of (1) illness,
(2)death, (3)
physical incapacity or injury, or (4)
causes
beyond the control of the employee.
Q: Are there any requirement for
separation
pay granted by foreign govt or corp?
A: None, the separation pay granted by
the aforementioned
institutions
are
exempt
without further qualifications (other
similar
benefits).
Q: is separation pay an exclusion,
therefore, exempt?
A: No.
GENERAL RULE: Separation pay not
exempt (?)
Exception:
1. Automatic exclusions, thus exempt if
due to:
a. illness
b. death
c. physical incapacity or injury.
2. Conditional exclusion
a. causes beyond the control of
the employee- excluded
b. within employees control included.
Examples:

1. registration CBA provides

separation pay, within the control =
included.
2. installation of labor saving devises
or
bankruptcy beyond the control
=
excluded.
Q: What is terminal leave pay?
A: the accumulated vacation leave and
sick leave benefits converted to cash or
money to

be given either every year or upon

retirement or separation.
Terminal Leave Pay granted upon
retirement or separation:

uder PD220, TLP in the Govt or in

the Private Sector shall be exempt from
income tax if given or granted upon
retirement or separation.
TLP granted on a yearly
basis:
1. employee in the private
sector:
a.
accumulated sick leave
subject to income tax.
b. Accumulated vacation leave:
if more than 10 days (meaning
11 pataas) subject to income
tax;
If 10 days or less
exempt.
2.
Govt
Employee:
governing law: EO 291 of Pres.
Estrada, RMC 16-2000.
Rule: Govt workers (both officers or nonoficers) granted TLP on a yearly basis
exempt from income tax.
there is no qualification as to vacation
or
sick
leave.

Take Note of 3
cases.
be reminded of EO 291, Sec. 2.
78.2 par. 97, RR2-98, RR16-200 (3).

Case
of
Zialcita

retired from DOJ, contention: TLP

should
be exempt from income tax pursuant to
the old law.
SC: on a diferent ground TLP is
exempt because it is similar to Retirement
pay, thus
exempt but the rulings application is
limited
only
to
DOJ
employees.
Borromeo
case:

Same as the Zialcita

case
Issues: WON the TLP is subject to income
tax and WON COLA and RATA are included?
SC:
RULED
TLP
is
Exempt!
Modified: the rule applies not only to
DOJ
oficers
but
also
to
CSC
commissioners.
COMMISSIONER
v.
CASTAEDA
- Castaeda DFA oficer in Phil. Embassy
in
England.
1.
TLP
is
exempt.
2. Ruling applies to DFA
officers.

Q: Does the rule or decision applies to

Govt
oficials only?
A: No. PD220: Exemption applies to
both private and public sectors(?)
it does not matter if TLP is vacation
or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
JAN, 1998 the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
Oficer in govt receiving TLP is
always
exempt whether or not vacation or sick
leave is granted.
Modified RR2-98:
TLP will only apply to private sectors
if granted on a yearly basis may
be subject to tax: VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B
(7)
(a) income derived by foreign
Govt
[Sec. 32 B (7) (a)]
Q: What kind of income?
A:
1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in
the
Philippines.
Q: Who are income earners?
A:
1. foreign government
2. financing
institutions
owned,
controlled or enjoying re-financing
from foreign govts; and
3. intl or regional financial institutions
established
by
foreign
govts
(established in the Philippines)

b. SMC- Stock dividends to 3. Brunei

Govt.
exclusion
c. Income derived by the Govt or its
political subdivisions (Sec. 32 B (7)
(b)
a. exercise of public utility
b. exercise of any essential govt
function.
accruing to the govt.
d prizes and awards (Sec. 32 B 7 c)
primarily for religious, charitable,
scientific, educational, artistic, literary
or
civic achievements:
1. recipient was selected without
any action on his part to enter the
contest
or proceedings;
2. the recipient was not required
to render substantial future services
as a
condition to receive the prize
or award.
D. prizes and awards in sports (Sec. 32B 7 d)
1. granted to athletes;
2. local or intl competitions;
3. held here or abroad;
4. sanctioned by the natl sports
associations.
E. 13th month pay and other benefits
(Sec.
32B 7 e)
TAKE NOTE: if plain foreign corp., subject to
FIT 20%.
EXAMPLES of exclusions:
a. Brunei Govt earns interest by
depositing
money in Makati Bank Exclusion.

Q: Do you include Christmas bonus in

your
ITR?
A: No, because the law says 13th month
pay
and other benefits/similar benefits
xmas bonus is included in the category.
Q: Who can increase the 30,000
limit?
A:
The
Sec.
of
Finance.
Q:
Applicable
whom?
A:
1. govt; and

to

2. Private institutions.
F.
GSIS,
SSS,
Medicare
and
other
contributions
(Sec. 32 B 7
f)
must be deducted from the GI not
NIT
because
it
is
an
exclusion.
-creditable withholding tax is an exclusionmust be deducted first from the GI
before you compute the NIT. Otherwise, you
are including
in
the
GI
something
that is
excluded
from
the
same.

G. Gains from the Sale of bonds,

debentures,
or
other
Certificate
of
indebtedness. (Sec. 32
B 7 g)
Q:
Why
5
years?
A: certificate of indebtedness is similar
to
Bank Interest in a long term
deposit.
- Sec. 32 B 7 g is similar or the same as 24
B
in
long
term
deposit.
H. Gains from redemption
in mutual fund (Sec. 32 B 7 h)

of

shares

1. Fiscal Year means an accounting

period of 12 months ending on the last day
of any month other than December.
2. Calendar year a period of 12 months
beginning on January and ending on
December.
Q:
Business
expense
incurred
in
February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the
fiscal
year and all the elements are
present.
- related to trade or
business.
REASON: Capital loss has no connection
to the trade or business.
TAKE NOTE:

for taxpayers liable for income within

and
without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
for taxpayers who are liable only
for
income within, they can claim a
deduction for expenses incurred within
the Philippines.

Sec.
34
EXPENSES

1. For those business expenses not

enumerated under A. You need to prove
that it is an ordinary and necessary
expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during
the taxable year.

Feb. 12,
Expenses)

2007

(Sec.

34

A,

Q: Did the law define what is

reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation,
there must be services actually rendered.
AGUINLDO
Case
F: involves a corporation engaged in
selling fish nets, and the corporation
have a land sold through a broker.
there was substantial profits gained
from
the sale of a land which was sold by a
broker. The profit was in turn given to the
workers as special bonus.
the corporation claimed the bonus as
a
deduction.
ISSUE: Should
allowed?

the

deduction

be

H: The SC did not allow the deduction, for

other forms of compensation, it must
be made or given for services actually
rendered.

in this case, it was proven that the sale

was not made by the employees, no effort
or services actually rendered by them
because the sale was made through a
broker.

Q: Reasonable Travel Expenses, What is

the requirement?
A:
1. Travel must be in pursuit of
business, trade or profession.
2. Travel expense while away from
home.
Q: Is there a travel expense which was not
in pursuit of business?
A: yes, those which are considered as
fringe benefits (FB), expenses for foreign
travel is
considered a FB only if it is not in pursuit
of
the
trade
or
business.
Q: can you claim it under Sec. 34 A (1)(a)
(ii)?
A: No, you can claim it under Sec. 34
A (1)(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:

1. required as a condition for the

continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.
Q: Reasonable allowance for entertainment,
amusement and recreation expenses, what
is the requirement?
A:
1. connected with the development,
management, and operation of the
trade (DOM);
2.
Does not exceed the limits or
ceiling set by the Secretary of Finance;
and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and
other similar payments
A: even without this provisions, kickbacks
will not pass the requirement of (i)
ordinary and
(ii)
necessary
hence
not
deductible
EXPENSES ALLOWABLE TO
PRIVATE EDUCATIONAL
INSTITUTION
Q: Why only private educational institution
is mentioned and no other taxpayers?
A:
it
refers
to
section
27
for
Private
Educational Institution
given to
the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for
capital
outlays
not
deductible as business expense
EXCEPTION: Private Educ. Institution can
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE
FOR DEPRECIATION
BUSINESS
EXPENSE
1. No carryover
2. can be claimed for one year
only.

3.
if the amount of capital outlay
is substantial, it cannot accommodate all of
the
expenses
incurred.
ALLOWANCE
DEPRECIATION
1. There is carry
over

FOR

2. you can claim it for a longer period

depending on the life span of the property.
3.
it can accommodate all of the
expenses
incurred.

a borrower or taxpayer can claim the

interest paid in advance as itemized
deduction when he filed his income
tax return (ITR) depending on whether or
not the principal obligation has been paid.

taxpayers
allowable
deduction
for interest expense shall be deducted by an
amount equal to 42% (RR 10-2000) of the
interest income subject to FIT.

1. if the entire amount or entire principal

obligation has been paid the entire
amount of interest can be claimed as
itemized deduction.

Q:
Who
claims
this
deduction?
A:
the
debtor
claims
deduction.

2. if only of the obligation had been paid,

then the entire amount of of that interest
can be claimed as a deduction.

this

Q: What kind of interest is

this?
A:
interest
on
loan.
interest on debt - when one borrows
money to finance his business interest in
connection with the taxpayers profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2
a)

3.
if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction
on the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable
year.
2. individual taxpayer reporting income on a
cash basis.

No deduction shall be allowed in

respect to the following interest:

1. if within the taxable year an individual

taxpayer reporting income on the cash
basis incurs an indebtedness on which an
interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to
be made are persons specified under Sec.
36 (B): a. member of a family
b. bet. an individual and a corp., more
than
50% in advance of the outstanding stock
of which is owned directly or indirectly by or
for
such
individual;
c. Bet. 2 corp., more than 50% in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for
the same
individual.
d. bet. the grantor and a fiduciary of
any trust;
e. bet. the fiduciary of a trust and
the fiduciary of another trust if the same
person is a grantor with respect to each
trust; or
f. bet. a fiduciary of trust and a beneficiary
of
such trust.
Q: Who are not allowed to claim
interest under sec 36 B?
A: interest incurred between related
parties.
Q:
What
if
halfbrother?
A: not allowed to claim deduction for
interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but
also interest incurred for installment
payments.
Q:
Who
are
related
parties?
A:
individuals
and
corporations.

OPTIONAL
TREATMENT
OF
INTEREST
EXPENSE:
1. interest incurred to acquire property
used
in
trade,
business
or
exercise
of
profession
can be claimed a an itemize
deduction
a. on interest; or
b. depreciation (as capital
expenditure?)
Q: What is this interest
income?
A: the money borrowed was deposited in a
bank so that it will warn interest.
(RR132000)

ILLUSTRATION:
1. loan of 1M from a bank with an interest
of
20
%
2. 20% of 1M is Php200,000 but you
cannot claim this whole amount as a
deduction.
3. when you deposited the 1M in the bank,
it earned a bank interest subject to FIT
worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR
9337)
5. Php200K-4,200= Php195,800/ this is
the amount you can claim as a deduction.
34
TAXES:

REQUISITES
:
1. taxes must paid or incurred within
the taxable year
2. it must be incurred in connection
with
trade
or
business.
3. can be claimed
as:
a.
a deduction; or 34 C
1&2
b.
tax credit 34 C
3&7
Q:
Where
deducted?

should

it

be

A:

1. if claimed as a deduction, it should

be deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)

MERCURY
DRUG
CASE
Discount
of
senior
citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction?
Example?
A: example is business
tax.
tax deduction is allowed if the taxes
were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim
it?
A: those liable to pay NIT. (Tax credit only
for
NIT)
Q: What is a tax
credit?
A: refers to the taxpayers right to
deduct from the income tax due the
amount of tax the taxpayer paid to
foreign country, subject to limitations.

Q: What is the tax credit being referred to

under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign
country.
3. Input tax on
Vat
4. Creditable w/holding tax system under
NIT
5.
Tax
credit
certificate.
Q: Who are allowed to claim
it? A: RC and DC only.
Q: suppose you paid the 100K NIT to US,
can you claim as a deduction the whole
100K? what is the formula?
same
foreign
foreign
foreign

procedure for (1) income tax paid to

country; (2) estate tax paid to
country; and (3) Donors tax paid to
country.

A:
Formula:
STEP 1
GI from sources w/in
NIT:
GI from entire world
STEP 2
Quotient x RATE = amount
be claimed as a deduction

w/c

can

A: you cannot claim the whole 100K, you

can only claim the product of the quotient
times the rate
TAKE NOTE: deduct at the bottom of the
formula ( sa computation ng GI)
Q: Suppose you are a RC, you pay NIT to
US, will you be able to claim it as a
tax deduction?

A: 1. generally, you can claim it as tax

credit.
2. you can claim under Sec. 34 C (1)
b

if the taxpayer did not signify in his return

his intention to avail himself of the benefit
of tax credit for taxes paid to foreign
country.
taxes incurred not related to the trade
or
business, you have the option
to:
a. claim it as tax credit;
or b. claim it as a
deduction
law
gives
you
this
privilege.
Q: When is taxes not allowed as a
deduction?
A: Sec. 34 C
(1)
1.
Income
tax;
2. Income tax imposed by authority
of any foreign country;
3. Estate and Donor tax;
and
4. taxes assessed against local benefits
of a kind tending to increase the
value of the property.

Q: Who are not allowed to claim

deductions?
A: Under 34 C (3) - NRC, NRA; and
N/RFC
TAKE NOTE:

1. NRAE and NFC allowed deduction only if

and to the extent that they are
connected with income from sources within
the Phils.
2. Taxes that had been allowed as
deduction but are later in refunded should
be treated as part of the gross income
during the year that it is received (34 1 last
paragraph)
Q: Which would you choose? Tax credit
or deduction?
A: tax credit because it is deducted from
the
taxable income while deductions are
deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME
x
RATE = TAXABLE NET INCOME TAX
CREDIT)
34
LOSSES

Q: Is always a requirement that it is

incurred in pursuit of trade, bus. or
profession?
A: No. Sec. 34 D(1) provides for 2 kinds of
losses:
a. incurred in pursuit of trade, bus.
or
profession;
b.
property connected with t,b,p, if
the loss arises from fire, storms,
shipwrecks or other casualties or from
robbery, theft

or embezzlement (arising from

natural calamity).

B. CAPITAL LOSS NET CAPITAL

LOSS CARRY OVER ( # 2 above)

Q: What is the requirement?

A:
1. Loss actually sustained during the
taxable year
2. Not compensated for by insurance or
other forms of indemnity.
3. Not claimed as a deduction for
estate tax purposes.
Q: This is your itemized deduction which
can be claimed as a deduction from?
A: Gross income
TAKE NOTE:

The
itemized
deduction
of
losses,
however, is not confined to section 34B. it
is also found under section 86A (1) (e)
which also pertains to deductions available
under the estate tax law.
Losses within six (6) months after the
death
of the decedent can be claimed as
itemized deduction of losses under Section
34B. However, may be claimed as
deduction under estate tax return provided
that the same are not claimed as itemized
deduction of losses under Section 34B.
Q: How many carry-overs do we have
under the Code?
A:
3.
Namely:
1. Section 27 E (32) Carry forward
of excess minimum Tax
2. Section 39 D Net Capital Loss
Carry- over
3. Section 39 D 3 Net Operating
Loss
Carry-Over.
KINDS OF LOSSES AND THEIR CARRYOVERS:
A. ORDINARY LOSS NOLCO ( #3
above)
Q: Why is there a need for a carry over
under Sec. 34 D # when you can claim the
loss from both capital and ordinary loss?

NET CAPITAL
LOSS CARRY-OVER

NET

OPERATING LOSS
1. taxpayers is an 1. taxpayer may be
individual only not an
individual
or
corporation.
corp;
2.
involves
capital loss

net 2. losses incurred

or connected with T
or B;

3. carry-over as loss 3. Business losses

A: if sale
the loss
exceeds
thepreviously
income forofthe
not
from
of capital
taxableinyear,
cannot
deduct
the entire
set as
a deduction
asset
theyou
next
amount ofyear
loss from
income
fromyour
the GI
carriedfor
succeeding
that
over as such for the
year so the excess may
next
be deducted
3 consecutive
for the
taxable year following years;
the loss.
4.
can
only
be 4. can be deducted
deducted
from from capital gains
capital gains.
and/or
ordinary
gains.

3. carried over as a deduction from the GI

for the next 3 consecutive taxable years
immediately following the year of such loss.

NE T
OPERATING
LOSS
CARRY
REQUIREMENT
S:
1.Net operating loss of the business or
enterprise incurred w/in the taxable year
2. not previously of-set as a deduction
from the GI

Q:
Can
the
period
be
extended?
A: yes, for mines other than oil and gas
well.
1. net operating loss w/out the
benefit incentives provided by law;
2. incurred in any of the first 10 years
of operation.
3. carried over as a deduction from the GI
for the next 5 years following such loss.
4. no substantial change in the
ownership of the business or enterprise.
Q: What is the
limit?
A:
75% of the nominal value of
outstanding shares is held by or on behalf
of the same persons/ corporation

 individual no problem, problem lies with

corporations or enterprises.
ABANDONMENT
LOSSES
1.
contract
area
where
petroleum
operations are undertaken is partially or
wholly abandoned;
all (1) accumulated exploration and
(2)
development
expenditures
pertaining
thereto shall be allowed as a deduction.
2. a producing well is subsequently
abandoned:
unamortized cost and undepreciated
cost
of equipment directly used therein shall be
allowed as a deduction in the years it was
abandoned.
TAKE NOTE:
1. if abandoned well is reentered and
production is resumed; or
2. if equipment or facilities are restored into
service in
the year
of
resumption
or
restoration
and
shall
amortized
or
depreciated.
Q: What is the Tax benefit
rule?
A: Last Par. of Sec. 34 E (1): recovery of
bad debts previously allowed as deduction
in the preceding year shall be included as
part of the gross income in the year of
recovery to the extent of the income tax
benefits of said deduction.
Q: What is a Bad
Debt?
A: Bad debts shall refer to those debts
resulting
from
the
worthlessness or
incollectibility in whole or in part of
amounts due the taxpayer by others,
arising
from
money
lent
or
from
uncollectible amounts of income from goods
sold and services rendered.
CHINA BANK VS.
CA
bad debts can only be claimed
pursuant

if

to a contract of
loan
- no bad debts
instruments.
Q: Who claims
it?
A: a. creditor
b.money
lender

for

loss

of

Q: What year can it be

claimed?
A: can be claimed in the year it was
actually sit ascertained to be worthless
and charged off, meaning cancelled in the
books of account.
Q: Do you need to file an action before
you can claim?
A: No, all you have to do is prove that you
did exert effort to claim or recover the
same.
Q: What cannot be deducted as bad
debts?
A:
1.
debts not incurred in connection
with the trade, business and profession
of taxpayer.
2.
transactions, mered into between
parties mentioned under Section 36 (B)
namely.
a) between members of the
family
b) between
an
individual
who
owns more
than
30%
of
outstanding
capital
stock
of
a
corporation and that corporation
c) between two (2) corporations
more
that
50%
of
the
outstanding
capital stock of which is owned by or
for the same individual

d) between a grantor and fiduciary

of any trust
e) between two (2) fiduciaries of two
(2)
trusts who has the same grantor
f) between a fiduciary of a trust
and above fiduciary of such trust
SECURITIES
BECOMING
WORTHLESS
1. ascertained
to be worthless and
charged off within the taxable year
2.
capital
asset
3. taxpayer, other than a Bank or trust
company incorporated under Phil. Laws
4. substantial part of business is the
receipt of deposit
5. considered as a loss from the sale
of capital assets on the last day of such
taxable year
34
DEPRECIATION

Q:
What
is
depreciation?
A: It is the gradual dimension in the
service or useful value of tangible property
due from

exhaustion, wear and

obsolescence.

tear and

normal

Q: What kind of property is

involved?
A: 1. Real property except parcel of
land
2. Personal Property
REQUISITE
S:
1. depreciation
deduction
must
be
reasonable
2. for
the
exhaustion,
wear
and
tear,
including
reasonable allowance for
obsolescence
3.
property used in the trade of
business
Q: What do you mean by
reasonable allowance?
A: it shall include, but not limited to,
an allowance computed in accordance with
rules
and
regulations
prescribed
by
the
Secretary
of Finance, upon recommendation of the
Commissioner, under any of the following
methods:
1.Straight-line
method
2.Declining
balance
method
3.Sum-of-the-year-digital
method;
and
4.any other method which may be
prescribed by the Secretary of Finance
upon
recommendation
of
the
Commissioner
DEPRECIATION OF PROPERTIES USED
IN PETROLEUM OPERATIONS
1. properties directly related to
production of petroleum
2. allowed under (1) straight line or (2)
declining
balance
method
3. useful life of properties used or
related to production of petroleum
shall be ten

(10)
years or such shorter life
as may be
permitted
by
the Commissioner.
4. for property not used directly in
the
production of petroleum (1) depreciated
under the straight line
method,
and useful life is only five (5) years
DEPRECIATION OF PROPERTIES USED
IN MINING OPERATIONS
ALLOWANCE
DEPRECIATION:

FOR

1.all properties used in mining operations

other than petroleum operations shall be
computed as follows:
a. if the expected life is ten (10) years
or less normal rate of depreciation

and
MINES

only deduction
self
executing
deduction

b. if the expected life is more than ten

(10) years depreciated over any number
of years between five (5) years and the
expected life.

Q:
What
is
depletion?
A: the exhaustion wear and tear of
natural resources as in mines, oil, and gas
wells
the
natural
resources
called
wasting
assets

REQUIREMENT
S:
1.
depreciation
is
allowed
as
a
deduction from 61; and
2. contractor notifies the Commissioner
at the beginning of the depreciation
period which depreciation rate shall be
used.
DEPRECIATION DEDUCTIBLE BY NRAETB
OR RFC

reasonable
allowance
for
the
deterioration
of property
arising out of its use or
employment
or non-use in the business, trade
or profession
3. property is located in the
Philippines
1.

2.

34 G DEPLETION
WELLS

OF

OIL

and

GAS

which

DEPRECIATION
DEPLETION

is

not

vs

1.involves property 1. involves

natural resources
2. ordinary wear 2. ordinary wear
and
tear
of and tear of natural
equipments
resources
TAKE NOTE:
Equipment
is
deductible
depreciation

used

in

mining

operation

in

Q:
Method
for
computing
depletion?
A:
cost
depletion
method

Q:
to
whom
allowed?
A: only mining entities owning
economic interest in mineral deposits
Economic interest: capital investments
in
mineral
deposits
34H CHARITABLE &
OTHER CONTRIBUTIONS
TAKE NOTE:
1.unique because deducted from the
taxable net income and not from the gross
income
second
step
of
the
formula
deduction
Q:
Who
is
deduction?
A:
the
donor

claiming

the

Q:
Who
are
the
Donees?
A: 1.Government of the Philippines or any
of its agencies or any political
subdivision
thereof
exclusively
for
public
purpose
2. Accredited Domestic corporation or
association
organized
and
operated
exclusively for religions, lion, charitable,
scientific,
youth
and
sports
development, cultural or educational
purposes or for
the
rehabilitation
of
veterans,
or to social welfare institution, or to non
government organization and no part
of its net income inures
to the
benefit of
any private
stock
holder or
individual
Q:
How
many
kinds
of
deduction?
A:
Two
(2)
kinds:
1.partial
deduction
10% of taxable income in case of
an
individual

5% of taxable income in case of

corporations
2. full /total deduction
Q: Which of
General
Rule?
A:
General
deduction
Exception:
deduction

the

two

Rule:
Total

kinds

is

the

Partial
/Full

Q: Suppose Mr. A made a cash donation of

P1M.
How much can he claim as
a deduction?
A: First determine the taxable income of Mr
A
since he is an individual, he can only
deduct
10%
of
his
taxable
income.

Q: What if the Donee is not one of those

mentioned under the law, can he claim a
deduction?
A: No.
TAKE NOTE:
individual.

Donee

is

never

an

Q:
If
the
Donor
is
a
pure
compensation income earner and he
donates P100,000 to the church, can he
claim it as a deduction?
A: No. pure compensation income earner
can only claim a deduction under Sec 34 M
Q:
If
Donee
is
the
Philippine
Government, what is the requirement?
A: it must be made exclusively for public
purposes
Q: What if the Donee is a
province?
A: there must be a qualification that it is
for public purpose
Q: If the Donee is a Domestic
Corporation, what is the requirement?
A: no part of its income inures to the
benefit of any private shareholder or
individual
Q: What are those contributions which can
be deductible in full?

A: 1.Donations to the Government

no conflict with
partial
(diferent
requirement
)
Partial
donated
for
exclusively
public
purposes
Full, used in undertaking priority
activities
of
NEDA
2.Donations
to
certain
Foreign
Institutions
or
International
Organizations
in
compliance
with
agreement,
treaties
or
commitment
entered
into
by
the
Philippine Government and such
donees
3.Donations
to
Accredited
government
organizations
government organization, non
domestic corporation

Non
Non
profit

REQUIREMENT
S:
1. organized and operated exclusively for
scientific, research, educational, character
building
and
youth
and
sport
development,

health, social welfare, cultural or charitable

purposes or a combination thereof
2. no part of the net income of which
inures
to the benefit of any private
individual
3. uses the contributions directly for the
active conduct of the activities constituting
the purpose or function for which it is
organized and operated
4. annual administrative expense does
not exceed 30% of the total expenses
and
5. in case of dissolution, the assets of
which
would be distributed
to:
a)
another
non
profit
domestic
corporation
organized
for
similar
purpose or purposes
b) to the state for public
purpose
c) distributed by the court to another
organization to be used in such a
manner which would accomplish the
general purpose for within the dissolve
organization was organized
34I
RESEARCH
DEVELOPMENT

AND

In the old law, this is not allowed as a

deduction. To remedy this, they felt that
those should be a separate deduction for
research and development.
REQUISITES
:
tax
payer
may
treat
research
and
development expenditures as ordinary and
necessary expenses provided:
1. it is paid or incurred during the taxable
year
2. incurred in connection with trade,
business or profession; and
3. not chargeable to capital
account.
Q:
Treated as such
when?
A: during the taxable year it is paid or
incurred

AMORTIZATION OF CERTAIN RESEARCH

AND DEVELOPMENT EXPENDITURES
at the election of the taxpayer, the
following shall or may be treated as
deferred expenses:
a. paid or incurred by the taxpayer
in
connection with his trade, business
or profession;

b. not treated as expenses under par 1

and c. chargeable to capital account
but not chargeable to property of a
character which is subject to depreciation
or depletion
Q:
How to compute taxable
income:
A: deferred expenses shall be allowed as
deduction ratably distributed over a period
of not less than 10 months as may be
elected by the taxpayer (beginning with the
month the
taxpayer first
expenditures.)

realizes

benefits

from

the election or option may be exercised

for any taxable year after the efectivity of
the code but not later than the time
prescribed by law for filing the return for
such taxable year.
LIMITATION
ON
DEDUCTION
Q:
When
not
deductible?
A: 1.Any expenditure for
the
(1) acquisition or improvement of land
or
(2) for the improvement of property to
be used in connection with research and
development of a character which is

subject to depreciation and depletion

and ofice site
2. Any expenditure paid or incurred for
the
purpose
of
undermining the
existence, location, extent or quality of
any deposit of one or other mineral
including oil or gas.
not for mineral exploration
34 J PENSION
TRUST Q: Claimed
by Whom?
A:
the
employer
Q;
What
is
a
Pension
Trust
contribution?
A: a deduction applicable only to employer
on account of its contribution to a
private
pension plan for the benefit of its
employee
deduction
is
purely
business
in
character.
Q:
Requisites?
A:
1.the employer must have established a
pension or retirement plan to provide for
the payment or reasonable pension of his
employees

2. pension plan must be reasonable and

actually sound;
3. it must be funded by the
employer
4. the amount contributed must no longer
be subject to his control or disposition
5. the amount has not yet been allowed as
a deduction and
6. the amount has or is apportioned in
equal parts
over
a
period
of
10
consecutive years beginning with the year
in which the transfer
or
payment
is
made.
34 K ADDITIONAL REQUIREMENTS FOR
DEDUCTIBILITY OF CERTAIN PAYMENTS
allowed as a deduction only if shown
that the tax required to be deducted and
withheld there from has been paid to the
BIR in accordance with Section 58 and
Section 81
34
L
OPTIONAL
DEDUCTION

STANDARD

KINDS
OF
DEDUCTIONS:
1.Itemized deduction
2.Optional Standard Deduction
3.Personal /Additional Deduction
OPTIONAL
STANDARD
DEDUCTION:
can be availed of by an individual who
may
elect a standard deduction in an amount
not exceeding 10% of his gross income
may apply in
lieu of the other
deductions
under
Section
34
the taxpayer must signify in his return
his
intention to elect the optional standard
deduction,
otherwise,
he
shall
be
considered as having availed of the itemized
deduction.
Q:
Who can claim this
deduction?
A: all individual taxpayers except non
resident alien not engaged in trade
or

business
(NRANETB)
Reason: he is not liable to pay by way of
the
NIT, thus, follows he cannot claim this
deduction because he is liable to pay by
way
of GIT.
TAKE NOTE:
can co-exist
additional
exemption

with

personal

and

or

34
M
PREMIUM
PAYMENTS
ON
HEALTH AND /OR HOSPITALIZATION
INSURANCE
OF
AN
INDIVIDUAL
TAXPAYER

 for (1) Health and /insurance

(2) Hospitalization
REQUIREMENTS:
1. amount of premiums, paid by
taxpayer for himself and members of his
family,
2. amount of premiums should not exceed
(1) P2,400 per family or (2) P200
a month
3. gross income of the family for
the taxable year is not more than
P250,000

Q: Who can avail of this deduction?

A: 1.individual taxpayer earning purely
compensation income during the year;
2. individual taxpayer availing itemized
or
optional standard deduction; and
3. individual taxpayer earning both
compensation income and income
from
business
SECTION 35 ALLOWANCE FOR
PERSONAL EXEMPTION FOR
INDIVIDUAL TAXPAYER

Q: When do we apply this?

A: apply if individual taxpayer is paying
by way of NIT
Q; Who are taxpayer?
A: those mentioned under Section 24 (A)
1. RC
2. NRC
3. OCW
4. RA
all can claim both personal and
additional
exemption
Q: Why not include NRAETB? Can the
latter claim any exemption?
A: NRAETB is not included because Section
35
A refers to Section 24 A
NRAETB can claim personal deductions but
not additional exemptions pursuant to Sec
35
D
REQUIREMENTS:
1.NRAETB should file a true and
accurate return
2. the amount to be claimed as personal
exemptions should not exceed the
amount provided for under Philippine Laws

TAKE NOTE:
AEMOP: can
NRAETB
BASIC
EXEMPTIONS:

be

RA

or

PERSONAL

1. Single individual; or individual judicially

decreed as legally separated with no
qualified dependents.
20, 000
2. For head of the family can be single
or legally separated with qualified
dependents.
25, 000
3. For each married individual if only
one of the spouse, earns or derives gross
income, only such spouse can claim the
personal exemption.
32, 000
Q: Who is the head of the
family?
A: 1.unmarried or legally separated man
or woman
2. With (1) one or both parties
or
(2) With one or more brothers
and sisters
(3) with one or more legitimate,
recognized, natural or legally
adopted children
3. living with and dependents upon
him for their chief support
4. whose such brother or sisters or
children are
(1) not more than 11 years old and
(2) not gainfully
employed, (3) unmarried
5. OR, regardless of age, the same are
incapable of self support because of
mental or physical defect.
Q: Why do we have to determine who
the head of the family is?
A: only legally separated individuals
can
claim additional exemptions if they have
qualified dependents.
TAKE NOTE:
R.A. 7432 and RR 2-98: a senior citizen
can

also
be
dependent.

Q:
Can
a
widower
claim
exemptions?
A: exemptions must be strictly
construed, widower not included in
the list under

Section 35 A but can claim under sec

35B
widower, married or used to be married
MARRIED INDIVIDUALS
each legally married individuals can claim
the personal exemption. Husband and wife
= P64,000
Q:
A:

Who are allowed to claim?

Normally , it is the husband who
claims unless he executes a waiver that
the wife
will claim the same (RR2-98)

Additional Exemptions: (35B)

-additional exemption of P8,000 for
each dependent not execeeding four (4)
Q: Who can claim the same?
A: 1.Married couples: only one of the
spouses can claim it;
2.legally separated individuals: can
be
claimed by the spouse who has
custody of the child or children
the additional exemption claimed by
both

shall not exceed the maximum

additional exemption herein allowed.
Q: Define dependents
A:
legitimate, illegitimate or legally
adopted child chiefly dependent upon
and
living with the taxpayer if such
dependent is (1) not more than 21 years
of age, (2) unmarried, and (3) not
gainfully employed or (4) if such
dependent, regardless of age is incapable
of self support because of mental or
physical defect.
Q: What if widower has illegitimate
children, can claim additional
exemption?
A: can claim, can be considered as head
of the family w/ dependent
Q: What if the children are temporarily
away from the parents?
A: still considered living with parents,
can claim exemption
CHANGE OF STATUS: (SEC 35 C)
Q: Reckoning Period?
A: end of the year or close of such year
when such change of status occurred.

TAKE NOTE:
always
choose the
higher amount
of
exemption if you are filing a return covering
the period within which the change of status
occurred
1. if the taxpayer should (1) marry or (2)
have additional dependents during the
taxable
year,
he
may
claim
the
corresponding exemption in full for the year.
Ill ustration:
1.Single
Jan
1,
2005
2.Married June 1, 2005 on April 15, 2006
status: legally married can claim P
32,000
2. if the taxpayer should die during the
taxable year, estate can claim personal
exemption.
Illustration
1.Jan. 25, 2005 taxpayer married w/ one
child
can claim on April 15,
2006
P32,000+
P8,000

} P40,000

In this case, as if the change of

status
occurred at the close of taxable year. If
taxpayers spouse or child dies within
the taxable year or the dependents
became (1) gainfully employed (2) got
married or (3) became 21 as if the
change as status occurred at the close of
taxable year. Ill ustration:
1. Taxpayers tragic story wife died Jan.
25,
2005 and child died the next day
then another child eloped and get married.
2. Taxpayer despite the tragedy can claim
ton
of money on April 15, 2006.
P 32,000
P 16,000 (8,000 per child)
48,000
Section 36. Items not Deductible
36 A. General R ule: In computing net
income, no deduction shall be allowed:

betterments, made to increase the value

of any property or estate
2.
Any
amount
expanded
in
restoring
property or
in
making good the
exhaustion thereof for which an allowance
is or has been made.
Exceptions
:
1.
Option
granted
to
Private
Educational Institution to deduct the
same as capital outlays.
TAKE NOTE:
Amount paid for new buildings, can be
deducted if it involves intangible drilling and
development cost incurred in petroleum
operations (Sec 34 6 (A)
PREMIUMS PAID ON LIFE INSURANCE
POLICY :
1. covering the life of any oficer or
employee or any person financially
invested in any trade of business
carried on by the taxpayer.
2. taxpayer is directly or indirectly the
beneficiary under such policy.
LOSSES FROM SALES OR EXCHANGES
OF
(1) Personal, living or family expenses
not related to trade or business
(2) Section 36 A (2) and Section 36 A
(3)
General Rule: No deductions allowed for
1. Any amount paid out for new
buildings or
for
permanent
improvements, or

PROPERTY
parties)

(between

1)
between
members

related

family

Q: Who is considered the family of

the
taxpayer?

A: a. brothers and sister (whole is

blood)
b. spouses
c.
ancestors
d. lineal descendants
Q: are uncles or nieces
included?
A:
no

I N DON OR S
TAX
Relatives
includes
relatives
by
consanguinity within the 4th
civil code.
Nephew is
a
stranger and
relative
ang nephew.
2)
individual
and
corporations
Gen. Rule: NO
DEDUCTION
Except: distribution in liquidation or
less than 50% of the outstanding
capital stock

3)
Two
corporations
4)
Grantor
or
Fiduciary
5) Two fiduciaries of two
trust
6) Fiduciary and beneficiary of
trust
Sec. 37 Special provisions
regarding deductions of
insurance companies.
Codal
Provisions
Section 38: Losses From Wash Sales of
Stock or Securities
Q: What is a wash
sale?
A: It is a sales or other disposition of
stock
securities
where
substantially
identical securities are purchased within 61
days, beginning 30 days before the sale and
ending
30 days after the
sale.
Q:
What
period?
A: 61 day period beginning 30 days
before and ending 30 days after the sale
Q: Jan 20 you purchased share of stock,
and
disposed of the same on Feb 5, 2005. Is
this a wash sale?
A: No
Q: If it is a loss in wash sale,
happens? A: General Rule: (Sec
131 RR No. 2) gains from wash sale
are taxable but losses are nondeductible
Exception
:
unless claim is made by a dealer in stock
or
securities and with respect to a transaction
made in the ordinary course of the
business of such dealer
Q: Reason why losses in wash sale cannot
be deducted?
A:
1. to avoid too much
speculation in the market
2. taxpayer not telling the truth,

because he may say he

loss instead of a
gain

incurred

Section 40. Determination of Amount

and
Recognition of Gain or
Loss
GENERAL
RULE:
This
is
totally
irrelevant if the income is subject to fit.
In fit gain is presumed.
EXCEPT: sale of shares of stock
where you have to determine actual
gain or loss

Q: When is there a
gain?
A: excess of the amount realized over the
basis or adjusted basis for determining
gain. (amount realized from the sale or
other disposition of property)
Q: When is there a
loss?
A: the amount realized is not in excess of
B
or AB
Illustration: 1987 Bar (Juan dela
Cruz sold jewelry for 300,000 ) contract
of sale
amount realized is 300,000
Q: What will be the basis of the
gain?
A: Sec. 40 B (1), property was acquired
by purchase
Cost: purchase price + expenses
Q: If there is a gain, is the whole gain
subject to income tax?
A:
it
depends
if ordinary asset = 100% is subject to
income tax
if capital assets
a. short term(less than 12 months) :

100%
taxable
b. long term (more than 12 months):
50%
taxable
Q: suppose property sold is a parcel of land
will the rule be the same?
A:
No,
and
it
depends
ordinary asset: apply the cost
capital asset: 6% FMV or selling price
which ever is higher
Q: Do we apply the holding
period?
A: No, holding period does not apply to the
sale of real property. This is an absolute
rule:
If realty is ordinary holding period
does not apply.
If realty is capital asset 6% FMV or
selling price applies.
Holding period applies only to sale of
personal property which is a capital asset
except sale of shares of stocks.
Holding period also do not
corporations.

apply to

Q: If the property is acquired

through inheritance, what is the
basis?
A: Sec 40 B (2) fair market value or price
as of the date of acquisition.
Q: Suppose it was a sale of personal
property, do we apply the same
principles?
A: No.
Q: What if it involves a sale of real
property?
A:
Apply
the
same
principles
Suppose it was a result of
swindling,
theft, robbery or estafa,
do we apply
the same principles?
A:
Law is silent, take note of the old
CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a
jewelry in Sept your GG breaks up with
you. GG request the jewelry be returned
but you already sold it for P200,000.
Will the entire P200,000 be included in
gross income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did
not acquire the same by gift (cost)
Q:
If it involves a parcel of
land?
A:
apply the same rules Section 40 B
(4)
what is the basis?
1.
Property
was
acquired
for
less
than
an
adequate
consideration
in
money
or
moneys worth: the basis
would be the amount paid by
the transferee for the property.
Q: Section 40 B (5) what is the basis? A: 40
C (5)

if the property was acquired in

a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges property
solely
for
stocks
in
another

corporation, also a party to the

merger or consolidation
b. is a party to the merger or
consolidation, solely for the stocks
of another corporation also a party
to the merger or consolidation, or

c.

Security
holder
of
a
corporation, party to a merger or
consolidation,
exchanges
his
securities solely for stock or security
in another corporation, also a party
to the merger or consolidation.
person
transfers
property
to
corporation to gain control

40
C
EXCHANGE
PROPERTY

OF

GENERAL RULE:
In sale or exchange
of property, the control amount of gain or
loss shall be recognized.
1.
gain
is
taxable
2.
losses
are
deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss
shall
be recognized
1. gain is exempt
2. losses are not deductible
REQUISITE
S:
1. the transaction involves a contract
of exchange
2. the
parties
are
members
of
the merger or consolidation

3. the subject matter is only limited

or confined with the one provided for
by law
Merger and Consolidation in corporation
code and tax code are not the same.
Sec 40 (2)
(a)
a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation
which is a party to the merger or
consolidation
Ill ustration:
Transferor gives 1M
Transferee gives 700,000 =
not taxble gain P300,000
If other property received by transferee
(40
C
(3)
(a)
TRANSFEREE
if the party receives not just the
subject
matter permitted to be received: lie if
the party receives money and /or
property, the gain, if any, but not the
loss, shall be recognized (meaning
taxable) but in an amount not in excess
of the sum of the

money
and
the
FMV
other property received.
(40
C
(3)
TRANSFEROR

of

such

(b)

1.Transferor corporation receives money

and
/ or property, distributes it pursuant to
the merger or consolidation plan
no gain to the corporation shall be
recognized
2. Transferor corporation receives money
and
/ or property, does not distribute it pursuant
to the merger or consolidation plan
the gain shall be recognized but in
an
amount not in excess of the sum of such
money and the FMV of such other property
so received.
Q: What is the
rule?
A: 40 C (3)
(a)
1.
gain
taxable
2.
loss
not
deductible
40 C (3) (b)
It
depends
on
how
distributed:
1. pursuant
to
the
merger
consolidation plan:
gain exempt
loss not deductible
2. not
pursuant
to
merger
consolidation plan:
gain taxable
loss not deductible.

or

or

Sec 40 C (1)
(b)
a shareholder
exchanges stock in
a
corporation which is a party to a
merger or consolidation, solely for the
stock of another corporation which is a
party to the merger or consolidation
Sec 40 C (2)
(c)

a
security
corporation

holder

of

which is a party to the merger or

consolidation, exchanges his securities
in such corporation, solely for stock
securities in another corporation.
The rule is similar in 40 C (3), (a), (b)
and (c) although diferent property are
involve, that is why the last paragraph of
40 C is a separate paragraph.
Therefore, Sec 40 C (3) (a,b,c) the rule
is
1.
gain
exempt

2.
loss
deductible

not

40c last
paragraph

the
transferee
becomes
stockholder,
parties are not members of the
merger

the
individual
wants
to
be
a
shareholder but does not want to
purchase shares but willing to give up
property as a result of the exchange ,
the person gains control of the
corporation
The rule is:
a.
gain
is
exempt
b.
loss
not
deductible
Requisites
:
1. There is A contract of exchange
where property was transferred
by the person in exchange of
stock
or unit of participation in a
corporation.
2. As a result, the person alone or
together
with
others
(not
exceeding of 4 persons) gains
control of the corporation.

Q: What is control?
A: ownership of stocks in a corporation
possessing at least 51% of total
voting
power.
Sec 40 B (5)
non applicability of income tax is only
temporar
y
Reason : Basis will be 40 C (5)
1.
40 C (5) (a)
Transferor
basis of stock or securities received
by
the transferor: same as the basis of
the property, stock or securities
exchanged:
decreased by the (1) money and (2)
FMV
of the property received; and
increased by (a) amount treated
as
dividend and (b) amount of
gain recognized
2.
40 C (5) (b)
Transferee
as it would be in the hands of
transferor increased by the amount
of gain recognized.
Sec 40 (c) (4) Assumption of
Liability

1.

2.

Taxpayer,
in
connection
with
the exchanges described receives
securities or stocks permitted (no
gains recognized) it is sole
consideration of the same the
other party assumes liability of the
same the acquisition of liability not
treated as money and / or other
property the exchange still falls
within the exceptions.
If amount of liabilities assumed
+ amount of liabilities to which
property is subjected to exceeds adjusted basis of the property
transferred the excess shall be
considered a gain from the sale of a
capital asset or of property which
is not a capital asset, as the case
may be.

SECTION
INVENTORIES

41

Purpose:
Change of inventory to
determine clearly the income of any
taxpayer/ to reflect the true income.
Limitation:
1.
once every 3
years
2.
approval of the secretary of
finance
Section
43
Accounting
Periods
1.
Fiscal
year
2. use of calendar year
a. no annual
accounting
b. does not keep books of
account c. individuals
Use of method as in the opinion of the
commissioner clearly reflects the income:
1. no
accounting
method
has
been
employed
2.
the method does not clearly
reflect the income
Sec 44 Period in which items of Gross
Income included and Sec 45 Period for
which Deductions and Credit Taken
Under Sec 44 amount of all items
of

gross income shall be included in the

gross income for the taxable year
in which they are received by the
taxpayer
Under Sec 45 deductions shall be
taken
for the taxable year in which paid
or
accrued
or
paid
or
incurred.

Sec 44 and Sec 45 are mentioned in

the code because of the death of the
person.
Ill ustration:
Facts: taxpayer dies in the middle of the
year
January 1, 2006 June 15,
2006
June 26, 2006 to Dec 31, 2006 the
estate
is
the
taxpayer
So the income and deductions from
Jan
1 to June 25,, included in the
computation
Section 46 Change of Accounting Period
Q: Who is the taxpayer?
A: corporation (taxpayer other
than individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2.
calendar
year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal

with the approval of the Commissioner,

net income shall be computed on
the basis of the new accounting period.
Q: Calendar to calendar, correct?
A: not correct statement
Section 47 (A)
Taxpayer: Corporation
1.
Fiscal
to
calendar
separate final or adjusted return
shall
be made for the period between the so
close of the last fiscal year for which the
return was
made and
(2) the
following Dec 31.
2.
Calendar to
Fiscal
separate final or adjusted return
shall
be made for the period between the
close of the last calendar year and the
date designated as the close of the fiscal
year.
3.
Fiscal to
fiscal
separate final or adjusted return
shall
be made for the period between the
close

of the former fiscal year and the date

designated as the close of the new
fiscal year.
File return indicating the change
in
accounting
method
Section
48
Term
Contract
s

Accounting

Q:
Who
are
involved?
A:
applies to
engineers

for

Long

Q: If the initial payment exceeds 25% what

do you call it?
A: called deferred
sale
Q:
Consequence?
A: you must pay the whole amount of the
tax
Q: Sale of Personal Property, is it important
to know if it is a casual or regular sale?

the

professionals

architects

and

Q: What is a long term

contract?
A: it means building, installation or
construction contracts covering a period in
excess of one (1) year.
Q:
Basis
of
income?
A: a. persons whose gross income is
derived in whole or in part from such
contract shall report such income upon
the basis of percentage of consumption.
b. the return shall be accompanied by
a certificate of architects or engineers
showing the percentage of completion
c. deduction of expenditures made
during the taxable year, on account of
the contract is allowed
Section 49 Installment
Basis
contemplates a seller
property
Q: Is it important to know if the
is personal or real?
A:
Yes

of

the
property

Q: Sale of Real Property is it important to

know if it is a casual sale or regular sale?
A: No
Requirement: The initial payments do
not exceed 25% of the selling price.

A:
Yes
Casual
Sale
has
Requirements:
1. selling price exceeds P1,000
2. initial payment not exceeding
25%
selling price
Regular
sale
no
requirements
Case
of
Baas
1.
subject
matter
2.
sold by
way
3.
agreement
4.
cash
deposit
5. post
dated
promissory
notes
(installments)
3. 1st installment promissory note
was disconnected
4. 2nd installment exchanged with cash
- these two exceeds the selling price
5.
you only compute
cash
H: Initial payment exceeds 25%
installment basis is not applicable
RR 2; Section 175: In payment by way of
installment promissory note, bills of
exchange
and
checks
will
not
be

considered in computing the 25% initial

downpayment.
Section 50
Allocation of
Income
and
Deduction
s
tremendous
power
of
the
Commissioner to allocate the income
and deduction of several corporations
having the same interest.
Q:
Same
interest?
A: stockholders substantially the
same
Q:
Limitations?
A:
None
That is why
of
corruption

it

is

great

source

Section
51
Individual
Returns
Who are required to file?
(ITR)
1. RC
2. NRC
3. RA
4.
NRAETB sources
within
Q: Who is not mentioned in Sec 51 but
liable to pay by way of NIT?
A:
OCW/
seaman

Exception:
RC OR ALIENS: engaged in trade or
practice of profession in Phil. Shall file ITR
regardless
of the amount of gross income.
Q: If OFW is exempt from filing a return,
what is he required to file?
A: Information Return
Q: who are not required to file a return?
A:
a.
an
individual
whose
gross
income does not exceed his total
personal and additional exemptions
for dependents
b. worker
(compensation
income
earners) regardless of the amount
of compensation shall not required
to file ITR because the management
files
it. (RR 3-2002)
c. individuals whose sole income
is subject to FIT
d. individuals who are exempt from
income tax
Exception: IT
1. the management files an incorrect
return
2. the
employee
has
two
or
more employer
51 A (3)
A: not required to file ITR may be required
to file information return
51 B - Where to file?
1.
authorized
agent
bank
2.
revenue
district
oficer
3.
collection
agent
4. duly authorized treasurer of the city
or municipality where taxpayer resides
or has principal place of business
5. office of commissioner if no
legal
residence or place of business in
Phil
51 C

Q: When to file?
A: filed on or before the 15th day of April
each year
51 C (1) NIT Payers using CY
two days provided (calendar)

1. on April 15; or
2. before April 15 (January, Feb or March)
not December because the calendar year
is
not
yet
over
Fiscal year: 15th day of the 4th month
following the close of the fiscal year.
51 C (2) individuals subject to tax
on capital gains
Exception: General Rules Sec
58
1. Sale of shares of
stocks
return filed within 30 days after each
transaction and
Final consolidated return on or before
April 15
2.Sale
of
Real
Property
return filed within 30 days following
each
sale
51 D Husband and
Wife
1. Pure compensation income earner
separate
return
RR
3-2000

pure compensation
income
earner
regardless of amount of income not file ITR.
2. Not pure compensation: joint
return

51 E. Return of
Income of
Childre
n

Parent

to

Include

unmarried minor receives income from

property received from living parent
included in the parents ITR.
Exception
:
1.Donors tax has been paid
2.Property exempt from donors tax
51
F.
Persons
Disability

Under

Q: Who makes the

return?
A:
1.duly authorized agent
2. duly authorized representatives
3. guardians
4.other persons charged with the care
of his person or property
both incapacitated taxpayer and agent
will be liable for:
1.erroneous return
2. false or fraudulent return
51 G Signature Presumed
Correct

prima facie evidence the

was
actually
signed
by
the
taxpayer

return

Section 52 Corporation Return

go back to Sec 51 A (2)
General Rule: Sec 58 Final Income
Tax
return and creditable withholding tax
return is filed monthly
Exception: Sale of Shares of Stocks
(Sec 51 A (2)) Sale of Real Property
RR -17-2003: Sale of Real
Property
subject to final withholding tax, the
buyer is deemed the agent.
Sale of Shares of Stocks
Q: Reasons for filing Final Income tax or
Final
Consolidated Return?
A: Reasons:
1.
FIT whose actual determination
of gain or loss
2.
in connection with Sec 24 C
the basis of the tax is not the
gross
income but the net capital
gains realized.
In connection with Sec 40:
actual determination of loss or gain
file a return within 30 days from date
of transaction
TAKE NOTE: In all other income subject
to
FIT, the gains are presumed
INCOME OF MINORS
Q: Minor below 18: Will it be included in
the
Minors ITR?
A: it depends
1. income from property received
from parents included in parents ITR

Except a.Donors tax paid

:
b.Property exempt from donors
tax
2. income from minors own industry
Minors ITR accomplished by guardian
or parents

SEC 52 CORPORATION RETURNS

A.Requirements
Taxpayer: DC or RFC (except
NRFC) ITR Filed: 1. TRUE AND
ACCURATE
a.
quarterly income tax
return
b.
final or adjusted income tax
return
Filed by:
1.President;
2.Vice President
3. Other principal oficer
ITR must be sworn by such oficer and the
treasurer or assistant treasurer
B. Taxable Year
1. fiscal; or 2. calendar
corporation cannot change accounting
method employed without the approval
or prior approval of the commissioner (Sec
47)
C. Return of Corporation Contemplatory
Dissolution or Recognition
1.Within 30 days after:
a. the adoption by the corporation of
a resolution or plan for its dissolution; or
b. liquidation of the whole or any part of
its
capital
stock,
including
a
corporation which has been notified of
possible involuntary dissolution by the
SEC; or
c.
for
its
reorganization
2.Render a correct return verified under
oath setting form:
a. forms of the resolution or
plan;
b.
such
other
information
prescribed
3.Secure a tax clearance from the BIR and
file it with the SEC
4.Thereafter, SEC issued a Certificate
of
Dissolution or Reorganization.

Q: if the individual is exempt from

income tax, can be required to file a return?

A: General Rule: No
Exceptions:
1.engaged in trade or business; or
2.exercise of profession Sec 51 A (2)

D. Sale of Stocks ITR

look at the previous notes about it
Section 53
File
Returns

Extension of

Q: To whom granted?
A: Corporations
Grounds: Meritorious case

Time

to

subject to
56
Time
Extension

the

provisions

of

Sec

Section 54 Returns or Receivers,

Trustees in Bankruptcy or Assignees
the aforementioned persons shall
make
returns of net income as and for such
corporation in the same manner and
form as such organization is required to
make.
Section
55
Returns
of
General
Professional
Partnershi
p
file a return of its income setting
forth
1. items of gross income and of
deductions allowed by this title
(Title II Tax on Income)
2.
Names
of
partners
3.
Taxpayer identification number
(TIN)
4.
address
of
partners
5.
shares of each
partners
GPP is exempt from corporate income
tax
Q: Why is the GPP obliged to file a
return?
A: to determine the shares of each
partners
Section 56 Payment and Assessment of
Income
Tax
for
Individuals
and
Corporations
A. Payment
Tax

of

Q: Who pays the tax of tramp

vessels?
A: 1.the shipping agents and or the
husbanding agent
2.in their absence, the captains
thereof
those people are required to file a
return

and pay
departure

the

tax

due

before

Q: What is the efect of failure to file

the return and pay the tax due?
A: 1.Bureau of Customs may hold the
vessel and prevent its departure until:
a. proof of payment of tax is
presented;
or
b. a sufficient bond is filed to
answer for the tax due.
Installment
Payments
Tax
due:
more
than
P2,000
Taxpayer: individuals only (other than
corporation)
Elect to pay the tax in two (2) equal
installments

a. 1st installment: paid at the time the

return is filed
b. 2nd installment on or before July 15
following
the
close
of
the
calendar year
Q: What is the effect of non payment on
the date fixed?
A: The whole amount of tax unpaid
becomes due and demandable
together with the
delinquency
penalties.
Payment of capital gains tax :
Q: Paid when?
A: on the date the return is filed
Avail
exemption for capital
gains:
a.no
payments
shall
be
required;
b. if you fail to qualify for exemption
tax
due
shall
immediately
become due and payable and
subject to penalties
c.seller pays tax submit intention or
proof of intent within six (6)
months
from the registration of
document transferring
Q: when is the real property entitled to
refund?

A: upon verification of compliance

the requirements for exemption.

with

Report gains on installments under

Sec
49 tax due from each installment
payment shall be paid within 30
days from the receipt of such payments.
No
registration
of
document
transferring
real
property
1. without
a
certification
from
commissioner
or
his
duly
authorize
representative
that
a. transfer has been
reported b. tax has been
paid
B. Assessment and Payment of Deficiency
Tax
Return is filed, the commissioner examiner
and assess the correct amount of tax
tax deficiency discovered shall be paid
upon notice and demand from the
commissioner.
3 INSTANCES CONTEMPLATED
1. file the return and pay the tax
2. file the return but not pay the tax
3. not file the return and not pay the tax

Section 57 Withholding of Tax at

Source
A.
Withholding
of
Taxes
subject to the Rules and Regulations
the
Section of Finance may promulgate, upon
recommendation
of
commissioner:
Require the filing up of certain income tax
return by certain income payees.
Q: Enumeration is all about
what?
A; Enumer ation about Final Income
Tax
Except:
Gross Income
Tax
1. 25 B
(NRANETB)
2. 28 B (NRFC)
B. Withholding of Creditable Tax at
Source
The
Sec.
of
Finance,
upon
recommendation of the commissioner
require the withholding of a tax on the
items of income payable to natural or
juridical persons, residing in the Phil,
by payor-corporation/ person the
same shall be credited against the
income tax liability of the taxpayer for
the taxable year. At the rate of not
less than 1% but not more than 32%
thereof.
Q:
What
is
the
maximum?
A: Maximum: now 35% pursuant to RA
9337
Q: When will you allow withholding
beyond
15%?
A:
For
NIT
15%
is
the
maximum
1. FIT the amount of withholding
is totally
2. GIT - equal to the amount of
tax
Tax
Bond

Free

Covenant

the bonds, mortgages, deeds of trust

or
other similar obligations
of
DC or RFC
contains a contract or provision where
the
obligor (debtor) agrees to pay the tax
imposed herein
normally between the creditor and
debtor
Q: Who pays the
tax?
A: Creditor pays the tax by virtue of an
agreement the debtor assumes the liability
and the creditor is now free from payment
of tax before it can transfer the property to
the buyer.

Section 58 Returns and Payment of

Taxes
Withheld
at
Source

filed and paid not later than last day of

the
month following the close of the
quarter during which withholding was made

A. Q uarterly Ret urns and Payment of

Taxes
Withheld
at
Source
1. covered by a return and paid
to:
a.
authorized
agent
bank b. revenue district
officer
c.
collection
agent
d. duly authorized treasurer of city or
municipality where withholding agent
has:
1. his legal residence; or
2. principal place of business; or
3. if corporation , where
principal ofice is located

5.
Commissioner,
with
approval
of
Sec
Finance

require withholding agents to pay

or
deposit
taxes
at
more
frequent
intervals where necessary to protect the
interest of the government

2.Tax
deducted
and
withheld
held as a special fund in trust
the
government until paid to the
collecting oficers.
3.Return for final withholding
tax
filed and paid within 25 days
the
close
of
each
calendar
quarter
4.Return
taxes

for

Creditable

for

from

withholding

B. Statement of Income Payments Made

and
Taxes
Withheld
Withholding agent shall furnish payee
a
written statement showing:
1. income or other payments made
by
WHA during such quarter or year
and
2. amount of tax deducted and
withheld

statement
given
simultaneously
upon
payment at the request of the
payee.
Creditable
withholding
taxes
1. corporate payee not later than
the
20th day following the close of
the quarter

2. individuals payee not

than
March 1 of the following year

later

Final Withholding taxes

the statement should be given to
the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
Withholding agent shall submit to the
commissioner an annual information
return containing :
1. the list of payees and income
required
2. amount of taxes withheld from each
payees
3.
other
pertinent
information
required
Final Withholding Tax: AIR
filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
not later than March 1 of the year
following
the year for which the annual report is
being submitted
Commissioner may grant WHA
reasonable
extension of time to furnish and submit
the return required herein.
D. Income of Recipient
1. Income upon which any creditable
tax is required to be withheld at
source
shall be included in the return of
its
recipient.
2. the excess of the amount of tax so
withheld over the tax due on
his return shall be refunded
3. income tax collected at source is
less
than the tax due on his return

diference shall be paid

4.
all
taxes
withheld
1. considered trust fund
2. maintained in separate account

3. not commingled with other

funds of WHA
E. Registration with Register of Deeds
No
registration
of
any
document
transferring real property shall be
efected by the Register of Deeds unless
the commissioner or his duly authorize
representative
has
certified
that
the

transfer (1) has been reported and (2)

tax due has been paid
Register of Deeds requires payment of
tax before transfer of property
Section 59 Tax on Profits Collectible
from
Owner
of
other
Persons
Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid
by virtue of the foregoing
shall be assessed by personal
return
Intent and Purpose of this
Title
1. All gains, profits and income of a
taxable class shall be charged
and
assessed with the corresponding tax.
2. Said tax be paid by the owner of
the gains, profit or income or the
person having the receipt, custody,
control or disposal of the same
Determination
of
Ownership:
determined as of the year for which a
return is required to be filed

CHAPTER X: ESTATES AND

TRUSTS Section 60: Imposition
of Tax
1. Estate property of the decedent
created by an agreement, trust or
by last will and testament
2. Trust agreement, contract or last
will and testament
Status
:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the
Estate:
income of the estate pending partition
or no partition at all:
Three
kinds
of
partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During
partition
Estate
earns
income:
1. individual income tax
2. corporation corporate
income tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is
individual

b.Impose income as if TP is
corporation c.Impose income as if
estate itself
depends whether there is a (1)
judicial
(2)extra judicial partition or (3) no partition
at all
When there is a judicial settlement which
is final and executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
Income of the Estate: corporate income
tax
2.Creation of Co-ownership
Income of the Estate: Income tax
on
individual
-co-owner liable in their individual company
Ponce Case:
H: After finality heirs did not divide the
property, the applicable income tax is
corporate income tax
because they
contributed money to engage in real estate.
SECTION 61 TAXABLE INCOME
(Important) Taxable income of the estate
or trust shall be computed in the same
manner and on the same basis as ill the use
of an individual.
Section 62: Applies during Pendency
of
Extra Judicial Settlement
Personal Exemption (P20,000)
Individual it will depend whether
he/she is classified as single, head
of the family or married
Estate regardless
Special deductions:Income distributed to
the heirs
if you distribute nothing you cannot
claim this special deductions
if there is a distribution, the heir shall
be liable to pay whether individual
capacity
if there is no distribution, heirs are not
liable to pay anything
Special deduction not apply if individual
tax is paid by the Estate itself.

Payment: made by executor,

administrator, to creditor to preserve the
estate
Sec. 61 and Sec 62

does not apply if estate is subject

to income or corporate income tax
it applies if the estate pays itself
during
the
pendency
of
the
judicial
settlement
Basis: Sec 60 C
during the period of administration or
settlement of the estate.
Taxpayer is a Trust:
Q; When liable to pay income tax?
A: If the trust is revocable (if revocable,
Sec
61 and 62 also apply)
Parties:
1.Grantor /creator /trustor
2.fiduciary / trustee
3.beneficiary / Les Qui
trust
Q: Who is liable to pay tax:
A: If trust revocable:

obligation
of
the
trustee
liability of trust itself
personal
Liability of trustee:
If trust irrevocable
obligation of the grantor

and

not

personal liability of the grantor as

an individual
TWO WAYS OF REPORTING
INCOME: PURSUANT TO RR2
(1949)
1. report only once
(building paid once)
2. after the span of 25 years
(payment of building divided per year)
ESTATE TAX:
1.Sec 60
2.Real
Estate
Tax
3.
Estate
Tax
transfer tax impose on the Net
Estate
for the transfer of property to the heirs
or beneficiary whether real, personal,
tangible or intangible
3 KINDS OF TRANSFER TAX:
1.Estate
Tax
2. Donors Tax
3. Sec 135 of LGU Transfer
Real
Property
Q: We dont have inheritance tax and
donees tax, why?

of

A: 1973 Marcos issued P.D.

69
Explain: Sec 84, rate is max of 20% of net
before
the
rate
is
60%
plus
additional amount.
resulted
to
many
gimiks
through
tax
avoidance scheme, like creating a family
corporation
(only
taxable
is
the
stockholders which is exempt)
Congress enacted RA 7449 decreased
60%
to 35% and then RA 8424 35% to
20%
Q: Now is it safe to create a family
corporation?
A:
No
more.
Q: Now: Iba na ang scheme which is
better sale or donation?
A:
1.Sale of RP considered capital assets
6% to 1.5% doc. Tax 7.5 % better
2.Sale of RP considered ordinary asset
5% to 52% as per use may be
3.Donation if given to all compulsory heir
relative lower than 20% which is 15%
stranger: 30% so go with 20%
Q:
Who
are
the
taxpayers?
A: Sec 104 Estate and
Donors
1.Estate
a. RC
b.NRC
c. RA
d. NRA
2. Donors Tax
a. RC
b.NRC
c. RA
d. NRA
e. DC
f. FC
A corporation cannot die of a natural
death. Q: What is the reason for classifying
the taxpayers?
A:
1. NRA and Estate
2. NRA and FC Donors = property
outside Phil exempt
3. all, other than these 3 taxable w
in and w/out

1.Franchise which must be exercised in

the Philippines;
2.S.O.B.
issued
by
a
Domestic
corporation;
3.S.O.B. issued by foreign corporation
at least 85% of the business of which is
located in the Philippines. do not
confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which
acquired a business situs in Phil
5.S.R. in business, partnership or
industry established in the Phils
Q:
to

NRA,

German

donates

SOS

of

FG

Filipina gf, is it subject to donors

tax?
A: it depends (you must
qualify)
1.Subject to donors tax
if:
1.S.O.B. FG at least 85% of
business located in the Phil
2.S.O.B. FG which acquired a
business situs in Phil
2.Exempt
1.personal property outside of Phil;
or
2.intangible
personal
property
net
taxable if following requisites concern:
A decedent at the time of his death or the
donor at the time of donation was a
citizen and resident.
1.of a foreign country which at the time of
his death or donation did not impose
a
transfer tax of any manner, in respect of
intangible personal property of citizens
of Philippines not residing in that foreign
country; or
2.
the laws of the foreign country
allows a
similar
exemption
from
transfer
or death taxes of every
character or description in respect of
intangible personal property owned by
citizens of the
Philippines
not
residing in that foreign country.
Q: Is Section 104 relevant to all taxpayers?
A: No, material only to NRA and FC
Section 104 speaks of intangible
personal property located in the Philippines.

Q: What if citizen of one country and

resident
of another country will the
exemption apply?
A: No, law requires that he must be a
citizen

and resident of the foreign country.

Campos R ueda Case:
F: NRA died married to Moroccan man,
so she was a Moroccan resident.

Donated SS in DC administrator claims

exemption,
ground:
In
Morocco,
intangible personal property of Filipinos
not residing therein is exempt from
transfer tax.
BIR contends: Morocco is not a
country but a colony of Spain.
H: claim granted even if it is not a full
pledged state, or its a mere colony,
what matter is that the foreign law
provides for
an
exception.

Q:

SECTION 84 RATES OF ESTATE

Q: is there a conflict between Sec 88 a

and
Sec 87 a? How do you
reconcile?
A:
No
conflict

TAX Q: What is the formula for

Estate tax?
A: Gross Estate (Sec
85)
- Deductions (Sec
86)
-------------Net
Estate x
Rate
-----------Taxable
net
income
- Tax credit
-------------------- Tax due
Gross estate (define) Sec
104
gross
estate
include
real
and
personal
property, whether tangible or
intangible, or mixed, wherever situated
NRA: Decedent / Donor property
situated outside of Philippines not
included on the gross estate
Section
85
Gross
(inclusion)
A .D ec ede nt s i
nte r e st

Estate

includes property (1) owned at the time of

death and (2) property not owned at the
time of death
Classic
example:
Usufruct

if terminated by the death of

usufructuary, is it subject to estate tax?
A: Not subject to estate
tax
Reason:
Exempt
Transmission
under
Sec
87
(a)
merger of the usufruct in the
of
the
naked
title

owner

1.Section 87 a contemplates a
situation where the usufruct is
terminated.
2.Section 88a contemplates a usufruct
for
a fixed period. Ex contract of lease
Q: How do you determine the value
of usufruct?
A: Sec. 88 a provides to determine the
value of the right of usufruct, take into
account the probable life of the
beneficiary.
Q: Why definition of gross estate is
longer than definition of gross gift?
A: transfer occurring after death. estate
tax absolute
Transfer during the life time
Normally Donors tax
However there are exceptions:
1.transfer in contemplation of death
(85B)
2.revocable transfer (85
C)
3.transfer
for
insufficient
consideration
B. Transfer in contemplation of death
Roces case:

F: during lifetime, the following

document were instituted or executed
simultaneously
1.will
and
2.
donation
The heirs insisted to pay Donors tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs
in the last will and testament
Donees wanted to pay donors tax
because
it is always lower than the estate tax
except when the donee is a stranger
H: this is a transfer in contemplation of death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days
thereafter son claims Donors
tax
H:Transfers in contemplation of death
Q:

What are
transfers deemed in
contemplation of death?
A: 1.Property was transferred during
the lifetime but the decedent:
a. retains possession or receive
income or fruits of property; or
b.retains the right to designate persons
who will possess the property or
the right to receive fruits or income
c.Revocable Transfers

1.revocable transfers are included in

the
gross estate
Reason: the decedent retains
tremendous power and control over the
property
2.Irrevocable transfers are not included
in
the
gross
estate:
exempt
Reason: the decedent losses control
over the property
Notice Not Required because the person
has the control over the property
D. Property passing under general power
of appointment

same
with
fidel
commissary
substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE
NOTE:
To
determine
whether
included in Estate or not, know who has the
choice to designate the 2nd heir:
if decedent instructs the 1st heir that he
can
transfer the property to whomever he
wants included in gross estate
1st heir choice included in gross
estate
E.
Proceed
of
Lif e
Insurance
1.Beneficiary is the
estate
included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd
person
revocable included
irrevocable not included
F.
Prior
Interest
important only due to the codification of
the tax code B,C,E, included whether
before or after the efectivity of the code
G.
Transfer
consideration

for

ins ufficient

Q: Similar provision in Sec 100 (Donors

tax) can you apply the two (2)
provisions simultaneously?
A: No, alternative application, one or
the other but not both.
The application will depend on the time
of
transfer or motive:
1.If transferred because of
impending death
estate tax

2.If transfer because of generosity

Donors tax
Q: Parcel of land was sold for less than
adequate consideration (adequate) to
relative for
P600,000 when FMV is 1
million pesos.
Is this subject to
transfer tax? Is it subject to Donors tax?
A: No, Sec 100 provides the property
should be other than real property
referred to in
Section
24
(D)
Not subject to Donors tax, the
applicable tax is 6%
FIT
Q: Will your answer be the same if
SOS
are sold?
A: No, answer not the same, SOS not
property contemplated in Sec 24 D (1)
in this case, the amount by which
the
FMV of prop exceeds the value of the
consideration shall be deemed a gift
and included in the computation of the
gross gift: subject to Donors Tax
Q: What is the subject matter in 85 G?

A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
correlate with Sec 86 C
both speak of legally married individual
pertains to the separate property
of spouse who survived
capital used in its generic sense
surviving spouse may be man or woman
Section 86 (c)
to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value
is at least P200,000 (Sec 90)
4.to determine if gross value is at least
42 M
Q: Who are the taxpayers under 86 A?
A: 1.RC
2.NRC
3.RA
Q: Who is the taxpayer under 86 B?

A: NRA
Q: Why do we need to know this?
A: NRA
cannot
avail
of
following deductions:
1.family income
2.standard deduction
3.hospitalization
4.retirement pay under RA 4917

Requirement:
the

A. Deductions Allowed to the Estate

of a
Citizen or Resident
1.ELIT (expenses, losses, indebtedness
and taxes)
a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
apply whichever is lower
Limitation:
a)amount equal to 5% of gross estate
should not exceed P200,000 (basis
is the gross value)
b)
Judicial
Expenses
no limitation

Pajonar vs Commissioner
I:
Whether
or
not
extra-judicial
expenses may be allowed as a deduction
H: This law has been copied from U.S. In
US, expenses to be claimed as a
deduction both judicial and extra judicial
expenses.
Claims against the estate
Estate is the debtor
Requirements:
1.at the time the indebtedness was
incurred the debt instrument was
duly
notarized;
2.loan contracted within 3 days before
death;
3.the administrator or executor
shall
submit a statement showing the
disposition of the proceeds of the loan
Claims of the deceased against
insolvent person
Estate is the creditor

the only requirement is that the (only)

amount of loan is included in the gross
estate
notarization
and
certification
not
required
Unpaid Mortgage, taxes and losses
Q: In unpaid mortgage who is the
mortgagor?
decedent mortgagor
1.
Unpaid
mortgage
1.value of the decedents interest in
the property is undiminished by such
mortgage;
2.included in
the
value
of
the
gross estate;
Illustration:
1 million FMV but mortgage is
only
600,000
you
include
1
million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the settlement
of the estate;
2.arising from fire, storms, shipwreck
or
other casualties, or from robbery, theft
or unbezzlement

3.losses
not
compensated
by
insurance
4.losses not been claimed as a
deduction for income as purpose
5. losses incurred not better than the
last day for the payment of the estate
tax
Property Previously Taxed
Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue
of donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be
acquired by inheritance or donation
2.Estate tax or Donors tax already paid
by the Estate of the Decedent (1st par)
3.Any person who died within five (5)
years prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years
20%
2.4years
40%
3.3 years
-60%
4. 2years
80%
5.
1
year
-100%

Q: Suppose the person died within 1 year

and it was inherited by son, suppose the
son also died within 1 year or may be 2
years, should we apply the vanishing
deductions?
A: No more (last par Sec 86 A2)
Transfer for Public Use
amount of
all
bequest, legacies,
devises
or transfers
Recipient:government or any
political
subdivision
exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is
not a
requirement
FAMILY HOME
amount equivalent to the current FMV
of
the
Family
Home
of
decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 22003)
1.Person
is
legally
married
GR: if single not allowed to
claim
Except: if head of the
family
2.Family Home actual residence of
the decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
automatic:
RR
2-2003
no
requirement
provided the decedent is the one in 86
(A) (RC, NRC, RA)
MEDICAL
EXPENSES
Requirements:
1.amount
not
exceeding
P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to his
death.
must be duly substantiated with receipt

RETIREMENT PAY UNDER RA 4917

(RETIREMENT PAY WITH PRIVATE
P L A N)
Requirements
:
1.plan duly approved by the
BIR
2.person at least 50 years
old
3.
10
years
in
service
4.
avail
only
once

TAKE NOTE: This is a deduction in the

nature of exemption, all other retirement
plan is excluded
B.
Deductions
Allowed
resident
Estate
s
1.ELIT
2.Property
Previously
taxed
3.Transfers for public
use
C. Shares
Property

in

the

to

Non

Conjugal

D.
Miscellaneous
Provisions
For NRA: No deduction allowed unless
include in the return the value at the
time of his death that part of his gross
estate not situated in the Philippines. For
proper deduction must include E. below
E. Tax Credit
to
Foreign
Country

for

Estate

Tax

Paid

SECTION 87 EXEMPTION OF
CERTAIN ACQUISITION AND
TRANSMISSIONS

1. Merger of usufruct in the owner of the

naked title;
2. transmission
or
delivery
of
the
inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
3.
transmission from the first heir,
legatee
or legacy donee in favor of another
beneficiary, in accordance with the
desire of the predecessor;
4.
All bequest, devises, legacies or
transfers to (1) social welfare (2)
cultural and (3) charitable institution
Requirement
s:
1.no part of the net income insures to the
benefit of any individual;
2.not more than 30% of donation
(BDL) shall be used by such institutions
for administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Us ufr uc
t
1.Determine value of right of
usufruct:
consider the probable life of the
beneficiary
based
on
the
latest
Basic
Standard
Mortality
Table
B.Propertie
s

fair market value of the Estate at the

time of death
1.FMV
determined
by
Commissioner
2.FMV schedule of values fixed by
the
Provincial
or
City
Assessors
SECTION 89 NOTICE OF DEATH TO
BE FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values
of the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1.
after
decedents
death
2.same period after qualifying as
executor or administrator
give
a
written
notice
Q: If the Net Estate is at least P16,000
will you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX
RETURNS Q: When required to file
return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross
value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor
vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
transfer of ownership in the name
of the transferee
return must set forth the following:
1.value of the gross estate at time of
death
2.deductions allowed

3.information necessary to establish

correct taxes
Q: What if Estate is exempt, is it required to
file a return?
A: General Rule: No
Exception
:

a. gross value exceeds P200,000

b.estate contains registrable
property
Q: if the estate or gross estate exceeds
2 million, what is the requirement?
A: return must be duly certified by a CPA
B. Time of Filing
filed within 6 months from decedents
death
within 30 days for filing the return
within 30 days after promulgation of
such order
1.certified copy of the schedule of partition
and
2.order of court approving the same
C. Extension of Time
Time: 30 days
Grounds: meritorious cases
Who grants: Commissioner
D. Place of filing:
return shall be filed with:

1.authorized agent bank

2.revenue district officer
3. collection officer
4. duly authorized treasurer
city or municipality in which decedent
was domiciled at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with
the ofice of the commissioner.
Q: Let us say there are 3 compulsory heirs,
namely A, B, and C. A renounces his
inheritance coming from the parents, but
A renounces his inheritance in favor of his 2
siblings, brother and sister B and C. Is
this subject to donors tax?
A: NO. It is exempt.
Q: But if in the given example, A said I
am renouncing my inheritance, but I am
giving it to my sister B, is this subject to
donors tax? A: YES. Renunciation is to
the disadvantage of the brother.
TAXATION UNDER THE LOCAL
GOVERNMENT CODE:
1. Local Tax
2. Real Property Tax

LOCAL TAXATION (186, 187, then go

to
151, 128 down)
Q: Mayor Binay of Makati ordered the
collection of elevator tax (for elevator in the
city hall).
Is the order of Mayor Binay
legally tenable?
A: NO.
There should always be a tax
ordinance after conducting a
public
hearing.
(186)
tax
ordinance
Q: Can BIR collect the tax even
the absence of a revenue regulation?
A:
YES.

in

Q: Can a province, city, municipality or

barangay collect the tax if there is no tax
ordinance?
A:
NO.
Q: Why is it that there should be a tax
ordinance as required by 186?
A:
The rationale is not mentioned in
186, but if you read the other provisions of
the LGC, you will come to set of
conclusions of
the reason why there must be a tax
ordinance.

In most of these provisions, it always

say: one-half if the town or municipality
shall collect a tax of not exceeding 1% of
the gross receipt.
TAKE
NOTE:
There
is
no
exact
amount; hence, it is the tax ordinance
which will fix the exact amount.

p ublic
hearing
In Congress, the requirement is not
absolute (by discretion only). Under local
taxation (last phrase of 186), the
requirement is ABSOLUTE.

REYES vs. SECRETARY (320 SCRA

486)
F: In the municipality of San Juan
(just beside Mandaluyong) there was a
tax ordinance passed.
Reyes, a
resident, claims that there was no
public hearing

conducted, he maintains that under

186 last phrase, there should always
be a public hearing.
H: The SC said: yes, that requirement is
an absolute one, but since the petitioner
failed to produce evidence to support his
allegation, if there is no proof presented
other than his own statement, we
hereby rule that the ordinance was
passed in accordance to the procedure
mandated
by law. While it is true that a public
hearing is an absolute requirement, he
who alleges, must prove the same.
Q: If you dont agree with the validity or
the constitutionality of the tax ordinance,
what will be your remedy?
A: Within 30 days from the efectivity of
the ordinance, the taxpayer should file an
appeal
with the office of the Secretary of the
DOJ
(187)
REYES vs. SECRETARY (320 SCRA
486)
F: Reyes
asserted
the
validity
and
constitutionality of the tax ordinance
only
after the lapse of thirty (30) days
(perhaps

his lawyer was thinking that an

ordinary statute may be contested
anytime with the RTC, CA or SC).
H: With regard to a tax ordinance, w have
a specific rule, failure to assail the
validity
with the specific period of time, is fatal
to the taxpayer.
Since it was filed
beyond the 30day period, we do not
disturb the validity of the ordinance.
Q: Within what period should the Sec.
of
Justice
decide?
A:
Within 60 days from the time the
appeal was filed. Failure to decide within
this time,
the taxpayer has the remedy to file an
action with the regular courts.

If the decision was made within the

60 day period, and receives the decision,
his remedy is to file an appeal within
30days form the receipt of the decision to
court of competent jurisdiction RTC.

Beginning April 23, 2004, from the

ruling of the RTC, pursuant to RA 9282 (the
law uplifting the standards of the CTA),
the ruling of RTC on local tax cases,
is appealable to the CTA en banc.

TWO APPEALS DECIDED BY THE CTA EN

BANC:
1. decisions of RTC involving local tax
cases
2. decision of the Central Board of
Assessment Appeals.

From CTA en banc, the appeal must

be file with the SC within 15days.

Go to 151:
The city could impose the tax
already imposed
by
the
province of
by the
municipality
.
Q:
What are the numerous taxes
imposable by the province which a city now
allowed to impose?
A: Those enumerated in 135 to 141 of
the
LGC
Reasons why a municipality wanted to be
converted
in t o
a
city:
1. 151
2. 233 (real estate tax)

In addition, the law says that the

city could increase the rate of the tax by not
more
than 50% of the maximum EXCEPT those
enumerated in 139:
a) professional
tax b) amusement
tax
A. General Principles (128130)
reiteration
provisions

of

the

constitutional

tax

notice that the constitutional

limitations on taxation do not only apply to
the national government but also to local
government units.
B.
(132)

Definitions

Local
(132)

Taxing

Authority

for
a
province,
it
is
the
provincial board
or
the
provincial council
(sangguniang panlalawigan)
for a city, we have the city
council
(sangguniang panlusod)
for the municipality, we have
the municipal council (sangguniang
pangbayan)

 for the barangay or barrio, we

have the barangay council.
C. Common
limitations
taxing
power of the LGUs
(133)

on

the

Under the old law this was 5 of the

Local
Tax Code.
Q:
Why
common?
A: Because the limitations or prohibitions
apply to all LGUs, the provinces, cities,
municipalities and barangays.
Two Common
133)
1.
prohibition
2.
prohibition

Crimes

(under

absolute
relative

It shall be unlawful for the LGUs to

collect:
I.
Income Tax EXCEPT when levied on
banks and other financing institutions
(133(A))

the term other financing

institution
shall include money changer,
lending investor, pawnshop (131(E))

rate of tax:does not mention rate

of tax, so long as it is fair, just and
reasonable

It cannot be prohibited taxation,

because the element of imposed by
the same taxing power is not present.
One is imposed by the national
government and
the other is by the
LGU.
II.
Documentary Stamp Tax
(133(B))

absolute
prohibition
III. Estate tax, inheritance, donations
inter vivos,
donations
mortis
causa
EXCEPT in
135 (133(C))
transfer tax on the transfer of
realty to be imposed by provinces
and cities
(135)
NOTE: this is not a real estate
tax, this is a local tax.
IV. Custom duties, charges or fees for
the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the
wharf had been established, maintained
and operated by the locality (133(D))

wharfage due is a custom

fee
imposed on the weight of the
cargoes.

wharf a
pier

special levy on public works

(240)
allows
provinces
cities
and
municipalities to impose a special
real

estate tax known as special levy

or public works

let us say the municipality

established
a pier for a minimal value of P10M;
out of P10M, under 240, 60% of this
may be recovered; the other 40% may
be recovered by warfage due.
v. Tax,
fee
or
charge
for
goods
or
commodities coming out or passing
through the territorial jurisdiction even if in
the guise of a toll or a fee (133(E))

an absolute
prohibition

commodities
marketed
in
a
public
market, lets say in the city of
Pasig, where the commodities came
from Laguna then to Tanay, Cainta,
Taytay; just imagine if each of the
towns will impse
1peso for every head of a chicken
or
50cents
for
every
bundle
of
vegetable.
P A LM A
D E V T
CO R P
v.
M
ALA N GAS
ZAMBOANGA DEL SUR (113 SCRA
572)
F:
Municipal council passed a tax
ordinance entitled police surveillance
fee which provide that ALL motor
vehicle passing through a particular
street in the town proper of Malangas
which will lead to the pier or wharf will
pay a certain sum of
money whether it is camote, copra,
palay,or rice. One of the owners of the
motor vehicle is Palma Devt Corp.
carrying copra, banana and coconut to
be loaded in a ship docked at pier of
Malangas. The lawyer of petitioner
assailed the validity of the ordinance
stating that it is a clear violation
of
133(E).
H: It is not the title of the ordinance which
is controlling but it is the essence of the
substance of the tax ordinance. The
tax ordinance clearly violated 133(E),
therefore, the SC had no option but
to
declare the tax ordinance null and
void for being in violation of the law.

VI. Taxes,
fees
or
charges
on
agricultural and aquatic products when
sold by marginal
farmers
or
fishermen
(133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled
in
Davao City, employed thousands of
workers
in
the
diferent
banana
plantation. Can the LGU impose tax
on the agricultural product which is
a banana?

A:
YES.
The
LGU
can
impose
because Don Antonio is not a marginal
farmer. It is only prohibited if it is
sold by a marginal farmer.

Marginal Farmer a farmer or a

fisherman
for
subsistence
only,
whose
immediate members are the immediate
members of the family (131(P))
VII. Tax, fee or charge on pioneer and
non- pioneer enterprise duly registered
with the
board of investments for a period of 6yrs
and
4yrs respectively (133(G))
relative prohibition because after
the period, the LGU concerned may
now
impose the tax.
VIII. Excise tax on articles and tax, fees
and charges on petroleum products
(133(G))

relative
prohibition
since
under
143(H), it says there that taxes
which are
prohibited
such
as
excise tax,
percentage tax and value added tax
nonetheless, the LGU may impose a
tax not exceeding 2% of the gross
receipt (for cities 3%).

My former student an assistant in

the city legal attorney in a city in
Metro

Manila, received a summon from the

RTC
(on complaint of a supermarket in Metro
Manila) questioning the validity of the
tax ordinance under 143(H) since the
rate imposed was 3%
I said, ineng, una file kayo ng
motion to dismiss. Nak ng puta, absent
ka na naman ata eh, you invoke 151
stating
that a city can impose a tax higher than
the rate provided for by law not
more than 50% of the maximum (50% of
the maximum of 2% is 1, therefore,
2+1 is
3%)

BULACAN v. CA (299 SCRA 442)

*first case decide by the SC which
interpreted both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of 138 of
the LGC. The problem is that the
ordinance
applies
to
ALL
entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged
to pay the tax, argued that under
138 of the LGC, the tax on quarrying
on which the province may be allowed
shall only be with regard to quarrying
private land, and

not only that but under 133(H), there

is a prohibition to impose excise tax
and tax on quarrying under the IRC
is an excise tax.
H: The tax on quarrying allowed to
provincial governments shall only be
with regard to lands which are public
lands, and since this is a private
tax on quarrying refers to a lot without
any distinction. Hence, if the LGC
made a
qualification as to the kind of land
(where it says it should be public land),
by implication, it should refer to private
land
under 151 (although the law did not
distinguish); and since it is a tax by
the national government, it should be
collected by the BIR (not the LGU),
and
also the SC agreed that it is an excise
tax where LGUs are prohibited from
collecting; thus, the SC declared the
tax ordinance null and void for being
contrary to law.

Sir, why is it a problem when the

law is clear that under 138, it shall
only
apply
to
public
land?
Perhaps
the
provincial
council
thought that the subject matter of
the tax
ordinance may be a subject matter
provided in any book including the
IRC, or worse, that it may impose a tax
on a subject matter not mentioned
in any
book.
Moral lesson:
although
a
tax ordinance may be passed even if the
subject matter is not provided for in any
law, it has to comply with the
limitations.
PETRON v. PENILLA (198 SCRA
86)
* The facts here arose under the old
law under 5 (now 133) of the local tax
code (PD 231)
F:
Petron
has
a
factory/plant
in
Penilla
where
the
raw
materials
petroleum products are being converted
into refined petroleum products. The
municipal

council of Penilla imposed a tax by way

of a tax ordinance saying that they are
invoking the old 19 (now 143(A))
stating
that
municipalities
are
authorized to impose tax of the
manufacture of any commodity, hence,
since it is manufacture of a petroleum
product, the
LGU must e authorized. However, Petron
objected since under 5 (now 133(H)),
the prohibition includes the prohibition
to

impose excise tax and not only that,

under this par., the tax on petroleum
products is an excise tax. Under this
par., the law is clear it does not only
prohibit the imposition of tax, fee or
charge over petroleum products.
H: The controlling provision here the old
19 (now 143(A)) that LGUs are
authorized to impose the business tax
for the
manufacturing
over
any
kind of
commodity by and petroleum product
is
any
kind
of
commodity.
Q:
What do you
think?
A:
I dont agree with this ruling
because between 133(H) and 143(A),
it is the former which is more specific.
IX. Value added tax and percentage
(133(I)
EXCEPT 143(H)

Relative
prohibition.
X. Tax, fee or charge on common
carriers whether by land, water or air
(133(J))
FIRST HOLDING CO. v.BATANGAS CITY
(300
SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.

F:

This revealed to the public the

existence of 2 very big oil pipelines
coming form Batangas City with a
distance of more than 100km, one
going to Pandacan Oil Depot and the
other one is going to Brgy. Bicutan,
Taguig. The Batangas City
council deemed it necessary to impose a
tax on the gross receipt of the 1 st
holding company for the operation of
the oil pipeline, but the operator argued
that the oil pipeline is not a common
carrier.
H: The SC reasoned out like in the case
of
Pajunar
v.
Comm
(328SCRA666),
saying
that we have copied the code of
carrier law form the US where the
definition of a common carrier is one
habitually carrying not only individuals
or
passengers
but also goods or
commodities, and since the oil pipelines
is
habitually
carrying
petroleum
products which is a commodity, we
rule this as a common carrier which is
under 133(J), LGU is prohibited from
imposing tax on common carriers, and
not only that but under
170 of the LGC, the law is very explicit,
that ALL LGUs are prohibited to impose
percentage tax on common carriers.
With
that,
the
tax
ordinance
passed
was

declared null and void for being contrary

to law.
XI.
Premiums
on
re-insurance
(133(K))

absolute
prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of
license
and
permit
for
driving
thereof
EXCEPT
tricycles.
(133(L))
BATUAN CITY v. LTO (322 SCRA
805)
I:
Which function was delegated to the
LGU?
The LTO registering motor vehicles or
the LTFRB granting franchise and
regulation of common carriers?
H: Under 133(L), the function of the LTO is
prohibited, an therefore what may be
delegated to the LGU is the function of
LTFRB.
XIII.
Tax, fee or charge on exportation
of products and is actually exported EXCEPT
under 143(C) where the LGU is authorized
to
impose business tax on exportation
(133(M)) XIV.
Tax, fee or charge on
cooperatives duly registered under the
cooperative cod (RA
6938)
and
Business
Kalakalan
(RA
6810)
(133(N)
)

A cooperative is exempt from

local tax, provided it is duly registered
with the cooperative code and the
cooperative development authority or
Business Kalakalan (not kalkalan)
XV.
Tax, fee or charge over the national
government,
political
subdivisions
and
agencies
and
instrumentalities
of
the
government
(133(O))

Relative prohibition since it admits

of an exception under 154 of the
LGC where it says that a LGU may be
authorized to impose a fee or charge for
the operation of a public utility
provided it is owned, maintained and
operated by such LGU.

NAIA v. PARANAQUE (JULY

2006)
H:
SC ruled in favor of the airport.
Paranaque being a LGU cant impose tax
on
a
government
instrumentality.
Airport owned by the government is not
an agency, it being an instrumentality.
Q: May the government tax itself it
the
taxing
power
is
the
local
government?
A: NO. The local government cannot
impose
tax
on
the
national
government,
and
with
more
reason
that
it
cannot
impose a tax with equal
LGU.

D. Taxes that can either be imposed

by
Provinces
or
Cities
I. tax on transfer of realty
(135)
Note that this is not a real estate tax,
this is a local tax for the simple reason that
it is not provide for under the topic of real
estate tax (198-280)
Law says it should not exceed of 1%
of the consideration (NOTE: do not use
zonal value since this is used only under
the IRC, not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding of 1%), is it violative of the
equal protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering
the
status
of
the
province.
Q: Why is that Makati fix the rate of 75%
or
3/4
of
1%?

A:
Because cities are authorized to
increase the rate of 50% of the maximum,
that is 50%
of is 25% (50+25 is
75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) this is the
Comprehensive Agrarian Reform Program
this is exempt.
II.
tax on printing an publication
(136)

Normally, a province cannot impose

this because the tax on business can only
be imposed by a city or municipality
EXCEPT this one,
on
printing
and
publication of magazines and periodicals.
III.
franchise
(137)

tax

The old national franchise tax under the

old tax code was already abolished.

We still have franchise tax other than

this one, known as national franchise tax
provided for in the republic act granting
franchise.
Two kinds of Franchise
Tax:
1. local franchise tax (under LGC
137)

2.

national franchise tax (provided for

in the statute or republic act
authorizing the franchise)

Q: May LGUs impose local franchise

tax?
A: We have to consider here many
supreme court decisions and also 193 of
the LGC.
Under
193,
it
says
there
unless
especially provided for in thiscode,
exemptions granted to natural juridical
persons are hereby withdrawn
(abolished) EXCEPT:
1.
local
water
districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock educational
institution.
BASCO v. PAGCOR (197 SCRA
52)
F: The city council passed a tax ordinance
imposing tax on PAGCOR, an agency of
the government. PAGCOR objected
saying that the local city is prohibited
under the old local authority act to
impose tax on
an
agency
of
the
government.
H: The SC declared null and void the tax
ordinance saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA
667)
F:
Cebu government was trying to
collect real estate tax from the
Mactan airport
(note: real property tax is a territorial
tax, meaning
it
should
only
be
collected
within
its
territorial
jurisdiction). Lawyers of
Mactan
airport argued that under
13(O), Cebu, a LGU, cannot impose
tax on an agency of the government,
and they also invoked the ruling in
BASCO.
H: The lawyer of Mactan airport is devoid of
any
merit
at
all,
it
is
100%
erroneous
since the real estate tax is not a local
tax, hence, why invoke a SC ruling and
codal provision which can only be

applied to local tax. Therefore, Mactan

airport should pay Real Property Tax.
Before the codification in 1991 (to take
efect January 1, 1992), local taxation was
embodied in a separate book known as
Local Tax Code (PD 231) while real
property tax was provided for in a
separate book known as Real Property Tax
Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA
692)

F:

The Manila city government tried

to collect real property tax but the
management of the LRT said no you
cannot do that to us since it is
exclusively for public use.
H: NO, you are not exclusively for public
use since every time a person wants
to use the LRT he has to pay.
Q: Why not use the defense that it is
owned by the government?
A:
Because in
real estate tax, the
defense that it is
owned by the
government is not a
defense.
The LGC in 199(B) and in 217, both
provisions says that the basis for the
imposition of real estate tax is the
ACTUAL
USE of anybody who is using that (maybe in
the concept of usufructuary or in the
concept of a lessee, or in the concept of
an owner); the basis is not ownership.
in 134, the taxes here must not only be
imposed by provinces, it may also
be imposed by cities in line with 151
those
enumerated in 135 to
141.
CAGAYAN DE ORO ELECTRIC CO.
MISAMIS OCCIDENTAL (181 SCRA 38)

v.

* This was the prevailing rule for more

than
10years
from
1988
H: In the franchise or the republic act,
there are only two (2) kinds of franchise,
one is a franchise which provide for a
condition that this tax (referring to
the franchise tax) shall be in lieu of all
other taxes, and the other franchise is
the one which do
not provide for such provision; the
province or the city can impose local
franchise tax if the franchise belong
to
the
second
example.
REYES v. SAN PABLO CITY (305 SCRA
353)
* Here the SC uniformly
ruled
H: A provision on exemption under 193
dont only refer to exemptions provided
for by diferent statutes, but it includes
those which claim exemptions by
virtue of the case of Cagayan de Oro
(because SC decisions are also laws).
PLDT v. DAVAO (363 SCRA
750)
F:
The franchise holders of Smart and
Globe are claiming exemptions from
the local

franchise tax because they are saying

that they are holding a franchise which
says that it is a franchise enacted by the
house of Congress in 1995 which carries
with it an exemption form local franchise
tax.
H: By the very explicit provision of 193,
the removal of exemptions granted by
diferent statutes and also by SC
decisions applies only to statutes and
decided by the SC on or before Jan.
1,
1992, because 193 says
upon
efectivity of this law. For exemptions
covered by 193 therefore, Smart
and
Globe
are
authorized
to
claim
exemptions because the statue (RA
7082) was enacted on 1995.
IV. tax on sand, gravel and other
quarry resources (138)
We are through with that in the case
of
Bulaca
n
V.
professional tax
(139)

this must be correlated with the tax

under
147.

NOTE that this is an exemption to the

rule that a city may increase the rate of the
tax under 151 of the LGC, the increase is
not allowed.
both 139 and 147 are taxes imposed
on persons exercising professional calling.
Section 139
are to be imposed
by provinces and
cities
are applicable to
workers who must
pass a
government
examination (e.g.
engineers,
physicians, etc)

Section 147
are to be imposed
by municipalities
and cities
are applicable to
persons who are
working but are
not required to
take government
examinations

there
is
a
maximum (P300)
NOTE: it is not
always 300,
since the exact
amt must
be fixed by the
ordinance.
VI.
amusement
(140)

It does not provide

for any amount,
the
only
requirement
is
that it must be
reasonable
tax

 under the IRC, there is also amusement

tax under 125.
PBA v. QUEZON CITY (137 SCRA
358)
F: The city government enacted a tax
ordinance trying to collect amusement
tax including amusement tax on the PBA
(in Araneta, Cubao); but PBA and no, we
are already paying amusement tax to the
national government through the BIR
because of 125 of the IRC
H: QC government can no longer collect on
the ground that it is already being
collected by the national government and
secondly,
in
the
enumerations
of
amusement under 140, you will never
see professional basketball. Most of all, it
is the intention of the author that it is
only the national government.
*nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974 when
we dont have any professional basketball..
since professional basketball was born May
1975.
* ano ba dapt tama diyan?
both
the
national government and the QC government
can collect. There is no violation of the
prohibited double taxation, because the

taxing powers are diferent, and not only

that
140 speaks of amusement tax on
admission fee but under 125, it is abut
gross receipts.
VII.
delivery
(141)
Q: What
sako
lang?

if

van
not

delivery

van,

but

A: The applicable tax is under 143(G)

(peddlers
tax,
one
imposed
by
municipalities and cities.
If may dalang sasakyan, yari siya ng
province sa tax.
NOTE: 135-141, these are taxes that can
be imposed by PROVINCES and CITIES.
143-150 are taxes to be imposed by
MUNICIPALITIES,
which
can
also
be
imposed by CITIES.
E. Taxes that can either be imposed
by
Municipalities
or
Cities

I.
H))

Business Tax (143(Aa. manufacturing,

repacking,
processing,
including
the
manufacturer of permitted liquor and
also its dealer
b. wholesaling
c. exportation
d. retailing
e.
contractors
tax
f. tax
on
banking
institution
and financing institution
g.
peddlers
tax
h.
the exemption under
133(i)

Q: If you have two branches, how many

business
taxes
do
you
have
to
pay? A:
You pay only one business tax
(146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164
S CR A
607)
F: Ilo-ilo Bottlers was already paying a
business
tax
on
manufacturing
under
143(A) to the city government by virtue
of a tax ordinance. Later on, they are
obliged to pay by virtue of another
tax
ordinance
imposing
business
tax
on
wholesaling. Naturally, Ilo-ilo Bottlers
argued, how could it be, if you
manufacture,
it
necessary
follows
that you sell the commodity so, with the
payment of the business tax on
manufacturing, it carries with it the
business of wholesaling.
H:
NO, you have to determine the
marketing system of the company. If
wholesaling is also being done in the
place of manufacture, the business tax
on wholesaling should no longer be paid
it should only be the business tax
on
manufacturing.
But
if
the
marketing
system of the company provides that
wholesaling shall be done in a separate
place
(maybe
several
kilometers

away), the manufacturer must still pay

the business tax on wholesale because
now it could be argued that they have
the separate business of wholesaling.
Q: On the business of retailing, should
the business tax of retailing be imposed
by the city or by the municipality OR by
the barangay in the city or the barrio in the
municipality?

A: 143(D) must be correlated with

152, the tax to be imposed by the
barangay.
It depends:
a. city
if the gross receipt of the
retailer exceeds
P50T
in
a
minimum of
one year, it is the right and
privilege of a city to impose the
business tax on retailing.
b. barangay
if the gross receipt of the
retailer did not exceed P50T, it is
the barangay
council
where
the
business of retailing is
located. c. municipality
if the gross receipt of the
retailer did not exceed P30T
within a period of one year.
d. barrio
if the gross receipt of the
retailer did not exceed P30T
within a
period
of
one
year.
NOTE: These distinctions do not apply
in wholesaling. These are only for retailing.

Paragraph H: for
the
imposition
of excise tax, percentage tax and value
added tax, the municipality may impose a
tax not exceeding 2% of the gross
receipt (with regard to a city, it may go as
far as 3%)
II. Municipalities in Metro Manila who
can increase their rate (144)
Right now
municipalities:
1. San Juan
2. Pateros

there

III.
Professional
(147)

are

only

two

Tax

we are through with

that
IV. Fees for sealing and licensing of
weights and measures (148)
V.
Fishery rentals, fees and charges
(149)
F.
Situs of Tax
(150)
The tax referred to in here is the
business tax on wholesaling and retailing.

Q:
RFM is manufacturing commodities,
one of them is Swift hotdogs, this is being
sold not only in Mandaluyong, Metro
Manila, but also to the inter country
from Batanes to Tawi-tawi. Where should
the business tax of wholesaling or the
business tax of retailing be paid? Should it
be in the principal ofice (Mandaluyong)
or the place where the commodities are
sold?
A: It will be paid in the place where it
had been sold PROVIDED there is a branch
ofice
or
a
sales
outlet
(150(A)).
If it so happens that the company has
a factory different from the place where the
principal office is located 30% should
be
pain in the principal ofice and 70% in the
municipality or city where the branch is
located.
PHIL MATCHES v. CEBU (81 SCRA
99 )
F:
Phil Matches were produced in
Nagtahan, Manila.
In
Cebu
city,
there was a
warehouse where the matches were
stored. Many of the customers, by way
of wholesale in the warehouse in Cebu
City,
they came from diferent towns of the
Visayan Region. May the business tax
ordinance of Cebu be imposed on
those transactions even if the buyers
did not
come from the territorial jurisdiction
of
Cebu?
H: Since in this case the contract booked
and paid, meaning, it was negotiated
perfected and consummated in the
warehouse where it was located in
Cebu City, the Cebu City government
has the
right to collect business
tax.
Q: What if there is an agreement that
commodities would be delivered and that
the buyer would be waiting in some other
town, is the answer still the same?

A:
YES, the answer is still the same
because delivery to the carrier is delivery to
the buyer
where delivery has been termed within
the
territorial
jurisdiction
of
Cebu.
SHELL v. CEBUCOT, CAMARINES SUR
(105
PHIL 1063)
F:
The
petroleum
products
were
purchased at
the
motor
vehicle
traversing the
neighboring towns of Cebucot like
Bason,
Dimalaon, all towns in Camarines
Norte.

The contract of sale was negotiated

and
perfected
in
diferent
municipalities where the motor vehicle
of Shell was traveling.
H: Although the oil depot was located in
Cebucot, the said municipality cannot
impose tax on that because the
contract of sale was negotiated and
perfected in the diferent nearby towns
of Camarines.
Q: Is there a conflict with the case of
Shell
and
Phil
Matches?
A: NONE. As a matter of fact, these
two decisions complement each other.
G. Taxing Powers of the Barangay
(152)

Only a minimal sum (fair and

reasonable) Power to impose tax:

1.
On
commercial
breeding
of
fighting
cocks,
cockfights
and
cockpits

must be for commercial

purposes
2. On places of recreation which
charge administration fee
3.
On
billboards,
signboards,
neon
signs
and
outdoor
advertisements
especially for
the barrios and
barangays along the highway

4.
For
barangay
clearance
if you want to engage in the
business of retailing
or
wholesaling
if
barangay captain will not approve
that
within 7days go to the municipal
hall or city hall for approval
5.
For the use of barangay
property

for instance the barangay has a

plaza.
H.
Common
Powers
(153-155)

Revenue

Raising

Q:
Why
common?
A: All the LGU could impose the same. But
it does not follow that all the provinces,
cities, municipalities could impose the
same. Only the LGU which operate,
establish, maintain the entity
If established by the province, it
should only be the province.
These
are:
1.
service fee and
charges

for services
rendered
2.
public
utility
charges

provided
owned,
operate
and
maintained by them
3.
toll fees and
charges
tax or toll for the use of a bridge or
a street

Padua filed a civil action in the

MakatI RTC trying to stop the government
form collecting a toll free in the South
Express including the North expressway
alleging that he is afected as a taxpayer
because he is from Paranaque. He argued
that if you use the property of the
government like a street or a public plaza,
you do not pay. He made the analogy, that
if you go to Luneta, you do not pay the city
government of Manila.
The Makati RTC, the CA and SC had
a uniform ruling that the operator should be
prohibited from collecting further toll fess
because if the operator had already
recovered
his investment and earned an income
already, he should be stopped. As argue
by the SC, it copied the argument of the
lawyer (re: Luneta).
NOTE: that Res Judicata do not
apply here.
When the ruling became final
an
executory in 1993, the North and South
Express were totally dismantled and totally
destroyed by the DPWH to give way to
the final and executory ruling of the Court,
that It should no longer be collected.
After
several
months,
the
government announced in the radio that
the party in the
case of Padua, mutually agreed that the
collection shall be resumed in order to have
money for the maintenance and repair of
the highway.
Exceptions to 155 (collection of toll
fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I.
Community
(156)

Tax

In the old days, known as residence

tax
certificate
.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?

A: NO, because the basis of imposition

of this tax is whether or not you are an
inhabitant of the Philippines. Meaning
you are a resident of the Philippines.
Q: What about a foreigner residing in
the
Philippines
(RA)?
A:
YES. You have to pay unless the
foreigner is
a
trans-investor for
not
more than
3months.

This is applied
and juridical persons.

to

both

natural

Requirements
:
1. for a natural person at least 18
years of age
2. for corporations upon registration
with the SEC
Q: What if you become 18 in the month of
January
or
November
or
December? A: For those who celebrated
their birthday before July 1 (that is up to
June 30), they are liable to pay the tax, for
this year.
For
those
who
celebrated
their
birthday on or after July 1, they are not
yet liable to pay this year, but have to wait
until next year.

Q: Is there a diference for those

who reached 18 in the months of Jan-FebMarch and those who reached 18 in the
months of April-May-June?
A:
YES. For those who celebrated
birthdays in the months of Jan-Feb-March,
they have a
grace period of 20days within which to
pay.
Those who celebrated their 18th birthday
in the month of April-May-June, they do
not
have any grace period at all, they have to
pay
the
tax
immediately.
Q:
If you have a community tax
certificate for this year (2006), can it be
used only until December 31, 2006?
A: NO. It shall be valid up to April 15,
2007. (163(C))
J.
Accrual of the Tax
(166)

January 1

Q: What if the tax was only approved in

the month of May 2006, do you have to wait
until January 2007?

A: NO. You have the right to collect that

in July 1, because the law is saying that it
should be collected in the next succeeding
quarter (167)

Mayor Binay had a tax ordinance in

May, sabi ng mga bata niya: bosing,
collect na tayo ng June.
Binay: hindi nga pupwede, maghintay
pa
tayo ng July
1.
Q: What if the tax ordinance had
been existing for several years already?
A:
The time of accrual will always be
January
1.
REMEDIES
UNDER
REVENUE CODE

THE

INTERNAL

1. Remedies of the Government

2. Remedies of the Taxpayer
Remedies
government:

of

the

1. Assessment
2. Collection
Under the NIRC, assessment and collection
have 2 kinds:
1. Normal/Ordinary assessment
collection Sec. 203, NIRC
2. Abnormal/Extraordinary

and

assessment and collection Sec.

222, NIRC
I. Normal/Ordinary
assessment and
collection

There was a return filed and

it
is not fraudulent and not
false
II. Abnormal/Extraordinary
assessment and collection

There was:
1. an omission or failure to file
the return;
2. if there was a return filed,
it was fraudulent, or;

3. the return was false

Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove
that

the return was false and fraudulent lies

against the government through the BIR.
The mere fact that the return is
erroneous
will not make the return fraudulent, it
must be proven by the BIR.
Q: Why is it important to know whether the
assessment is under normal or abnormal
condition?
A: It is important to know because the
prescriptive
period
between
normal
and
abnormal
assessment
differ.
Prescriptive
Period
for
Assessment
1. Normal/Ordinary Assessment 3
years from the time the return has
been filed
(not the payment of the tax) (Sec.
203,
NIRC)
3 Ways of filing the return under
Sec.
203, NIRC:
1. filed before the deadline (for any
tax under NIRC)
2. filed on the date of deadline
3. filed after the deadline
2 Ways of counting the 3 year period
of
Assessment
:

1.

if return is filed before or on the

day of the
deadline,
the
prescriptive period starts on the date
of the deadline;
2. if return is filed after the deadline,
the prescriptive period starts on the
date the return has been filed.

For the calendar year of 2004, a

return
must be filed and paid for Net Income Tax
on or before April 15, 2005. Since he was
not able to meet the deadline, the
taxpayer is now being assessed for tax due
for 2004.
To minimize interest and
surcharges, it has been suggested by the
BIR that the taxpayer file a late return.
Supposed he filed his return covering 2004
on April 1, 2006.
In this example, the
reckoning point is the deadline of April 15,
2005. The starting point of the counting
the 3 yr. period is on the date the return
is filed which is April 1, 2006.

Suppose it is not a late filing of

return, the counting of the period is on the
date of
the deadline which is April
15.
2.
Abnormal/Extraordinary
Assessment

the government has 2

options:
a. Assess and Collect


the prescriptive period for
assessment shall be 10 years
from the discovery of none filing or
false or fraudulent return (Sec. 222,
par. o, NIRC)

the prescriptive period for

collection shall be 5 years from
the date of final assessment (Sec.
222, par c, NIRC)
b.
Collect
Without
Assessment
through
Judicial Action

since
there
is
no
assessment
there is no prescriptive period for
assessment

prescriptive period for

collection
shall be 10 years from the date of
discovery of none filing of return
or
false
or
fraudulent
return.

These options are available only if

the
Assessment
is
under
the
Abnormal/Extraordinary Conditions.
These
are
not
available
under
Normal/Ordinary
Assessment
Prescriptive Period for Collection
1.
Normal/Ordinary Collection Sec.
203 did not provide for the prescriptive
period for the collection
- Intention
of
the
author: 5
years from the date of final
assessment
Reasons: (Sababan agrees with the 5
year prescriptive period)
Prescriptive period of collection
under
1st option on Abnormal Assessment
is
5 years
from final assessment
(Sec.
222,
par
c,
NIRC)
1.
under the old code of 1939,
1977, and
1985,
if
the
prescriptive
period
for
collection
under
abnormal is 3 years, then the

prescriptive period for collection

under normal is also 3 years.
If
now a days, it is 5 years in
abnormal,
the
prescriptive
period for normal should also be
5 years.
2.
to say that there is a
prescriptive period for collection
under Abnormal and there is
none under Normal is too
abnormal. It should
be
the
other
way
around.
2.
Collection

Abnormal/Extraordinary

a. assess and collect 5 years

from the final assessment
b. collect
without
assessment
through judicial action 10 years
from date of discovery of none
filing, or false, or fraudulent
return.
Q: How
to
apply
these
periods? A: Annual net income tax return
filed by individual using a calendar year.
The return should be filed on or before
April 15, 2000. It was filed on April 15,
2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A:
Under
normal
condition,
first
determine the date of final assessment. If
the BIR finally
assessed the tax in November 2001,
then
2007 is way beyond the 5year period to
collect.
Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally
assed on March 2003, can it be collected in
2007?
A:
Yes, because it is within the
prescriptive period of 5years.

BASILAN v. COMMISSIONER (21 SCRA

17)
F: Supposed the notice of assessment was
given within
the
period
but
it
was
received by the taxpayer outside
the period.
I: Whether or not the assessment is
within the period of 3 years.
H: Yes. It is within the period. If the notice
is sent through registered mail, the
running of the prescriptive period is
stopped.
What matters is the sending of the
notice is made within the period of
prescription.
It is the sending of the notice and not
the receipt that tolls the prescriptive period.
Q:
What if the return has been
amended, how would you compute the
period of assessment?
A:
NIRC is
silent.
PHOENIX v. COMMISIONER (14 SCRA
52)
If the amendment of the return is
substantial
as
distinguished
from
superficial, the counting of the prescriptive
period is also amended.
The prescriptive
period shall be

reckoned on the date the substantial

amendment was made. If the amendment
is superficial, the
counting
of
the
prescriptive period is still the original period.
Procedure for Assessment (Sec. 228,
NIRC; RR 12-99)
Steps
of
assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)

FORMS
PROTEST

2 Steps under Sec. 228,

NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 1299
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3.
Formal Letter of Demand
Notice to Pay the Tax

A: NO. This is because 228, NIRC and

RR
12-99
requires
the
exhaustion
of
administrative remedy of protest. After the
receipt
of
FAN
or
formal
demand
within
30days must file a protest before the
ofice
of the commissioner of internal
revenue.

and

PROCEDURE (Sec. 228, NIRC; RR

12-99)
1.
Upon receipt of the notice of
informal conference, file a reply
within 15 days from receipt of notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice
of
Informal Conference or
b. BIR will send a Preliminary
Notice of Assessment
3. Upon
receipt
of
Preliminary
Assessment Notice (PAN), file a
reply within 15 days from receipt
4. Failure to file a reply will result
in either:
a. BIR will repeat PAN
b. Declare the taxpayer in
default, and send you a Final
Assessment
Notice (FAN)
5. Upon receipt of FAN, taxpayer
may file a protest within 30 days.
Q: Is FAN the one appealable to the Court
of
Tax
Appeals
(CTA)?

OF

1. Local
Tax
(Sec.
125,
Local
Government Code (LGC))
2. Real Property Tax (Sec. 252,
LGC)
3. Tariff and Customs Code (Sec.
2313, RA 7651)
In all protest under the diferent codes,
payment under protest is only necessary
under the Real Estate Tax.
RR 1299

If
the
taxpayer
receives
2
final
assessments, one under the Net Income
Tax (NIT) and the other in VAT. If the
taxpayer dont want to file protest under
VAT but want to file a protest under NIT.
The taxpayer in order to be allowed to file a
protest under the NIT must first pay the VAT
where he does not intend to file a protest.
This is not payment under protest
because, payment under protest is the one
mentioned in Real Property Tax under
Sec.
252, LGC.
Under NIRC, Protest is referred to
as:
1. disputing of final assessment or

2. file a motion for reconsideration

or reinvestigation
Q: What should be done after filing
a protest?
A: Count 60days is the period to file the
necessary documents and receipts in
support
of
the
protest.
Q: What is the efect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting
documents
within
the
60day
period, to be counted on the day the
protest
is filed, the final assessment shall become
final and executory.
On the 51st day you filed the necessary
document, you have to count another
period, which is 180 days from the day you
filed the necessary documents.
Relevance of the 180 Days:
180 days
is the time given to the BIR to decide the
case
Q: Supposed it did
case within 180days?

not

decide

the

A:
Do not invoke the Lascano case
because it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have lapsed,
you have to wait for the BIR to take positive
action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of the
CTA has been amended by RA 9282.
RA 9282 provides that in case of
inaction of the commissioner after the
lapse of
180days, remedy is to file an
appeal.
RR 12-99 says that after lapse of
180days but within 30days after 180days,
that is the
time
to
file
an
appeal.
Q: Supposed the BIR rule within
180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting
in division.
Q: Supposed the CTA decided not in your
favor?
A:
File a motion for reconsideration
within
15days to the same division deciding
the case.
Q:
Supposed the
CTA,
in
division
decided not in you favor?
A: File an appeal to the CTA sitting en
banc.
Q: Supposed the CTA en banc decided not
in
your
favor? A:
File an appeal within 15days
from receipt of decision to Supreme Court.
Q: During the pendency of the protest in
the ofice of the Commissioner, supposed
you receive a notice of collection, levy and/
or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150
SCRA
278)
2. UNION
SHIPPING
LINES
v.
COMMISSIONER (185 SCRA
547)

YABES v. COMMISSIONER (150 SCRA

278)
F:
The taxpayer receives a notice of
collection
while
waiting
for
the
decision of his protest. He then filed
an appeal with the CTA contending his
protest has been denied because he did
not receive a
decision but receive a notice of
collection. Simultaneously, the BIR filed
before the

CFI an ordinary civil action for the

collection of sum of money. When the
judge of the CFI, was about to
conduct the hearing of the case, the
taxpayer filed an injunction with the SC
to prohibit the judge of the CFI
contending that a single cause of action
is pending in two courts, one in the CTA
and another in CFI.
H:
Injunction was granted prohibiting
the
Judge of the CFI and requiring the
Judge to transfer the records to the CTA
saying
that the remedy made by the
taxpayer
was
the
correct
remedy.
Q: Was
the
appeal
made
on
time? A:
Yes, when the BIR filed an
ordinary action, the protest is deemed
denied. Hence an appeal is a proper
remedy.
UNION
SHIPPING
LINES
v.
COMMISSIONER
F:
The taxpayer was waiting for the
decision of his protest. But instead, he
received
a
notice
of
collection.
Immediately, he filed a Motion
for
Reconsideration and
Clarification asking whether his protest
has been denied. The BIR did not reply

or answer but instead filed an Ordinary

Civil
Action before the CFI.
When the
taxpayer received summons, he did not
answer but instead filed an Appeal
before the CTA.
I: Whether or not the remedy of Appeal
was
the correct remedy and Whether or not
it was filed on time.
H:
Yes.
The remedy of appeal is the
correct remedy and the appeal was filed
on time. The reckoning period within
which to file an appeal is the time
the taxpayer received the summons.
While an Appeal is pending before the
CTA, the CTA will determine:
1. If the decision was made within 180
days, whether the appeal was made
within 30 days from the receipt of
the said decision, or
2. if there was no decision after
the lapse of 180 days, whether the
appeal was made within 30 days
upon the expiration or the lapse of
the 180-day period.
Q: Pending appeal with the CTA, can the
BIR
amend
the
final
assessment?
A:
2
SCHOOLS
OF
THOUGHT:

1. GUERRERO v. COMMISSIONER
(19
SCRA 25)
2. BATANGAS v. COLLECTOR
(102
PHIL 822)
GUERRERO v. COMMISSIONER (19 SCRA 25)
H: No. Because it is no longer the
disputed assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of
suits
ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822)
is the better ruling
PROTEST UNDER LOCAL TAX (Sec.
195, LGC)
Under NIRC, protest is filed in the
Ofice
of the Commissioner
Under LGC, protest is filed with the
same
City or Provincial or Municipal Treasurer
who issued the assessment
Period to file Protest
60 days from receipt of
assessment
Q: If the treasurer did not decide within
a
60day period, remedy?
A: Go to the court of competent
jurisdiction
(RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc
(beginning April 23, 2004)
Q: If the CTA decided not in your
favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA
en banc can be made from:
1. Decision of the RTC involving local
taxation
exercising
appellate
jurisdiction
2. Decision of the Central Board
of

Assessment
Appeal
appellate jurisdiction.

exercising

PROTEST UNDER REAL PROPERTY

TAX (Secs. 226, 230, and 252)
Remedy shall be the same
Sec. 252, LGC

If the taxpayer receives a Notice

of Assessment from municipal, city,
or provincial treasurer, the remedy is
to file a protest but there must be
first Payment Under Protest.
- This
is
the
only
instance
where payment under protest is
necessary

Q: How is payment under protest

made? A: At the back of the receipt there
will be an annotation that there was a
payment under protest within 60days from
receipt of the notice of assessment within
the same treasurer who issued the
assessment.
Q:
If the treasurer rules against the
taxpayer, remedy?
A: The remedy is to file an appeal to
the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board
of
Assessment
?
A: Appeal should be made to the
Central

Board
Appeal.

of

Assessment

Beginning April 23, 2004, the ruling of

the Central Board of Assessment Appeal is
no longer final. It can now be appealed to
the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)

Formerly, the automatic appeal under

the TCC applied only to protest; but now a
days, the automatic appeal applies to both
protest and forfeiture.
For Forfeiture Under the Tariff and
Customs
Code

Refers
to
the
Order
of
the
Collector
confiscating
the
imported
goods
or
commodities
Doctrine
of
Primary
Jurisdiction
If the Collector ordered the forfeiture
of the imported commodities the order of
the Collector shall be to the exclusion of all
government offices and authority.

TAXATION LAW REVIEW

NOTES
Importer of Chemical, under the TCC,
the duties is only P27 but the collector
custom
says it should be P52. The importer will
then file a protest with the Office of the
Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest.
But under RA 7651, the
remedy of automatic appeal is applicable
to both protest and forfeiture.
I. In both cases of protest and forfeiture,
if the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Ofice of
the Commissioner.
From
the
ruling
of
the
Commissioner, the importer should
file an appeal
within 30 days before the CTA,
sitting
in division.
From the ruling of the CTA in
division, the importer should file an
MR within
15 days before the same
division hearing the case.
From the ruling of the CTA in
division, deciding on the MR, the
importer should file an appeal
within 15 days
before the CTA sitting en banc.
From the CTA en banc, appeal to
SC
within 15 days.
II. If the importer-taxpayer wins the case,
the government lose the case, Sec. 2313
of TCC as amended by RA 7651, there shall
be an automatic review within 15 days.
Q: Where should the automatic review be
made?
A: It depends. Publish the value of the
commodity.
1.
IF P5 MILLION OR MORE
AUTOMATIC REVIEW
SHALL
BE
BEFORE THE
SECRETARY OF THE DEPT. OF
FINANCE.
2. IF LESS THAN P5 MILLION
AUTOMATIC REVIEW
SHALL
BE
BEFORE THE OFFICE OF THE
COMMISSIONER

If the commissioner affirms or did

Q:notSuppose the commissioner decide or
did not decide within 30days, what
happens?
A: If the commissioner reverses the ruling
of the collector, the ruling is final and
executory.

TAXATION LAW REVIEW

NOTES
Importer of Chemical, under the TCC,
decide
the within 30days, there shall be an
automatic appeal before the sec. of finance.
Q:
Between the two which will be
appealed to the CTA?
A: The
decision
of
the
secretary
which passes through the ofice of the
commissioner (RA 9282)
But not all the decision of the
secretary
which passes the ofice of the commissioner
affirms or did not decide within 30days and
appealed before the secretary of finance
will appeal to the CTA be allowed.
There are 3 instances when the Secretary of
Finance renders a decision appealable to
the CTA:
1. decision of the Secretary by virtue
of automatic review passing through
the Commissioner
2. cases of anti-dumping duty, where
the anti-dumping duty was ordered
by the Secretary
3.
decision of the Secretary of
Finance on countervening duty.
COMPROMISE
NIRC)

(Sec.

204,

If the commissioner affirms or did

3 Q
uestions asked in 2004
not
BAR:
1. May the Government compromise
criminal cases and civil cases?
2. Supposed the corporation is
already
dissolved, can the stockholder
be obliged to pay?
3. Suppose the civil case filed by the
BIR is final and executor, can it be
subject to compromise?
CAN THERE BE COMPROMISE
IN:
1.
CIVIL
CASES?
- YES,
IN
ANY
STAGE
OF
THE PROCEEDING
- EXCEPT WHEN THE CIVIL CASE
IS
ALREADY
FINAL
AND
EXECUTORY BECAUSE IT WILL BE
VIOLATIVE OF THE SEPARATION
OF POWERS
2.
CRIMINAL
CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN
COURT (RTC) OR;
b. IF IT INVOLVES
FRAUD

TAXATION LAW REVIEW

NOTES
3. IF THE CORPORATION IS ALREADY
DISSOLVED, CAN THE STOCKHOLDER BE
HELD LIABLE TO PAY TAX?
- GENERAL RULE: NO
- EXCEPT:
a. IF IT IS PROVEN THAT THE
ASSETS
OF
THE
COPORATION
IS
TAKEN
BY
ONE
STOCKHOLDER OR;
b.
IF
THE
STOCKHOLDER
DID NOT PAY HIS UNPAID
SUBSCRIPTION
Minimum Amount to be Compromised
(Sec.
204)
1. If the ground is financial incapacity
of the taxpayer, the minimum shall
not be less than 10% of the original
assessment.
2. If based on other grounds, the
minimum amount shall not be lower
than 40% of the original assessment.
Q: Can it be lower than that prescribed
by law?
A: As a rule, no. EXCEPT, if allowed by
the evaluation board consisting of the:
a) commissioner; and
b) deputy commissioner.
Instances when the Final Assessment
becomes final and executor:
1. If the taxpayer did not file the
protest
on time
2. Failure to submit the supporting
documents within the 60-day period
3.
After the lapse of the 180-day
period, you did not file an appeal
within the
30-day period to the CTA
4.
An appeal was filed but made
beyond the reglementary period to
appeal
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy

c. Tax lien

TAXATION LAW REVIEW

NOTES 3. Actual (Sec. 207, par. a, and Sec.
Why is it important to know whether the

Q:
final assessment is under normal or
abnormal conditions?
A: It
is
important
because of
the
requirement
under
222.
If
the
final
assessment becomes final and executory,
the
government
(BIR)
can
exercise
the
remedies under 205 in any order or
simultaneously (207). But it is not always
the case, because the
right
of
the
government to collect is
limited
in
case
of
abnormal
assessment/collection
under
222.
Under the
second
option,
the
right
of the
government is limited to judicial action
either civil or criminal.
Administrative
remedies such as distraint, levy, or tax lien
is not available under such condition.
Q: In distraint, levy or tax lien, is the 10
year period of collection applicable?
A:
No, only the 5year period should
apply.
Distrain
t
Kinds:
1. Constructive (Sec. 206)
2. Distraint of Intangible (Sec. 208)

209)
1.
Distraint

Constructive

The distraining oficer shall make a list

of the personal property of the property to
be distraint in the presence of the owner of
the property or the person in possession
of the property.

The owner shall be requested to sign

the
receipt.
Q: What if the owner refuses to sign the
receipt?
A: Sec. 206:
The
distraining oficer
shall require 2 individuals within the
neighborhood
with the warning that they should not
allow
the taxpayer to dispose, transfer, or sell the
property subject of distraint.
Grounds for Constructive Distraint (Sec .
206):
1. The taxpayer intends to leave
the
Philippines
2. The taxpayer leaves the
Philippines
3. The taxpayer ceases or retires
from business

4. The taxpayer obstructs the

collection of the tax.
THESE GROUNDS ALSO ANSWER THE
QUESTION:
WHAT ARE THE TAXABLE
PERIOD LESSER THAN 12 MONTHS?
2.
Distraint
Property

of

Intangible

Limited
to
3
Intangible
Properties:
1.
Shares of
stocks
2.
Bank
accounts
3.
Credits and
debits
Share
of
stocks

Warrant of distraint furnished to

the
taxpayer or the oficer of the corporation
with the warning that the property is
subject of distraint and it should not
dispose of it.
Bank
Accounts

Warrant of distraint furnished to

the
taxpayer or the oficer of the bank with
the warning that the taxpayer should
not be allowed to withdraw.
Debits
and
Credits

Warrant of distraint furnished to

the
debtor
and
creditor
3.
Distraint

Actual

Personal property shall be physically

taken by the distraining oficer.

Within 10 days from the receipt of

the
warrant, a report of the distraint shall be
submitted to the BIR (Sec. 207, par a
last par.)

The property subject of distraint

shall
be sold at a public auction EXCEPT bank
accounts and debits and credits.

Notice of sale shall be by

posting in 2 conspicuous place,
stating the date and the place of
the sale (No
publication
requirement)
Sec. 211: after the sale and within
2
days, a report shall be made to the
BIR
Q: If the property sold is a personal
property, is there a right of redemption?
A:
NO. The rule is
absolute.

Q: If the property is a personal property,

is there a right of preemption?
A: SEC. 210: Before the scheduled sale,
the taxpayer is allowed to recover the
property
by paying all the property by paying all
the
proper charges as well as the interest,
cost and penalties.
During the Scheduled Auction Sale, 2
Things may happen:
1.
There is bidder and the bid is
enough
2. There is no bidder or there is a
bidder but the bid is not enough
Q: What is the relevance of knowing
the diference?
A: 1. If there is a bidder and the bid
is enough

In case of insuficiency, there shall

be
further distraint to cover the liability.
(217)

In case of excess, the excess shall

be returned to the taxpayer.
2. If there is no bidder or the bid is
not enough.

It will be purchase by the

government and the later sold in a
public auction again (212)

In case of insuficiency, no further

distraint, 217 applies only if there was
a
bidder.

In case of excess, the excess shall

not be returned to the taxpayer but
shall be remitted to the national
treasury.
Levy
Other than the delinquent taxpayer,
warrant of levy is served to the register
of deeds having jurisdiction over the real
property (Sec. 213)

Within 10 days from the receipt of

the
warrant, a report of the levy shall be
submitted to the BIR (Sec. 207 (b)
last par)
Notice of Sale in Public Auction:
1.
Posting in 2 conspicuous
places
2. Publication in newspaper of
general circulation once
a
week for 3
consecutive
weeks.
Q: Is there a right of pre emption?

A: Yes, 213.
Q:
Is
there
redemption?
A:
Yes.

right

of

Q:
After sale, if there was
deficiency?
A:
There shall be no further levy,
because
215 says that it shall be to the
total satisfaction of the taxpayer.

2 Things may happen in a Public

Auction:
1. There is a bidder and the bid
is enough
2. There is no bidder or the bid is not
enough

Q:
After sale, if there was an
excess?
A: It shall not be returned to the
taxpayer but shall be remitted to the
national treasury.

Q: What if there is no bidder or the bid is

not enough?
A:
Forfeiture shall be made
(215)

Sec. 217: this is only true if there was no

bidder or the bid was not enough because
of the provisions of the Secs. 212, 215, and
216

3 Definitions of Forfeiture under the

Internal
Revenue
Code
1. Violation of Excise Tax Law (Sec.
224)
2. If there is no bidder or the bid is
not enough (Sec. 215)
3. The order of the Collector to
confiscate
imported
commodities
(Sec.
2313,
TCC)
Relevance of the Choice of
Words:
Under sec. 212, the law says
purchase
Under sec. 215, the law says
forfeiture

under 215: the real property

shall be automatically registered in
the name of the Government
(forfeiture)

under 212:
the real property
is not automatically registered in
the
name
of
the
Government
(purchase)
Q: If sold at a private sale, what is
the requirement?
A: There must be an approval of
the
Secretary
of
Finance
(216)

Sec. 218:
no court shall issue an
injunction to restrain the collection of tax
under this code
Determine what kind of injunction is
referred to here:
1. Prohibitory referred in Sec. 218
because it restrains the collection of
tax.
2. Mandatory
Q: Is the provision limited to tax under
this code?
A: Limited to internal revenue taxes.
EXCEPT: CTA (Regular Court) RA 1125
and
9282:
CTA
is
authorized
to
issue
injunction to restrain the collection of taxes
or fees collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A:
Yes, local
tax.
175 for DISTRAINT
176 for LEVY
Q: How
about
real
property
tax? A: No, distraint is not authorized
(256, LGC), because the remedy is only
Judicial Action and Levy.

Tax
Lien

Non payment of tax, the government

has the right to claim a lien over the
property of the taxpayer
1. NIRC Sec. 219, NIRC
2. Local Tax Sec. 173,
NIRC
3. Real Property Tax Sec. 257,
NIRC
Q: Supposed a parcel of land is about to be
levied by the government, but the same is
being foreclosed by the mortgagee, which
of the 2 obligee, the government or the
mortgagee shall be preferred?
A: 219, last portion:
The government
is the preferred one if the lien is annotated
and
recorded in the registry of deed.
In
the
absence of annotation in the registry
of deeds, the mortgagee is preferred.
Q: Do we have the same rule under
Local
Tax and Real Property
Tax?
A:
NO. Both 173 and 257, the
government is always the preferred one.
The lien can only

be removed by payment of tax, interest and

penalty.
Sec. 220: approving of filing an ordinary
civil action for violation of the internal
revenue code

The approval must be made

the
Commissioner
of
Internal
Revenue

by

HIZON v. REPUBLIC (320 SCRA

574)
F: An ordinary civil action for violation of
the tax code was filed in the city of
San
Fernando.
But the filing was only
approved by the Revenue Regional
Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by
the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of
the
NIRC
General Rule:
powers and
functions of
the
Commissioner
may be delegated but not to a
position
lower than a Division
Chief
Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to issue
rules and regulation
b) Power to decide a case of
fist
impression
c) Power
to
enter
into
a
compromise agreement
d) Power to assign BIR oficer
in the place of production
subject to income tax

Since the case does not fall

under the prohibited delegation, the
filing of the case is legal and tenable.

Decision of the Commissioner of

Internal
Revenue (CIR) is appealable to
CTA.

Q:
When is a decision of the cir
appealable to the Secretary of Finance?
A: 4, on matters of interpretation of
tax laws.
SEC. 223:
SUSPENSION OF THE
RUNNING OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada,
after
15years he went back, he is being
assessed

by the BIR under normal assessment. Has

the right of the government to asses the
tax already prescribed?
A:
NO. When he went to Canada, the
running of the prescribed period is
suspended.
Q:
What if the change of address is
within the Philippines, say only from manila
to Pasay City, is the running of the
prescriptive period suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district
ofice,
223 provides that the taxpayer must send
a written notice of change of address to
the BIR.
In the absence of the written notice,
the period will be suspended.

1.

During
collection
if
there
is
no property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
3. In distraint of levy, the BIR oficer
cant locate the property
CLAIM FOR REFUND (SEC
229)
Written
claim
for
refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom

Q: Change of address is from Philippines to

abroad?
A:
The period will be
suspended.

Written claim for refund under the

input tax (Sec. 112)
Period is also 2 years from the close
of
the taxable quarter when the transaction
was made

Other
Grounds
Suspension:

Q: Can
we
apply
229
to
VAT? A: Yes, because there is no conflict.
112 is refund under input tax system.

for

229 is refund for:

1. errors in payment or;
2. collected without authority; or
3. assessment without authority.

The period to claim refund is

2years.
Doctrine
of
Equitable
Recoupment

If a taxpayer is entitled to a written

claim
for refund but the prescriptive period to
claim has lapsed, the taxpayer is allowed
to credit his written claim for refund which
he failed to recover to his existing tax
liability.
Computed from;
a. Individual counted on the day
the tax has been paid
1. paying by way of withholding
tax
system, the reckoning point is
the end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds
is
applied
to
the
satisfaction of the tax
liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam life
(244 SCRA 446)
- 1998, Commissioner v. CTA (301
SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner
(363
SCRA 840)
1. Existing the counting of the
prescriptive period is 2 years on
the day
the
annual
adjusted
return is filed, because it is at that
day that the tax liability is known.
2. Non-existing the counting of the
prescriptive period should also be

reckoned on the day the annual

return is filed. But the corporation
is no longer required to wait till the
taxable period is over to file the
return. Upon
receipt of a notice from the SEC
to dissolve the corporation, within
30

days thereafter, a return should

be filed.

A: Within 21days before the end of the

2 year period.

Q: Suppose there is a supervening

event, and the taxpayer was not able to file
a written claim
of
refund
within the
period? A: Regardless
of
supervening
event, a written claim for refund must be
filed within
2years.

A written claim for refund should be filed

within 2 years

Q: Suppose the 2 year period is about to

expire and there is no decision yet as to
your refund?
A: Remedy is to file an appeal before
the
CTA
(deemed
a
denial)

Q:
May the commissioner of internal
revenue open the bank account of a
taxpayer?
A:
General Rule: NO.
EXCEPT:
1. To determine the gross value of
the estate; and
2. To
enter
into
a
compromise
agreement. (under 204(A))

Q: Suppose the BIR decided within 2 years

against
the
refund?
A:
Appeal within 30days from the
decision, provided it is still within the 2 year
period.
Q: Suppose there is only 21days remaining
after receiving the decision, when to file
an appeal?

Sec 204 (c) last phrase: in case of

over payment a written claim is not
necessary because a return constitutes a
written claim for refund.

The written claim for refund to

determine the gross value of the estate
because the taxpayer is already dead
In case of compromise, there must
be
consent.