TAXATION LAW I

TAXATION
-

Sovereign power/process

Sovereign Power
One of the inherent powers of the State
No need for a law, even the Constitution
The source of power is the mere existence of the State

Process
Means by which government will collect contribution
Levy enactment of a law (Legislative)
Assessment computation of tax dues (Administrative)
Collection demand to pay tax dues (Administrative)

Supreme, plenary, unlimited, and comprehensive

Restrictions/Limitations:
o Inherent
Public purpose
International comity
Essentially legislative
Territorial
Exemption of the Government
o Constitutional
Equal protection
Due process
Importance:
o Continuance of delivery of service to the people
o Life Blood Doctrine taxes are the life-blood of the government and without
taxes, the government cannot exist
Justifications:
o Benefit-Receipt Theorythe State has the right to collect taxes because of the
protection received by a citizen

Necessity existence of a government is a necessity and without taxes, the

government cannot exist

Symbiotic Theory citizens will contribute so the State will protect and render
services to its citizens

Benefit-Receipt Theory v. Symbiotic Theory

BRT = past tense
ST = future tense

Justice
Marshall:
power to tax is also power to destroy
Holmes: power to tax is not power to destroy whole the court sits
Cruz: power to destroy = police power
Objectives:
o Revenue: for government to exist
o Non-Revenue:
Implement of Police Power
Reduction of Social Inequity (progressive system of taxation: higher income =
higher tax)
Protectionism (protect local industry)
Implement of Eminent Domain
General Welfare (public purpose)
Sound Taxation System
o Fiscal Adequacy/Monetary Sufficiency
o Administrative Feasibility laws must be reasonable and just in order to
o

collect
Theoretical Justice higher income = higher tax
Ability to Pay Principle
Progressive System of Taxation

TYPES OF TAXES
1. As
a.
b.
c.
2. As
a.
b.

to Subject Matter
Property properties
Excise interest, right, privilege
Poll person; mandatory, but non-payment will NOT cause imprisonment
to Burden
Direct taxpayer will have the burden of paying his own tax
Indirect the burden to pay can be shifted to another individual

NOTE: Burden is shifted, NOT the Obligation to pay the tax

TAX v.

DEBT: not compulsory; has no limit; non-payment will not result in

imprisonment
TOLL: user fee
SPECIAL

ASSESSMENT:

for

specific

purpose;

cannot

exceed

the

improvement/service it is financing

CONCEPT and CHARACTERISTICS:

1.
2.
3.
4.
5.

Enforced obligation mandated by law

Proportionate Contribution pegged on certain amount; Ability to Pay Principle
Levied by Law-Making Body Congress through enactment of law
Having Territorial Jurisdiction tax situs (taxing authority)
Personal in Nature only the burden and not the obligation can be shifted to

another person
6. Purpose raising money and other public needs

LIMITATIONS:
1. Inherent
a. Public Purpose for general welfare
b. Essentially Legislative
Inherent
Power is delegated to LGUs (Sanggunian)
Coverage what to tax
Object purpose of tax
Nature kind/type of tax
Extent tax rate
Situs taxing authority
Cannot be questioned by Judiciary -> Judicial Non-Interference (not
applicable to LGUs taxing power)
GR: Power to tax cannot be delegated
Expn: LGU
(1) Separation of Power is not applicable to LGUs
(2) Delegation is by an immemorial practice

 1987 Constitution directly confers the power to tax to LGUs (ergo, no

longer delegated to LGUs)

Double Taxation
Not prohibited, only frowned upon
Direct Double Taxation
Taxing the same:
Object at the same
Taxing authority for the same
Purpose by the same
Taxing authority
Tantamount to confiscation = violates due process = unconstitutional
Indirect Double Taxation
Different taxing authorities

LGUs cannot impose tax akin to those imposed by the National Government
(i.e. import tax)

Flexible Tariff Clause

Sec. 28 (2), Art. VI, 1987 Constitution
Delegation to President
Administrative discretion subject to valid standards
(1) Congress authorizing President
(2) Fix tariff rates, import and export quotas, tonnage and wharfage
dues, other duties and imposts
(3) subject to limitations/restrictions imposed by Congress

c. Territoriality
Situs = taxing authority
Excise: WHERE income has been earned (based either on residence or
citizenship)
Property:
Tangible
- personal property: passage of title test
- real property: location

 Intangible(personal property)
GR: Mobilia sequuntur personam (movables follow the person)
Expns:
(1) Business Situs (operating in the Philippines)
(2) 85% operation is in the Philippines
(3) Exercise of Business in the Philippines

Poll: RESIDENCE of the taxpayer

d. International Comity
Courteous and friendly interaction between States
Respect laws of other country

Employer tax withholding agent

Tax withholding = deduction of withholding tax from salaries of
employees -> remitted to the government

Embassies/International Organizations cannot be obliged by the government

to be tax withholding agent of the government for its Filipino employees
e. Exemption of Government
Agencies and instrumentalities
GOCCs
GR: taxable
Expn: charter provides for exemption

2. Constitutional
a. Due Process
Substantial DP existence of a valid tax law before tax may be levied
Procedural DP there should first be the twin due process requirement of
notice and hearing before there can be foreclosure
NET INCOME(NI) = Gross Income (GI) minus Expense (E)
GI = Gross Sales/Receipts (GS or GR) minus Cost of Sales/Receipts (CoS or CoR)

CoS/CoR = Capital =direct cost = indispensable cost

E = allowable deductions (AD) = prerogative of Congress whether to remove (broaden

tax base) or not

The Government cannot tax the Capital

Gross Income is not the same as Capital
Congress has wide prerogative to choose the tax base
Deductions are mere legislative grace

Creditable

Final

Withholding

Withholding

Tax (CWT)
Advance
payment
Not
extinguishes
tax liability
Included in ITR

Tax (FWT)
Final payment
Extinguishes
tax liability
Not included in
ITR
CWT

30k/mo.
(CWT = 5k)
l11 mo.l
Jan.

CWT =

Dec.

5k x 11 mo.

= 55k
Declared Taxable Income in ITR (TI)
TI = 30k x 12 mo.
= 360k
Taxable Due per Year = 100k

Final Tax Due =

100k 55k

= 45k

CWT Certificate
Issued by the BIR for amount of tax paid in excess
Personal property = transferrable

FWT
1M = winning
-200k = FWT
800k will no longer be included in ITR

Legislative

Administrative

Rules

. Rules
Provide
for

Provide details

mere

for the law

interpretation

Should

of the law
Need not

be

published

published

b. Free Exercise
Free Exercise
Freedom

be

to

exercise
religious belief

v.

Non-Establishment
Non-

Establishment
Government
should not give
undue favor to
a religion/sect

License Tax imposed before sale = prior restraint violates Free Exercise

= unconstitutional
VAT imposed after sale = no prior restraint
regressive (allowed but frowned upon), not progressive (not mandated
but encouraged)

c. Non-Imprisonment for Non-Payment of Poll Tax no tax evasion

d. Non-Impairment Clause
Only refers to contract between government (proprietary function) and
taxpayer
ONLY Contractual Tax Exemption agreed to by taxing authority through
contracts
Presuppositions:
Taxpayer was granted a tax exemption
Tax exemption revoked is contractual
Tax Holiday
Taxpayer will not pay tax for a definite period only
Can be revoked anytime
Government-Issued Bonds
Coupon bond, treasury bond
Loan agreements with the Government as the debtor
CANNOT be impaired
e. Exemption of Traditionally Exempted Tax Payers
Sec. 28(3), Art. VI, Const.
All
L, B, I real property property tax
A, D, E used usage, not ownership
directly and incidentally OLD interpretation
(!!!) Lung Center of the Philippines Case: usage = solely,
excluding incidentally
R, E, C purpose
Sec. 4(3), Art. XIV, Const. (Omnibus Tax Exemption)
All Revenues and Assets income and real prop. excise and property
taxes
NSNPEI

A, D, E used
Educational Purpose
Sec. 4(4), Art. XIV, Const.
All Grants, Endowments, Donations, Contributions privilege excise
A, D, E used
Educational Purpose
f. Uniformity
Tax operates with the same force and effect at any place for all members of
the same class

Equality
Fair, just, and reasonable
Progressive
Theoretical Justice = Ability to Pay

Valid Classification:
Substantial
Germane to the purpose of the law
Not limited to existing conditions
Applies equally to all members of the same class

Owner: X Corporation
Lessee: Systems Plus Proprietary educational purpose
Lease
Pecuniary benefit:
Not Exempt: Primary usage = industrial proprietary sec. 30, NIRC
Taxable
X Exempt: Primary usage = educational

!!! AUF v. CITY OF ANGELES

AUF is not exempt from Building Permit not tax

FINANCE DEPARTMENT ORDER NO. 137-87

Tax Exemptions of NSNP Corporations (sec. 30. NIRC) and Educational Institution
(Constitution)
Corporation not exempt if income is derived from property/activity for profit
Educational Institution
Cafeteria/Canteen and Bookstores
1. Owned by the school
2. Operated by educational institution as ancillary activities
3. Located in school premises

Private Educational Institution

Exempt from VAT if accredited by CHED/DECS
Interest Income from Currency Bank Deposits
1. Certification from Depositary Banks
2. Certification of actual utilization of income should be A, D, E in pursuance
of educational institutions purposes
3. Board Resolution by School Administration on the proposed project to be
funded out of such money deposited

!!! CIR v. YMCA

YMCA welfare, educational, charitable non-profit institution

X Sec. 28(3), A. VI: educational institution = hierarchically, chronologically high
graded

!!! MACEDA CASE

NPC
exempted from tax :government agencies and instrumentalities
may refuse to shoulder indirect tax

Oil Company
Taxpayer
Cannot shift burden to NPC

!!! GOTAMCO CASE

WHO international organization = exempt from tax

Requested for Gotamcos exemption

!! Refund can be requested only by the statutory taxpayer who should hold the
refund in trust for the customers if request is granted

!!

Tax

Shield/Shelter

may

be

tax

avoidance/evasion

depending

circumstances

!! Tax Exemption granted by Congress by a majority vote of all members

S.28(4), A.VI, Const.

FORMS OF ESCAPE FROM TAXATION

1. Resulting in Losses in the Governments Revenue

on

the

a. Tax Evasion tax-dodging scheme outside lawful means

Civil and/or criminal liability
b. Tax Avoidance tax minimization
Devise within means sanctioned by law
Should be (1) in good faith and (2) at arms length
c. Tax Exemption immunity from tax which should be expressed in law or
contract
Mere privilege = strictissimijuris
X Tax Credit debt of government (not a privilege; considered as property)
2. Not Resulting in Losses in the Governments Revenue
a. Shifting tax burden (i.e. VAT)
b. Capitalization reduction in prices to cope with tax
c. Transformation improvement in production = more efficient
Producers absorb the payment of tax to reduce prices and maintain market
share

RULES OF TAX LAWS CONSTRUCTION

1. Provision imposing tax strict interpretation
Tax = burden
Strictly against the government
Power to tax liberally in favor of the Government: inherent power of the State
2. Grant of tax exemption strictissimi juris
Mere exception to the rule of taxation
3. Both imposition and exemption
a. Strict interpretation (ascertain the applicability of the tax law first)
b. Strictissimi juris

! There must be an ambiguity first

!!! GULF AIR v. CIR

Rules and regulations issued by the Secretary of Finance is binding upon courts as
per Sec. 244, NIRC, which empowers the Secretary of Finance to promulgate the
same

CONCEPTS OF TAX LAWS

1. GR: Tax laws are not penal in nature (not ex post facto law)
2. Sources
a. Constitution limitation, regulation of power
b. Statutes Congress, National Tax
c. Issuances of Secretary of Finance Revenue Regulations, Rules and Regulations
d. Administrative Issuances by the BIR rulings, Revenue Memorandum Circulars
e. Tax Ordinances Sangguniang Bayan, local taxes
f. Tax Treaties
(1) actual existence of the treaty
(2) the taxpayer must invoke it
!!! CIR v. SC JHONSON
The Most Favored Nation Clause eliminates double taxation
3. Principles
a. Prospectivity
GR: Applies to future circulars
Sec. 246, NIRC no retroactive effect if prejudicial to the taxpayer
Expns:
The facts subsequently gathered by BIR are materially different from the
facts from which rulings has been based
Taxpayer deliberately omits material facts from returns or any document
required by BIR
Taxpayer deliberately misstates material facts from returns or any document
required by BIR
Taxpayer is in bad faith

Legislative Approval by Re-Enactment tacit approval of the Congress by

adopting the rules into law

Sec. 246, NIRC

There are two acts by BIR
Second act is a reversal/revocation/modification of the first act
The second act is prejudicial to taxpayer

b. No Estoppel against the Government

The Government cannot be estopped by acts of its agents
An administrative issuance contrary to law is null and void and cannot be a
source of right

Rulings cannot override/supplant law

2 Methods to Avoid Double Taxation (SC Johnson Case)

1. Exemption State of source (source of income) shall impose the tax but
resident State (taxpayers State) will not
2. Credit State of source and resident State will impose tax but State of
residence will allow tax reduction

!!! SC JOHNSON CASE

To eliminate international double taxation, (1) determine the rights of the State first
then (2) choose between EXEMPTION and CREDIT for relief
Most Favored Nation Clause
Lower rate in the Philippines
Not involve privies
3rd State is not involved in agreement
Treaties should have similar reliefs

RP-US Treaty = 10% and 15%

RP-West Germany = 10% concessional tax rate

SC Johnson is based in US and RP-WG was used instead of RP-US

RP-WG cannot be used by SC Johnsons and Sons (Phils.): RP-US and RP-WG do
not have similar reliefs
c. Imprescriptibility
GR: Action of the Government does not prescribe
Expn: If covered by a tax return filed by the corporation/individual taxpayer
(prescriptive period may be 3 or 10 years)
Improperly Accumulated Tax
If the retained earnings (corporate income, subject to 30% tax, retained by the
corporation instead of being distributed to stockholders in the form of
dividends, subject to 5% FWT) is already equivalent to 100% or more of the paid
up capital (fully paid shares of stocks)
Improperly Accumulated Income Tax not covered by tax returns =
imprescriptible
Exemptions from Strictissimi Juris
Law provides for liberal interpretation
Special taxes in relation to special cases and affecting special classes of
person
Public properties are involved
Property used for R, E, C (Const.)
Exemption granted to government political subdivision/instrumentalities

Equitable Recoupment a scheme not applicable in the Philippines whereby

the taxpayer is allowed to use prescribed claim for refund to settle tax liabilities
d. No Set-Of
No compensation
The Government and taxpayer are not mutual debtors

Rules and

Administr

Regulatio

ative

ns

Rulings

Issuin

BIR/CIR/

Secretary

authorized

Author

of Finance

representat
ive

ity

(CIR)
Rulings

of

First
Impression
(not
binding
Implemen
ting rules
of

tax

laws
(binding
Nature

upon

courts, but
only
considered
with

great

weight,
because

courts

those

and
applicable
to

upon

all

taxpayers)

only

are
best

guess

on

novel
issues and
applicable
only

to

those who
requested
the
rulings)

INCOME TAXATION

INCOME
All wealth other than mere return of capital
Profit of service, products, etc. coming to a certain person/company for a specific
period of time (amount of money)
Flow of wealth
Fruit of ones labor

CAPITAL
Fund existing at the instance of time which can be used for purchase of goods
Not subject to tax
Fund/property

FOREIGN EXCHANGE
Conversion of one currency to another
Taxable event only if it is a buying and selling business

TEST IN DETERMINING EXISTENCE OF INCOME

1. Severance/Realization Test
Separation of something of exchangeable in value
2. Tax Benefit Rule
Benefit obtained in the payment of taxes
Economic Benefit
Increase in net worth of taxpayer whatever may have been the mode by which it
is effected
3. Claim of Right Doctrine
Taxable gain is conditioned upon presence of a claim of right to the alleged
gain/absence of a definite unconditional obligation to return
4. Income from Whatever Source
Flow of wealth regardless of source of income even if the source is illegal

REQUISITES FOR TAXABILITY OF INCOME

1. Existence of gain
2. Realization of gain
a. Actual taxpayer has full control over income and physical possession thereof
b. Constructive taxpayer has no physical possession but with control over the
income (sec. 26 and 73(D), NIRC, bank account)
c. Presumptive provided under the law (sec. 24(d), NIRC)

Sec. 24(d), NIRC

Sale of real property
Capital asset = not related to business(ordinary asset = related to
business)
Capital Gains Tax 6% of the gross selling price/market value, whichever
is higher
Market Value may be fair market value (determined by Assessor) or
zonal value (determined by BIR)
e.g. GSP = 3M 6% CGT
FMV = 2M
ZV = 1M
3. Gain must not be excluded by law

Business

General
Professional
Partnership
Constructive
receipt

of

income
Not treated as
corporate

Partnership/
General CoPartnership
Actual

receipt

of income
Treated
corporate

as

taxpayer
among
taxpayer

other

kinds

of

partnership
except GPP
Not considered
as

income

taxpayer
Partners

as

individual
taxpayer

30%

income

tax
Partnership
Income = 30%
Dividend = 5%
FWT

TAX BENEFIT RULE = seemingly non-taxable event but considered taxable because of
the tax benefit given to the taxpayer

e.g. BAD DEBT

Debt which cannot be collected

Debt is stricken off/written off the Books
Reduces NI = TI
Diligent effort to collect = allowable deductions (not all expenses can be

deducted)
Uncollectibility is certain
Allowance Method method practiced by accountants whereby they reserve a
particular amount as bad debt, which CANNOT be treated as BAD DEBT
EXPENSE (BDE) for purposes of taxation
If collected subsequently, it will be taxed = seemingly non-taxable event

e.g.

Yea

Year

Yea

r1

r3

GI

2M

5M

AD

2M

2M

3M

-1M

-1M

NI taxable
(default)
BDE(subseq
uently
recovered)
Net
Income/Lo

3M
2.5
M
0.5
M
-1M
-

-1M

2M

0.5
M

ss
w/
bene
No

fit

ben

(excu

efit

sed

from

not

taxat

taxa

ion) =

ble

1M
taxa

w/
ben
efit
=
0.5
M
taxa
ble

ble
SURCHARGE
1. Ordinary 25%
2. Fraud 50%

PHILIPPINE INCOME TAX SYSTEM (Mixed)

1. Global System = fixed rate + schedular rate
Aggregation of all income regardless of source
2. Schedular System based on the nature of income

SOURCE PRINCIPLE

Kinds of Taxpayers
1. Individual calendar year (Jan. to Dec.)
2. Corporate fiscal year (any 12-month period ending in any month other than Dec.)
3. Estates only if under judicial settlement; otherwise, the heirs are the taxpayers
(individual)
4. Trusts only if irrevocable
3 Parties
TRUSTOR taxpayer if trust is revocable
TRUSTEE in possession of property when Trust is taxed
BENEFICIARY

Individual Taxpayer
1. Resident Citizen (RC) income from within AND outside Philippines
2. Non-Resident Citizen (NRC) income from within Philippines
Sec.22, NIRC
Establishes to the satisfaction of the CIR of his physical presence abroad
Leaving the Philippines with intent to permanently reside abroad as an
immigrant worker
Employment requires physical presence abroad for more than 183 days
(most of the time), which needs not be continuous

3. Resident Alien (RA) income from within Philippines

An alien who comes to the Philippines for a definite purpose but has extended
his stay in the Philippines (temporary home)
Stayed for at least 1 calendar year

4. Non-Resident Alien income from within Philippines

a. Engaged in Trade/Business (NRA-ETB)
Stayed in the Philippines for more than 180 days

b. Not Engaged in Trade/Business (NRA-NETB)

Corporate Taxpayer
1. Domestic (DC) income from within AND outside Philippines
2. Resident Foreign (RFC) income from outside Philippines
3. Non-Resident Foreign (NRFC) income from outside Philippines

Elements in Taxing NRCs

1. Previously classified as NRC
2. Intent to reside in the Philippines permanently during the taxable period he arrived
(the period of arrival is the beginning of the taxable year)

Jan.

May

Dec.

lll
abroad date of arrival
500k

700k

Not taxable

taxable

OVERSEAS CONTRACT WORKERS NRC

SEAFARER NRC if with concurrence of:
1. Receiving compensation for services rendered abroad as a member of the
complement of a vessel
2. The vessel is engaged in international trade

RFC and NRFC the determining factors are the continuity of transaction in the
Philippines and its conduct of business

SOURCE (SITUS) OF INCOME

1. Service where the act that produced the income is performed

e.g.: X: employee of A
A: Domestic Corp
HK:HK-based subsidiary Corp of A
X: was sent to HK for a project
: 190 days abroad
: received salary and allowance from A

APPLICABLE TAXES:
HK: NRFC income earned from within the Philippines
X: NRC (190>183) income earned from within the Philippines

Salary: for service rendered performed in HK = not taxable

Allowance: for project performed in HK = not taxable
2. Interest Income obligation of a resident
e.g.: X: RC
HK: NRFC
X: sent machines to HK for repairs
:total cost = 1M
: down payment = 500k
: 500k 5 equal installments with interest at 10% per annum

X: a RC who has the obligation to pay interest = taxable

3. Dividends GI of the corporation declaring the dividends

Share of stockholders from the profit of the corporation
(a) cash taxable
(b) property taxable
(c) stock GR: not taxable
(d) liquidating GR: not taxable

Domestic GI from within Philippines

Foreign GI from within and outside Philippines
(1) date of declaration of the distribution of dividends
(2) compare GI
Count 3 years ending taxable year prior to declaration
Compare GI from within Philippines and worldwide income (WW)
WW = income from within + income from outside
If WW = 50% or more = considered income from within
If WW = less than 50% = pro-rated
e.g.:2011 declaration
2010 ending taxable period prior to declaration
2009 to 2010 3 years prior to declaration

Year
2010
2009
2008

GI
Within
1M
1M
1M
3M

WW
2M
2M
2M
6M

Within WW = 3M 6M = = 50%
Whole dividend income is considered sourced from within Philippines =
whole amount of dividend income is taxable

Year
2010
2009
2008

Withi
n
0.5M
0.5M
1M

WW
2M
2M
2M

2M

6M

2M 6M = 1/3 < 50%

Only 1/3 of the dividend income is considered sourced from within and,
therefore, taxable
If dividend income = P10M, only P3.33M will be taxed

!! But if the stockholder is a RC, the whole amount of the dividend income will
be taxed regardless if the income is considered sourced from outside
Philippines

Shares of Stock personal property

GR: Mobilia sequuntur personam
Expns:
1. 85% of business of corporate shares are sold in the Philiippines
2. Business situs
3. Franchise exercised in the Philippines

4. Sale of Property depends on whether personal or real

(a) Real location
(b) Personal passage of title test

Passage of Title Tests

1. Free on Board (FOB) Shipping Pointownership is transferred at shipping point
e.g. US US Port Philippines
Ownership is transferred at the US Port
Tax situs is US
2. FOB Destinationownership is transferred at the point of destination
e.g. US US Port Philippines
Ownership is transferred at the Philippines
Tax situs is Philippines

Manufactured in the Philippines sold outside Philippines

Partly within and partly outside

!!! CIR v. BAIER-NICKEL

Case of BOAC its airplanes have no landing rights in the Philippines but it

maintains a liaison office, which sells tickets in the Philippines

The activity/product/service that produced the income is the selling of tickets in

the Philippines
The tax situs is the Philippines = taxable

5. Rents where exercised

e.g. Real property located in Japan owned by a Filipino residing in Japan who
rented it out
Source of Income: Japan
Taxpayer: NRC = only income from within
Rental income is not taxable
Royalties RMC 44-2005 (effective September 1, 2005)
Rules of Software/Computer Program (RMC 44-2005)
1. Transfer of Copyrights (CR)
CR Rights (CRR):
a. Make copies for the distribution to public
b. Make derivative computer program
c. Make public performance of software
d. Publicly display computer program
e. Any other rights of copyright owner
All/Some CRR = royalty income

!! If the entire CR ownership is transferred, and not only CRR, then the income
is NOT ROYALTY but BUSINESS INCOME

2. Copyright and Articles Transfer

CR (copy of a particular software) + technical know-how (TKH) = Royalty
Income
Without TKH imparted = Business Income

Insufficient Benefits = Rental Income

Similar to business income
To point the fact that there is no transfer of ownership
3. After-Sale Services
Depends on the Purpose
a. Use of software = royalty income
b. Provision of service = service income
Identify which is the principal and which is the ancillary purpose (ancillary
follows the tax treatment of the principal)
If both are principal, apportion the income
4. Site License/Network License Agreement
Transferee rights to make multiple copies of program for operation only
within its own business
Business income
5. Supply of Information
The computer programmer supplies information, formulae, principle which
cannot be separately copyrighted
Royalty income
6. Transfer of ownership on CR
Business Income or Capital Gains (for persons not engaged in business)

Royalty
20%
(gross
amount

of

Business
Normal tax

royalties) FWT
No
expense

With allowable

deducted

deductions

BIR DA-ITAD
e.g. Texas Instruments (Singapore) provided program and training in TI (Phils.)
a. provision of program = transfer ownership of ownership of program = business
income Principal

b. Training = technical know-how = royalty Ancillary

Whole service = Business income (ancillary follows the treatment of the principal)

RMC 77-2003 repealed by RMC 44-2005

All computer programs = royalty
6. Prizes with exertion of effort (active)
P10k or less = not taxable
More than P10k = 20%FWT
Winnings without exertion of effort (passive)
20% FWT
7. Pensions Compensation Income

GROSS INCOME

Sec. 27(a), NIRC

GI = GS or GR minus Sales Discount, Cost of Sales, Sale Returns

Sec. 32(a)
All pertinent items enumerated under sec. 32(a) and covers income from whatever
source

Compensation Income (CI)

Gross CI minus (Exclusions + Personal Exemption) = TI = tax base

Exclusions SSS, GSIS, Pag-IBIG

Personal Exemption assistance corresponding to support from the government
which is not applicable to NRA

Taxable Income (TI) from Business, Trade, and Profession

GS/GR
- COS/CoR
GI
- AD

NI = TI

RECAP: Taxability of Income:

1. Existence of gains
2. Realization of gains
3. Not excluded by law

EXCLUDED BY LAW
1. Life Insurance
e.g.X Corp: Insurer
A: Insured
B and C: Beneficiaries
A died
P1M B and C
Income in nature but not treated as income for taxation purposes
Treated as indemnity = not taxable

2. Return of Premium
Mere return of capital not taxable
e.g. X: insured
A: insurer

Premium = P250k
Insurance Contract: if X survives in 10 years, he will receive P1M

X: survived in 10 years
: received P1M
P1M
- 250kpremium = return of capital
750kincome = taxable

3. Gifts donors tax

Bequests personal estate tax
Devises real property tax
Already subject to another type of tax: not included in GI anymore
4. Compensation from Injuries (Personal Injury)/Sickness
Hospital and Medical Expense = indemnity not taxable
Cost of Repair = return of capital not taxable
Moral Damages = personal injury not taxable
Attorneys Fee = expense not taxable
Earned Salary = personal injury not taxable
Loss of Profit = opportunity loss taxable
5. Exempt under Treaty
Should be invoked by the taxpayer (SC Johnson Case)
6. Retirement Benefits
GR: Subject to tax
Expns:
a. Granted under Reasonable Private Benefit Plan (RPBP)
At least 50 years old
At least 10 years in service
Availed of the benefit of being excluded from tax for the first time

b. Without RPBP
60 to 65 years old
At least 5 years in service

c. Silent presume with RPBP

Separation Pay
a. Voluntary: taxable (as long as employee decided to sever employment relations
with employer regardless if given a choice) authorized cause
b. Involuntary: not taxable just cause

e.g. X Corp: dropped its Line 1 due to economic loss

: 2 groups of employees were dismissed on separate dates
Group A: with RPBP and received P150k separation pay
Group B: without RPBP and received P50k

P150k: not taxable not because of the RPBP but because the cause
authorized cause
P50k: not taxable regardless of absence of RPBPauthorized cause

Other Social Legislation Benefits

SSS, maternity leaves, GSIS, etc.

7. Prizes and Awards

Religious, charitable, scientific, educational, artistic, literary, or civic achievement
if:

a. Without action on his part (nominated)

b. Not required to render substantial future services

8. Income Derived from Foreign Government

9. Income Derived from Government and Its Subdivision

10.
Prizes and Awards in Sports Competition
a. Local and international sports competition and tournaments
b. Sanctioned by national sports association
11.

Gains from Sale of Bonds, Debentures, and Other Certificates of

Indebtedness
a. Sale of bonds, debentures, certificates of indebtedness
b. Maturity of more than 5 years
12.
De Minimis Benefit
Benefits in small value not taxable
Uniform allowance (UA) = up to P5k
Christmas bonus ( CB) = up to P5k
Rice allowance (RA) = up to P1,500 per month
e.g.
13th

10

month

14th

10

month

Productivi
ty bonus

10k

5K

CB

7K

UA

8K

RA

10k

10
K

5k
DM =
5k
DM
=5k
DM =
18k/

2k
3k

yr
30k
not
taxabl
e

!!Benefits up to P30k is not taxable (#13)

13th

15 k

15k

15k

15k

1k

1k

CB
UA

5k
8k

0
3k

RA

10k

month
14th
month
Productivi
ty bonus

34k

30k = not
taxable
4k =
taxable
13.
13th Month and Other Benefits
Up to P30k
e.g. GS minus (SSS + Pag-IBIG + PhilHealth + Union Dues) = TI

RMC 27-2011
Whole amount (SSS, PhiliHealth, etc.) = not taxable
REPEALED by RMC 53-2011
July 2, 2011
Sec. 32(b): mandatory contributions only
SSS, PhilHealth, etc. = not taxable only up to the amount mandated
by law (EXCESS = not included in social legislation investment =
taxable)

RA 9994

 Seniors are exempt from individual income tax if he is a minimum wage earner
(private government)

RA 9504, RR 10-2008

MINIMUM WAGE EARNER (MWE)

Exempt from income tax and withholding tax
Daily rate = Wage Order
+ Night Shift Differentials, Overtime Pay, Holiday Pay, Hazard Pay = still minimum

wage earner not taxable

+ Commissions, Honoraria, Fringe Benefits, Taxable Allowance (up to 30k = not
taxable; more than 30k = entire amount is taxable with both income and creditable
withholding) = entire earnings is taxable with both income and creditable
withholding tax

!! MWE + Income from Business, Trade, or Profession = whole amount subject to

income tax but not CWT

Public School Teachers not MWE

Subject to monthly CWT and annual FWT

DE MINIMIS
Not subject to Fringe Benefit Tax (FBT)
Exclusive enumeration RR 5-2011
1. Leave Credits
a. Private only UNUSED VACATION LEAVE
Government unused vacation AND sick leave
b. No. of Days to be Monetized not taxable
Private: up to 10 days UVL
Government: up to 10 days UVL and 10 days USL

!! VL and SL not mandatory

Service Incentive MANDATORY

combination of SL and VL
Private: identify VL
Government: no limit
: both VL and SL
: no need to identify

!! If used compensation income

taxable = normal tax
CWT

2. Medical Allowance
a. Employee P10,000.00
b. Dependents of Employees P750.00 per semester = P1,500.00 per year
3. RA P1,500.00 per month = P18,000.00 per year
4. UA P5,000.00 (RR 8-2012)
5. Laundry Allowance P300.00 per month = P3,600.00 per year
6. Employment Achievement Awards
Tangible personal property (actual monetary value = P10,000.00 not taxable)
other than cash and gift certificates (taxable)
7. Daily Meal Allowance
25% of minimum wage
ONLY if in favor of employee who works on overtime and night/graveyard shift
8. Gift of Flowers, etc. taxable (RR 5-2011)
9. Representation And Transportation Allowance (RATA) and PERA
a. Government not taxable
b. Private GR: taxable
Expn: concurrence of:
Advance/reimbursements which are pre-computed on daily basis
Expense is necessary for business or trade of employer
Expense is liquidated

!! If not spent but KEPT taxable

10.
Employers Convenience Rule
DA-233-07
BIR mobile allowances and communication allowances granted to employee =
NOT TAXABLE IF necessary business
e.g. Marketing supervisor communication allowance call different clients = not
taxable

FRINGE BENEFIT
subject to Fringe Benefit Tax(FBT) FWT paid by employer
granted to managerial/supervisory employees only for their benefit
e.g.
P10,000.00 granted by employer for personal use to:
a. MANAGER = taxable income FBT = FWT
b. CLERK not managerial rank and file = taxable income CI = CWT
GR: tax = 32% gross up monetary value
Expns:
a. 25% NRA-NETB
b. 15% special individual taxpayer

!! Special Individual Taxpayers taxpayers employed in:

a.
b.
c.
d.

Regional Area Headquarter

Regional Operating Headquarter
Offshore Banking Unit
Foreign Service Contractor/Sub-Contractor in Petrol Business

Gross Up Monetary Value (GUMV) = Monetary Value + FBT

GUMV value of FB inclusive of tax

Monetary Value (MV) = GUMV FBT

MV FB Net of Tax = assumed value received

FB
FBT

MV = Net of Tax
32%
68%

GUMV = MV 68%

e.g.MV = P10,000.00
GUMV = P10,000.00 + 32% GUMV
X = 10,000 + 0.32 X
X 0.32 X = 10,000
0.68X = 10,000
0.68

0.68

1. Housing
a. Transfer of use and possession
b. Transfer of ownership

Expn (Not Taxable):

a. AFP near military camp
b. Adjacent to business premises (within 50 km)
c. Temporary (3 months/less) use of employee

2. Expenses
Personal use of employee
If necessary for business = NOT FBT

3. Vehicle
a. Employer gives cash
b. Car delivered to employee
c. Transfer of ownership
d. Employer allowed employee to use company car for personal use

!! Official Use = employers benefit NOT FB

4. Household Expenses household maid/helper, driver, etc.

5. Interest Foregone
Actual Interest Rate v. Market Rate
12% as per CB Circular
e.g. A manager of Metrobank
15% interest
30% interest normally given by Metrobank
ActualMarket
15% > 12% NT
10% < 12% 2% FBT
6. Membership Dues
Social/athletic clubs/akin thereto
Borne by employer
7. Foreign Travel
Personal use of employee
Should be documented substantiated by receipts
If not substantiated, entire amount = FBT
Expn (not taxable):
a. Attend meetings, etc. (employers benefit)
b. Inland travel
c. Hotel accommodation up to $300 per day
d. Airfare economy/business class ticket
first class ticket up to 70%
8. Holiday and Vacation Expense

9. Educational Assistance
Employee/dependent
Expn (not taxable)
a. Education should be necessary for business/trade of employer
Written Contract condition of future rendition of service of employee
b. Competitive scheme under a scholarship program by the employer
10.

Life Insurance
Premiums paid by employer in excess of what the law allows
Beneficiary:
a. Employee/his family CI NT (sec. 32 (B), NIRC)
b. Employer NT (sec. 32 (B), NIRC)
Indemnity exempted under sec. 32 (B), NIRC

!!Rank and File(R&F) life insurance paid by employer beneficiary =

R&F/family benefit = TI CWT premium payment not indemnity
R&F not managerial not FB XFWT

TAX OPTION
a. Shares listed presumptive gain of 1% of gross sales
b. Not listed actual gain

STAGES OF CONTRACT
1. Negotiation
2. Perfection approval of income
3. Consummation

TAXPAYERS SUIT
1. Extraction of taxes
2. Such extraction is illegal
Dividends who declares

1. Domestic within
2. Foreign outside
Should be operating in the Philippines for 3 years as per BIR Ruling

EXPANDED FOREIGN CURRENCY

Income is not taxable if income earner is non-resident even if sourced from within

NRF Corp automatically not engaged in business

PASSIVE FWT except lease income

RR nature of subordinate legislation binding upon courts

Pensions from foreign companies exempt from taxes

PURCHASE NT no flow of wealth on the part of the buyer

!!! CIR v. GEN. FOODS

Advertising Expense allowable deductions reasonable amount only

MCIT not tax on capital valid

tax basis = GI not capital

EMPLOYERS CONVENIENCE RULE

Benefit of employer not FB
Expense for employer NT

!!All benefits derived from employer-employee relationship = CI

ALLOWABLE DEDUCTIONS (AD)

Recognizable against:
X CI
Income from Business, Trade, or Profession (BTP) must be related to BTP
e.g. Rental Income= business income all income derived from lease
Maintenance ExpenseAD
2 individuals: A owner of building
B Lessee of building
A: statutory taxpayer rental income
B: rental expense

!! Stipulation that B will shoulder tax VALID income on the part of

A Rental Income

CASH

ACCRUAL BASIS

BASIS
Income
recognized

Income

once

recognized

collected

accrued whether

whether

collected/uncolle

earned

or

once

cted

unearned
May be used

Must be used by

by

manufacturing/r

service

enterprise

etail enterprise

e.g.A: business of buying and selling pre-owned Louis Vuitton bags

Buy & Sell: Retail accrual basis

MON

COLLEC

TH
Janu

TION
P10,000.

ary
Febru

00
P30,000.

ary
Marc

00
P50,000.

00
P90,000.

income
income
income

00
!! When is income considered accrued?
When the right to collect arises perfection of contract

A: Lessor
Lease: Service cash basis

MONT

COLLECTI

Payme

ON

Janua

P30,000.0

nt for
Nov,

ry

Febru

P20,000.0

ary

0
P10,000.0

March

Dec,
Jan
Feb,
Mar

April
0
NO INCOME for the months of November and December

Income for January: P30,000.00

February: P20,000.00
March: P10,000.00

!! Rental Expense ALWAYS accrual basis

Rental Income cash basis

J: lessee should pay every month but did not pay in March

March: Rental Expense should BE reported

Rental Income should NOT be reported

!! Prepaid Rental advance payment for the next taxable year

!! Security Deposit
Indemnity to lessor if there are damages in leased premises

e.g. P10,000.00 security deposit

P 3,000.00 damages = indemnity not taxable
P 7,000.00 return to lessee
if kept = rental income

With Forfeiture Clause breach/violation of lease agreement = forfeit deposit

income in the year of breach

PASSIVE INCOME

GR: FWT
!!! Normal Tax CWT

1. Royalties
a. Literary, Book, Musical Composition 10%
b. Others 20%
2. Prizes
a. P10,000.00 or less Normal tax [sec. 24 (A)]
b. More Than P10,000.00 20% of entire amount

Winnings 20% FWT

3. Interest Income
a. Bank Deposits and Deposit Substitute 20% FWT
b. Loan normal tax
Expns:
Long-term deposit/investment
holding period = not less than 5 years
v. Bonds, debentures, etc.
More than 5 years = exempt from tax
Gains from sale
Not cover exactly 5 years

e.g. Depositor 1M investment PNB

* P100,000.00 interest
* more than 5 years holding period tax exempt
* 1 month holding period 20% FWT
* 5 years holding period pre-terminated depends on the lapse of
period

Pre-

Expired

FWT

Period

Rate

years

to

less

than
Terminate
d 5-Year
Holding
Period

5%

years
3 years
to

less

than

12 %

years
Less
than

20%

years
Interest

income

received

by

member

cooperative CTA-registered
Expanded foreign currency deposit system
7.5% FWT if income earner is a resident
exempt if income earner is non-resident
4. Dividends
Date of declaration = right arises
Shares of stockholder in a particular corporation
May give rise to:
a. Dividend income
b. Fluctuation
Forms:
a. Cash face value of cash
b. Property fair market value
c. Script provisional dividend
warrant/certificate already issued
issued in promissory note
Issue warrant/certificate
fair market value
permanent
Presumption of income
d. Liquidating issued upon dissolution
e. StockGR: not subject to tax

of

duly

registered

merely represents a transfer of surplus to capital account

not represents any flow of wealth same percentage of ownership
e.g. At least 5 incorporators

10

In

Co

co

nt

rp

ri

or

bu

at

ti

or

on

1k

1/8

100

2k

2/8

200

2k

2/8

200

1k

1/8

100

2k

2/8

200

of

Sto

Ow

ck

Tot

Sh

ner

Dec

al

are

shi

lar

atio
ns

8k

1,10
0
2,20
0
2,20
0
1,10
0
2,20
0
8,80

1/8
2/8
2/8
1/8
2/8

0
GR: Not taxable
Expn: When there is flow of wealth

!!! CIR v. ANSCOR

Transferring surplus

Unrealized gain
Cash dividend

STOCK DIVIDEND
GR: Not taxable
Expn:
1. Company granted options in favor of stockholder (cash/property/stock)
2. At least some exercise option to avail cash dividend

e.g.

In

Co

co

nt

rp

ri

or

bu

at

ti

or

on

A
B
C
D
E

1
k
2
k
2
k
1
k
2
k
8k

10
%

of

Sto

Ow

ck

ner

Dec

shi

lar

atio
ns

1/8

100

2/8

200

2/8

200

1/8

100

2/8

200

Sto
ck
Divi
den
d

Sh
are

Cho
ice
Cas
h

1k

Stoc

2.2

Cas
h

2k

Stoc

1.1

Stoc

2.2

k
8.5

k
Flow of wealth = taxable
Different percentage of shares
Sec. 73(B)
Dividend Equivalents redeem/cancels shares of stocks previously issued to
stockholder
Corporation reacquires shares
Time and Manner
question of fact
existence of dividend equivalents
should be as declaration of dividend distribution
Redemption capital transaction
!!! ANSCOR Case
criteria for dividend equivalent (not an automatic indication)
Anscor redeemed shares of Don Andres
P108,000 shares redeemed
25k original subscription
purchased by stockholder
return of capital = not taxable
83k earned by reason of stock dividend
acquired from income of corporation
stock equivalent = taxable
Requirements (sec. 73):
a. Redemption/Cancellation
b. Stock Declaration
c. Time and Manner = dividend declaration

Factual Circumstances
1. Lapse of time between of issuance to redemption not sufficient indicator to
determine taxability
2. Business Purpose should be legitimate (not taxable) at the time of distribution

SALE OF REAL PROPERTY

 Presumptive Gain 6% [sec. 24(D)]

Applicable to:
1. Sale
2. Exchange
3. Other disposition of real property (capital asset)

Pacto de retro salesale with right to repurchase execution = transfer of

ownership = CGT
Conditional sale no transfer of ownership unless condition happens = CGT
Contract to sell no transfer of ownership only upon execution of a Deed of
Absolute Sale = CGT
Forced sale properties sold due to tax lien, unpaid mortgage, etc. = CGT
Barter = exchange if resulted in income/loss = CGT
NRA-NETB 25% FWT [sec. 25(D)] except stock

Alternative/Optional Treatment in Taxation

Sale of real property (capital asset) to:
a. Government
b. Political subdivision
c. Agencies
d. GOCCs
Option of taxpayer to use 24(D) (FMV or GS) or 24(A) (normal tax with net income
as basis)

CAPITAL GAINS TAX

Within 30 days from execution of Deed of Sale violation = 20% interest per year
+ 25% surcharge + compromise penalty
Avoided/Exemptions:
1. Sale of Principal Residence (Requirements):
a. New principal residence must be acquired and constructed within 18
months from sale
b. Notice to avail exemption within 30 days from execution of Deed of Sale
c. Once in 10 years availability

d. Revised Regulation
escrow account of the taxpayer will be included in CGT return
proceeds of sale should be wholly/fully utilized for acquisition of new
residence
!! If partially used: (utilized amount total proceeds) x Market Value or
GSP
2. Sale in Favor of Government
3. Comprehensive Agrarian Reform Law
4. Sec. 24(C) real property is transferred to a corporation to obtain corporate
control
Ensured by Government issuance of Certificate Authorizing Registration (RMO
15-2003)

SALES OF SHARES OF STOCKS

Sold by dealer = ordinary asset normal tax
Sold by non-dealer
Listed presumptive gain = of 1% GSP
Not Listed actual gain = 5% of first 100k + 10% of excess of 100k

OTHER SOURCES:
1. Cancellation of Indebtedness
Condonation
Depends on circumstances of cancellation
e.g. A loaned 100k to B
If A cancelled Bs indebtedness by:
a. Gratuity: donors tax
b. Remuneration: income tax
c. Declaration of Dividends: FWT

If 3rd person renders service to cancel Bs debt: 3rd person income and
donors taxes

2. Leasehold
Lessors share in the income of lessee rental income

 Improvement by lessee to be owned by lessor after lease period is Rental

Income recognized:
a. Outright FMV

of

improvement

during

the

date

of

completion

of

improvement
b. Spreadout value of improvement at the end of the lease term during the
entire period of lease

e.g. 25 M amount of construction cost of improvement

2013 finished
25 years estimated useful life
15 years lease term

Outright 25 M
Spreadout:
2013 to 2028 lease period
10 M depreciated value

Depreciation Expense (DE)

DE = Value of asset Estimated useful life
= 25M/25y
= 1M/yspread out over 15 years of lease term

3. Installment Transaction
Personal Property
a. Regular Basis automatically installment basis
b. Casual Basis initial payment (cash/property received, other than a
certificate of indebtedness, in the year of sale) should not exceed 25% GSP
Real Property
a. Regular Basis automatically installment basis
b. Casual Basis:
Selling price is at least P1,000.00

 Initial payment should not exceed 25% GSP

!! If more than 25%: Deferred sale
4. Mortgages (REM)
Public auction highest bidder Certificate of Sale
1 year redemption period:
a. If exercisedX CGT
b. If not exercised consolidation of title after 1 year (expiration of redemption
period) CGT (RR 4-99)

INSTALLMENT SALE
Real Property 25% rule + at least P1k selling price
Personal Property 25% rule
Initial Payment sec. 49, NIRC
a. Cash/Property/Shares of Stock
b. Except evidence of indebtedness
c. Received during the year the sale was made

!! Deferred Sale more than 25% down payment entire amount recognized in
the year of sale

e.g.1M (2013) selling price

600K (2013) purchase price
DP = Down Payment

1. DP = 350k (2013) Deferred = whole amount is recognized in 2013

2. DP = 200k cash + 100 shares of stock = 300k > 25% GSP deferred sale
3. DP = 200k cash + 400k on promissory note
PN = evidence of indebtedness not initial payment
200k cash installment sale portion recognized = 200k/1M
4. DP = 200k cash + 400k on PN
PN with 10% interest and discounted to P350k
DP = 200k + 350k = 550k sufficient cashdeferred sale

METHODS OF RECOGNIZING INCOME FROM CONSTRUCTION PROJECT

1. Lump Sumnever used under long-term construction project should be
accomplished for more than one year
2. Percentage of Completion mandatory for long-term construction project
e.g.10M Cost of Project
9M Expense
1M 2013: 40%
2014: 40%
2015:20%