Income Taxation Reviewer

TAXATION I REVIEWER
ATTY. C. VILLENA
PART I TAXATION IN GENERAL

CHAPTER I GENERAL PRINCIPLES OF
TAXATON
I. TAXATION
TAXATION DEFINED
The power by which the sovereign raises revenue to defray the

necessary expenses of the government. It is merely a way of
apportioning the costs of government among those who in
some measures are privileged to enjoy its benefits and must
bear its burdens. It is the inherent power of the state to
demand and enforced contributions for public purposes.
Taxation is described as a destructive power which interferes
with the personal and property rights of the people and takes
from them a portion of their property for the support of the
government (Paseo Realty & Devt Corp v. CA, 2004)
NATURE OF INTERNAL REVENUE LAWS

a) Internal revenue laws are not political in nature. They are
deemed to be laws of the occupied territory and not of the
occupying enemy.
b) Tax law are civil, not subject to expost facto law prohibition
and not penal in nature, although there are penalties provided
for their violation. The purpose of tax laws in imposing
penalties for delinquencies is to compel the timely payment of
taxes or to punish evasion or neglect of duty in respect
thereof.
NATURE AND CHARACTERISTICS OF TAXATION
The power of taxation is INHERENT IN SOVEREIGNTY as an

incident or attribute thereof, being essential to the
existence of an independent government
The right to tax exists apart from constitutions and without

being expressly conferred by the people
It is legislative in character
It is generally not delegated to executive or judicial
department. EXCEPTIONS:
i.
To LGUs in respect to matters of local concern to be
exercised by LG bodies thereof (Sec 5, Art X, 1987
Constitution)
ii.
When allowed by the Constitution (Sec 28(2), Art VI,
1987 Constitution)
iii.
When the delegation relates merely to administrative
implementation that may call for some degree of
discretionary powers under a set of sufficient
standards expressed by law (Cervantes v. Auditor
General, 91 PHIL 359), or implied from the policy
and purpose of the Act (Maceda v. Macaraig, 197
SCRA 771)
It is subject to constitutional and inherent limitations
It must be used for public purposes It has been held
that tax has been utilized for public purpose if the welfare
of the nation or the greater portion of its population has
benefited for use (Gomez v. Palomar, 25 SCRA 827; Phil
Guaranty Co v. Commissioner, 13 SCRA 775)
It is the strongest of all the inherent powers of the
government (Sison v. Ancheta, 130 SCRA 654)
It is territorial in operation The power to tax can only be
exercised within the territorial jurisdiction of a taxing
authority (51 AM JUR 88) except when there exists privity
of relationship between the taxing State and the object of
tax
It is an enforced charged and contribution
Generally pecuniary in nature (payable in money)
HILADO V. CIR 100 PHIL 288

Internal revenue laws are not political in nature and as such were
continued in force during the period of enemy occupation and in
effect were actually enforced by the occupation government. Income
tax returns were filed during that period and income tax payment
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BY: J. Lumbres, C. Mejia and M. Mejia

Digests: J. Lumbres, C. Mejia, M. Mejia, V. Pinaroc and H. Wong
were effected and considered valid and legal. Such tax laws are
deemed to be the laws of the occupied territory and not of the
occupying enemy. Furthermore, it is a legal maxim, that except that
of a political nature, Law once established continues until changed
by some competent legislative power. It is not changed merely by
change of sovereignty.
PURPOSES AND OBJECTIVES

A. REVENUE To raise funds or property to enable the State
to promote the general welfare and protection of its
citizens
B. NON-REVENUE/SUMPTUARY PURPOSES (PR2EP)
1. PROMOTION of general welfare Taxation may be
used as an implement of police power in order to
promote the general welfare of the people
2. REGULATION
3. REDUCTION of social inequality The progressive
system of taxation in the Philippines prevents the
undue concentration of wealth in the hands of few
individuals. Progressivity is based on the principle that
those who are able to pay more should shoulder the
bigger portion of the tax burden
4. ENCOURAGE economic growth The grant of
incentives or exemptions encourage investment
5. PROTECTIONISM In case of foreign importations,
protective tariffs and customs are imposed for the
benefit of local industries
SCOPE OF TAXATION
It is comprehensive, unlimited, supreme and plenary, but subject

to constitutional and inherent limitations.
Article VI Constitution, Section 28:
1. The rule of taxation shall be uniform and equitable. The

Congress shall evolve a progressive system of taxation.
2. The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national

development program of the Government.
3. Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, for religious, charitable, or
educational purposes shall be exempt from taxation.
INHERENT ATTRIBUTE OF SOVEREIGNTY The moment the
state exist, the power to tax automatically exists. The power can
be exercised even without the Constitution or any law expressly
conferring such power.
A. Basis: The LIFEBLOOD DOCTRINE Without taxes, the
government would be paralyzed for lack of motive power
to activate and operate it. Hence, despite the natural
reluctance to surrender one part of ones earned income to
the taxing authorities, every person who is able must
contribute his share in the running of the government (CIR
v. Algue, supra)
B. Manifestations
1. Imposition even in the absence of constitutional grant
2. States right to select objects and subjects of taxation
3. No injunction to enjoin collection of taxes
4. Taxes could not be the subject of set-off or
compensation
5. Taxation is an unlimited or plenary power
C. Distinction between National Government and Local
Government Unit (LGU)
1. National government inherent power
2. Local Government Unit (LGU) not inherent since it is
merely an agency instituted by the State for the
purpose of carrying out in detail the objects of the
government; can only impose taxes when there is:
a. Constitutional grant
b. Legislative grant
D. Grant of Taxing Power of LGU
o Constitutional grant
o Power is derived from Art X Sec 5 of the 1987
Constitution
LEGISLATIVE IN CHARACTER
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TAXATION I REVIEWER
ATTY. C. VILLENA
A. Basis: Taxes are a grant of the people who are taxed and
the grant must be made by the immediate representatives
of the people. And where the people have laid the power,
there it must be exercised (Cooley). The power can only be
exercised by the law-making body, not by the executive or
the judicial branch of the government, except when
delegated by the national legislative body to a local
legislative body, or to the executive branch, subject to
limitations as may be provided by law.
B. Scope of Legislative Power (SM PARKS)
1. SUBJECTS of taxation (Persons, property, occupation,
excises or privileges to be taxed, provided they are
within the taxing jurisdiction)
2. Amount or RATE of tax
3. PURPOSES for which taxes shall be levied provided
they are for public purposes
4. KIND of tax to be collected
5. APPORTIONMENT of the tax (whether the tax shall be
of general application or limited to a particular locality,
or partly general and partly local)
6. SITUS of taxation
7. METHOD of collection
IS THE POWER TO TAX THE POWER TO DESTROY?
Power to tax INCLUDES the power to destroy. Chief

Justice Marshall in McCulloch v. Maryland (4 Wheat, 316 4L
ed. 570, 607) opined that the power to tax involves the
power to destroy. Taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their property for
the support of the government
Power to tax is NOT the power to destroy. According to
Justice Holmes in Panhandle Oil Co v. Mississippi (277 US
218). The power to tax is not the power to destroy while
this court sits
Reconciliation of the two views:
The imposition of a valid tax could not be judicially

restrained merely because it would prejudice
taxpayers property
o An illegal tax could be judicially declared invalid
and should not work to prejudice a taxpayers
property
According to Justice Isagani Cruz, the power to tax
includes the power to destroy if it is used validly as an
implement of the police power in discouraging and in
effect, ultimately prohibiting certain things or enterprises
inimical to the public welfare, but where the power to tax
is used solely for the purpose of raising revenues, the
modern view is that it cannot be allowed to confiscate or
destroy
The power to tax is sometimes called the power to destroy.
Therefore, it should be exercised with caution to minimize
injury to the proprietary rights of the taxpayer (Roxas et al
v. CTA, G.R. no L-25043, April 26, 1968)
o
CHAMBER OF REAL ESTATE AND

BUILDERSASSOCIATION (CREBA) V. ROMULO,
AMATONG AND PARAYNO (2010)
The taxing power has the authority to make reasonable
classifications for purposes of taxation. Inequalities which result from
singling out a particular class for taxation, or exemption, infringe no
constitutional limitation.
SISON V. ANCHETA 130 SCRA 654

The power to tax, an inherent prerogative of the State, has to be
availed to assure the performance of vital state functions. It is the
source of the bulk of public funds. Taxes, being the lifeblood of the
government, their prompt and certain availability is of the essence.
According to Justice Malcolm, The power to tax is an attribute of
sovereignty. It is the strongest of all the powers of government. It is,
of course, to be admitted that for all its plenitude, the power to tax is
not unconfined. There are restrictions which the Constitution sets
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forth. Adversely affecting as it invalidate in appropriate cases a

revenue measures since the power to tax is not the power to destroy.
The SC held that it is inherent in the power to tax that a State be free
to select the subjects of taxation, and that inequalities which result
from singling out one particular class for taxation, or exemption, does
not infringe constitutional limitation.
Equity and uniformitu in taxation, as required by the Constitution,
means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has the authority
to make reasonable and natural classifications for purposes of
taxation. The differentiation complained conformes to the practical
dictates of justice and equity and is not therefore discriminatory. The
standard then is that the tax applies equally to all persons firms and
corporations placed in similar situation.
SARASOLA V. TRINIDAD, 40 PHIL 259

Taxation is an attribute of sovereignty. It is the strongest of all the
powers of the government. It involves, as Chief Justice Marshall
said, the power to destroy. The right of taxation where it exits, is
necessarily unlimited in its nature. It carries with it inherently the
power to embarrass and destroy.
Public policy decrees that, since upon the prompt collection of
revenue there depends the very existence of government itself,
whatever determination shall be arrived at by the Legislature should
not be interfered with unless there be a clear violation of some
constitutional inhibition. It is upon the taxation that several states
chiefly rely to obtain the means to carry on their respective
governments, and it is of the utmost importance to all of them that
the modes adopted to enforce the taxes levied should be interfered
with as little as possible. Any delay in the proceedings of the officers,
upon whom the duty is devolved of collecting the taxes, may derange
the operations of government, and thereby cause serious detriment
to the public.
The Government may fix the conditions upon which it will consent to
litigate the validity of its original taxes. The proper of taxation being
legislative, all the incidents are within the control of the Legislature.
The people of a state give to their government a right of taxing

themselves and their property, and as the exigencies of the
Government cannot be limited, they prescribed no limit to the
exercise of this right, resting confidently on the interest of the
legislator and on the influence of the constituents over their
representatives, to guard themselves against its abuse.
UNDERLYING THEORY AND BASIS

1.
2.
PRINCIPLE OF NECESSITY (Theory of Taxation) The

existence of the government is a necessity; the main
source of revenue of the government is taxes. These are
the life-blood of the government. The government
therefore will not be able to survive and continue to
perform its functions without taxes.
BENEFITS RECEIVED PRINCIPLE (Basis or Rationale for
Taxation) In return for the enforced contribution of the
citizens, the latter receive general protection and
enjoyment of benefits in an organized society. The power
of taxation is therefore founded on the reciprocal duties of
protection ad support between the state and its
inhabitants. This does not mean, however, that only those
who pays their taxes to the government are entitled to
protection and benefits, because these are the primary
duty owed by the State to every citizen. Moreover, the
taxpayer should not expect a definite, specific commodity,
service or benefit in return for the contributions he has
made.
CIR V. ALGUE
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of motive power
to activate and operate it. Hence, despite the natural reluctance to
surrender part of ones hard earned income to the taxing authorities,
every person who is able to must contribute his share in the running
of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation and
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TAXATION I REVIEWER
ATTY. C. VILLENA
should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. Collection should be made in
accordance with the law as any to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of common good,
may be achieved.
COMPARISON WITH POLICE POWER AND EMINENT

DOMAIN
TAX
POLICE
EMINENT
POWER
DOMAIN
EXERCISING
Government
Government
May be
AUTHORITY
or Political
or Political
granted to
PURPOSE
Subdivision
Subdivision
Raises
revenue
Exercise to
promote
public welfare
through
regulation
Limited to the
cost of
regulation,
issuance of
license of
surveillance
Principles of a Sound Tax System

1.
2.
3.
4.
FISCAL ADEQUACY The sources of revenue should be

sufficient and elastic to meet the demands of public
expenditure.
EQUALITY OR THEORETICAL JUSTICE The tax burden
should be in proportion to the taxpayers ability to pay.
ADMINISTRATIVE FEASIBILITY Tax laws must be capable
of convenient, just and effective administration on the part
of both the government and the taxpayer.
Consistency or compatibility with economic goals.
ABAKADA GURO PARTY LIST OFFICERS V.ERMITA

(2005)
The increase the VAT collection does not render it unconstitutional so
long as there is a public purpose for which the law was passed,
which in this case, is mainly to raise revenue. In fact fiscal adequacy
dictate the need for a raise in revenue. The principle of fiscal
adequacy as a characteristic of a sound tax system. Every tax ought
to be so contrived as both to take out and to keep out of the pockets
of the people as little as possible over and above what it brings into
the public treasury of the state. It simply means that sources of
revenue must be adequate to meet government expenditures and
their variations.
AMOUNT OF
IMPOSITION
No limit
EFFECT
Becomes part
of the public
funds
PERSONS
AFFECTED
Applies to all
persons,
property and
excises that
may be
subject
thereto
Contract may
not be
impaired
SUPERIORITY
OF
CONTRACTS
Restraint on
the injurious
use of
property
Applies to all
person,
property and
excises that
may be
subject
thereto
Contracts
may be
impaired
public service
companies or
public utilities
The taking of
property for
public use
No limit
imposed, but
the amount
should be
based on the
market value
of the
property
Transfer of
right to the
property
Only particular
property is
comprehended
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BENEFITS
RECEIVED
RELATIONSHI
P TO
CONSTITUTIO
N
unless a
government
is property to
contract
granting; or
involves
franchise
Protection
and general
from the
government
Subject of
certain
constitutional
limitations
Since the enactment of the Local Autonomy Act, a liberal rule has
been followed by this Court in construing municipal ordinances
enacted pursuant to the taxing power granted under Section 2 of
said law. This Court has construed the grant of power to tax under
the provision as sufficiently plenary to cover everything, excepting
those which are mentioned therein subject only to the limitation that
the tax so levied is for public purposes, just and uniform.
No direct or
immediate
benefit such
as may arise
from the
maintenance
of a healthy
economic
standard of
society
Relatively
free from
constitutional
limitations
Market value
of the
property
The SC agreed with the trial court that the amount collected under
the ordinance in question partakes of the nature of a tax, although
denominated as police inspection fee since its undeniable purpose
is to raise revenue. According to Section 2 of Local Autonomy Act,
the tax levied must be for public purpose, just and uniform. As
correctly held by the trial court, the so-called police inspection fee
levied by the ordinances is unjust and unreasonable.
LUTZ V. ARANETA, 98 PHIL 48

Subject to
certain
constitutional
limitations.
GEROCHI V. DOE (2007)

If generation of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is incidentally raised does not
make the imposition a tax.
The taxing power may be used as an implement of police power. The
theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people.
MATALIN COCONUT CO. INC. V. MUNICIPAL COUNCIL

OF MALABANG
The basic defect in the plaintiffs position is his assumption that the
tax provided for in Commonwealth Act. No. 567 is a pure exercise of
the taxing power. Analysis of the Act, and particularly of section 6 will
show that the tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police
power.
The Court can take judicial notice of the fact that sugar production is
one of the great industries of our nation, sugar occupying a leading
position among its export products; that it gives employment to
thousand of laborers in fields and factories; that it is a great source of
the states wealth, is one of the important sources of foreign
exchange needed by our government, and is thus pivotal in the plans
of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to find
that the general welfare demanded that the sugar industry should be
stabilized in turn; and in the wide field of its police power, the
lawmaking body could provide that the distribution of benefits there
from be readjusted among its components to enable it to resist the
added strain of the increase in taxes that it had to sustain.
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TAXATION I REVIEWER
ATTY. C. VILLENA
NTC V. CA
The power to tax is a legislative power which under the

Constitution only Congress can exercise through the enactment of
laws. Accordingly, the obligation to pay taxes is a statutory liability.
It bears stressing that it is not the NTC that imposed such a fee. It is
the legislature itself. Since Congress has the power to exercise the
State inherent powers of police power, eminent domain, and
taxation, the distinction between police power and the power to tax
which could be significant if the exercising authority were mere
political subdivisions (since delegation by it to such political
subdivision of one power does not necessarily include the other),
would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. All that is to be
done would be to apply and enforce the law when sufficiently
definitive and not constitutional infirm
II.
TAXES
TAXES DEFINED
Taxes are the enforced proportional contributions from persons and
property levied by the law-making body of the State by virtue of
its sovereignty for the support of government and for public needs.
REPUBLIC V. PHILIPPINE RABBIT BUS LINE INC.

(1970)
A tax refers to a financial obligation imposed by a state on persons,
whether natural or juridical, within its jurisdiction, for property owned,
income earned, business or profession engaged in, or any such
activity analogous in character for raising the necessary revenue to
take care of the responsibilities of government.
A tax is neither a penalty that must be satisfied nor a liability arising
from contract. Much less can it be confused or identified with a
license or a fee as a manifestation of an exercise of the police power.
ESSENTIAL CHARACTERISTIC OF TAXES

1. It is levied by the law-making body of the State
2.
It is an enforced contribution
A tax is not a voluntary payment or donation. It is not
dependent on the will or contractual assent, express or implied, of
the person taxed. Taxes are not contracts but positive acts of the
government.
3.
It is generally payable in money

Tax is a pecuniary burden an exaction to be discharged alone
in the form of money which must be in legal tender, unless
qualified by law such as RA 304 which allows backpay certificates
as payment of taxes.
4.
It is proportionate in character It is ordinarily based on the

taxpayers ability to pay.
5.
It is levied n persons or property A tax may also be

imposed on acts, transaction, rights or privileges.
6.
It is levied for public purpose or purposes Taxation

involves, and a tax constitutes, a burden to provide income for
public purposes.
7.
It is levied by the State which has jurisdiction over the

persons or property The persons, property or services to be
taxed must be subject to the jurisdiction of the taxing state.
8.
It is paid at regular periods or intervals.
TAXES VS. DEBT

DEBT is based upon juridical tie, created by law, contracts,
delicts or quasi-delicts between parties for their private interest or
resulting from their own acts or omissions.
TAXES
DEBT
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BASIS
Law
FAILURE TO PAY
Failure to pay tax

(other than poll tax)
may result in
imprisonment
Generally payable in
money
Not assignable
Not subject to
compensation or
set-off
Tax does not draw
interest unless
delinquent
Imposed by public
authority
MODE OF
PAYMENT
ASSIGNABILITY
PAYMENT
INTEREST
AUTHORITY
Contract or
judgment
No imprisonment for
nonpayment of debt
Payable in money,
property or service
Assignable
May be subject to
compensation or
set-off
Debt draws interest
if stipulated or
delayed
Imposed by public
individuals
Caltex Philippines v. COA

A taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract, or judgment as is allowed to be
set-off
FRANCIA V. IAC, 162 SCRA 753

There can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government. A
claim for taxes is not such a debt, demand, contract or judgment as
is allowed to be set-off under the statures of set-off, which are
construed uniformly in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality
to one who is liable to the state or municipality for taxes. The general
rule based on grounds of public policy is well settled that no set-off
admissible against demands for taxes levied for general or local

government purposes. The reason for this is that taxes are not in the
nature of contract between the party but grow out of duty to and are
the positive acts of the government to the making and enforcing of
which, the personal consent of individual taxpayers is not required.
PHILEX MINING CORP. V. CIR AND CTA (1998)

Tax cannot be the subject for compensation for simple reason that
the government and the taxpayer are not mutual creditors and
debtors of each other. Debts are due in the government in its
corporate capacity while taxes are due to the government in its
sovereign capacity.
A taxpayer cannot refuse to pay his taxes when they fall dues simply
because he has a claim against the government that the collection of
the tax is contingent on the result of the lawsuit it filed against the
government. A person cannot refuse to pay tax on the ground that
the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a
lawsuit against the government.
TAXES VS. LICENSE FEE

LICENSE OR PERMIT FEE is a charge imposed under the police
power for the purpose of regulation.
TAXES
LICENSE FEE
Based on the power of Taxation

Purpose is revenue
Amount is unlimited
Based on police power

Purpose is regulation
Amount is limited to the cost of:
1. Issuance of license
2. Inspection and
surveillance
Normally paid before the
commencement of business
License fee may be with or
without consideration
Normally paid at the start of

business
Taxes being the lifeblood of the
State, cannot be surrendered
except for lawful consideration
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TAXATION I REVIEWER
ATTY. C. VILLENA
Nonpayment does not make the
business illegal but may be a
ground for criminal prosecution
TAXES
Nonpayment makes the

business illegal
PROGRESSIVE DEVELOPMENT CORPORATION V. QC, 172

SCRA 629
To be considered a license fee, the imposition must relate to an
occupation or activity that so engages the public interest in health,
morals, safety and development as to require regulations for the
protection and promotion of such public interest; the imposition must
also bear a reasonable relation to the probable expenses of the
regulations, taking into account not only when the costs of direct
regulations but also its incidental consequences as well. The gross
receipts from stall rentals have been used only as a basis by
computing the fees or taxes due to the city to cover the latters
administrative expenses. The use of the gross amount if stall rentals,
as basis for the determination of the collectible amount of license tax,
does not by itself convert or render the license tax into a prohibited
city tax on income. The aggregate volume of foodstuffs and related
items sold in such market, the greater extent and frequency of
inspection and supervision that may be reasonably required in the
interest of the buying public.
PAL ESSO V. CIR, 175 SCRA 149

A tax is levied to provide revenue for government operations, while
the proceeds of the margin fee is reapplied to strengthen our
countrys international reserves. The margin fee was imposed by the
State in the exercise of its police power and not the power of
taxation.
TAX VS. SPECIAL ASSESSMENT
SPECIAL ASSESSMENT an enforced proportional contribution

from owners of lands especially or peculiarly benefited by public
improvements
SUBJECT
LIABILITY
BASIS
APPLICATION
Taxes are levied on

land, persons,
property, income,
business etc.
Personal liability of
the taxpayer
Based on necessity
and partially on
benefits
General application
SPECIAL
ASSESSMENT
Levied on land
Cannot be made a
personal liability of
the person assessed
Based solely on
benefits
Special application
only as to particular
time and place
APOSTOLIC PREFECT V. TREASURER OF BAGUIO, 71

PHIL 547
While the word "tax" in its broad meaning, includes both general
taxes and special assessments, and in a general sense a tax is an
assessment, and an assessment is a tax, yet there is a recognized
distinction between them in that assessment is confined to local
impositions upon property for the payment of the cost of public
improvements in its immediate vicinity and levied with reference to
special benefits to the property assessed. The differences between a
special assessment and a tax are that (1) a special assessment can
be levied only on land; (2) a special assessment cannot (at least in
most states) be made a personal liability of the person assessed; (3)
a special assessment is based wholly on benefits; and (4) a special
assessment is exceptional both as to time and locality. The
imposition of a charge on all property, real and personal, in a
prescribed area, is a tax and not an assessment, although the
purpose is to make a local improvement on a street or highway. A
charge imposed only on property owners benefited is a special
assessment rather than a tax notwithstanding the statute calls it a
tax.
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TAX VS. TOLLS
TOLL sum of money for the use of something, generally applied

to the consideration which is paid for the use of a road, bridge of
the like of a public nature.
TAXES
TOLL
Taxes are levied for the support

of the government
The amount of tax is
determined by the sovereign
Tolls are compensation for the

use of anothers property
The amount of the toll is
determined by the cost of the
property or of the improvement
Imposed by the government or
private individuals
May only be imposed by the

State
DIAZ AND TIMBOL V. THE SECRETARY OF FINANCE ET

AL. (2011)
Toll way fees are not taxes. They are not assessed and collected by
the BIR and do not go to the general coffers of the government.
A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public
expenditures. Toll fees on the other hand, are collected by private toll
way operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the toll
ways, as well as to assure them a reasonable margin of income.
Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly
treated as a tax. Taxes may be imposed only by the government
under its sovereign authority, toll fees may be demanded by either
the government or private individuals or entities, as an attribute of
ownership.
Enforced proportional
contribution from persons and
property
Intended to raise revenue

May be imposed only by the
government
Sanction imposed as a
punishment for violation of law
or acts deemed injurious;
violation of tax laws may give
rise to imposition of penalty
Designed to regulate conduct
May be imposed by the
government or private
individuals or entities.
NDC V. CIR, 151 SCRA 472

The Japanese shipbuilders were liable on the interest remitted to
them under Section 37 of the Tax Code. The NDC is not the one
taxed. The imposition of deficiency taxes on the NDC is a penalty for
its failure to withhold the same from the Japanese shipbuilders. Such
liability is imposed by Section 53 (c) of the Tax Code. NDC was
remiss in the discharge of its obligation as the withholding agent of
the government and so should be liable for its omission.
TAX VS. CUSTOM DUTY

TARIFF as duties payable on goods imported or exported (PD No.
230); as the system or principle of imposing duties on the
importation/exportation of goods.
TAX
All-embracing term to include
various kinds of enforced
contributions upon persons for
the attainment of public
purposes
CUSTOM DUTY/TARIFF
A kind of tax imposed on
articles which are traded
internationally.
TAX VS. PENALTY
PENALTY any sanctions imposed as a punishment for violation of

laws or acts deemed injurious.
TAX
PENALTY
II. CLASSIFICATION OF TAXES

A.
AS TO SUBJECT MATTER
Page | 10
TAXATION I REVIEWER
ATTY. C. VILLENA
1.
2.
3.
PERSONAL, POLL OR CAPITATION tax of a fixed amount

imposed upon persons residing within a specified territory,
whether citizens or not, without regard to their property,
occupation or business in which they may be engaged (e.g.
community tax)
PROPERTY tax imposed on property, whether personal or
real, in proportion either to its value of some other
reasonable rule of apportionment (e.g. real property tax)
EXCISE OR PRIVILEGE charge imposed upon performance
of an act, the enjoyment of a privilege or engaging in an
occupation, profession or business (e.g. donors tax, estate
tax, VAT, income tax)
on strict interpretation does not apply in the case of exemptions in

favor of government political subdivision or instrumentality. In the
case of property owned by the state or a city or other public
corporations, the express exception should not be construed with
the same degree of strictness that applies to exemptions contrary
to the policy of the state, since as to such property exception is
the rule and taxation the exception.
C. AS TO HOW AMOUNT IS DETERMINED

1.
B. AS TO WHO BEARS THE BURDEN AND INCIDENCE

1.
2.
DIRECT - tax which is exacted from the very persons

primarily liable to pay them; the taxpayer cannot shift the
burden of its payment to another. The liability for the
payment of the tax (incidence) as well as the impact (or
burden) of the tax falls on the same person (e.g. income tax,
community tax)
INDIRECT tax wherein the incidence or liability for the
nonpayment falls on one person but the burden case be
shifted or passed on to another (e.g. VAT, percentage tax)
a. The Constitution has been interpreted to mean
simply that direct taxes are to be preferred and as
much as possible, indirect taxes should be
minimized.
The imposition of indirect taxes is not a violation of the
principle that taxes are personal liabilities, the payment of
which cannot be transferred to another person. When the
seller passes on the tax to his buyer, he is only shifting the
tax burden (not the liability to pay it) to the purchaser as
part of the costs of the goods sold or services rendered.
MACEDA V. MACARAIG (1993)

NAPOCOR is a non-profit public corporation created for the general
good and welfare, and wholly owned by the government of the
Republic of the Philippines. It is recognized principle that the rule
2.
D.
1.
2.
SPECIFIC TAXES sec. 129

- tax of a fixed amount imposed by the head or number or
by some standard of weight or measurement; it requires no
valuation other than a listing or classification of the objects
to be taxed (e.g. tax on fermented liquors, cigars, distilled
spirits)
AD VALOREM TAXES sec. 129
tax of a fixed portion of the value of the property with
respect to which the tax is assessed; it requires the
intervention of assessors or appraisers to estimate the value
of such property before the amount due from each taxpayer
can be determined (e.g. real property tax)
AS TO PURPOSE
GENERAL, FISCAL OR REVENUE - tax imposed for the

general or ordinary purposes of the government, to raise
revenue for the governmental needs (e.g. income tax)
SPECIAL, REGULATORY, OR SUMPTUARY tax imposed for a
special purpose, to achieve some social or economic ends
irrespective of whether revenue is actually raised or not (e.g.
countervailing and dumping duties under the TCC.
E. AS TO SCOPE
1.
2.
NATIONAL levied by the National government (e.g. NIRC

taxes, custom duties) SENATE
LOCAL TAXES levied by the local government (e.g. real
property tax, occupation tax) city council
F. As to graduation or
rate
Page | 11

1.
PROGRESSIVE OR GRADUATED the tax rate increases as

the tax base or bracket increases (e.g. income tax on
individuals, estate tax and donors tax)
REGRESSIVE the tax rate decreases as the tax base
increases not prohibited
PROPORTIONATE the tax rate is bases on a fixed
percentage of the amount of the property, receipts or other
bases to be taxed (e.g. real property tax, VAT and 3%
percentage tax)
2.
3.
IV. DOCTRINES IN TAXATION

1. PROSPECTIVITY OF LAWS
This principle provides that a tax bill must only be

applicable and operative after becoming a law.
EX POST FACTO LAW is NOT applicable for tax purposes.
However, when it comes to civil penalties like fines and
forfeiture (except interest), tax laws may be applied
retroactively unless it produces harsh and oppressive
consequences which violate the taxpayers constitutional
rights regarding equity and due process.
HYDRO RESOURCES V. CA (1990)

In general, tax laws are not retroactive in nature. Taxing authorities
must be applied prospectively, EXCEPT, by express provision of the
law
2.
IMPRESCRIPTIBILITY OF TAXES
Unless otherwise provided by the tax law itself, taxes in

general are not cancelable
Although the NIRC provides for the limitation in the
assessment and collection of taxes imposed, such
prescriptive period will only be applicable to those taxes
that where returnable. The prescriptive period shall start
from the time the taxpayer files the tax return and
declares his liability
CIR V. AYALA SECURITIES CORP. (1980)

In the absence of express statutory provision, the right of the
government to assess unpaid taxes is imprescriptible.
3.
Double Taxation is the imposition by the same taxing body of two

taxes on what is essentially the same thing; the imposition of two
taxes on the same property during the same period and for the
same taxing purpose.
VILLANUEVA V. ILOILO CITY (1968)

The rule does not require that taxes for the same purpose should be
imposed in different territorial subdivisions at the same time. So long
as the burden of tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality
and uniformity is accomplished. The presumption that tax statutes
are intended to operate uniformly and equally were not overthrown
herein.
SANCHEZ V. CIR (1955)

Separated tax levied upon a business or occupation and the
property used therein does not amount to double taxation.
A license tax may be levied upon a business or occupation
although the land or property used therein is subject to property
tax; and the State may collect an ad valorem tax on property used
in a calling, and at the same time imposes a license tax on the
pursuit of that calling, the imposition of the latter kind of tax being
in no sense a double tax.
PUNSALAN V. MUNICIPAL BOARD OF MANILA

95 PHIL 46
The Legislature may select what occupations shall be taxed , and in
the exercise of that discretion it may tax all, or it may select for
taxation certain classes and leave the others untaxed. It is not for the
courts to judge what particular cities or municipalities should be
empowered to impose occupation taxes in addition to those imposed
by the National Government.
The argument against double taxation may not be invoked where
one tax is imposed by the state and the other is imposed by the city,
it being widely recognized that there is nothing inherently obnoxious
in the requirement that license fees or taxes be exacted with respect
DOUBLE TAXATION
Page | 12
TAXATION I REVIEWER
ATTY. C. VILLENA
to the same occupation, calling or activity by both the state and the
political subdivision thereof.
that the subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is liable.
THE CITY OF MANILA V. COCA-COLA BOTTLERS

PHILIPPINES (2009)
b.
When a municipality or city has already imposed a business tax on

manufacturers, etc. of liquors, distilled spirits, wines, and any other
article of commerce, said municipality or city may no longer subject
the same manufacturers, etc. to a business tax of the same Code.
4.
METHODS OF AVOIDING THE OCCURRENCE OF

DOUBLE TAXATION
a.
Tax treaty formally known as convention or agreement

for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income (and on
capital) could be defined in terms of its purpose. First, a
tax treaty is intended to promote international trade and
investment in several ways, the most important of which is
by allocating taxing jurisdiction between the Contracting
States so as to eliminate or mitigate double taxation of
income. Second, a tax treaty is intended to permit the
Contracting States to better enforce their domestic laws so
as to reduce tax evasion. These purposes are in fact
incorporated in the title and the preamble
CIR V. SC JOHNSON & SONS (1999)

In negotiating tax treaties, the underlying rationale for reducing the
tax rate is that the Philippines will give up a part of the tax in the
expectation that the tax given up for this particular investment is not
taxed by the other country
If the rates of tax are lowered by the state of source (Philippines),
there should be a concomitant commitment on the part of the state of
residence (US) to grant some form of tax relief, whether this be in the
form of tax credit or exemption.
The essence of the principle is to allow the taxpayer in one state to
avail of more liberal provisions granted in another tax treaty to which
the country of residence of such taxpayer is also a party provided
TAX CREDIT -- An amount allowed as a deduction of the

Philippine Income tax on account of income taxes paid or
incurred to foreign countries. It is given to a taxpayer in
order to provide a relief from too onerous a burden of
taxation in case where the same income is subject to a
foreign income tax and the Philippine Income tax.
WHO CAN CLAIM TAX CREDIT

1)
Citizens of the Philippines
2)
Domestic corporations
CIR V. LEDNICKY (1964)

The laws intent is that the right to deduct income taxes paid to
foreign government from the taxpayers gross income is given only
as an alternative or substitute to his right to claim a tax credit for
such foreign income taxes; so that unless the alien resident has a
right to claim such tax credit if he so chooses, he is precluded from
deducting the foreign income taxes from his gross income. The
purpose of the law is to prevent the taxpayer from claiming twice
the benefits of his payment of foreign taxes, by deduction from
gross income and by tax credit.
CHAPTER II LIMITATION TO THE POWER OF

TAXATION
I.
INHERENT LIMITATIONS Proceed from the very nature

of the taxing power itself. They are otherwise known as the
elements or characteristics of taxation (SPINE)
1. Territoriality or SITUS
2. PUBLIC purpose
3. INTERNATIONAL comity
4. NON-DELEGABILITY of the taxing power
5. EXEMPTION of the government
Page | 13

1.
A violation of the inherent limitations constitutes taking without
due process of law (Vitug and Acosta, Tax Law and Jurisprudence,
p. 4, citing Pepsi Cola v. Municipality of Tanauan, 69 SCRA 460)
A.
PUBLIC PURPOSE The proceeds of the tax must be used
for:
(1) The support of the State; or
(2) Some recognized object of government or directly to
promote the welfare of the community (Vitug and
Acosta, Tax Law and Jurisprudence, p. 5)
o The legislature is without power to appropriate
public revenues for anything but a public purpose
(Sababan, Tax Law Review, p. 5)
o It is the essential character of the direct object of
the expenditure which must determine its validity.
Incidental advantage to the public or the State,
which results from the promotion of private
interests, does not justify their aid by the use of
public money (Pascual v. Secretary of Public Works
et al, G.R. no L-10405, December 29, 1960)
o Congress determines the public purpose for which
a tax law is enacted. However, this will not prevent
the court from questioning the propriety of such
statute on the ground that the law enacted is not
for a public purpose; but once it is settled that the
law is for a public purpose, the court may no
longer inquire into the wisdom, expediency or
necessity of such tax measure.
NOTE: if the tax measure if not for public purpose, the act
amounts to confiscation of property.
TAX IS CONSIDERED FOR PUBLIC PURPOSES WHEN
1. It is for the welfare of the nation and/or for greater portion
of the population
2. It affects the area as a community rather than as individuals
3. It is designed to support the services of the government for
some of its recognized objects
TESTS TO DETERMINE PUBLIC PURPOSE
DUTY TEST Whether the thing to be furthered by the
appropriation of public revenue is something which is the

duty of the state as government to provide
NOTE: The term public purpose is not defined. It is an elastic
concept that can be hammered to fit modern standards.

Jurisprudence states that public purpose should be given a
broad interpretation. It does not only pertain to those purposes
which are traditionally viewed as essentially government
functions, such as building roads and delivery of basic services,
but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation
of illegal settlers, low-cost housing and agrarian reform (Planters
Products Inc v. Fertiphil Corp, G.R. no 166006, March 14, 2008)
2.
PROMOTION OF GENERAL WELFARE TEST whether

the proceeds of the tax will directly promote the welfare of
the community in equal measure (Aban, Law of Basic
Taxation, P. 53-54)
PRINCIPLES RELATIVE TO PUBLIC PURPOSE

1.
2.
Tax revenue must not be used for purely private purposes or

for the exclusive benefit of private persons
Inequalities resulting from the singling out of one particular
class for taxation or exemption infringe no constitutional
limitation because the legislature is free to select the
subjects of taxation.
NOTE: Legislature is not required to adopt a policy of all or none

for the Congress has the power to select the object of taxation
(Lutz v. Araneta, G.R. no L-7859, December 22, 1955)
3.
4.
An individual taxpayer need not derive direct benefits from

tax
Public purpose is continually expanding. Areas formerly left
to private initiative now lose their boundaries and may be
undertaken by the government if it is to meet the increasing
social challenges of the times
Page | 14
TAXATION I REVIEWER
ATTY. C. VILLENA
5.
The public purpose of law must exist at the time of its

enactment. (Pascual v. Secretary of Public Works, G.R. no L10405, December 29, 1960)
PASCUAL V. SECRETARY OF PUBLIC WORKS, 110 PHIL

331 (1960)
The right of the legislature to appropriate funds is correlative with its
right to tax, under constitutional provisions against taxation except
for public purposes and prohibiting the collection of a tax for one
purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than a public
purpose. The validity of a statute depends upon the powers of
Congress at the time of its passage or approval, not upon events
occupying, or acts performed, subsequently thereto, unless the latter
consist of an amendment of the organic law, removing, with
retrospective operation, the constitutional limitation infringed by said
statute. Herein, inasmuch as the land on which the projected feeder
roads were to be constructed belonged to Senator Zulueta at the
time RA 920 was passed by Congress, or approved by the President,
and the disbursement of said sum became effective on 20 June 1953
pursuant to Section 13 of the Act, the result is that the appropriating
sough a private purpose and hence, null and void.
TIO V. VIDEOGRAM REGULATORY BOARD, 151 SCRA

208 (1987)
Taxation has been made the implement of the state's police power.
The levy of the 30% tax is for a public purpose. It was imposed
primarily to answer the need for regulating the video industry,
particularly because of the rampant film piracy, the flagrant violation
of intellectual property rights, and the proliferation of pornographic
video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.
We find no clear violation of the Constitution which would justify us in
pronouncing Presidential Decree No. 1987 as unconstitutional and
void. While the underlying objective of the DECREE is to protect the
moribund movie industry, there is no question that public welfare is at
bottom of its enactment, considering "the unfair competition posed by

rampant film piracy; the erosion of the moral fiber of the viewing
public brought about by the availability of unclassified and
unreviewed video tapes containing pornographic films and films with
brutally violent sequences; and losses in government revenues due
to the drop in theatrical attendance, not to mention the fact that the
activities of video establishments are virtually untaxed since mere
payment of Mayor's permit and municipal license fees are required to
engage in business."
TAXING POWER IS INHERENTLY LEGISLATIVE

GENERAL RULE: The power to tax is exclusively vested in the
B.
legislative body; hence, it may not be delegated (Delegata

potestas non potest delegari).
The power to tax is inherently legislative; this is based on

the principle that taxes are a grant of the people who are
taxed, and the grant must be made by the immediate
representatives
The Congress contemplates the power to determine the kind,

object, extent, amount, coverage and situs of tax
EXCEPTIONS:
1. DELEGATION TO LOCAL GOVERNMENT Refers to the
power of local units to create its own sources of revenue and

to levy taxes, fees and charges (Art X, Sec 5, 1987
Constitution)
QUEZON CITY V. BAYANTEL, G.R. NO 162015 (2006)

The power to tax is primarily vested in the Congress. However, it
may be delegated to the local government units subject to the
guidelines and limitation as the Congress may provide, consistent
with the basic policy of local autonomy. It is understood, however,
that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must
be within the jurisdiction of the local unit to pass.
Page | 15

Indeed, the grant of taxing powers to local government units under

the Constitution and the LGC does not affect the power of Congress
to grant exemptions to certain persons, pursuant to a declared
national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions
on municipal taxing powers, doubts must be resolved in favor of
municipal corporations.
2.
DELEGATION TO THE PRESIDENT The authority of

the President to fix tax tariff rates, import or export quotas,
tonnage and wharfage dues, or other duties and imposts (Art
VI, Sec 28(2), 1987 Constitution)
3.
DELEGATION TO ADMINISTRATIVE AGENCIES
When the delegation relates merely to administrative

implementation that calls for some degree of discretionary
powers under sufficient standards expressed by law or
implied from the policy and purposes of the Act.
a. Authority of the Secretary of Finance to promulgate the
necessary rules and regulations for the effective
enforcement of the provisions of the law (Sec 244, RA
8424)
b. The Secretary of Finance may upon the recommendation
of the Commissioner, require the withholding of a tax on
the items of income payable (Sec 57, RA 8424)
NOTE: Technically, this does not amount to a delegation of the
powers to tax because the questions which should be determined
by Congress area already answered by Congress before the tax
law leaves Congress.
PHIL COMM SATELLITE CORP V. ALCUAZ, 180 SCRA

218 (1989)
Fundamental is the rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is
provided and that the legislature in making the delegation has
prescribed the manner of the exercise of the delegated power.
Therefore, when the administrative agency concerned, respondent
NTC in this case, establishes a rate, its act must both be non-
confiscatory and must have been established in the manner

prescribed by the legislature; otherwise, in the absence of a fixed
standard, the delegation of power becomes unconstitutional. In case
of a delegation of rate-fixing power, the only standard which the
legislature is required to prescribe for the guidance of the
administrative authority is that the rate be reasonable and just.
However, it has been held that even in the absence of an express
requirement as to reasonableness, this standard may be implied.
NTC, in the exercise of its rate-fixing power, is limited by the

requirements of public safety, public interest, reasonable feasibility
and reasonable rates, which conjointly more than satisfy the
requirements of a valid delegation of legislative power, as provided
for in the provisions of EO 546 and 196.
SMITH BELL & CO V. CIR, G.R. NO L28271 (1975)

There can be no uncertainty that the purpose of the provision is to
impose a specific tax on wines and imitation wines. The first clause
of Section 134 states so in plain language. The sole object of the
sub-enumeration that follows is in turn unmistakably to prescribe the
amount of the tax specifically to be paid for each type of wine and/or
imitation wine so classified and described. The section therefore
clearly and indubitably discloses the legislative will, leaving to the
officers charged with implementation and execution thereof no more
than the administrative function of determining whether a particular
kind of wine or imitation wine falls in one class or another. In the
performance of this function, the internal revenue officers are
demonstrably guided by the sound established practices and
technology of the wine industry, an industry as aged and widely
dispersed as one can care to know.
Page | 16
TAXATION I REVIEWER
ATTY. C. VILLENA
In the case at bar, the Commissioner had the petitioner's wine
examined and analyzed. The petitioner, on the other hand, does not
appear to have made a similar effort. On the bases of the test thus
made and the authoritative and published work on the subject of
wines, the Commissioner ordered the corresponding deficiency
assessment to be issued. Having chosen to engage in the wine
trading business, the petitioner is duty bound to know the kinds of
wine it deals in, particularly insofar as such knowledge may be
relevant to the proper appreciation of its tax liabilities, and cannot
take comfort in its pretended ignorance of what sparkling wine is.
C.
taxation is the place or authority that has the right to impose

and collect taxes (CIR v. Marubeni Corp, G.R. no 137377,
December 18, 2001)
GENERAL RULE: A state may not tax property lying outside its
borders or lay an excise or privilege tax upon the exercise or
enjoyment of a right or privilege derived from the laws of another
state and therein exercised or enjoyed (51 AM JUR 87-88)
REASONS FOR THE RULE:

1.
SCOPE OF LEGISLATIVE POWER IN TAXATION

1.
2.
3.
The determination of: (SAP-MAKS)

a. SUBJECTS of taxation (persons, property, occupation,
excises or privileges to be taxed, provided they are
within the taxing jurisdiction
b. AMOUNT or rate of tax
c. PURPOSES for which taxes shall be levied provided they
are public purposes
d. METHOD of collection
e. APPORTIONMENT of the tax (Whether the tax shall be of
general application or limited to a particular locality, or
partly general and partly local)
f. KIND of tax to be collected
g. SITUS of taxation
The grant of tax exemptions and condonations
The power to specify or provide for administrative as well as
judicial remedies (Phil Petroleum Corp v. Municaplity of
Pililla, G.R. no 85318, June 3, 1991)
NON-DELEGABLE LEGISLATIVE POWERS (SuPuRSiK)

1.
2.
3.
4.
5.
Selection of SUBJECT to be taxed

Determination of PURPOSES for which taxes shall be levied
Fixing the RATE or amount of taxation
SITUS of tax
Kind of tax
TERRITORIALITY or SITUS OF TAXATION Situs of
2.
Taxation is an act of sovereignty which could only be

exercised within a countrys territorial limits
This is the result of the concept that taxes are paid for the
protection and services provided by the taxing authority
which could not be provided outside the territorial
boundaries of the taxing State
FACTORS THAT DETERMINE SITUS (K-PRICE)

1.
2.
3.
4.
5.
6.
KIND or classification of the tax being levied

Situs of the thing or PROPERTY being taxed
CITIZENSHIP of the taxpayer
RESIDENCE of the taxpayer
Source of the INCOME taxed
Situs of the EXCISE, privilege, business, or occupation being
taxed
SITUS OF SUBJECTS OF TAX

1. PERSONS poll, capitation or community taxes are based
upon the residence of the taxpayer, regardless of the source
of income or location of the property of the taxpayer
2. PROPERTY
a.
b.
c.
Real property lex rei sitae or lex situs (where the

property is located)
Tangible personal property where the property is
physically located although the owner resides in
another jurisdiction (51 AM JUR 467)
Intangible personal property
Page | 17

GENERAL RULE: Mobilia sequuntur personam

(movables follow the person). The situs is the domicile
of the owner.
EXCEPTIONS:
d.
e.
f.
(1) When the property has acquired a business

situs in another jurisdiction; or
(2) When the law provides for the situs of the
subject of tax (e.g., see Sec 104 NIRC)
Income factors that determine the situs of income
tax (See Sec 23 NIRC)
(1) Nationality or citizenship of the taxpayer
(2) Residence or domicile of the taxpayer; and
(3) Source of the income
Excise or privilege (upon performance of an act or the
engaging in an occupation) depends upon the place
where the act is performed or occupation is engaged in
not upon the domicile of the person subject to the
excise nor upon the physical location of the property
and in connection with the act or occupation taxed
(Allied Thread v. City Mayor of Manila, G.R. no 40296,
November 21, 1984)
Gratuitous transfer the transmission of property from
a donor to a donee, or from a decedent to his heirs
may be subject to taxation in the state where the
transferor is(was) a citizen or resident, or where the
property is located in case of a non-resident
APPLICATION OF SITUS OF TAXATION

KIND OF TAX
SITUS
Personal or
Community tax
Residence or domicile of the

taxpayer
Real property tax
Location of property (Lex rei sitae)
Personal property tax
-tangible: where it is physically

located or permanently kept (Lex rei
sitae)
-intangible: subject to Sec. 104 of
the NIRC and the principle of
mobilia sequuntur personam
Business tax
Place of business
Excise or Privilege
tax
Where the act is performed or where

occupation is pursued
Sales tax
Where the sale is consummated
Income Tax
Consider
(1) citizenship,
(2) residence, and
(3) source of income (Sec. 42, 1997
NIRC)
Transfer tax
Residence or citizenship of the

taxpayer or location of property
Franchise Tax
State which granted the franchise
SITUS OF TAXATON OF INTANGIBLE PERSONAL

PROPERTY
GENERAL RULE: Domicile of the owner pursuant to the principle
of the mobilia sequuntur personam or movables follow the person.
EXCEPTIONS:
1.
When the property has acquired a business situs in another

jurisdiction;
2. When an express provision of the statute provide for another
rule.
Illustration: For purposes of estate and donors taxes, the
following intangible properties are deemed with a situs in the
Philippines:
(1) franchise which must be exercised in the Philippines;
(2) shares, obligations or bonds issued by any corporation
organized or constituted in the Philippines in accordance
with its laws;
(3) shares, obligations or bonds by any foreign corporation
eighty-five percent (85%) of the business of which is
located in the Philippines;
Page | 18
TAXATION I REVIEWER
ATTY. C. VILLENA
(4) shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines; and
(5) shares or rights in any partnership, business or industry
established in the Philippines. (Sec. 104, 1997 NIRC).
SITUS OF PERSONS
1) COMMUNITY TAX place where the person resides
2) INCOME TAX
a) CITIZENSHIP, or the country of which he is a
citizen (National theory) applied to RC, DC on
sources of income derived within and without the
Philippines
b) LEGAL RESIDENCE (Domicillary theory)
applied to NRC, NRA, NRFC on sources derived
within the Philippines
c) Place where the income is derived (Source)
applied to RA, RFC on sources of income derived
i.
INTEREST Interest on sources derived
from the Philippines (Sec 42.A.1 NIRC)
EXCEPTION: Other than those in Sec
42.A.1 NIRC Sources derived outside of
the Philippines
ii.
DIVIDENDS Dividends from DC and FCs
on sources derived within the Philippines
iii.
SERVICES Compensation for services
personally performed in the Philippines
(Sec 42.A.3 NIRC)
EXCEPT: those performed outside of the
Philippines (Sec 42.C.3 NIRC)
CIR V. BAIER-NICKEL, G.R. NO 153793 (2006)

The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it is the
place where the labor or service was performed that determines the
source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal
service with the residence of the payor or the place of payment of the
income. The decisive factual consideration here is not the capacity in
which respondent received the income, but the sufficiency of
evidence to prove that the services she rendered were performed in
Germany.
CIR V. MARUBENI CORP, G.R. NO 137377 (2001)
Marubeni was able to prove that not all its work was performed in
the Philippines because some of them were completed in Japan in
accordance with the provisions of the contracts. All services for the
design, fabrication, engineering and manufacture of the materials
and equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside
Philippines taxing jurisdiction and are therefore not subject to
contractors tax.
iv.
3)
RENTALS AND ROYALTIES rentals and

royalties from properties located in the
Philippines
EXCEPTION: rentals and royalties from
properties located outside the Philippines
BUSINESS, OCCUPATION, TRANSACTION Where the

business is done, or the occupation is engaged in
MANILA ELECTRIC CO V. YATCO, 69 PHIL 89 (1939)

Where the insured against also within the Philippines, the risk
insured against also within the Philippines, and certain incidents of
the contract are to be attended to in the Philippines, such as,
payment of dividends when received in cash, sending of an unjuster
into the Philippines in case of dispute, or making of proof of loss, the
Commonwealth of the Philippines has the power to impose the tax
upon the insured, regardless of whether the contract is executed in a
foreign country and with a foreign corporation. Under such
Page | 19

circumstances, substantial elements of the contract may be said to

be so situated in the Philippines as to give its government the power
to tax. And, even if it be assumed that the tax imposed upon the
insured will ultimately be passed on the insurer, thus constituting an
indirect tax upon the foreign corporation, it would still be valid,
because the foreign corporation, by the stipulations of its contract,
has subjected itself to the taxing jurisdiction of the Philippines. After
all, Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but reasonable that
the latter should pay a just contribution therefor. It would certainly be
a discrimination against domestic corporations to hold the tax valid
when the policy is given by them and invalid when issued by
foreign corporations.
4) TRANSFER OF PROPERTY BY DEATH OR GIFT
a.
b.
ESTATE TAX residence of the decedent at the time of his

death
DONORS TAX residence of the donor at the time of the
donation
WELLS FARGO BANK V. COLLECTOR, 70 PHIL 325

(1940)
Inheritance tax is not a tax on property, but upon transmission by
inheritance. Originally, the settled law is that intangibles have only
the domicile of the decedent at the time of his death as the situs for
the purpose of inheritance tax (mobilia sequuntur personam).
However, such doctrine has been decreed as a mere "fiction of law
having its origin in considerations of general convenience and public
policy, and cannot be applied to limit or control the right of the state
to tax property within its jurisdiction," and must "yield to established
fact of legal ownership, actual presence and control elsewhere, and
cannot be applied if to do so would result in inescapable and patent
injustice."
certificates of stock have remained in this country up to the time

when the deceased died in California, and they were in possession
of one Syrena McKee, secretary of the Benguet Consolidated Mining
Company, to whom they have been delivered and indorsed in blank.
This endorsement gave Syrena McKee the right to vote the
certificates at the general meetings of the stockholders, to collect
dividends, and dispose of the shares in the manner she may deem
fit, without prejudice to her liability to the owner for violation of
instructions. For all practical purposes, then, Syrena McKee had the
legal title to the certificates of stock held in trust for the true owner
thereof. In other words, the owner residing in California has extended
here her activities with respect to her intangibles so as to avail
herself of the protection and benefit of the Philippine laws.
Accordingly, the jurisdiction of the Philippine Government to tax must
be upheld
5)
SALE OF PERSONAL PROPERTY Where the sale is

consummated or perfected
MULTIPLICITY OF SITUS Multiplicity of situs, or the

taxation of the same income or intangible subjects in several
taxing jurisdictions, arises from various factors:
1.
The variance in the concept of domicile for tax purposes;
2.
Multiple distinct relationships that may arise with respect to
intangible personal property; or
3.
The use to which the property may have been devoted all of
which may receive the protection of the laws of jurisdictions
other than the domicile of the owner thereto.
REMEDIES AGAINST MULTIPLICITY OF SITUS

Tax laws and treaties with other States may:
1. Exempt foreign nationals from local taxation and local
nationals from foreign taxation under the principle of
reciprocity
2. Credit foreign taxes paid from local taxes due
3. Allow foreign taxes as deduction from gross income; or
4. Reduce the Philippine income tax rate
In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled therein. And besides, the
Page | 20
TAXATION I REVIEWER
ATTY. C. VILLENA
D.
INTERNATIONAL COMITY The respect accorded by

nations to each other because they are sovereign equals. It
refers to the respect. Thus, the property or income of a foreign
state may not be the subject of taxation by another state.
NOTE: RA 7160 expressly prohibits the LGUs from levying tax

from the national government, its agencies and instrumentalities
and other LGUs (see Basco v. PAGCOR, G.R. no 91649, May 14,
1991)
BASIS: Sec 2, Art II of the 1987 Constitution which provides that

the Philippines adopts the generally accepted principle of
international law as part of the land of the land
REASONS:
(1) In par parem non habet imperium, or as between equals

there is no sovereign (Doctrine of Sovereign Equality)
(2) The rule of international law that foreign government may
not be sued without its consent. Thus, it would be useless to
imposed a tax which could not be collected
(3) The concept that when a foreign sovereign enters the
territorial jurisdiction of another, it does not subject itself to
the jurisdiction of the other
E. EXEMPTION OF THE GOVERNMENT

GENERAL RULE: Properties of the national government as well
as those of the local government units are NOT subject to tax,
otherwise, it will result in the absurd situation of the government
taking money from one pocket and putting it in another (Cooley on
Taxation, Sec 621, 4th ed, as cited in Board of Assessment Appeals
of Laguna v. CTA, G.R. no L-18125, May 31, 1963)
As a matter of PUBLIC POLICY, property of the State and its
municipal subdivisions devoted to government uses and purposes
is generally deemed to be exempt from taxation although no
express provision in the law is made therefor (51 AM JUR 503)
OTHER REASONS FOR THE RULE:

(1) So that the functions of the government shall not be unduly
impeded (51 AM JUR 550-51)
(2) To reduce the amount of money that has to be handled by
the government in the course of its operations (Maceda v.
Macaraig, G.R. no 88291, June 8, 1963)
HOWEVER, the Constitution is silent on whether the Congress is

prohibited from taxing the properties of the agencies of the
government. Therefore, nothing can prevent Congress from
decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to
tax (MCIAA v. Marcos, G.R. no 120082, September 11, 1996)
Pursuant to the provisions of the NIRC, the national

government may levy income tax upon corporations,
agencies and instrumentalities owned or controlled by the
government subject to exceptions provided therein (Sec
27(c) NIRC). However, under Sec 32(B)(7)(b) of the NIRC,
income derived by the government from any public utility
and from the exercise of any essential governmental
functions are exempt from income tax
UNLESS OTHERWISE PROVIDED BY LAW, the exemption

applies only to government entities through which the
government immediately and directly exercises its
government powers (Infantry Post Exchange v. Posadas,
G.R. no 33403, September 4, 1930)
II.
CONSTITUTIONAL LIMITATIONS
CONSTITUTIONAL LIMITATIONS restrictions imposed by

the Constitution
A. General or indirect
B. Specific or direct
1. DUE PROCESS CLAUSE

Page | 21

b.
ARTICLE III CONSTITUTION, SECTION 1:

No person shall be deprived of life, liberty or property without
due process of law, x x x.
Any deprivation of life, liberty or property is with due process if

it is done under the authority of a valid law and after
compliance with fair and reasonable methods or procedures
prescribed. The power to tax can be exercised only for a
constitutionally valid public purpose and the subject of taxation
must be within the taxing jurisdiction of the state.
REQUISITES:
1.
2.
3.
4.
The interest of the public generally as distinguished from those

of a particular class require the intervention of the state;
The means employed must be reasonably necessary to the
accomplishment for the purpose and not duly oppressive;
The deprivation was done under the authority of a valid law or
of the constitution; and
The deprivation was done after compliance with fair and
reasonable method of procedure prescribed by law.
Due process in taxation REQUIRES:

a. Tax must be for a public purpose;
b. Imposed within territorial jurisdiction;
c. No arbitrariness or oppression in assessment or collection.
Due process in taxation DOES NOT REQUIRE:
a. Determination through judicial inquiry of the property

subject to tax or the amount of tax to be imposed;
b. Notice and hearing as of amount of the tax or the
manner of apportionment.
Any deprivation is with due process if it is

done:
a.
Under the authority of a law that is valid or under the

Constitution itself, and that it must be reasonable, fair and
just (Substantive Due Process)
After compliance with fair and reasonable methods of

procedure prescribed by law, with notice or hearing, or at
least an opportunity to be heard whenever necessary.
(Procedural Due Process)
In a string of cases, the SC held that in order that due process

of law must not be done in an arbitrary, despotic, capricious or
whimsical manner.
COM. OF CUSTOMS V. CTA & CAMPOS RUEDA CO., 152

SCRA 603
Appraisers of the Bureau of Customs are given ample leeway in
determining the correct customs duties under Section 1405 of the
Tariff and Customs Code, Section 201 of the same Code, which
prescribes the criteria for the determination of the dutiable values of
imported articles, has not been complied with. What is more,
administrative proceedings are not exempt from the operation of due
process requirements one of which is that a finding by an
administrative tribunal should be supported by substantial evidence
presented at the hearing or at least contained in the records or
disclosed to the parties affected. In this case the "Alert Notices" on
which petitioner based its re-appraisal were not disclosed during the
proceedings before the Bureau of Customs nor presented in
evidence before respondent Court. The re-appraisal made by
petitioner, therefore, can be faulted with arbitrariness in disregard of
the standard of due process to which all governmental action should
conform to impress upon it the stamp of validity.
2. EQUAL PROTECTION CLAUSE
x x x Nor shall any person be denied the equal protection of

the laws.
Page | 22
TAXATION I REVIEWER
ATTY. C. VILLENA
Persons and properties to be taxed shall be grouped, and all

the same class shall be subject to the same rate, and the tax
shall be administered impartially upon them.
a) Equal protection of the laws signifies that all persons
subject to legislation shall be treated under circumstances
and conditions both in the privileges conferred and
liabilities imposed.
b) This doctrine prohibits class legislation which discriminates
against some and favors others.
TWO WAYS EQUAL PROTECTION CLAUSE CAN BE

VIOLATED IN TWO WAYS:
a.
b.
When classification is made where there should be none

(i.e. where classification deos not rest ipon substantial
differences)
When classification is called for (i.e. when substantial
distinctions exists but not corresponding classification is
made on the basis thereof.)
Requisites for a Valid Classification

1)
2)
3)
4)
Must
Must
Must
Must
not be arbitrary
be germane to the purpose of law
not be limited to existing conditions only
apply equally to all members of the same class
Vertical Equity vs. Horizontal Equity

VERTICAL EQUITY connotes a difference in the tax treatment
between those who are financially well-off and those who have
relatively less.
Equal protection clause applies only to persons or things identically

situated and does not bar a reasonable classification of the subject
of legislation, and a classification of the subject of legislation, and a
classification is reasonable where (1) it is based upon substantial
distinction; (2) these are germane to the purpose of the law; (3) the
classification applies not only to present conditions, but also to future
conditions substantially identical to those present; and (4) the
classification applies only to those who belong to the same class.
If the ordinance is intended to supply to a specific taxpayer and to no
one else regardless of whether or not other entities belonging to the
same class are established in the future, it is a violation of the equal
protection clause, but if it is intended to apply also to similar
establishments which maybe established in the future, then the tax
ordinance is valid even if in the meantime, it applies to only one
entity or taxpayer for the simple reason that there is so far only one
member of the class subject of the tax measure.
TIU V. CA 301 SCRA 279

The Constitution does not require absolute equality among residents.
A classification based on valid and reasonable standards does not
violate the equal protection clause. A classification based on valid
and reasonable standards does not violate the equal protection
clause.
3. RULE OF TAXATION SHALL BE UNIFORM AND
EQUITABLE
ARTICLE VI CONSTITUTION, SECTION 28(1):
HORIZONTAL EQUITY implies that those who are similarly situated

in life should be taxed similarly.
The rule of taxation shall be uniform and equitable. The

ORMOC SUGAR CO. V. TREASURER OF ORMOC CITY, 22

SCRA 603
a. UNIFORMITY (Equality or equal protection of the laws)

means all taxable articles or kinds or property of the same
class shall be taxed at the same rate. A tax is uniform
Page | 23

when the same force and effect in every place where the
subject of it is found. It implies equality in the burden not
in amount.
b. EQUITABLE means fair, just, reasonable and

proportionate to ones ability to pay. It requires that the
apportionment of the tax burden be more or less just in
the light of the taxpayers ability to bear the tax burden..
c.
Inequality which results in singling out one particular class

for taxation or exemption infringes no constitutional
limitation.
d. The rule of uniformity does not call for perfect uniformity or

perfect equality, because this is hardly attainable.
PROGRESSIVE SYSTEM OF TAXATION
It means that as the resources of the taxpayer become higher,

his rate likewise increases. It places stress on direct rather
than indirect taxes or on the taxpayers ability to pay. It is
based on the ability to pay and in implementation of the social
justice principle that the more affluent should contribute more
for the communitys benefit, and is best exemplified by the
increase of income tax rate as net taxable income increases.
The Constitution does not really prohibit regressive taxes.

What it simply provides is that Congress shall evolve a
progressive system of taxation. This is a mere directive upon
Congress, not a justiciable right. (Tolentino v.Secretary of
Finance, G.R. No. 115455, 1994)
CITY OF BAGUIO V. DE LEON, 25 SCRA 938

Equality and uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same rate. A
tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found. The taxing
power has the authority to make reasonable and natural
classifications for purposes of taxation. Where the statute or
ordinance in question applies equally to all persons, firms and

corporations placed in a similar situation, there is no infringement of
the rule on equality. Inequality which result from a singling out of one
particular class for taxation or exemption, infringe no constitutional
limitation.
EASTERN THEATRICAL CO. V. ALFONSO

Equality and uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. Thus, the fact that some
place of amusements are taxed while others like theatre and
cinematographs are not does not violate uniformity and equality in
taxation.
BRITISH AMERICAN TOBACCO V. CAMACHO AND

PARAYNO
The classification freeze provision does not violate the equal
protection and uniformity of taxation. It meets the standards for valid
classification: rests on a substantial distinction, is germane to the
purpose of the law, applies to present and future conditions and
applies equally to all those belonging to the same class. The second
condition, was not fully satisfied as it failed to promote fair
competition among the players in the industry. However, it does not
make the assailed law unconstitutional.
The classification freeze provision could hardly be considered biased
toward older brands over newer brands. The provision was the result
of Congress earnest efforts to improve the efficiency and effectivity
of the tax administration over sin products while trying to balance the
same with other State interests.
Uniformity of taxation requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and
liabilities. In the instant case, the CFP meets the geographical
uniformity requirement because the assailed law applies to all
cigarette brands in the Philippines.
Page | 24
TAXATION I REVIEWER
ATTY. C. VILLENA
The excise tax imposed on cigarettes is an indirect tax, and thus,
regressive in character. HOWEVER, this does not mean that the law
may be declared unconstitutional because the Constitution does not
prohibit the imposition of indirect taxes but merely provides that
by a later taxing statute, the said law shall not be valid,

because it will impair the obligation of contract.
A law which changes the terms of the contract by making new

conditions, or changing those in the contract, or dispenses with
those expressed, impairs the obligation.
When the State grants an exemption on the basis of a

contract, consideration is presumed to be paid to the State,
and the public is supposed to receive the whole equivalent
there from
The non-impairment clause applies to the power of taxation

but not to police power and eminent domain.
The non-impairment rule, however, does not apply to public

utility franchise since a franchise is subject to amendment,
alteration or repeal by the Congress when the public interest
so requires. It applies only where one party is the Government
and the other party, a private individual.
When an exemption is bilaterally agreed upon between the

government and the taxpayer it cannot be withdrawn without
violating the non-impairment clause.
When it is unilaterally granted by law and the same is

withdrawn by virtue of another law no violation.
4. NON-IMPAIRMENT OF OBLIGATION AND CONTRACTS
No law impairing the obligation of contract shall be passed.
ARTICLE XII CONSTITUTION, SECTION 11:
No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of
the Philippines or to corporation or association organized under the
laws of the Philippines, at least 60% of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than 50 yrs.
Neither shall any such franchise or right be granted except under
the conditions that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines.
The obligation of a contract is impaired when its terms and

conditions are changed by law or by a party without the
consent of the other, thereby weakening the position or the
rights of the latter.
If a tax exemption granted by law and of the nature of a

contract between the taxpayer and the government is revoked
IMUS ELECTRIC CO. V. CTA AND CIR (1967)

The status of petitioners municipal franchises as property and
property right is dependent upon or qualified by the nature and
limitations of the authority under which said franchises were granted
by the municipal corporations concerned. Such authority shall be
subject to the power of Congress to alter, modify or repeal the same.
In effecting such alteration, our legislative department has merely
exercised a power expressly reserved thereto by said franchises,
and has acted in conformity therewith not in violation of the
provisions thereof or to the detriment of the rights thereby vested in
petitioner herein.
Page | 25

which shall be added to the unpaid amount from due date until
it is paid. (Sec. 161 LGC)
PHIL. RURAL ELECTRIC COOPERATIVES ASSOCIATION

INC. ET AL. V. DILG AND DOF (2003)
PROHIBITION AGAINST TAXATION OF REAL

PROPERTY OF CHARITABLE INSTITUTIONS,
CHURCHES, PARSONAGES, OR CONVENTS, MOSQUES
AND NON-PROFIT CEMETERIES
It is ingrained in jurisprudence that the constitutional prohibition on

the impairment of the obligation of contracts does not prohibit every
change in existing laws. To fall within the prohibition, the change
must not only impair the obligation of the existing contract, but the
impairment must be substantial.
6.
A law which changes the terms of a legal contract between parties,

either in the time or mode of performance, or imposes new
conditions, or dispenses with those expressed, or authorizes for its
satisfaction something different from that provided in its terms, is law
which impairs the obligation of a contract and is therefore null and
void.
Charitable institutions, churches and personages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes
shall be exempt from taxation.
Moreover, to constitute impairment, the law must affect a change in

the rights of the parties with reference to each other and not with
respect to non-parties.
5. NON-IMPRISONMENT FOR NON PAYMENT OF POLL
TAX
No person shall be imprisoned for debt or non-payment of poll

tax.
POLL TAX tax imposed on a per head basis. The present poll
tax is the community tax.
Lest of the tax exemption: the use and not ownership of the
property
To be tax-exempt, the property must be actually, directly and
exclusively used for the purposes mentioned.
The word exclusively means primarily.
The exemption is not limited to property actually indispensable
but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes.
The constitutional exemption applies only to property tax.
However, it would seem that under existing law, gifts made in
favor or religious charitable and educational organizations
would nevertheless qualify for donors gift tax exemption (Sec.
101(9)(3), NIRC)
ABRA VALLEY COLLEGE V. AQUINO, 162 SCRA 106
A person cannot be imprisoned for non-payment of basic

community tax because payment thereof is not mandatory, but
may be imprisoned for other violations of the Community Tax
Law, such as falsification of the community tax certificate, or
for failure to pay other taxes.
The lot which not used for commercial purposes but serves solely as
a sort of lodging place, also qualifies for exemption because this
constitutes incidental use in religious functions. Exemption extends
to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes.
The only penalty for delinquency in payment is the payment of

surcharge in the form of interest at the rate of 24% per annum
The TEST OF EXEMPTION from taxation is the use of the property

for purposes mentioned in the Constitution.
Page | 26
TAXATION I REVIEWER
ATTY. C. VILLENA
institutions, their assets shall be disposed of in the manner
provided by law.
LUNG CENTER V. QC (2004)

Under the Constitution, for lands, building and improvements of the
charitable institution to be considered exempt, the same should not
only be exclusively used for charitable purposes it is required that
such property be used actually and directly for such purposes.
Portions of the land leased to private entities as well as those parts
of Lung Center leased to private individuals are not exempt from
taxes but portions of the land occupied by the hospital used for its
patients, whether paying or non-paying, are exempt from paying real
property tax.
Since taxation is the rule and exemption is the exception, a claim for
exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken.
If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to
taxation. Thus, exclusively means SOLELY.
What is meant by actual, direct and exclusive used of the property
for charitable purposes is the DIRECT, IMMEDIATE, ACTUAL,
application of the PROPERTY itself to the purposes for which the
charitable institution is organized. It is NOT the use of INCOME of
the property which is the controlling factor (to exempt)
7. PROHIBITION AGAINST TAXATION OF NON-STOCK
NON-PROFIT EDUCATIONAL INSTITUTIONS

ARTICLE XIV CONSTITUTION, SECTION 4(3):
All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such
Proprietary educational institutions, including those cooperatively

owned, may likewise be entitled to such exemptions, subkect to
the limitations provided by law, including restrictions on dividends
and provisions for reinvestment.
ARTICLE XIV CONSTITUTION, SECTION 4(3):

All grants, endowments, donations or contributions used actually,
directly, and exclusively for educational purposes shall be exempt
from tax.
SECTION 30, NIRC: EXEMPTIONS FROM TAX ON

CORPORATIONS
(H) A nonstick and nonprofit educational institution.
Constitutional and Statutory Provisions

Section 30 NIRC last paragraph note that its provisions,
particularly the phrase regardless of dispositions made of

such income is in conflict with Article XIV, Section 4(3),
Constitution.
The conflict, however, has already been settled. Section 1 of
DOF Order No. 149-95, which amended DOF Order No. 92-88
and DOF Order No. 137-87, provides that these non-stock,
non-profit educational institutions shall be subject to internal
revenue taxes on income from trade, business or other activity
the conduct of which is not related to the exercise or
performance by such educational institution of its educational
purpose of function.
Proprietary educational institutions including those
cooperatively owned MAY likewise be entitled to such
exemptions subject to limitation:
a. Provided by law
b. Provisions for reinvestments
CIR V. CA & YMCA 298 SCRA 83
Page | 27

Under the NIRC, while Section 27 of the NIRC provides that nonprofit organizations and clubs shall not be taxed on their income, it
also provides that this exemption will NOT apply to income derived
from (1) properties. Real or personal, and (2) any other activities
conducted for profit shall be subject to tax
Under the Constitution, Article VI, Section 28 exempts charitable
institutions from the payment not only of taxes. However according
to Constitutional framers, the exemption does not pertain to income
tax but only to property taxes.
For the YMCA o be granted the exemption as an educational
institution under the Constitution Article XIV Section 4, it must prove
with substantial evidence that:
a. It falls under the classification non-stock, non-profit
educational institution; and
b. The income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
All appropriation, revenue or tariff bills, bills authorizing increase

of the public debt, bills of local application, and private bills, shall
originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
Bill should embrace only one subject expressed in the title

thereof
Three readings on three separate days
Printed copies in final form distributed three days before the
passage
TOLENTINO V. SECRETARY OF FINANCE 249 SCRA 628

What the Constitution simply means is that the initiative for filing
revenue, tariff or tax bills, bills authorizing an increase of the public
debt, private bills and bills of local application must come from the
House can be expected to be more sensitive to the local needs and
problems.
The Senators power is not only to only to concur with amendments
but also to propose amendments.
CIR V. CA AND ATENEO DE MANILA (1997)

In case of doubt, statutes on tax imposition are to be construed
strongly against the government and in favor of citizens, because the
burdens are NOT to be imposed nor presumed beyond what is
expressed.
Ateneos IPC never sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of the
academic purposes of the university. Funds received by Ateneo are
technically not a fee. They may however fall as gifts or donations
which are tax-exempt as shown by Ateneos compliance with the
NIRC requirement provided for the exemption of such gifts to an
educational institutions.
8. PASSAGE OF TAX BILLS
9. GRANTING OF TAX EXEMPTION
No law granting any tax exemption shall be passed without the

concurrence of a majority of all the Members of the Congress.
It requires the concurrence of a majority not of attendees

constituting a quorum but of all members of the Congress.
JOHN HAY PEOPLES ALTERNATIVE COALITION, ET AL.

V. LIM ET AL. (2003)
It is the legislature, unless limited by a provision of the state
constitution that has full power to exempt any person or corporation
or class of property from taxation, its power to exempt being as
broad as its power to tax. Other than Congress, the Constitution may
ARTICLE VI CONSTITUTION, SECTION 24:

Page | 28
TAXATION I REVIEWER
ATTY. C. VILLENA
same state or taxing district are obliged to pay. Laws granting
tax exemption is strictly construed against the taxpayer and
liberally in favor of the taxing power
itself provide for specific tax exemptions, or local governments may

pass ordinances on exemption only from local taxes.
The challenged grant of tax exemption would circumvent the
Constitutions imposition that a law granting any tax exemption must
have the concurrence of a majority of all the member of Congress.
10. VETO POWER OF THE PRESIDENT
B.
The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object.
Shall not affect item or items to which he does not object
11.
JUDICIAL POERT TO REVIEW LEGALITY OF TAX
EXPRESS OR AFFIRMATIVE expressly provided the

Constitution, statutes, treaties, ordinance, franchise or
contract.
IMPLIED OR EXEMPTION BY OMISSION the exemption
applies to all those who are not expressly mentioned in the
law as subject to tax.
CONTRACTUAL tax exemption is consideration of a
contractual agreement with the government.
2.
KINDS OF EXEMPTION
1.
3.
C.
NATURE OF POWER TO GRANT TAX EXEMPTION

a) A presumption that the public interest will be subserved by
the exemption allowed. Grant of exemption rests upon
that such will benefit the body of the people and not upon
any idea of lessening the burden of the individual owners
of property
b) Purpose is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary
loss entailed in the grant of exemptions.
c) Created in a treaty on grounds of reciprocity or to lessen
the rigors of the international double or multiple taxation.
d) Equity is not a ground for tax exemption
ARTICLE VIII CONSTITUTION, SECTION 5:
The Supreme Court shall have the following powers:

xxx
(2) Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rues of Court may provide, final
judgements and orders of lowers court:
xxx
(b) All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto
D.
CONSTITUTIONAL EXEMPTION
CHAPTER III EXEMPTIONS FROM TAXATION

I. IN GENERAL
A.
DEFINITION
TAX EXEMPTION is a grant of immunity to particular class,
from a tax which persons or corporation generally within the
E.
No law granting any tax exemption shall be passed without

the concurrence of a majority of all the Members of the
Congress.
LEGISLATIVE GRANT OF EXEMPTION
Charitable institutions, churches and parsonages or

convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and improvements
used exclusively for religious, charitable or educational
Page | 29

purposes shall be exempt from taxation. (section 28 (3),
Art. VI, 1987 Constitution)
CIR V. BOTELHO (1967)

No tax exemption like any other legal exemption or exception is
given without any reason therefor. In much the same way as other
statutory commands, its avowed purpose is some public benefit or
interest, which the law-making body considers sufficient to offset the
monetary loss entitled in the grant of the exemption
It should be noted, however, that there is no constitutional injunction
against granting tax exemptions to particular persons. In fact, it is not
unusual to grant legislative franchises to specific individuals or
entities, conferring tax exemptions thereto. What the fundamental
law forbids is the denial of equal protection, such as through
unreasonable discrimination or classification.
CIR V. GCL RETIREMENT PLAN (1992)

Employees' trusts or benefit plans normally provide economic
assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which
members of the Plan may be exposed. It is an independent and
additional source of protection for the working group. What is more, it
is established for their exclusive benefit and for no other purpose.
The tax advantage was conceived in order to encourage the
formation and establishment of such private Plans for the benefit of
laborers and employees outside of the Social Security Act.
F.
EXEMPTION CREATED BY TREATY
G.
Exemption is on grounds of reciprocity or to lessen the

rigors of the international double or multiple taxation.
EXEMPTION OF GOVERNMENT AGENCIES

1. Sec 27(C) Exempt FROM INCOME TAX:
(1)
GSIS
(2)
SSS
(3)
Phil Health Insurance Corp (PHIC)
(4)
PCSO
2.
3.
Sec 30(I) Government Educational Institution = EXEMPT

Sec 32 (B) (7) (b) Income from public utility or exercise of
governmental functions = EXEMPT
PHIL PORTS AUTHORITY V. CITY OF ILOILO (2003)

Any income or profit generated by an entity, even of a corporation
organized without any intention of realizing profit in the conduct of
its activities, is subject to tax. What matters is the established fact
that it leased out its building to ten private entities from which it
regularly earned substantial income. Thus, in the absence of any
proof of exemption therefrom, petitioner is liable for the assessed
business taxes.
PHIL FISHERIES DEVT AUTHORITY V. CA (2007)

The Authority is an instrumentality of the national government. It is
liable to pay real property taxes with respect to those portions which
are leased to private entities.
Instrumentalities of the national government are exempt from local
taxes except with respect to real property taxes.
II. TAX AMNESTY

A. DEFINITION AND SAMPLE TAX AMNESTY PROGRAM
a. RA No. 9480
When the case is not final and executory, the corporation may
apply for tax amnesty. The BIR will check if they could apply tax
amnesty.
PHIL BANKING CORP V. CIR (2009)

A tax amnesty is a general pardon or the intentional overlooking by
the State of its authority to impose penalties on persons otherwise
guilty of violation of a tax law. It partakes of an absolute waiver by
the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate. A tax
amnesty, much like a tax exemption, is never favored nor presumed
in law. The grant of a tax amnesty, similar to a tax exemption, must
be construed strictly against the taxpayer and liberally in favor of the
taxing authority.
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TAXATION I REVIEWER
ATTY. C. VILLENA
12 months from date of acquisition you can reduce the tax on the
capital gain by 50%.
Metrobank is a qualified tax amnesty applicant, having complied with

the requirements enumerated in RA 9480. The completion of these
requirements shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall thereafter be
immune from the payment of taxes, as well as the appurtenant civil,
criminal or administrative penalties arising from the failure to pay any
and all internal revenue taxes for taxable year and prior years.
B. VOLUNTARY ASSESSMENT PROGRAM/LAST PRIORITY

IN AUDIT
CIR V. ARIETE (2010)
VAP is in the nature of a tax amnesty and must be strictly construed
against the taxpayer-applicant. The essence of the program is
voluntariness. However, the language of the law is clear and
unequivocal. Therefore, it must be given its literal application and
applied without interpretation.
CIR V. GONZALES (2010)

Tax amnesty is a general pardon to taxpayers who want to start a
clean tax slate. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the
tedious process of a tax case. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law and if granted by
statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the
taxing authority.
III. TAX AVOIDANCE V. TAX EVASION

TAX AVOIDANCE is also known as tax minimization. It is the
use of legally permissible alternative tax rates to avoid or reduce
tax liability
Ex: Following the holding period rule in capital asset
transactions, by postponing the sale of a capital asset until after
TAX EVASION is also known as tax dodging. It is the use of

illegal means to defeat or lessen the payment of the tax
Ex: deliberate padding expenses, understatement of income, etc.
1.
2.
3.
ELEMENTS OF TAX EVASION
The end to be achieved, i.e. payment of less than that

known by the taxpayer to be legally due, or paying no tax
when it is shown that tax is due
An accompanying state of mind which is described as being
evil, in bad faith, willful, or deliberate and not
accidental
A course of action (or failure of action) which is unlawful
CIR V. ESTATE OF BENIGNO TODA JR. (2004)

Tax evasion connotes the integration of three factors: (1) the end to
be achieved, i.e., the payment of less than that known by the
taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is
described as being "evil," in "bad faith," "willfull," or "deliberate and
not accidental"; and (3) a course of action or failure of action which is
unlawful.
CHAPTER IV SOURCES AND CONSTRUCTION

OF TAX LAWS
I. SOURCES OF TAX LAW
1. STATUTES
Existing laws
Page | 31

i.
ii.
iii.
iv.
v.
vi.
National National Internal Revenue Code of 1997

Local Book II, 1991 Local Government Code
Tariff and Customs Code
BCDA Law
PEZA law
Omnibus Investment Law
2. REVENUE REGULATIONS
a.
b.
c.
Authority to Promulgate Secretary of Finance shall

promulgate all needful rules and regulations for effective
enforcement of NIRC (Sec 244 NIRC)
Specific provisions to be contained in Revenue Regulation
(Sec 245 NIRC)
Force and Effect of Revenue Regulation shall be valid
only when they are not contrary to laws and the
Constitution
ASTIRUAS SUGAR CENTRAL V. COMMISSIONER, 29

SCRA 617 (1969)
The one-year period prescribed in the Philippine Tariff Act of 1909
is non-extendible and compliance therewith is mandatory.
The provisions invoked by the petitioner (to sustain his claim for
refund) offer two options to an importer. The first, under sec. 105 (x),
gives him the privilege of importing, free from import duties, the
containers mentioned therein as long as he exports them within one
year from the date of acceptance of the import entry, which period as
shown above, is not extendible. The second, presented by sec. 106
(b), contemplates a case where import duties are first paid, subject to
refund to the extent of 99% of the amount paid, provided the articles
mentioned therein are exported within three years from importation.
Customs Code as long as it is assured, by the filing of a bond, that

the same shall be exported within the relatively short period of one
year from the date of acceptance of the import entry. Where an
importer cannot provide such assurance, then the Government,
under sec. 106(b) of said Code, would require payment of the
corresponding duties first.
BPI LEASINGCORP V. CA AND CIR, G.R. NO 127624

(2003)
The questioned revenue regulation is legislative in nature.
Administrative issuances may be distinguished according to their
nature and substance: legislative and interpretative. A legislative
rule is in the matter of subordinate legislation, designed to
implement a primary legislation by providing the details thereof.
An interpretative rule, on the other hand, is designed to provide
guidelines to the law which the administrative agency is in
charge of enforcing.
The questioned revenue regulation to be legislative in nature. Sec 1
of Revenue Regulation 19-86 plainly states that it was
promulgated pursuant to Sec 277 NIRC. Sec 277 (now Section
244) is an express grant of authority to the Secretary of Finance
to promulgate all needful rules and regulations for the effective
enforcement of the provisions of the NIRC.
It is prospective in nature. The principle is well entrenched that
statutes, including administrative rules and regulations, operate
prospectively only, unless the legislative intent to the contrary
is manifest by express terms or by necessary implication. 1 In
the present case, there is no indication that the revenue
regulation may operate retroactively. Furthermore, there is an
express provision stating that it "shall take effect on January 1,
1987," and that it "shall be applicable to all leases written on or
after the said date." Being clear on its prospective application, it
must be given its literal meaning and applied without further
interpretation. Thus, BLC is not in a position to invoke the provisions
of Revenue Regulation 19-86 for lease rentals it received prior to
January 1, 1987.
It would seem then that the Government would forego collecting

duties on the articles mentioned in section 105(x) of Tariff and
Page | 32
TAXATION I REVIEWER
ATTY. C. VILLENA
3.
BIR ISSUANCES: BIR REVENUE ADMINISTRATIVE

ORDER (RAO) NO 2-2001 This RAO shall, in general,
apply to all revenue rulings and issuances of the Bureau of
Internal Revenue that pertain to the implementation of the
provisions of the Tax Code and other tax laws
a) RULINGS OF FIRST IMPRESSION - These refer to the
rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the
provisions of the Tax Code and other tax laws without
established precedent, and which are issued in
response to a specific request for ruling filed by a
taxpayer with the Bureau of Internal
Revenue. Provided, however, that the term shall
include reversal, modification or revocation of any
existing ruling.
b) RULINGS WITH ESTABLISHED PRECEDENTS - These
refer to mere reiteration of previous rulings, opinions
and interpretations of the Commissioner, as delegated
to duly authorized internal revenue officers (i.e.,
Deputy Commissioner, Legal and Inspection Group;
Assistant Commissioner, Legal Service; Regional
Directors)that are issued in response to a specific
request for ruling filed by a taxpayer with the Bureau
of Internal Revenue.
c) REVENUE MEMORANDUM RULINGS (RMR) - These
refer to the rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the
provisions of the Tax Code and other tax laws, as
applied to a specific set of facts, with or without
established precedents, and which the Commissioner
may issue from time to time for the purpose of
providing taxpayers guidance on the tax consequences
in specific situations.
d) REVENUE TRAVEL ASSIGNMENT ORDERS (RTAO) These orders assign revenue personnel to specific
functions in specific units. Travel assignment orders
specifically mention the names of revenue personnel
concerned.
e) REVENUE SPECIAL ORDERS (RSO) - Instructions or
directives for the accomplishment of special
assignments or missions of significance which are

temporary in nature or for a definite period of time.
These issuances specifically mention the personnel or
units of organization concerned.
f) REVENUE MEMORANDUM CIRCULARS (RMC) - These
issuances shall disseminate and embody pertinent and
applicable portions, as well as amplifications of the
rules, precedents, laws, regulations, opinions and
other orders and directives issued by or administered
by the Commissioner of Internal Revenue, and by
offices and agencies other than the Bureau of Internal
Revenue, for the information, guidance or compliance
of revenue personnel.
g) REVENUE MEMORANDUM ORDERS (RMO) - These are
directives or instructions outlining procedures,
techniques, methods, processes, operations, activities,
work flow, and the like, which are necessary to carry
out programs or to achieve policy goals and objectives.
These issuances may be of general or of limited scope
yet in any case require definite compliance by those
concerned. They are not addressed to any particular
group of employees or offices because they are for
general information, but those directly concerned with
the compliance of these provisions are either definitely
stated, or unmistakably implied thereat.
h) REVENUE AUDIT MEMORANDUM ORDERS (RAMO) These refer to the uniform audit procedures to be
observed by revenue officers in the conduct of audit of
tax cases and in their submission of reports of
investigation.
i) REVENUE DELEGATION OF AUTHORITY ORDERS
(RDAO) - These refer to the functions delegated by the
Commissioner to revenue officers in accordance with
law.
j) REVENUE ADMINISTRATIVE ORDERS (RAO) - These
refer to matters that deal strictly with more or less
permanent administrative set-up of the Bureau.
Delineation of organizational structures, statements of
functions and/or responsibilities, definitions and
delegations of authority, staffing and personnel
Page | 33

requirements, standards of performance,
establishment of Bureau-wide programs, installation of
systems, and the like, are most likely subject matter of
Revenue Administrative Orders. These issuances are
for general guidance, compliance and/or information.
POWER OF CIR TO INTERPRET TAX LAWS (SEC 4

NIRC)
1.
2.
3.
4.
5.
6.
7.
8.
SUMMON persons on certain cases pending investigation

Inquire into bank deposits Only to determine the gross
estate of decedent and not to determine the income
Except: Secrecy of bank deposits law
EXAMINE books of the accounts of the taxpayer and other
documents
OBTAIN information
Take TESTIMONY of persons
ADMINISTER oaths
ARREST persons who have violated the provisions of the tax
code (should have warrant of arrest first)
Take INVENTORY
RETROACTIVITY OF RULINGS (SEC 246 NIRC) Not

retroactive if the revocation, modification or reversal shall be
prejudicial to the taxpayer
EXCEPTIONS:
1.
2.
3.
Where the taxpayer deliberately misstates or omits material

facs from his return or in any document required of him by
the BIR
Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based
Where the taxpayer acted in bad faith
CIR V. BURROUGHS LTD, G.R. NO L-66653 (1986)

Any revocation, modification, or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the Commissioner
shag not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in

the following cases
(a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based, or
(c) where the taxpayer acted in bad faith.
CIR V. PHILIPPINE HEALTH CARE PROVIDERS, G.R.

NO 168129 (2007)
Section 246 of the 1997 Tax Code, as amended, provides that
rulings, circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue have no retroactive application if
to apply them would prejudice the taxpayer. The exceptions to this
rule are: (1) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by
the Bureau of Internal Revenue; (2) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (3) where the taxpayer
acted in bad faith.
There is no showing that respondent "deliberately committed
mistakes or omitted material facts" when it obtained VAT Ruling No.
231-88 from the BIR. The CTA held that respondent's letter which
served as the basis for the VAT ruling "sufficiently described" its
business and "there is no way the BIR could be misled by the said
representation as to the real nature" of said business. The failure of
respondent to refer to itself as a health maintenance organization is
not an indication of bad faith or a deliberate attempt to make false
representations."
PBCOM V. CIR 302 SCRA 241 (1999)

When the Acting Commissioner of Internal Revenue issued RMC 785, changing the prescriptive period of two years to ten years on
claims of excess quarterly income tax payments, such circular
Page | 34
TAXATION I REVIEWER
ATTY. C. VILLENA
created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by Congress.
Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. As
pointed out by the respondent courts, the nullification of RMC No. 785 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230 of
1977 NIRC,for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
Revenue laws imposing taxes on business must be strictly construed

in favor of the citizen. In construing a word or expression in the
statute susceptible of two or more meanings, the court will adopt that
interpretation most in accord with the manifest purpose of the statute
as gathered from the context. Where a particular word is obscure or
of doubtful meaning, taken by itself, its obscurity or doubt may be
removed by reference to associate words.
OPINIONS OF THE SECRETARY OF JUSTICE
If the question presented in the interpretation of a tariff law is one of

doubt, the doubt would be resolved in favor of the importer, as duties
are never imposed upon citizens upon vague and doubtful
interpretation.
LEGISLATIVE MATERIALS
PHIL HEALTH CARE PROVIDERS INC V. CIR, G.R. NO

167330 (2009)
Administrative rules and regulations, rulings and opinions of tax

officials particularly the CIR, including opinions of the Secretary of
Justice.
COURT DECISION Decision of the Supreme Court applying or

interpreting existing tax laws binding on all subordinates courts
and have the force and effect of law. They form part of the legal
system of the Philippines (Art. 8 NCC). They constitute evidence
of what the law means.
II. CONSTRUCTION OF TAX LAWS, EXEMPTIONS AND

REFUNDS
1. GENERAL RULES OF CONSTRUCTION OF TAX
LAWS
LUZON STEVEDORING V. TRINIDAD, 43 PHIL 803
(1922)
There was no legislative intent to impose DST on health care

agreements of HMOs. When the law imposing the DST was first
passed, HMOs were yet unknown in the Philippines. However, when
the various amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in fact
already been defined by RA 7875. If it had been the intent of the
legislature to impose DST on health care agreements, it could have
done so in clear and categorical terms. It had many opportunities
to do so. But it did not. The fact that the NIRC contained no
specific provision on the DST liability of health care agreements of
HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact,
petitioner was assessed its DST liability only on January 27, 2000,
after more than a decade in the business as an HMO.
Considering that Section 185 did not change since 1904 (except
for the rate of tax), it would be safe to say that health care
agreements were never, at any time, recognized as insurance
Page | 35

contracts or deemed engaged in the business of insurance within
the context of the provision.
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg."
The settled rule is that good faith and honest belief that one is not
subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax laws are sufficient justification
to delete the imposition of surcharges and interest. In refuting liability
for the local franchise and business taxes, we do not believe SMART
relied in good faith in the findings and conclusion of the Bureau of
Local Government and Finance (BLGF).
RODRIGUEZ INC V. COLLECTOR, 28 SCRA 119 (1969)

2. CONSTRUCTION OF TAX EXEMPTIONS
CITY OF ILOILO V. SMART, G.R. NO 167260 (2009)
The term "exemption" in Section 23 of the Public Telecoms Act does
not mean tax exemption; rather, it refers to exemption from certain
regulatory or reporting requirements imposed by government
agencies such as the National Telecommunications Commission.
The thrust of the Public Telecoms Act is to promote the gradual
deregulation of entry, pricing, and operations of all public
telecommunications entities, and thus to level the playing field in the
telecommunications industry. The language of Section 23 and the
proceedings of both Houses of Congress are bereft of anything that
would signify the grant of tax exemptions to all telecommunications
entities. Intent to grant tax exemption cannot therefore be discerned
from the law; the term "exemption" is too general to include tax
exemption and runs counter to the requirement that the grant of tax
exemption should be stated in clear and unequivocal language too
plain to be beyond doubt or mistake.
Since SMART cannot validly claim any tax exemption based either
on Section 9 of its franchise or Section 23 of the Public Telecoms
Act, it follows that petitioner can impose and collect the local
franchise and business taxes amounting to P764,545.29 it assessed
against SMART. Aside from these, SMART should also be made to
pay surcharge and interests on the taxes due.
It has been the constant and uniform holding of the Supreme Court
that exemption from taxation is not favored and is never presumed;
in fact, if it is granted, the grant must be strictly construed against the
taxpayer. Affirmatively put, the law requires courts to frown on
alleged exemptions from taxation, hence, an exempting provision in
a legislative enactment should be construed in strictissimi juris
against the taxpayer and liberally in favor of the taxing authority. This
should be applied to the case at bar where the law invoked (Section
9 of Republic Act No. 333) does not make any reference whatsoever
to exemption of income derived from sale of expropriated property
there under.
WONDER MECHANICAL ENGINEERING V. CTA, 64 SCRA

555 (1975)
An industry to be entitled to a tax exemption under RA 35 must be
"new and necessary" and that the tax exemption was granted to new
and necessary industries as an incentive to greater and adequate
production of products made scarce by the second world war which
wrought havoc on our national economy, a production "sufficient to
meet local demand or consumption"; that will contribute "to the
attainment of a stable and balanced national economy"; an industry
that "will make its products available to the general public in
quantities and at prices which will justify its operation."
Viewed in the light of the foregoing reasons for the State grant of tax
exemption, We are firmly convinced that petitioner was granted tax
Page | 36
TAXATION I REVIEWER
ATTY. C. VILLENA
exemption in the manufacture and sale "of machines for making
cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as
explicitly stated in the Certificate of Exemption. But it is quite difficult
for us to believe that the manufacture of steel chairs, jeep parts, and
other articles not constituting machines for making certain products
would fall under the classification of "new and necessary" industries
envisioned in Republic Acts 35 and 901 as to entitle the petitioner to
tax exemption.
There is no way to dispute the "cardinal rule in taxation that

exemptions therefrom are highly disfavored in law and he who claims
tax exemption must be able to justify his claim or right thereto by the
dearest grant of organic or statute law".
Tax exemption must be clearly expressed and cannot be established

by implication. Exemption from a common burden cannot be
permitted to exist upon vague implication.
REPUBLIC FLOUR MILLS V. CIR 31 SCRA 148 (1970)

It is true that in the construction of tax statutes tax exemptions are
not favored in the law, and are construed strictissimi juris against the
taxpayer. However, it is equally a recognized principle that where
the provision of the law is clear and unambiguous, so that there is no
occasion for the courts seeking the legislative intent, the law must be
taken as it is, devoid of judicial addition or subtraction.
In this case, we find the provision of Section 186-A whenever a tax

free product is utilized, etc. all encompassing to comprehend taxfree raw materials, even if imported. Where the law provided no
qualification for the granting of the privilege, the court is not at liberty
to supply any.
3.
CONSTRUCTION OF TAX REFUNDS Tax refunds are

in the nature of TAX EXEMPTIONS. They are regarded as in
derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the
exemption. The burden of proof is upon him who claims the
exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statue law.
RESINS INC V. AUDITOR GENERAL, 25 SCRA 754

(1968)
Tax refund undoubtedly partakes of a nature of an exemption, it
cannot be allowed unless granted in the most explicit and
categorical language. In Esso Standard Eastern Inc v. Acting
Commissioner of Customs, has been the constant and uniform
holding that exemption from taxation is not favored and is never
presumed, so that if granted it must be strictly construed against
the taxpayer. Affirmatively put, the law frowns on exemption from
taxation, hence, an exempting provision should be construed
strictissimi juris."
KEPCO PHILS CORP V. CIR, G.R. NO 179356 (2009)

It is settled that tax refunds are in the nature of tax exemptions.
Laws granting exemptions are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. Where the
taxpayer claims a refund, the CTA as a court of record is required to
conduct a formal trial (trial de novo) to prove every minute aspect of
the claim.
Page | 37

CONSTRUCTION OF TAX LAWS

1.
2.
3.
4.
5.
6.
7.
8.
When legislative intent is clear Tax statutes are to receive

a reasonable construction with a view to carrying out their
purpose and intent
o They should not be construed as to permit the
taxpayer easily to evade the payment of taxes.
Tax laws are PROSPECTIVE in operation (subject to
exceptions)
LEGISLATIVE INTENTION must be considered Tax statutes
are to receive a reasonable construction with a view to
carrying out their purpose and intent (51 Am Jur 361)
Where there is DOUBT In every case of doubt, in tax
statutes imposing payment of tax, laws are construed strictly
against the government and liberally in favor of the tax
payer (Manila Railroad v. Collector of Customs, G.R. no
10214, November 4, 1915)
o No person or property is subject to taxation unless
within the terms or plain import of a taxing statute. In
every case of doubt, tax statutes are construed strictly
against the government and liberally in favor of the
taxpayer.
o Taxes, being burdens, are not to be presumed beyond
what the statute expressly and clearly declares.
Where the language is PLAIN Rule of strict construction
against the government does not apply where the language
of the tax is plain and there is no doubt as to the legislative
intent (51 Am Jur 368). The words employed are to be
given their ordinary meaning
Where the taxpayer claims EXEMPTION Exemption are
construed strictly against the one who asserts the clam of
exemption. Public purpose is always presumed
Provisions of the taxing act are not to extended by
implication
Tax laws are special laws and prevail over general laws
APPLICATION OF TAX LAWS

GENERAL RULE: Tax laws are prospective in operation
EXCEPTION: While it is not favored, a statute may nevertheless

operate retroactively provided it is expressly declared or is clearly
the legislative intent (Cebu Portland Cement v. Collector, G.R. no

18649, February 24, 1965)
EXCEPTION TO NON-RETROACTIVE APPLICATION OF

TAX RULINGS TO TAXPAYERS
1.
2.
3.
Where the taxpayer deliberately misstates or omits material

facts from his return or any document required of him by the
BIR
Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based; or
Where the taxpayer acted in bad faith (Aban, Law on Basic
Taxation in the Philippines)
KINDS OF PROVISIONS OF TAX

1.
2.
MANDATORY Those provisions intended for the security of

the citizens which are designed to insure equality of taxation
or certainty as to the nature and amount of each persons
tax
DIRECTORY Those provisions designed merely for the
information or direction of officers to secure methodical and
systematic modes of proceedings
IMPORTANCE OF DISTINCTION The omission to follow

mandatory provisions renders invalid the act or proceeding to
which it relates while omission to follow directory provisions does
not involve such consequence
PART II INCOME TAXATION

CHAPTER I GENERAL PRINCIPLES
I. OVERVIEW OF INCOME TAXATION
1. INCOME TAX is a tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on a
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TAXATION I REVIEWER
ATTY. C. VILLENA
persons income, emoluments, profits and the like. Income tax
is a direct tax on actual or presumed income (gross or net) of
taxpayers during the taxable year.
c) Semi-Schedular or Semi-Global Tax System

It is a tax on the net income or the entire income realized
in one taxable year, levied upon corporate an individuals
income in excess of specified amounts, net of certain
deductions and exemptions provided by law.
A final income tax may also be imposed on certain onetime transactions like the sale of real property classified as
capital assets
FISHER V. TRINIDAD, 43 PHIL 973

An income tax on the yearly profits arising from property, salary,
private revenue, capital invested, and all other sources of income.
What is taxed is the profit, not the source.
2. PHILIPPINE INCOME TAX LAW
3.
It is embodied in Title II (Tax on Income) of the NIRC as

well as in numerous: (a) revenue regulations promulgated
by the Secretary of Finance upon recommendation of CIR;
and (b) BIR rulings and other administrative issuances
signed by the CIR to implement and interpret various
provisions of the tax law.
INCOME TAX SYSTEM

a) Global Tax System (prevailing until 1981) All
items of gross income, deductions, and personal and
additional exemptions, if any, were declared in one income
tax return, and one set of tax rates were applied on the
net taxable income.
b)
deductions) or net income. i.e. Gross Income less

allowable deductions)
Schedular Tax System - (introduced by BP 135)

Different types of income are subject to different rates,
whether graduated or flat income tax rates. Tax rates will
depend on the classification of the taxable income (without
Global, in sense that, all compensation income, business

or professional income, capital gain, passive income, and
other income not subject to final tax are added together to
arrive at the gross income and after deducting the sum
allowable deductions from business or professional income,
capital gain and passive income and other income not
subject to final tax, in the case of corporation, as well as
personal and additional exemptions in the case of
individual taxpayer, the taxable income i.e. Gross income
less allowable deductions and exemptions) if subjected to
one set of graduated tax rates (if individual) or normal
corporate income tax rate (if corporation)
Schedular, in the sense that, passive investment incomes
subject to final tax and capital gains from the sale or
transfer of shares of stocks of a domestic corporation and
real properties remain subject to different sets of tax rates
covered by different tax returns.
d) Progressive System The tax rate increases as the

tax base increases.
e) Regressive System The tax rate increases as the

tax base increases.
4. FEATURES OF PHILIPPINE INCOME TAXATION

a) Direct Tax the tax burden is borne by the income
recipient upon whom the tax is imposed. It is a tax
demanded from the very person who, it is intended or
desired, should pay it.
b) Progressive Tax the tax base increases as the tax
rate increases. It is founded on the ability to pay principle

(those who receive more income and thus have more
capacity to pay shall pay more in taxes) and is consistent
Page | 39

with the Constitutional provision that Congress shall
evolve a progressive system of taxation.
he qualifies as a non-resident citizen; hence, his foreignsource income shall be exempt from Philippine income tax.
b) Residence or Domicile Principle An alien is
c) Comprehensive System of imposing Income
subject to Philippine income tax because his residence in

the Philippines. Thus, a resident alien is liable to pay
Philippine income tax only on his income from sources
within the Philippines but is exempt from tax on his income
from sources outside the Philippines.
Tax by adopting the citizenship principle, the residence

principle, and the source principle.
d) Semi-Schedular or Semi-Global System

taxable income (i.e. gross income less allowable
deductions and exemptions) is subjected to one graduated
tax rates (if an individual) or normal corporate income tax
rate (if a corporation). Passive investment incomes subject
to final tax and capital gains from sales of shares of stocks
of a domestic corporation and real properties remain
subject to different sets of tax rates and covered by
different tax returns
c) Source of Income Principle An alien is subject

to Philippine income tax because he derives income from
sources within the Philippines. Thus, a non-resident alien
or non-resident foreign corporation is liable to pay
Philippine income tax on income from sources within the
Philippines, such as dividend, interest, rent, or royalty,
despite the fact that he has not set foot in the Philippines.
e) American Origin the authoritative decisions of the
US courts and officials charged with enforcing US Internal

Revenue Code have peculiar force and persuasive effect for
the Philippines. Great weight should be given to the
construction placed upon a revenue law, whose meaning is
doubtful, by the department charged with its execution.
5. CRITERIA IN IMPOSING INCOME TAX
The income tax law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of
resident citizen and domestic corporations that subject
them to income tax liability on their income from all
sources within and without the Philippines, while the law
adopts the source rule with respect to income received by
taxpayers, other than resident citizen and domestic
corporations. (Tan v. Del Rosario, 237 SCRA 324, 334)
II.
GENERAL PRINCIPLES OF INCOME TAXATION

SECTION 23, NIRC
1. RESIDENT FILIPINO CITIZEN - A citizen of the
2.
3.
OVERSEAS FILIPINO CONTRACT WORKER OR

SEAMAN - An individual citizen of the Philippines who is
working and deriving income from abroad such as an

overseas contract worker is taxable only on income from
sources within the Philippines: provided, that a seaman
who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract
worker.
a) Citizenship or Nationality Principle A

citizen of the Philippines is subject to Philippine income tax
(a) on his worldwide income, if he resides in the
Philippines, or (b) only in his Philippine-source income, if
Philippines residing therein is taxable on all income derived

from sources within and without the Philippines.
NONRESIDENT FILIPINO CITIZEN - A nonresident
citizen is taxable only on income derived from sources
4.
RESIDENT OR NONRESIDENT ALIEN INDIVIDUAL

As an alien individual, whether a resident or not of the
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TAXATION I REVIEWER
ATTY. C. VILLENA
5.
6.
Philippines, is taxable only on income derived from sources

DOMESTIC CORPORATION A domestic corporation is
taxable on all income derived from sources within and
without the Philippines.
FOREIGN CORPORATION A foreign corporation,
whether engaged or ot in trade or business in the
Philippines, is taxable only on income derived from sources
within the Philippines.
taxable on all income derived from sources within and

without the Philippines.
a.
Those who are citizens of the Philippines at the time
of adoption of the new Constitution (Feb. 2, 1987)
b.
Those who fathers or mothers are citizens of the
Philippines
c.
Those born before Jan. 17, 1973 of Filipino mothers,
who upon reaching the age of majority, elected
Philippine citizenship
d.
Those who are naturalized in accordance with law.
CHAPTER II CLASSIFICATION OF INCOME

TAXPAYERS
2.
I. SCOPE OF INCOME TAXATION

1.
DEFINITION OF TAXPAYER sec. 22 (N) any person subject

to tax imposed by THE TAX CODE
2.
DEFINITION OF PERSON sec 22 (A) means an individual, a

trust, estate or corporation
3.
WHO IS A PERSON LIABLE TO TAX
CIR V. PROCTER & GAMBLE (1991)

A "person liable for tax" has been held to be a "person subject to tax"
and properly considered a "taxpayer." The terms liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax.
NON-RESIDENT CITIZEN OF THE PHILIPPINES sec. 22 (E)

Filipino citizens who are physically present abroad for an
uninterrupted period covering an entire taxable year.
a.
A non-resident citizen is one who establishes to the

satisfaction of the Commissioner of Internal Revenue
the fact of his physical presence abroad with a
definite intention to reside therein, including an
immigrant, permanent employee and contract worker
or seaman. Such Filipino shall be considered a nonresident citizen for such taxable year with respect to
the income he derived from foreign sources from the
date he actually departed from the Philippines.
b.
A Filipino citizen who has been previously considered

as a non-resident citizen, and who arrives in the
Philippines at any time during the taxable year to
reside therein permanently shall also be considered a
nonresident citizen for the taxable year in which he
arrived in the Philippines, with respect to this income
derived from sources abroad until the date of his
arrival in the Philippines
SILK AIR PTE V. CIR (2010)

The proper party to seek a refund of an indirect tax is the
STATUTORY TAXPAYER, the person on whom the tax is imposed by
law and who paid the same even if he shifts the burden to another.
II. INDIVIDUAL TAXPAYERS

A.
CITIZENS sec 1-2, Art IV 1987 CONSTITUTION

1.
RESIDENT CITIZEN Resident of the Philippines who are

residing in the Philippines. A resident Filipino citizen is
B.
ALIEN
1.
RESIDENT ALIEN sec 22 (F)

An individual whose residence is within the Philippines and
who is not a citizen thereof.
Page | 41

RR NO. 2, LAST PARAGRAPH

a.
Aliens actually present in the Philippines who are not mere
transients or sojourners;
b.
Aliens who live in the Philippines and have no definite
intention as to the time of return to their country or their
stay in the Philippines.
c.
Aliens who come to the Philippines and whose extended
stay may be necessary t accomplish the purpose of their
coming.
d.
Aliens who have acquired residence in the Philippine retain
their status as such until they abandon the same and
actually depart from the Philippines.
2.
c.
C.
Engaged in trade or business (NRA-ETB) Sec. 25 (A)

Include those performing personal services in the
Philippines, those who come and stay in the Philippines,
those who come and stay in the Philippines for an
aggregate period of more than 180 days during any
calendar year; and foreign technicians on a job contract for
one year.
b.
Not engaged in trade or business (NRA-NETB) Sec. 25 (B)

Include non-resident aliens whose stay in the Philippines
is 180 days or less.
Aliens employed by regional or area headquarters and
regional operating headquarters of multinational
companies in the Philippines, which are engaged in
international trade with affiliates and subsidiary branch
offices in the Asia Pacific Region.
d.
Aliens employed by offshore banking units
e.
Aliens by petroleum contractors and subcontractors
Sec. 22
NIRC Sec 22(B): General professional partnerships are

partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived
from engaging in any trade or business.
TAN V. DEL ROSARIO (1994)

A general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax
purposes and so subject to corporate income tax) IS NOT itself an
income taxpayer. The income tax is imposed not on the
professional partnership, which is tax exempt, but on the partners
themselves in their INDIVIDUAL capacity computed on their
distributive shares of partnership profits.
NON-RESIDENT ALIEN sec 22 (G)

Individuals who are neither citizens nor residence of the
Philippines.
a.
GENERAL PROFESSIONAL PARTNERSHIP

(B)
There is no distinction in income tax liability between a person who

practices his profession alone or individually and one who does it
through partnership with others in the exercise of a common
profession. The Congress did not intend SNIT to cover corporations
and partnerships which are independent subject to the payment of
income tax.
KINDS OF PARTNERSHIPS UNDER THE TAX CODE

1.
TAXABLE PARTNERSHIPS No matter how created or

organized, they are subject to income tax which, for
purposes of the categorization, are by law assimilated to be
within the context of (and legally contemplated as)
corporations
2.
EXEMPT PARTNERSHIPS are not similarly identified as

corporations nor even considered as independent taxable
entities for income tax purposes. An example of such is a
general professional partnership. Here, the partners
themselves, and not the partnership, are liable for the
payment of income tax in their INDIVIDUAL CAPACITY
computed on their respective and distributive shares of
profits.
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TAXATION I REVIEWER
ATTY. C. VILLENA
III. ESTATES AND TRUSTS
A.
ESTATE refers to the mass of properties left by a deceased

person.
SUBJECT TO INCOME TAX:

1. Income tax for individuals: From January to the time of
Death (Sec 24 and 25)
2. Income tax of the estate: If the estate is under
administration or judicial settlement (Sec 60)
B.
TRUST Right to property, whether real or personal, held by

one person for the benefit of another
CLASSIFICATION OF TRUSTS FOR TAX PURPOSES:

1. Taxable and Tax-exempt trusts
2. Irrevocable and revocable trusts
3. Trust administered in the Philippines and trust
administered in a foreign country Only trusts
administered in the Philippines are subject to tax
REVOCABLE TRUST A kind of trust where the power to revert to
grantor title to any part of the corpus (body) of the trust is vested:
a. In the grantor, either alone or in conjunction with any
person having substantial adverse interest in the
disposition of the corpus or the income therefrom; or
b. In any person not having a substantial adverse interest in
the disposition of the corpus or the income therefrom
IRREVOCABLE TRUST A kind of trust which cannot be altered
without the consent of the beneficiary
NOTE: The income of a revocable trust is included in

computing the taxable income of the grantor without any of
the deductions allowed for estates while the income of an
irrevocable trust is a separate taxable entity subject to tax as
income after deducting the allowable deductions
C. APPLICATION OF TAX
Sec 60: The tax imposed by this title upon individuals shall apply
to the income of estates or any kind of property held in trust,
including
(1) Income accumulated in trust for the benefit of unborn
or unascertained persons with contingent interests,
and income accumulated or held for future distribution
under the terms of the will or trust
(2) Income to be distributed by the fiduciary to the
beneficiaries and collected by the guardian of an infant
(3) Income derived by estates of deceased persons during
the period of administration or settlement of the estate
(4) Income which, in the discretion of the fiduciary, may
be distributed to the beneficiaries or accumulated
EXCEPTIONS: This shall not apply to employees trust which forms
part of a pension, stock bonus, or profit-sharing plan of an
employer for the benefit of his employees
CIR V. VISAYAS ELECTRIC 23 SCRA 715

To qualify for exemption, the employees trust (pension) fund must
refer to a definite program, scheme, or plan. It must be set up in
good, actuarially sound, and not to be used or controlled in any way
by the company. It must extend retirement and pension benefits for
the employees
CIR V. CA, CTA AND GCL RETIREMENT PLAN

207 SCRA 715
The tax law has singled out employees' trusts for tax exemption.
Employees' trusts or benefit plans normally provide economic
assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which
members of the Plan may be exposed. It is an independent and
additional source of protection for the working group. What is more, it
is established for their exclusive benefit and for no other purpose.
Page | 43

IV. CORPORATIONS
A. DEFINITON OF A CORPORATION sec. 22 (B)
Corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or
insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant
to an operating or consortium agreement under a service contract
with the Government.
1. PARTNERSHIPS (Art 1767-1769 NCC)
Art. 1767. By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the
exercise of a profession.
Art. 1768. The partnership has a judicial personality separate and
distinct from that of each of the partners, even in case of failure to
comply with the requirements of Article 1772, first paragraph. (n)
Art. 1769. In determining whether a partnership exists, these rules
shall apply:
1. Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third
persons;
2. Co-ownership or co-possession does not of itself establish a
partnership, whether such-co-owners or co-possessors do or
do not share any profits made by the use of the property;
3. The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which
the returns are derived;
4. The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits
were received in payment:
(a)
As a debt by installments or otherwise;
(b)
(c)
(d)
(e)
As wages of an employee or rent to a landlord;

As an annuity to a widow or representative of a
deceased partner;
As interest on a loan, though the amount of
payment vary with the profits of the business;
As the consideration for the sale of a goodwill of
a business or other property by installments or
otherwise.
ONA V. CIR 45 SCRA 74 (1972)

For tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment
the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the
heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding.
From the moment of such partition, the heirs are entitled already to
their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, and, accordingly
he becomes liable individually for all taxes in connection therewith. If
after such partition, he allows his share to be held in common with
his co-heirs under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is
formed.
EVANGELISTA V. COLLECTOR 102 PHIL 140 (1957)

The term corporation includes partnerships, no matter how created
or organized. This expression clearly indicates that a joint venture
need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax
on corporations. Partnership has been defined in the Civil Code
refers to two or more persons who bind themselves to contribute
money, property, or industry to a common fund, with the intention of
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TAXATION I REVIEWER
ATTY. C. VILLENA
dividing the profits among themselves. Thus, petitioners, being
engaged in real estate transactions for monetary gain and dividing
the same among themselves constitute a partnership so far as the
Code is concerned and are subject to income tax for corporation.
AFISCO INSURANCE CORP V. CIR 302 SCRA 1 (1999)
NIRC Sec 22(D): A foreign corporation is one which is not domestic
C. RESIDENT FOREIGN CORPORATION

NIRC Sec 22(H): Resident foreign corporation is a foreign
corporation engaged in trade or business within the Philippines
The term partnership includes a syndicate group, pool, joint venture

or other unincorporated organization, through or by means of which
any business financial operation or venture is carried on.
D. NON-RESIDENT CORPORATION
The ceding companies entered into a pool agreement or an

association clearly indicates a partnership or association since:
a.
The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the
pool. This common fund pays for the administration and
operation expenses of the pool
b.
The pool functions through an executive board, which
resembles the board of directors of a corporation, composed
of one representative for each of the ceding companies
c.
While the pool itself is not a reinsurer and does not issue any
insurance policy, its work is indispensable, beneficial and
economically useful to the business of the ceding companies
and Munich. The ceding companies share in the business
ceded to the pool and in the expenses according to a
Rules of Distribution annexed to the pool agreement. Profit
motive or business is, therefore, the primordial reason for the
pools formation.
CHAPTER III TAX BASE AND TAX RATES
A. CO-OWNERSHIP
Art 484 NCC: Art. 484. There is co-ownership whenever the

ownership of an undivided thing or right belongs to different
persons.
B. DOMESTIC CORPORATION
NIRC Sec 22(C): A domestic corporation is one which is created or

organized in the Philippines or under its laws
B. FOREIGN CORPORATION
NIRC Sec 22(I): Non-resident Corporation is a foreign corporation

not engaged in trade or business within the Philippines
TAXABLE INCOME Gross income less deductions and/or

personal and additional exemptions, if any authorized by NIRC or
other special laws
I. INDIVIDUALS
D. CITIZENS
1. RESIDENT CITIZEN (RC)
TAXABLE INCOME
TAX SOURCE: All sources within and without Philippines
(WIWO) (Sec 24.A.1.a)
TAX BASE: Taxable Income (Sec 24.A.1.a)
TAX RATE: Graduated Rates 5-32% (Sec 24.A.2)
PASSIVE INCOME
BANK DEPOSITS: Final Tax rate 20% (Sec 24.B.1)
FDCU/OBU: 7.5% (Sec 24.B.1)
LONG-TERM DEPOSIT: Exempt (Sec 24.B.1)
However, should the holder pre-terminate before
the 5th year:
4 yrs to less than 5 yrs = 5%
Less than 3 yrs
= 20%
ROYALTIES: 20% (Sec 24.B.1)
EXCEPT: Books, literary works and musical
Page | 45

Compositions
= 10%
PRIZES & WINNINGS: 20% (Sec 24.B.1)
EXCEPT: If 10K or less = Graduated rates
PCSO & LOTTO
= Exempt
CASH/PROPERTY DIVIDENDS: Final tax 10% (Sec
24.B.2)
CAPITAL GAINS TAX (CGT)
REAL PROPERTY: Final tax 6% on GSP or FMV whichever
is higher (Sec 24.D.1)
However, Sale of real property to
government/GOCC may be taxed based 6% or
graduated rates at the option of the taxpayer
EXCEPTIONS (Sec 24.D.2):
Proceeds from sale of principal residence by
natural persons used to construct or acquire new
principal residence = Exempt if:
(1) Historical cost or adjusted basis of real
property sold shall be carried over to the new
principal residence
(2) CIR shall be informed within 30 days from
sale of intent to avail of tax exemption
(3) Tax exemption can only be availed once
every 10 yrs
(4) If no full utilization of sale proceeds,
unutilized portion is subject to CGT
(computed at GSP/FMV at the time of sale
multiplied by fraction of unutilized portion)
SHARES OF STOCK NOT LISTED/TRADED IN PSE (Sec
24.C):
Not over 100K
= 5%
In excess of 100K
= 10%
2. NON-RESIDENT CITIZEN (NRC)

TAXABLE INCOME
TAX SOURCE: All sources within the Philippines (Sec
24.A.1.a; Sec 23.C)
TAX BASE: Taxable Income (Sec 24.A.1.b)

PASSIVE INCOME
FCDU/OBU: Exempt (Sec 24.B.1; Sec 27.D.3; Sec
28.A.7.b)
the 5th year:
Less than 3 yrs
= 20%
Compositions
= 10%
PCSO & LOTTO
=
Exempt
CASH/PROPERTY DIVIDENDS: Final Tax 10% (Sec
24.B.2)
principal residence
every 10 yrs
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TAXATION I REVIEWER
ATTY. C. VILLENA
24.C):
Not over 100K
= 5%
In excess of 100K
= 10%
E. ALIENS
1. RESIDENT ALIEN (RA)
TAXABLE INCOME
24.A.1.c)
TAX BASE: Taxable Income (Sec 24.A.1.c)
PASSIVE INCOME
FCDU/OBU: 7.5% (sec 24.B.1)
the 5th year:
Less than 3 yrs
= 20%
Compositions
= 10%
PCSO & LOTTO
= Exempt
CASH/PROPERTY DIVIDENDS: Final tax 10% (Sec
24.B.2)

principal residence
every 10 yrs
SHARES OF STOCK NOT LISTED/TRADED IN PSE:
Not over 100K
= 5%
In excess of 100K
= 10%
2. NON-RESIDENT ALIEN
b. NON-RESIDENT ALIEN ENGAGED IN TRADE OR
BUSINESS (NRA-ETB)
TAXABLE INCOME
25.A.1)
TAX BASE: Taxable Income (Sec 25.A.1)
PASSIVE INCOME:
BANK DEPOSITS: Final Tax rate 20%(Sec 25.A.2)
28.A.7.b)
Page | 47

LONG-TERM DEPOSIT: Exempt (Sec 25.A.2)
However, should the holder pre-terminate the
deposit before the 5th year:
Less than 3 yrs
= 20%
ROYALTIES: 20% on total amount (Sec 25.A.2)
EXCEPT: Books, literary works & musical
compositions
= 10%
PRIZES & WINNINGS: 20% (Sec 25.A.2)
EXCEPT: If 10K or less = 10%
PCSO & LOTTO
= Exempt
CASH/PROPERTY DIVIDENDS: 20%
CINEMATOGRAPHIC FILMS: 25% gross income
REAL PROPERTY: Applicable only to all properties
located in the Philippines
Final tax 6% on GSP or FMV whichever is higher (Sec
24.D.1 & D.2 in relation to Sec 25.A.1)
EXCEPTIONS:
principal residence
every 10 yrs
SHARES OF STOCK NOT LISTED/TRADED IN PSE (sec

24.C in relation to Sec 25.A.2):
Not over 100K
= 5%
In excess of 100K
= 10%
c. NON-RESIDENT ALIEN NOT ENGAGED IN

TRADE OR BUSINESS (NRA-NETB)
25.B)
TAX BASE: Gross Income (Sec 25.B)
TAX RATE: 25% (Sec 25.B)
PASSIVE INCOME
28.A.7.b)
3. SPECIAL ALIENS
a. REGIONAL OR AREA HEADQUARTERS (RHQ)
TAX BASE: Gross Income
TAX RATE: 15%
NOTE: Applicable to also Filipinos holding the same
position as those of aliens in Multinational Companies
(MCs)
b. OFFSHORE BANKING UNITS (OBU)

TAX RATE:15%
NOTE: Applicable also to Filipinos holding the same
position as those of aliens in MCs
c. PETROLEUM SERVICE CONTRACTORS (PSC)

TAX RATE: 15%
NOTE: Applicable also to Filipinos holding the same
position as those of aliens in MCs
Page | 48
TAXATION I REVIEWER
ATTY. C. VILLENA
MINIMUM WAGE EARNERS (MWE)
MINIMUM WAGE EARNERS Workers in the private sector paid the
statutory minimum wage (SMW)
Or employee in the public sector with compensation not

more than the SMW in the non-agricultural sector where he
is assigned
TAX RATE: Exempt including Holiday pay, OT pay, Night Diff pay;
and hazard pay (Sec 24 last par)
EXEMPTIONS: Additional compensation in excess of the allowable
statutory amount of 30K, taxable allowances and other taxable
income other than SMW, holiday pay, OT pay, hazard pay and
Night diff pay shall not be exempt from income tax.
MEMBERS OF GENERAL PROFESSIONAL

PARTNERSHIP (GPP)
GPP as such shall not be subject to income tax

Persons engaged in business as partners in GPP shall be
liable for income tax only in their separate and individual
capacities
For purposes of computing the distributive share of partners,
the net income of the partnership shall be computed in the
same manner as a corporation
II. CORPORATIONS
1. DOMESTIC CORPORATIONS
a.
b.
c.
d.
2.
In general
Special Corporations
i. Propriety educational institutions and Hospitals
ii. GOCCs
Passive income
i.
Interest, royalties
ii.
Dividends
Capital gains
i.
Real property classified as capital asset
ii.
Shares of stock
RESIDENT FOREIGN CORPORATIONS
a. IN GENERAL
N.V. REEDERIJ AMSTERDAM V. COMMISSIONER
162 SCRA 487 (1988)
Petitioner N.V. Reederij AMSTERDAM is a foreign corporation not
authorized or licensed to do business in the Philippines and it made
only two calls in Philippine ports (1963 and 1964). In order that a
foreign corporation may be considered engaged in trade or business,
its business transactions must be continuous. Casual business
activity in the Philippines by a foreign corporation as in the case at
bar, does not amount to engaging in trade or business in the
Philippines for income tax purposes.
a. SPECIAL FOREIGN CORPORATIONS

1)
2)
3)
International carriers
Offshore banking units
Regional or area headquarters and regional operating
headquarters
b. PASSIVE INCOME
1)
2)
Interest
Dividends
c. CAPITAL GAINS
d. SUBSIDIARY V. BRACH OF A FOREIGN
CORPORATION
e. BRANCH PROFIT REMITTANCE TAX
MARUBENI CORP V. COMMISSIONER
177 SCRA 500 (1989)
The said dividends that were remitted directly to Japan are not
considered branch profits for purposes of the 15% profit remittance
tax.
The investment was made by Marubeni Japan and the dividends
were remitted to it directly. The Philippine branch had no participation
Page | 49

or invention, directly or indirectly. Marubeni Japan cannot now claim

that the investment is a consequence of its trade or business in the
Philippines and avail of the lower tax rate.
Being a non-resident foreign corporation, as a general rule, is taxed
35 % of its gross income from all sources within the Philippines.
BANK OF AMERICA NT V. CA 234 SCRA 302 (1994)

In the 15% remittance tax, the law specifies its own tax base to be on
the "profit remitted abroad." There is absolutely nothing equivocal or
uncertain about the language of the provision. The tax is imposed on
the amount sent abroad, and the law calls for nothing further. The
taxpayer is a single entity, and it is the local branch of the
corporation, using its own local funds, which remits the tax to the
Philippine Government.
Rationale of 15%: To equalize/ share the burden of income taxation
with foreign corporations.
3. NON-RESIDENT CORPORATION (NRC)

d. IN GENERAL
e. SPECIAL NON-RESIDENT FOREIGN
CORPORATIONS
f. PASSIVE INCOME
(1) INTEREST
(2) DIVIDENDS
COMMISSIONER V. PROCTER & GAMBLE PMC, 203 SCRA
377 (1991)
The ordinary 35% tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation goes
down to 15% if the country of domicile of the foreign stockholder
corporation shall allow such foreign corporation a tax credit for taxes
deemed paid in the Philippines, applicable against the tax payable to
the domiciliary country by the foreign stockholder corporation. Such
tax credit for taxes deemed paid in the Philippines must, as a
minimum, reach an amount equivalent to 20 percentage points which
represents the difference between the regular 35% dividend tax rate
and the preferred 15% tax rate. Since the US Congress desires to
avoid or reduce double taxation of the same income stream, it allows
a tax credit of both (i) the Philippine dividend ax actually withheld,
and (ii) the tax credit for the Philippine corporate income tax actually
paid by P&G Philippines but deemed paid by P&G USA.
With Respect to Taxes on Income, the Philippines, by treaty
commitment, reduced the regular rate of dividend tax to a maximum
of 20% of the gross amount of dividends paid to US parent
corporations, and established a treaty obligation on the part of the
United States that it shall allow to a US parent corporation receiving
dividends from its Philippine subsidiary a[tax] credit for the
appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary].
COMMISSIONER V. WANDER PHILS, 160 SCRA 573

(1988)
Switzerland does not impose any tax on dividends received by Swiss
corporation from corporations domiciled in foreign countries. While
Sec. 24 of the Tax Code stipulates a 35% tax on gross income
received from all sources within the Philippines, an exception can be
made that the tax can be reduced to 15% subject to the condition
that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20%. This represents the difference
between the regular tax of 35% and the 15% tax on dividends.
g. CAPITAL GAINS
4. MINIMUM CORPORATE INCOME TAX (MCIT)
a. TAX RATE & TAX BASE (Sec 27.E.1)
TAX BASE: Gross Income as of the end of the taxable
year beginning on the 4th taxable year, when the
minimum income tax is greater than NCIT
TAX RATE: 2%
Page | 50
TAXATION I REVIEWER
ATTY. C. VILLENA
b. CARRY FORWARD EXCESS MINIMUM TAX (Sec
27.E.2)
o
Excess of MCIT over the NCIT shall be carried

forward and credited against the NCIT for the next
3 yrs
c. GROSS INCOME (Sec 27.E.4)

o
o
o
Gross sales less sales returns, discounts and

allowances and cost of goods sold
Cost of goods sold all business expenses directly
incurred to produce merchandise
For sale f service, gross income is gross receipts
less sales returns, allowances, discounts and cost
of services
CREBA V. ROMULO, G.R. NO 160756 (2010)

The MCIT is not a tax on capital because MCIT is imposed on gross
income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other
direct expenses from gross sales. Clearly, the capital is not being
taxed.
The MCIT is not an additional tax imposition. It is imposed in lieu of
the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a very much
reduced 2% and uses as the base the corporations gross income.
Besides, there is no legal objection to a broader tax based or taxable
income by eliminating all deductible items and at the same time
reducing the applicable tax rate.
MANILA BANKING CORP V. CIR, G.R. 168118 (2006)

The intent of Congress relative to the minimum corporate income tax
is to grant a four (4)-year suspension of tax payment to newly formed
corporations. Corporations still starting their business operations
have to stabilize their venture in order to obtain a stronghold in the
industry. It does not come as a surprise then when many companies
reported losses in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the

initial stages of their operations, the lawmaking body saw the need to
provide a grace period of four years from their registration before
they pay their minimum corporate income tax.
Let it be stressed that Revenue Regulations No. 9-98, implementing
R.A. No. 8424 imposing the minimum corporate income tax on
corporations, provides that for purposes of this tax, the date when
business operations commence is the year in which the domestic
corporation registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of operations of
thrift banks, such as herein petitioner, is the date the particular thrift
bank was registered with the SEC or the date when the Certificate of
Authority to Operate was issued to it by the Monetary Board of the
BSP, whichever comes later.
5. IMPROPERLY ACCUMULATED EARNINGS (TAX

(IAET)
a. DEFINITION AND TAX RATE (Sec 29.A and
B.1)
IMPROPERLY ACCUMULATED EARNINGS TAX surtax
imposed on corporations formed or availed for the
purpose or the shareholders of another corporation, by
permitting earnings and profits to accumulate instead of
being divided or distributed
TAX RATE: 10% of improperly accumulated taxable
income
b. CORPORATION SUBJECT TO IAET (Sec

29.B.1)
APPLICABLE TO: Corporations formed or availed of to

evade tax by permitting earnings and profit to
accumulate instead of being divided or distributed
c. EXCEPTIONS (Sec 29.B.2)
(1) Publicly-held corporations

(2) Banks and other non-bank financial intermediaries
(3) Insurance companies
Page | 51

d. EVIDENCE TO AVOID INCOME TAX (Sec 29.C)

The fact that a company is merely a holding company is
PRIMA FACIE evidence of a purpose to evade tax
e. IMPROPERLY ACCUMULATED TAXABLE INCOME

(Sec 29.D)
Computed by adding to the taxable income:

(1) Income exempt from tax
(2) Income excluded from gross income
(3) Income subject to final tax; and the amount of net
operating loss carry-over deducted
And deducting:
(1) Dividends actually or constructively paid
(2) Income tax paid for the taxable year
CIR V. TUASON, 173 SCRA 397

In this case, Tuason Inc, a mere holding company for the corporation
did not involve itself in the development of subdivisions but merely
subdivided its own lots and sold them for bigger profits. It derived its
income mostly from interest, dividends, and rentals realized from the
sale of realty.
Another circumstance supporting that presumption is that 99.99% in

value of the outstanding stock of Tuason, Inc., is owned by Antonio
Tuason himself. The Commissioner "conclusively presumed" that
when the corporation accumulated (instead of distributing to the
shareholders) a surplus of over P3 million from its earnings in 1975
to 1978, the purpose was to avoid the imposition of the progressive
income tax on its shareholders.
Since the company as of the time of the assessment in 1981, had
invested in its business operations only P773K out of its
accumulated surplus profits of P3.2M for 1975-1978, its remaining
accumulated surplus profits of P2.4M are subject to the 25% surtax."
The importance of liability is the purpose behind the accumulation of

the income and not the consequences of the accumulation. Thus, if
the failure to pay dividends were for the purpose of using the
undistributed earnings & profits for the reasonable needs of the
business, that purpose would not fall to overcome the presumption
and correctness of CIR.
CYANIAMID V. CA, 322 SCRA 639 (2000)

The amendatory provision of Section 25 of the 1977 NIRC, which
was PD 1739, enumerated the corporations exempt from the
imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank
of the Philippines to hold shares of stocks of banks. Petitioner does
not fall among those exempt classes. Besides, the rule on
enumeration is that the express mention of one person, thing, act, or
consequence is construed to exclude all others. Laws granting
exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. The burden of
proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed, a burden which petitioner
here has failed to discharge.
If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and the
taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first
going forward with evidence, is on the taxpayer. This applies even if
the corporation is not a mere holding or investment company and
does not have an unreasonable accumulation of earnings or profits.
In order to determine whether profits are accumulated for the
reasonable needs to avoid the surtax upon shareholders, it must be
shown that the controlling intention of the taxpayer is manifest at the
time of accumulation, not intentions declared subsequently, which
are mere afterthoughts. Furthermore, the accumulated profits must
be used within a reasonable time after the close of the taxable year.
Page | 52
TAXATION I REVIEWER
ATTY. C. VILLENA
In the instant case, petitioner did not establish, by clear and
convincing evidence, that such accumulation of profit was for the
immediate needs of the business.
The burden of proof to establish that the profits accumulated were
not beyond the reasonable needs of the company, remained on the
taxpayer. Unless rebutted, all presumptions generally are indulged in
favor of the correctness of the CIR's assessment against the
taxpayer. Petitioner failed to prove the CIR incorrect, hence it is liable
for the tax assessed by CIR.
6. EXEMPTION FROM TAX ON CORPORATION

a. EDUCATIONAL
JESUS SACRED HEART COLLEGE V. CIR,
G.R. NO L-6807 (1954)
Actual realization of profits is immaterial; what is important is the
presence of the purpose to make a profit over and above the cost of
instruction. At any rate, the main evidence of the purpose of a
corporation should be its articles of incorporation and by-laws, for
such purpose is required by statute to be stated in the articles of
incorporation and the by-laws outline the administrative organization
of the corporation which, in turn, is supposed to insure or facilitate
the accomplishment of said purpose.
b. COOPERATIVES
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE V. CIR,
G.R. NO 182722 (2010)
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared
policy of the State to foster the creation and growth of cooperative as
a practical vehicle for promoting self-reliance and harnessing people
towards the attainment of economic development and social justice.
Thus, to encourage the formation of cooperatives and to create an
atmosphere conducive to their growth and development, the State

extends all forms of assistance to them, one of which is providing
cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment
is apparent in Articles 61 and 62 of RA 6938.
Cooperatives, including their members, deserve a preferential tax
treatment because of the vital role they play in the attainment of
economic development and social justice. Thus, although taxes are
the lifeblood of the government, the States power to tax must give
way to foster the creation and growth of cooperatives. To borrow the
words of Justice Isagani A. Cruz: The power of taxation, while
indispensable, is not absolute and may be subordinated to the
demands of social justice.
CORPORATIONS
A. DOMESTIC CORPORATION (DC)
TAXABLE INCOME
TAX SOURCE: All sources within and without the Philippines
(Sec 27.A)
TAX BASE:
Normal Corporate Income Tax or NCIT: Taxable Income
(Sec 27.A)
GROSS INCOME METHOD: Gross Income provided that
the following are met (Sec 27.A):
(1) Tax effort ratio (20%) of GNP
(2) Ratio of 40% income tax collection to total tax
revenues
(3) VAT tax effort of 4% of GNP; and
(4) 09.% ratio of Consolidated Public Sector Financial
Position (CPSFP) to GNP
(5) Availing firm must have ratio of cost of sales to
gross sales or receipts from all sources not
exceeding 55%
Page | 53

(6) Election of gross income tax option shall be
irrevocable for 3 consecutive taxable years
Minimum Corporate Income Tax or MCIT: Gross Income
(Sec 27.E.1)
TAX RATE:
NCIT: 30%
GNP: 15%
MCIT: 2%
PASSIVE INCOME
BANK DEPOSIT: Final Tax 20%
FCDU/OBU: 7.5%
LOANS: NA
ROYALTIES: 20%
PRIZES & WINNINGS: 30%
CASH/PROPERTY DIVIDENDS: 30%
REAL PROPERTY: Final Tax 6% on real property not actually
used in the business of a corporation and are treated as
capital assets, based GSP or FMV whichever is higher
Not over 100K
= 5%
In excess of 100K
= 10%
1. PROPRIETARY EDUCATIONAL INSTITUTIONS

AND HOSPITALS
APPLICABLE TO: Proprietary education institutions
(private school) and hospitals (non-profit)
TAX RATE: 10% on taxable income
Provided that:
(1) If gross income from unrelated trade or
business exceeds 50% of total gross income
derived from all sources, NCIT (30%) shall be
applied
(2) Unrelated trade or business conduct which is
not substantially related to the exercise or
performance by such educational or hospital

institution
2. GOCCs, AGENCIES & INSTRUMENTALITIES

All GOCCs, agencies or instrumentalities shall be subject
to pay NCIT/MCIT
EXCEPT: GSIS, SSS, Philippine Health Insurance Corp
(PHIC) and PCSO
B. FOREIGN CORPORATION
1. RESIDENT FOREIGN CORPORATION (RFC)
TAXABLE INCOME
28.A.1)
TAX BASE:
NCIT: Taxable Income (Sec 28.A.1)
MCIT: Gross Income (Sec 28.A.2)
TAX RATE:
NCIT: 30% (Sec 28.A.1)
MCIT: 2% (Sec 28.A.2)
PASSIVE INCOME
BANK DEPOSITS: Final tax 20% (sec 28.A.7.a)
FDCU/OBU: 7.5% (28.A.7.a)
LOANS: NA
ROYALTIES: 20% (Sec 28.A.7.a)
PRIZES & WINNINGS: 30% (Sec 28.A.1)
CASH/PROPERTY DIVIDENDS: Exempt (Sec 28.7.d)
REAL PROPERTY: 30% (Sec 28.A.1)
28.A.7.c):
Not over 100K
= 5%
In excess of 100K
= 10%
BRANCH PROFIT REMITTANCE TAX (BPRT): 15% imposed
on the profit remitted by the Philippine branch to its
head office. It shall be based on the total profits applied
Page | 54
TAXATION I REVIEWER
ATTY. C. VILLENA
or earmarked for remittance without any deduction for
the tax component thereof, such will not be considered
as branch profits (Sec 28.A.5)
EXCEPTION: It does not apply to activities
registered with PEZA. RR 2-98 also exempts
enterprises registered with SBMA and Clark Devt
Authority (CDA) under RA 7227
Remittances not considered as branch profits:
Interest, dividends, rents, royalties including
premiums, annuities, emoluments or other fixed
or determinable annual, periodic or casual gains,
profits, income and capital gains received by a
foreign corporation during each taxable year
from all sources within the Philippines shall not
be treated as branch profits (Sec 28.A.5)
Branch profits: When they are effectively
connected with the conduct of the branchs trade
or business in the Philippines (Sec 28.A.5)
NOTE: If branch, it is subject to BPRT. If it is a subsidiary, the
amounts received by RFC will be treated as dividends and becomes
part of its gross income taxable at 30%
HOME OFFICE (HO)-BRANCH RELATIONSHIP AND

PARENT-SUBSIDIARY RELATIONSHIP DISTINGUISHED
HOME OFFICE-BRANCH
Branch is classified as RFC
HO is classified as RFC
HO and Branch are taxed on
taxable income within the
Philippines
Income repatriation by Branch

to HO is referred to as Branch
profit remittances
PARENT-SUBSIDIARY
Subsidiary is classified as DC
Parent company is classified as
NRFC
Subsidiary is taxed on taxable
income within and without the
Philippines, while Parent
company is taxed on gross
income within the Philippines
Income repatriation by a
Subsidiary to Parent Company
is referred to as dividends
Branch profit remittances are

subject to 15% tax on
remittance of branch profits
effectively connected to the
conduct of the branchs trade or
business in the Philippines
HO and Branch are considered
as one and the same corporate
entity
Tax and other liability of the
Branch in the Philippines can be
collected from the HO in foreign
country as they are one and the
same
Dividends paid by DC to NFRC is

subject to the preferential rate
of 16% condition to the tax
sparing condition
Parent Company and Subsidiary

are two separate legal entities
Tax and other liability of the
Subsidiary cannot be collected
from the Parent Company in a
foreign country as they are
considered separate legal
entities
2. NON-RESIDENT FOREIGN CORPORATION (NRFC)

TAXABLE INCOME
28.B)
TAX BASE: Gross Income (Sec 28.B)
TAX RATE: 30% (Sec 28.B)
PASSIVE INCOME
BANK DEPOSITS: NA
FCDU/OBU: Exempt
EXCEPTION: Interest income from foreign currency loans
shall be subject to 10% (Sec 27.D.3; Sec 28.A.7.b)
LOANS: Final Withholding tax 20% on foreign loans (Sec
28.B.5.a)
ROYALTIES: 30% (Sec 28.B)
PRIZES & WINNINGS: 30% (Sec 28.B)
CASH/PROPERTY DIVIDENDS:
Dividends: 30% (Sec 28.B)
Intercorporate Dividends: Final withholding tax at
15% on cash/property dividends from domestic
corporation (Sec 28.B.5.b)
Page | 55

NOTE: The 15% tax on intercorporate dividends shall be collected

and paid subject to the condition that the country in which the
NRFC is domiciled shall allow a credit against the tax due from the
NRFC taxes deemed to have been paid in the Philippines equivalent
to 15%, which represents the difference between the regular
income tax of 30% and 15% tax on dividends
REAL PROPERTY: 30% (Sec 28.B)
Not over 100K
= 5%
In excess of 100K
= 10%
C. SPECIAL CORPORATIONS
1. INTERNATIONAL CARRIERS (AIR OR SEA)
Foreign Airline Corporation doing business in the
Philippines having been granted landing rights in any
Philippine port to perform international air transportation
service/activities or flight operations anywhere in the
world (Sec 2, RR 15-2002)
TAX RATE: 2.5% on its Gross Philippine billings (Sec
28.A.3)
Gross Philippine Billings:
(1) As to International Carrier the amount of
gross revenue from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue
and the place of payment of ticket or passage
document, provided:
(a) Tickets revalidated, exchanged and/or
endorsed to another international airline
form part of the Gross Philippine Billings if
the passenger boards a plane in a port or
point in the Philippines;
(b) For a flight which originates in the
Philippines, but transshipment of
passenger takes place at any port outside

the Philippines on another airline, only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to a point of transshipment
shall form part of Gross Philippine Billings
(2) As to International Shipping Gross revenue
whether for passenger, cargo or mail
originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
2. OFFSHORE BANKING UNITS (OBU)

Income derived from OBU from foreign currency
transactions with non-residents, other OBU or local
commercial banks: Exempt
Interest income derived from foreign currency loans
granted to residents other than OBU or local banks: Final
tax 10%
3. REGIONAL OR AREA HEADQUARTERS (RHQ)

RHQ is a branch established in the Philippines by MCs
and which headquarters do not earn or derive income
from the Philippines and which act as supervisory,
communications and coordinating center for their
affiliates (Sec 22.DD)
RQH: Exempt
4. REGIONAL OPERATING HEADQUARTERS (ROHQ)

ROHQ is a branch established in the Philippines by MCs
which are engaged in general administration and
planning; business planning and coordination; sourcing
and procurement of raw materials and components;
corporate finance advisory services; marketing control
and sales promotion; training and personnel
management; logistic services; research and
development services; technical support and
Page | 56
TAXATION I REVIEWER
ATTY. C. VILLENA
maintenance; data processing and communication;
business development (Sec 22.EE)
ROHQ: 10% of taxable income
5. NON-RESIDENT CINEMATOGRAPHIC FILM

OWNER, LESSOR OR DISTRIBUTOR (Sec
28.B.2)
TAX SOURCE: All sources within the Philippines
TAX RATE: 25%
6. NON-RESIDENT OWNER OR LESSOR OF VESSELS

(Sec 28.B.3)
TAX BASE: Gross rentals, lease or charter fees from leases or
charters
TAX RATE: 4.5%
7. NON-RESIDENT OWNER OR LESSOR OF

AIRCRAFT, MACHINERIES & EQUIPMENT (Sec
28.B.4)
TAX BASE: Gross rentals or fees
TAX RATE: 7.5%
CHAPTER V DEDUCTIONS
DEDUCTIONS Items or amounts authorized by law to be
EXCLUSION FROM GROSS INCOME AND ALLOWABLE

DEDUCTIONS FROM GROSS INCOME DISTINGUISHED
EXCLUSION
Refers to flow of wealth which
does not form part of the gross
income because:
1. It is exempted by the
fundamental law
2. It is exempted by the
statute
3. It does not come within the
definition of income
Material to arrive at gross
income
Something earned or received
which do not form part of the
gross income
1.
2.
NRA-NETB and NRFC tax base is gross income

RC, NRC and RA If income is purely compensation
income (except for premium payments on health and/or
hospitalization insurance)
Necessary to arrive at net or

taxable income
Something paid or incurred in
earning gross income
EXEMPTION AND ALLOWABLE DEDUCTION

DISTINGUISHED
EXEMPTION
An immunity or privilege, a
freedom from a charge or
burden to which others are
subjected
Generally receipts which are
excluded from taxable income
subtracted from pertinent items of gross income to arrive at the

taxable income
WHO ARE NOT ALLOWED TO CLAIL DEDUCTIONS
ALLOWABLE DEDUCTION
Refers to amounts which the
law allows as deductions from
gross income in order to arrive
at net income or taxable income
The theoretical personal, family

and living expenses of an
individual
ALLOWABLE DEDUCTION
A subtraction from gross income
Not receipts, but are,

expenditures which are
permitted to be subtracted from
income to determine the
amount subject to tax
Reduction of wealth which
helped earn the income subject
to tax
ALLOWABLE DEDUCTION AND PERSONAL EXEMPTION

DISTINGUISHED
Page | 57

AS TO
NATURE
AS TO
PURPOSE
AS TO
CLAIMANT
AS TO
AMOUNT
ALLOWABLE
DEDUCTION
In the nature of
business expenses
To recover or recoup
the cost of doing
business
May be claimed by
individual and
corporate taxpayers
EXCEPT:
1. NRA-NETB
2. NRFC
The actual expenses
paid or incurred in the
conduct of trade,
business or activity
PERSONAL EXEMPTIONS
(iii)
In the nature of personal,

living or family expenses
To recover the personal,
living & family expenses
paid or incurred during the
taxable year
Are granted only to
individual taxpayer
(iv)
EXCEPT: NRTA-NETB
Arbitrary amounts granted

to approximate the personal
expenses
I. CONDITIONS FOR DEDUCTIVILITY OF BUSINESS

EXPENSES
1. It must be ordinary and necessary.
Sec. 34 (A) (1) (a)
There shall be allowed as deduction from gross income all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to,
the development, management, operation and/or conduct of the
trade, business or exercise of a profession, including:
(i)
A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually
rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by the employer to the
employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;
(ii)
A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade,
business or profession;
A reasonable allowance for rentals and/or other payments

which are required as a condition for the continued use or
possession, for purposes of the trade, business or
profession, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity
other than that of a lessee, user or possessor;
A reasonable allowance for entertainment, amusement
and recreation expenses during the taxable year, that are
directly connected to the development, management and
operation of the trade, business or profession of the
taxpayer, or that are directly related to or in furtherance
of the conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the Secretary of
Finance may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into account
the needs as well as the special circumstances, nature
and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense
incurred for entertainment, amusement or recreation that
is contrary to law, morals public policy or public order
shall in no case be allowed as a deduction.
a) Test of deductibility
ESSO V. CIR, G.R. NO. L-28508-9 (1989)

Test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely:
(1) the expense must be ordinary and necessary;
(2) it must be paid or incurred within the taxable year; and
(3) it must be paid or incurred in carrying on a trade or
business.
In addition, the taxpayer must substantially prove by evidence or
records the deductions claimed under law, otherwise, the same will
be disallowed.
An expenses is considered necessary where the expenditure is
appropriate and helpful in the development of the taxpayers
business. It is ordinary when it connotes a payment which is normal
in relation to the business of the taxpayer and the surrounding
circumstances. Assuming that the expenditure is ordinary and
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TAXATION I REVIEWER
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necessary in the operation of the taxpayers business; the
expenditure, to be an allowable deduction as a business expense,
must be determined from the nature of the expenditure itself, and on
the extent and permanency of the work accomplished by the
expenditure. .
business of the particular taxpayer. Here it is admitted that the

bonuses are in fact compensation and were paid for services actually
rendered.
ZAMORA V. CIR, G.R. NO L-15290 (1963)
CM HOSKINS & CO. V. CIR G.R. NO. L-24059

(1969)
There shall be allowed as deductions all the ordinary and necessary

expenses paid or incurred during the taxable year, in carrying on any
trade or business. Since promotion expenses constitute one of the
deductions in conducting a business, same must testify these
requirements. Claim for the deduction of promotion expenses or
entertainment expenses must also be substantiated or supported by
record showing in detail the amount and nature of the expenses
incurred.
That to be deductible, said business expenses must be ordinary and
necessary expenses paid or incurred in carrying on any trade or
business; that those expenses must also meet the further test of
reasonableness in amount; that when some of the representation
expenses claimed by the taxpayer were evidenced by vouchers or
chits, but others were without vouchers or chits, the court should
determine from all available data, the amount properly deductible as
representation expenses.
KUENZLE &STREIFF V. CIR G.R.NO. L-18840

(1969)
It is a general rule that `Bonuses to employees made in good faith
and as additional compensation for the services actually rendered by
the employees are deductible, provided such payments, when added
to the stipulated salaries, do not exceed a reasonable compensation
for the services rendered.
The condition precedents to the deduction of bonuses to employees
are: (1) the payment of the bonuses is in fact compensation; (2) it
must be for personal services actually rendered; and (3) bonuses,
when added to the salaries, are `reasonable ... when measured by
the amount and quality of the services performed with relation to the
b) Test of reasonableness
"It is a general rule that 'Bonuses to employees made in good faith

and as additional compensation for the services actually rendered by
the employees are deductible, provided such payments, when added
to the stipulated salaries, do not exceed a reasonable compensation
for the services rendered'.
Conditions precedent to the deduction of employees:
1. Payment of the bonuses is in fact compensation
2. Must be for services actually rendered; and
3. Bonuses, when added to the salaries are reasonable when
measured by the amount and quality of the services
performed with relation to the business of the particular
taxpayer
CIR V. GENERAL FOODS

The advertising expense is not an ordinary and necessary expense,
but a capital expenditure that should be spread out over a
reasonable time. It failed to meet the two conditions:
(1) reasonableness of the amount incurred [their advertising expense
was almost double the amount of their administrative expense] and
(2) not be a capital outlay to create goodwill.
Advertising is generally of 2kinds:
(1) stimulate current sale of merchandise and
(2) stimulate future sale of merchandise.
The first kind is allowed, subject to reasonableness of the
expenditure. The second is normally spread out over time. The
companys advertising expense falls under the second kind, as the
company admitted it is to protect the brand franchise.
Page | 59

2. IT MUST BE PAID OR INCURRED DURING THE

TAXABLE YEAR. Sec. 34 (A) (1) (a)
CIR V. ISABELA CULTURAL CORPORATION G.R. NO.
172231 (2007)
The requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and
auditing services, are:
a. The expense must be ordinary and necessary;
b. It must have been paid or incurred during the taxable
year;
c. It must have been paid or incurred in carrying on the
trade or business of the taxpayer; and
d. It must be supported by receipts, records, or other
pertinent papers.
Under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year
but failed to do so cannot deduct the same for the next year.
3.
It must be paid or incurred in carrying on, or which are

directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise
of profession. Sec 34 (A) (1) (a)
CIR V.
CTA & SMITH KLINE & FRENCH OVERSEAS

(1984)
It is manifest that where an expense is clearly related to the

production of Philippine-derived income or to Philippine operations
(e.g. salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross income
acquired in the Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in
connection with finance, administration, and research and
development, all of which direct benefit its branches all over the
world, including the Philippines, fall under a different category
however. These are items which cannot be definitely allocated or
Identified with the operations of the Philippine branch. Smith Kline
can claim as its deductible share a ratable part of such expenses
based upon the ratio of the local branch's gross income to the total
gross income, worldwide, of the multinational corporation.
The matter of allocated expenses which are deductible under the law
cannot be the subject of an agreement between private parties nor
can the Commissioner acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common
knowledge that audited financial statements are generally completed
three or four months after the close of the accounting period. There
being no financial statements yet when the certification of January
11, 1972 was made the treasurer could not have correctly computed
Smith Kline's share in the home office overhead expenses in
accordance with the gross income formula prescribed in section 160
of the Revenue Regulations. What the treasurer certified was a mere
estimate.
GUITIERREZ V. CIR 14 SCRA 33

To be deductible, an expense must be:
a. Ordinary and necessary
b. Paid or incurred within the taxable year
c. Paid or incurred in carrying on a trade or business.
General Rule In computing net income no deduction shall in any
case be allowed in respect of
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate;
(3) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
the life of any officer or employee, or any person
financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the
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TAXATION I REVIEWER
ATTY. C. VILLENA
taxpayer is directly or indirectly a beneficiary under
such policy
4. IT MUST BE SUPPORTED BY ADEQUATE INVOICES OR

RECEIPTS.
Sec. 34 (A) (1) (b)
No deduction from gross income shall be allowed unless the
taxpayer shall substantiate with sufficient evidence, such as official
receipts or other adequate records:
(i) the amount of the expense being deducted, and
(ii) the direct connection or relation of the expense being deducted
to the development, management, operation and/or conduct of the
trade, business or profession of the taxpayer.
payments of royalty are not deductible as legitimate business

expenses.
6. THE TAX REQUIRED TO BE WITHHELD ON THE

EXPENSE PAID OR PAYABLE WAS REMITTED TO
THE BIR.
Sec. 34 (K)
Any amount paid or payable which is otherwise deductible from, or
taken into account in computing gross income or for which
depreciation or amortization may be allowed, shall be allowed as a
deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the BIR.
II.
TYPES OF DEDUCTIONS
1.
2.
3.
Itemized Deductions. Sec. 34 (A) (J)

Optional Standard Deduction (OSD) Sec. 34 (L)
Special Deductions under the NIRC and special laws. Sec.
34 and 38
GANCAYCO V. COLLECTOR (1961)

Gancayco's claim for representation expenses was disallowed. Such
disallowance is justified by the record, for, apart from the absence of
receipts, invoices or vouchers of the expenditures in question,
petitioner could not specify the items constituting the same, or when
or on whom or on what they were incurred.
5.
It is not contrary to law, public policy or morals.
Sec. 34 (A) (1) (c)

No deduction from gross income shall be allowed for any payment
made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local
government unit, or to an official or employee of a GOCC, or to an
official or employee or representative of a foreign government, or
to a private corporation, general professional partnership, or a
similar entity, if the payment constitutes a bribe or kickback.
3M PHILIPPINES, INC V. CIR (1988)

Although the Tax Code allows payments of royalty to be deducted
from gross income as business expenses, it is CB Circular No. 393
that defines what royalty payments are proper. Hence, improper
Itemized Deductions (BELT-DID-CRP)

Sec. 34 (A) (J)
1.
2.
Bad debts
Expenses (Ordinary and Necessary Trade, Business or
Professional)
3. Losses
4. Taxes
5. Depreciation
6. Interest
7. Depletion
8. Charitable & other contributions
9. Research & development
10. Contribution to Pension Trust
III. ITEMIZED DEDUCTIONS

1. INTEREST
REQUISITES FOR DEDUCTIBILITY Sec. 34 (B) (1)

a. There must be an indebtedness
b. There should be an interest expense paid or incurred
upon such indebtedness
Page | 61

c.
d.
e.
f.
g.
h.
i.
j.
Indebtedness must be that of the taxpayer

Indebtedness must be connected with the taxpayers
trade, business or exercise of profession
Interest expense must have been paid or incurred
during the taxable year
Interest must have been stipulated in writing
Interest must be legally due
Interest payment arrangement must not be between
related taxpayers
Interest must not be incurred to finance petroleum
operations
In case of interest incurred to acquire property used
in trade, business or exercise of profession, the same
was not treated as a capital expenditure.
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 through discount or
otherwise.
Allowed as deduction n the Such interest shall be

allowed as a deduction in the year the
indebtedness is paid.
If the indebtedness is payable in periodic

amortization, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be allowed
as deduction in such taxable year.
2.
If both the taxpayer and the person to whom the payment

has been made or is to be made are related persons
specified under Sec. 36 (B) of NIRC, viz:
a. Between members of the family (include only
brothers and sisters, spouse, ancestors, and lineal
descendants)
b. Between an individual and a corporation more than
50% in value of the outstanding stock is owned by
such individual; or
c. Between 2 corporations more than 50% in value of
the outstanding stock of each of which is owned by
same individual
d. Between grantor and fiduciary of any trust; or
e. Between 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. Between a fiduciary or a trust and a beneficiary of
such trust.
g. Interest on preferred stock which in reality is
dividend
h. Interest on unpaid salaries and bonuses
i. Interest calculated for cost keeping on account of
capital or surplus invested in business which does
not represent charges arising under interestbearing obligation
j. Interest paid when there is no stipulation for the
payment thereof.
If the indebtedness on which the interest expense is paid is
incurred to finance petroleum exploration in the
NOTE: GENERAL RULE ON DEDUCTION

The amount of interest expense or incurred within a taxable year
on indebtedness in connection with the taxpayers trade, business
of exercise of profession shall be allowed as a deduction from the
taxpayers gross income.
LIMITATION ON DEDUCTION:
Interest expense shall be reduced by 42% of the interest income
subjected to final tax. Effective jan. 1, 2009, the percentage shall
be 33%
Example:
Interest expense:
Interest Income subject to final tax:
Deductible interest expense:
[P2,000 (P1,500 x 33% )]
Year 2012
P2,000
P1,500
P1,505
Disallowed interest on tax arbitrage. Sec. 34 (B) (2)

TAX ARBITRAGE is a method of borrowing without entering
into a debtor/creditor relationship, often to resolve financing and
exchange control problems. In tax cases, back-to-back loan is
used to take advantage of the lower rate of tax on interest income
and a higher rate of tax on interest expense deduction.
Non-deductible Interest expense (from gross income)
3.
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TAXATION I REVIEWER
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Philippines. (The non-deductible interest expense herein
referred to pertains to interest or other consideration paid
or incurred by a service contractor engaged in the
discovery and production of indigenous petroleum in the
Philippines in respect of the financing of its petroleum
operations).
OPTIONAL TREATMENT OF INTEREST Expense Sec 34

(B) (3)
At the option of taxpayer, the interest incurred to acquire property
used in trade, business, exercise of a profession may be allowed
as:
As expense (outright deduction)
As capital expenditure (subject to depreciation)
PALANCA VS. CIR (1966)

Interests on taxes should be considered as interests on
indebtedness. Interest paid by herein respondent for the late
payment of her donor's tax is deductible from her gross income
PAPER INDUSTRIES CORP. VS. CA (1995)

The 35% transaction tax is imposed on interest income from
commercial papers issued in the primary money market. Being a tax
on interest, it is a tax on income.
The Tax Code does not prohibit the deduction of interest on a loan
incurred for acquiring machinery and equipment. Neither does it
compel the capitalization of interest payments on such a loan. The
Tax Code is simply silent on a taxpayer's right to elect one or the
other tax treatment of such interest payments. Accordingly, the
general rule that interest payments on a legally demandable loan are
deductible from gross income must be applied.
2. TAXES
Deductible taxes
All taxes, national, or local, paid or incurred during the taxable
year in connection with the taxpayers profession, trade or
business, are deductible from gross income.
Requisites for deductibility. SEC 34 (C) (1)

1.
It must be paid or incurred within the taxable year
2.
It must be paid or incurred in connection with the
taxpayers trade, profession or business
3.
It must be imposed directly on the taxpayer
4.
It must not be specifically excluded by law from being
deducted from the taxpayers gross income
Non-deductible taxes SEC 34 (C) (1)
1.
Philippine income tax
2.
Income tax imposed by authority of any foreign country
(except when the taxpayer signifies his desire to avail of
the tax credit for taxes of foreign country)
3.
Estate and donors taxes; and
4.
Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
Taxes, when refunded or credited, shall be included as part of
gross income in the year of receipt to the extent of the income tax
benefit of said deduction.
Limitations on deductions in case of NRAETB. SEC 34 (C) (2)
Taxes to be allowed only if and to the extent that they are
connected with income from sources within the Philippines
CIR VS. LEDNICKY (1964)

The right to deduct income taxes paid to foreign government from
the taxpayer's gross income is given only as an ALTERNATIVE to his
right to claim a tax credit for such foreign income taxes so that
unless the alien resident has a right to claim such tax credit if he so
chooses, he is precluded from deducting the foreign income taxes
from his gross income. The law provides that the deduction shall be
allowed if the taxpayer in his return does not signify his desire to
have the benefits of tax credits for taxes paid to foreign countries.
Thus, the statutes assumes that the taxpayer in question may also
signify his desire to claim a tax credit and waive the deduction.
Page | 63

c.
Foreign Tax Credit
TAX CREDIT a right of an income taxpayer to deduct from
income tax payable the foreign income tax he has paid to his
foreign country subject to limitation
Persons Allowed. SEC 34 (C) (3)
1.
Citizen and Domestic Corporations
The tax imposed shall be credited with the amount of
income taxes paid or incurred during the taxable year to
any foreign country
2.
Member of General Professional Partnership and/or
Beneficiary of an Estate or Trust
The tax imposed shall be credited with his proportionate
share of such taxes of the GPP or the estate or trust paid
or incurred during the taxable year to a foreign country, if
his distributive share of the income of such partnership or
trust is reported for taxation.
Limitations on Credit. SEC. 34 (C) (4)
1.
Per Country Limitation amount of credit to tax
paid/incurred to any country shall not exceed same
proportion of the tax against which such credit is taken
2.
Global Limitation total amount of credit shall not exceed

same proportion of tax which such credit is taken
Tax Credit vs. Tax Deduction
Tax Deduction: included in the gross income but later

deducted.
Tax Credit : paid beforehand and is deducted from the tax

liability of the taxpayer.
3.
LOSSES
Requisites for deductibility Sec. 34 (D) (1)

a. Losses must be of the taxpayer
b. Actually sustained during the taxable year
d.
e.
f.
g.
Not compensated for by insurance or other forms of

indemnity
Incurred in trade, business or profession OR property
connected with trade, business or profession lost through
fires, storm, shipwreck, or other casualties or from
robbery, theft or embezzlement
Evidenced by a completed transaction
Not claimed as a deduction for estate tax purposes
Notice of loss must be filed with the BIR within 30 days
but not more than 90 days from the date of discovery of
the casualty or robbery, theft or embezzlement giving rise
to the loss.
MARCELO STEEL CORP. VS. COLLECTOR (1960)

Petitioner cannot deduct from the profits realized from its taxable
industries, the losses sustained by its tax exempt business activities.
The law intended to treat taxable or non-exempt industry as separate
and distinct from new and necessary industry, which is tax exempt,
and did not mean to grant an entrepreneur, engaged at the same
time in a taxable or non-exempt industry and a new and necessary
industry, the benefit or privilege of deducting his gains or profit
derived from the operation of the first from the losses incurred in the
operation of the second. Moreover, aside from its exemption from the
payment of income tax on its profits derived from the operation of
new and necessary industries, the petitioner is exempt from the
payment of other internal revenue taxes directly payable by it, such
as the fixed and privilege tax on the sales of manufacture products,
in respect to which exemption is granted, the compensating tax on
the articles, goods or material exclusively used in the new and
necessary industry, and the documentary stamp tax.
PLARIDEL SURETY & INS VS. CIR (1967)

Loss is deductible only in the taxable year in which it actually
happens or is sustained. However, if it is compensable by insurance
or otherwise, deduction for the loss suffered is postponed to the
subsequent year, which, to be precise, is that year in which it
appears that no compensation at all can be had, or that there is a
remaining net loss, i.e. no full compensation. So where there is
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TAXATION I REVIEWER
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reasonable ground for reimbursement, the taxpayer must seek his
redress and may not secure a loss deduction until he establishes
that no recovery can be had. In other words, the taxpayer must
exhaust all remedies first to recover or to reduce his loss.
CIR VS. PRISCILLA ESTATE (1964)

Since the demolished building was not compensated for by
insurance or otherwise, its loss should be charged off as deduction
from gross income.
Ordinary Loss vs. Capital Loss
Ordinary Loss Incurred in trade, business or profession OR
property connected with trade, business or profession lost through
fires, storm, shipwreck, or other casualties or from robbery, theft
or embezzlement
Limitations on Capital Losses Sec. 34 (D) (4) (a)
Losses from sales or exchanges of capital assets shall be allowed
only to the extent that it does not include:
1.
Stock or 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 his trade or business
3.
Property used in the trade or business, of a character
which is subject to the allowance for depreciation
4.
Real property used in trade or business of the taxpayer
Securities Becoming Worthless Sec 34 (D) (4) (b)
If Bonds, debentures, notes or certificates, or other evidence of
indebtedness, issued by any corporation become worthless during
the taxable year and are capital assets, the loss resulting
therefrom shall be considered as a loss from the sale or exchange,
on the last day of such taxable year, of capital assets
If the shares of stock are held by way of an investment, the shares to

him would be capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the sale or
exchange of capital assets, and thus not deductible from gross
income.
Wash Sales Sec. 34 (D) (5) and 38
30 days before and after the date of the sale, the taxpayer
has acquired or has entered into a contract or option so as
to acquire, substantially identical stock/securities
GENERAL RULE: NOT deductible unless claim is made by

a dealer in stock/securities and made in ordinary course of
business of such dealer.
Wagering Losses Sec. 34 (D) (6)
Deductible only to the extent of gains from such transactions.
Example, if winnings amounted to 10,000 and the losses
amounted to 6,000, only 4,000 of the net winnings is taxable.
However, if the winnings are 5,000 and losses are 6,000, the 1,000
net losses cannot be claimed as a deduction from gross income.
Abandonment Losses Sec. 34 (D) (7)
In case of abandoned petroleum operations (wholly or

partially), accumulated expenditures incurred prior to Jan.
1, 1979 allowed as deduction only from income derived
from the same contract area, notice of abandonment shall
be filed with Commissioner
In case of abandoned producing well, the unamortized cost

and undepreciated costs of equipment directly used,
allowed as deduction in the year of abandonment by the
contractor. However, if such equipment is restored into
service, said costs shall be included as part of gross
income in the year of resumption or restoration and shall
be amortized or depreciated.
CHINA BANK CORP VS. CA (2000)
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Net Operating Loss Carry Over (NOLCO) Sec. 34 (D) (3), RR 142001
NOLCO refers to the excess of allowable deductions over

gross income of the business for any taxable year, which
has not been previously offset as deduction from gross
income.
The net operating loss of a business shall be carried over

as deduction from gross income for the next 3 consecutive
taxable years immediately following the year of such loss.
The 3 year period shall continue to run notwithstanding

that the corporation paid its taxes under MCIT, or that the
individual availed of the OSD.
For mines other than oil and gas wells, if loss incurred in
any of the 1st 10 years of operation may be carried over as
a deduction from taxable income for the next 5 years
immediately following the year of such loss. The entire
amount of the loss shall be carried over to the first of the 5
taxable years following the loss, and any portion of such
loss which exceeds the taxable income of such first year
shall be deducted from the taxable income of the next
remaining 4 years.
NOLCO requirements
1.
The taxpayer was not exempt from income tax in the year of
such net operating loss;
2.
The loss was incurred in a taxable year during which the
taxpayer was exempt from income tax; and
3.
There has been no substantial change in the ownership of
the business or enterprise
There is no substantial change in the ownership of the business
when:
Not less than 75% in the nominal value of outstanding

issued shares is held by same persons.
Not less than 75% of paid up capital of corporation is held

by same persons.
NOTE: no actual change in ownership is involved in when:

1.
In case the transfer involves change from direct
ownership to indirect ownership
2.
Merger of the subsidiary into the parent company
Other types of Losses
1.
Losses from illegal transactions NOT deductible
2.
Losses due to voluntary removal of building incident to
renewal or replacements deductible expense from gross
income
3.
Loss of useful value of capital assets due to charges in
business conditions deductible expense only to the
extent of actual loss sustained
PICOP VS. CA
The rule applicable in respect of corporations not registered with the
BOARD OF INVESTMENT as a preferred pioneer enterprise is
that net operating losses cannot be carried over. Under our Tax
Code, losses may be deducted from gross income only if such
losses were actually sustained in the same year that they are
deducted or charged off.
Where a net operating loss is sustained by a corporation prior to its
merger with another corporation and the business of the loss
corporation becomes a unit of the business conducted by the
surviving corporation, such pre-merger losses may not be used to
offset the income of other units of the surviving corporation which
prior to the merger were operated by the other corporation because
the income against which the offset is made was not produced by
substantially the same business which incurred the losses. And such
rule has been applied even though the corporation which sustained
the losses is the corporation surviving the merger.
4.
a.
BAD DEBTS
Requisites for Deductibility Sec. 34 (E) (1)

1) Existing indebtedness due to the taxpayer which must
be valid and legally demandable;
2) Connected with the taxpayers trade, business or
practice of profession
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3) Must not be sustained in a transaction entered into
between related parties.
4) Actually ascertained to be worthless and uncollectible
as of the end of the taxable year; and
5) Actually charged off in the books of accounts of the
taxpayer as of the end of the taxable year.
i)
Transactions between related parties 36 (B) in relation to

34 (E) (1)
In computing net income, net deduction shall in any case
be allowed in respect of losses from sales or exchanges of
property directly or indirectly:
i.
ii.
iii.
iv.
v.
vi.
ii)
Between members of the family (include only

brothers and sisters, spouse, ancestors, and lineal
descendants)
Between an individual and a corporation more than
50% in value of the outstanding stock is owned by
such individual; or
Between 2 corporations more than 50% in value of
the outstanding stock of each of which is owned by
same individual
Between grantor and fiduciary of any trust; or
Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust; or
Between a fiduciary or a trust and a beneficiary of
such trust.
Recovery of bad debt previously written off
1.
Tax Benefit Rule 34 (E) (1)
Recovery of bad debts previously allowed as deduction in the
preceding year shall be included as part of gross income in the
year of recovery to the extent of the income tax benefit of such
deduction.
Our statute permits the deduction of debts "actually ascertained to be

worthless within the taxable year," to prevent arbitrary action by the
taxpayer, to unduly avoid tax liability.
The requirement of ascertainment of worthlessness requires proof of
two facts: (1) that the taxpayer did in fact ascertain the debt to be
worthlessness, in the year for which the deduction is sought; and (2)
that, in so doing, he acted in good faith.
PHIL REFINING COMPANY VS. CA (1996)

Before a debt can be considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the
taxpayer to prove that he exerted diligent efforts to collect the debts,
viz: (1) sending of statement of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; (4) filing a
collection case in court.
5. DEPRECIATION
Depreciation is the gradual diminution in the useful (service)
value of tangible property used in trade, profession or
business resulting from exhaustion, wear and tear and
obsolescence.
As a deductible expense, it refers to the periodic allocation
as an expense of the portion of the cost of a tangible,
permanent asset. For taxation purposes, the term is afforded
a wider application to include the amortization of the value of
intangible assets.
NON-DEPRECIABLE ASSETS:
(a) Inventories or stock
(b) Land
(c) Bodies of minerals subject to depletion
(d) Personal effects and clothing
COLLECTOR VS. GOODRICH (1967)
Page | 67

WHO IS ENTITLED TO CLAIM DEPRECIATION EXPENSE: The
owner since he sustains an economic loss from the decrease
in the value of the property due to depreciation. However,
NRA and FCs are allowed to deduct only when the property is
located in the Philippines
a. REQUISITES FOR DEDUCTIBILITY (Sec

34.F.1)
(1) The allowance for depreciation must be REASONABLE
(2) It must be for property USED in trade, business or
operation
(3) It must be CHARGED off during the taxable year
(4) A statement of allowance should be ATTACHED to the
return
b. METHODS OF DEPRECIATION (Sec 34.F.2)
(1) STRAIGHT LINE METHOD equal depreciation per

unit of time, regardless of use or production output
of the property
FORMULA: Depreciation Expense = (Cost salvage
value)/estimated life
Example: Cost = 15,000; SV = 5,000; Est. life 5
yrs
(15,000 5,000)/5 yrs = 2,000
(2) DECLINING BALANCE METHOD Amount of
depreciation is subtracted annually from the cost of
the property and the rate then only applied to the
resulting balance
FORMULA: Depreciation Expense = [(Cost
Accumulated depreciation)/estimated life] x rate
Example: Cost = 15,000; SV = 5,000; Est. life = 5
yrs; Depreciation rate = 200%
Year 1:
[(15,000 0)/5] x 200% = 6,000
Year 2:
[(15,000-6,000)/5] x 200% = 3,600
(3) SUM OF YEARS DIGIT METHOD Application of a
changing fraction to the taxpayers cost basis for the
property, reduced by the estimated residual salvage
value
FORMULA: Depreciation Expense = (nth period/sum
of year) x (cost SV)
Example: Cost = 15,000; SV = 5,000; Est. life = 5
yrs
Sum of years: 5+4+3+2+1 = 15
Year 1:
(5/15) x (15,000 5,000) = 3,333.33
Year 2:
(4/15) x (15,000 5,000) = 2,666.67
(4) Any other method which may be prescribed by the
Secretary of Finance upon recommendation of CIR
c. SPECIAL RULES ON DEPRECIATION

(1) PRIVATE EDUCATIONAL INSTITUTIONS (Sec 34.A.2)
At its option may:
(a) Deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred
during the taxable year for expansion of school
facilities; or
(b) Deduct allowance for depreciation of under Sec
34.F
(2) PETROLEUM OPERATIONS (Sec 34.F.5) An
allowance for depreciation shall be allowed under the
straight line or declining-balance method at the
option of the service contractor. If the service
contractor initially elects the declining-balance
method, it may at any time, shift to straight-line
method
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TAXATION I REVIEWER
ATTY. C. VILLENA
(a) The useful life of properties used in production of
petroleum shall be 10 yrs
(b) Properties not used directly in production of
petroleum shall be depreciated using straightline method on the basis of estimated useful life
5 yrs
(3) MINING OPERATIONS (Sec 34.F.5) Allowance for
depreciation used in mining operations other than
petroleum shall be computed as:
(a) At the normal rate of depreciation if the expected
life is 10 yrs or less; or
(b) Depreciated over any number of years between 5
yrs and the expected life if the expected life is
more than 10 yrs, and the depreciation thereon
shall be allowed as deduction from taxable
income; provided the contractor notifies CIAR at
the beginning of the depreciation period which
rate shall be used
(4) NRA-ETB or RFC (Sec 34.F.6) A reasonable
allowance for the deterioration of property arising
out of its use or employment or its non-use in the
business, trade or profession shall only be allowed
for property located in the Philippines
BASILAN ESTATE INC V. COMMISSIONER, 21 SCRA 17

(1967)
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescence. The
term is also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in
duration.
Depreciation commences with the acquisition of the property and its
owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to
see that from earnings, the value of the property invested is kept
unimpaired, so that at the end of any given term of years, the original
investment remains as it was in the beginning.
The law allows deduction from gross income for depreciation but
limits the recovery only to the capital invested in the asset being
depreciated. The Income Tax does not authorize the depreciation of
an asset beyond its acquisition cost. Deductions from gross income
are privileges, not matters of right. They are not created by
implication but upon clear expression in the law.
If allowed, depreciation based on re-appraisal, will allow the
company not only to recover acquisition cost but also some profit.
Recovery in due time thru depreciation of investment made is the
philosophy behind the depreciation allowance; the idea of profit on
the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
ZAMORA V. COLLECTOR, 8 SCRA 163 (1963)

The CTA was approximately correct in holding that the rate of
depreciation must be 2.5%. An average hotel buildings estimated
useful life is 5 yrs, but inasmuch as it also depends on the use and
location, change in population and others, it is allowed a depreciation
rate of 2.5% which corresponds to a useful life of 40 years.
US V. LUDLEY, 247 US 295 (1927)

The depreciation charge permitted as a deduction from the gross
income in determining the taxable income of a business for any year
represents the reduction, during the year, of the capital assets
through wear and tear of the plant used. The amount of the
allowance for depreciation is the sum which should be set aside for
the taxable year, in order that, at the end of the useful life of the plant
in the business, the aggregate of the sums set aside will (with the
salvage value) suffice to provide an amount equal to the original
cost. The theory underlying this allowance for depreciation is that, by
using up the plant, a gradual sale is made of it. The depreciation
charged is the measure of the cost of the part which has been sold.
Page | 69

When the plant is disposed of after years of use, the thing then sold
is not the whole thing originally acquired. The amount of the
depreciation must be deducted from the original cost of the whole in
order to determine the cost of that disposed of in the final sale of
properties. Any other construction would permit a double deduction
for the loss of the same capital assets.
The amounts of depreciation and depletion to be deducted from cost
to ascertain gain on a sale of oil properties are equal to the
aggregates of depreciation and depletion which the taxpayer was
entitled to deduct from gross income in his income tax returns for
earlier years; but are not dependent on the amounts which he
actually so claimed.
6. DEPLETION
Depletion is the exhaustion of natural resources like mines,
oil, and gas wells as a result of production or severance from
such mines or wells
As an allowable deduction, it refers to the periodic allocation
of the cost of the wasting asset over the period of the
natural resources are extracted or produced.
Wasting assets refer to natural physical resources that are
physically consumed and once consumed, are irreplaceable.
Example: lands containing deposits of cola, oil, ore, gold,
silver and timber.
WHO CAN AVAIL OF DEPLETION: Annual depletion
deductions are allowed only to MINING ENTITIES which own
an economic interest in mining deposits (Sec 3, RR 5-76)
THEORY AND PURPOSE OF DEPLETION ALLOWANCE: As the
product of the mine is sold, a gradual sale is being made of
the taxpayers capital interest in the property. The purpose,
then, is to enable him to recover the capital interest free of
income tax at its cost or on some other basis
REQUISITES FOR DEDUCTIBILITY
(1) Depletable asset Natural resources, e.g. mines, gas and oil
wells
(2) Charged off within the taxable year

(3) Allowance for depletion is computed in accordance with costdepletion method
DEDUCT EXPLORATION AND DEVELOPMENT EXPENDITURES:
At taxpayers option, he may deduct exploration and
development expenditures provided it shall not exceed 25%
of the taxable income from mining operations computed
without the benefit of any tax incentives under existing laws
(Sec 34.G.2)
DETERMINATION OF AMOUNT OF DEPLETION:
(1) Basis for the cost of the property
(2) Estimated recoverable units in the property; and
(3) Number of units recovered during the taxable year in
question
a. IN GENERAL (Sec 34.G.1)

Reasonable allowance for depletion or amortization
computed in accordance with cost-depletion method,
provided that:
(1) When the allowance for depletion shall equal the
capital invested, no further allowance shall be
granted
(2) After production in commercial quantities has
commenced, intangible exploration and
development drilling costs: (a) shall be deductible
in the year incurred if such expenditures are
incurred for non-producing wells and/or mines; or
(b) shall be deductible in full in the year pair or
incurred (taxpayers option)
US V. LUDLEY, 247 US 295 (1927)

The depletion charge permitted as a deduction from the gross
income in determining the taxable income of mines for any year
represents the reduction in the mineral contents of the reserves from
which the product is taken. The reserves are recognized as wasting
assets. The depletion effected by operation is likened to the using up
Page | 70
TAXATION I REVIEWER
ATTY. C. VILLENA
of raw material in making the product of a manufacturing
establishment. As the cost of the raw material must be deducted
from the gross income before the net income can be determined, so
the estimated cost of the part of the reserve used up is allowed. The
fact that the reserve is hidden from sight presents difficulties in
making an estimate of the amount of the deposits. The actual
quantity can rarely be measured. It must be approximated. And
because the quantity originally the reserve is not actually known, the
percentage of the whole withdrawn in any year, and hence the
appropriate depletion charge, is necessarily a rough estimate. But
Congress concluded, in the light of experience, that it was better to
act upon a rough estimate than to ignore the fact of depletion.
7. CHARITABLE & OTHER CONTRIBUTIONS

a. REQUISITES FOR DEDUCTIBILITY (Sec
34.H.1)
(1)
(2)
(3)
(4)
The contribution or gift must be ACTUALLY paid

It must be paid WITHIN the taxable year
It is given to the organization SPECIFIED by law
It must be EVIDENCED by adequate receipts or
records
(5) The net income of the institution must not INURE
to the benefit of any private stockholder or
individual. Amount shall not exceed:
(a) For individuals 10% of taxable income
before contributions
(b) For corporations 5% of taxable income
before contributions
b. LIMITED DEDUCTIBILITY (Sec 34.H.1)
(1) Contributions not in accordance with the priority

plan
(2) Donations whose conditions are not complied with
(3) Donations to the Government or political
subdivisions exclusive for public purposes
(4) Donations to domestic corporations organized
exclusively for:
(a) Religious
(b)
(c)
(d)
(e)
(f)
(g)
Charitable
Scientific
Cultural
Education
Rehabilitation of veteran
Social welfare
c. DEDUCTIBLE IN FULL (Sec 34.H.2)

(1) Donations to GOVERNMENT or political subdivisions
including full-owned GOCCs to be used exclusively
in undertaking priority activities in:
(a) Culture
(b) Health
(c) Economic development
(d) Education
(e) Science
(f) Human settlement
(g) Youth and sports development
(2) Donations to FOREIGN institutions and
international organizations in compliance with
treaties and agreements with the government
(3) Donations to ACRREDITED NGOs
(a) Exclusively for: Scientific, Research, Character
building, Youth and sports development,
health, social welfare, cultural charitable, any
combination thereof
(b) Utilized not later than the 15h day of the 3rd
month following the close of its taxable year
(c) Administrative expenses must not exceed 30%
of total expenses
(d) Upon dissolution, assets must be distributed to
another non-profit domestic corporation or to
the State
ROXAS V. CTA, 23 SCRA 276 (1968)

The proposition of the CIR cannot be favorably accepted in this
isolated transaction with its peculiar circumstances in spite of the fact
that there were hundreds of vendees. Although they paid for their
Page | 71

respective holdings in installment for a period of 10 years, it would

nevertheless not make the vendor Roxas y Cia a real estate dealer
during the 10-year amortization period. It should be borne in mind
that the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only inconsonance with, but more in
obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless. It was the bounden
duty of the Government to pay the agreed compensation after it had
persuaded Roxas y Cia to sell its haciendas, and to subsequently
subdivide them among the farmers at very reasonable terms and
prices. However, the Government could not comply with its duty for
lack of funds. Obligingly, Roxas y Cia shouldered the Government's
burden, went out of its way and sold lands directly to the farmers in
the same way and under the same terms as would have been the
case had the Government done it itself. For this magnanimous act,
the municipal council of Nasugbu passed a resolution expressing the
people's gratitude. In fine, Roxas y Cia cannot be considered a real
estate dealer for the sale in question. Hence, pursuant to Section 34
of the Tax Code the lands sold to the farmers are capital assets, and
the gain derived from the sale thereof is capital gain, taxable only to
the extent of 50%.
(2) Any expenditure paid or incurred for the purpose of

ascertaining the existence, location, extent or quality
of any deposit of ore or other mineral including oil or
gas
9. CONTRIBUTION TO PENSION TRUST Applicable

only to employer on account of its contribution to a private
pension plan for the benefit of the employee. Purely business
in character
a. REQUISITES FOR DEDUCTIBILITY (Sec 34.J)
(1) Employer must have established a pension or

retirement plan for the payment of reasonable pension
to its employees
(2) Pension plan is reasonable and actuarially sound (Sec
118, RR 2-40)
(3) Funded by the employer (employer contributes cash)
(4) Amount contributed must no longer be subject to
control of the employer
(5) Payment has not been allowed as deduction
(6) Apportioned in equal parts over a period of 10
consecutive yrs beginning with the year in which the
payment or transfer was made
TREATMENT OF INCOME FROM PENSION PLAN
(1) Not taxable to employee (BIR Ruling, 20 November
1956)
(2) In case any portion of the funds is reverted back to the
employer, said funds form part of the income of the
employer during the taxable year of reversion (BIR
Ruling, 3 April 1959)
8. RESEARCH AND DEVELOPMENT (Sec 34.I)

Taxpayer may treat R&D as:
(1) Revenue expenditure it will be wholly deducted as
ordinary and necessary expenses in the year it was
paid or incurred
(2) Deferred expense allowed as deduction ratably
distributed over a period of at least 60 months starting
from the month benefits are received from such
expenditure
LIMITATIONS ON DEDUCTION (Sec 34.H.3)
The following are not deductible:
(1) Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a
character which is subject to depreciation; and
IV.
OPTIONAL STANDARD DEDUCTION OR OSD (Sec

34.L, RR 16-08)
OSD is a scheme whereby a taxpayer is given the option to
deduct from his gross revenue or gross income a lump sum
equivalent to a percentage of such gross revenue or gross
income for purposes of computing the net income on which
the income tax rate will be applied
Page | 72
TAXATION I REVIEWER
ATTY. C. VILLENA
WHO ARE ENTITLED: RC, NRC, DC and RFC, Partnerships,
Taxable estates and trusts
1. REQUISITES FOR OSD

a.
b.
c.
d.
2.
Optional
Taxpayer must signify in his return to elect OSD
otherwise Itemized deductions shall apply
Once elected, it is irrevocable for the entire taxable year
Need not be substantiated by receipts
OSD FOR INDIVIDUALS OSD not exceeding 40% of

gross sales or gross receipts
3. OSD FOR CORPORATIONS OSD not exceeding 40% of

gross income
4. OSD FOR GPP (Sec 6, RR 16-2008)GPP may claim

either itemized deductions or OSD allowed to corporation.
Net income is the distributable net income from which the
share of each partner is to be determined
V. PREMIUM PAYMENTS ON HEALTH/HOSPITALIZATION

INSURANCE (Sec 34.M)
Premium payments on health and/or hospitalization insurance
made during the taxable year maybe deducted provided the
following are met:
a. Taxpayer is individual, regardless whether he is deriving
gross income or gross compensation income
b. Health and/or hospitalization insurance is taken by
taxpayer for himself or for any member/s of his family
c. Amount deducted shall not exceed P2,400 per family or
P200 a month during the taxable year
d. Gross income of taxpayers family does not exceed 250K
for the taxable year
e. In case taxpayer is married, only the spouse claiming the
additional exemption for dependents shall be entitled to
this deduction
VI.
ALLOWANCE FOR PERSONAL & ADDITIONAL

EXEMPTION or PAE (Sec 35)
PAE are arbitrary amounts allowed as deductions from gross
income of an individual representing personal, living and family
expenses of the taxpayer
WHO ARE ENTITLED: RC, NRC, RA
1. PERSONAL EXEMPTION 50K for each individual
taxpayer
2. ADDITIONAL EXEMPTIONS 25K for each dependent
not exceeding 4
3. DEFINITION OF DEPENDENT Dependent means:
a. Legitimate, illegitimate or legally adopted child
b. Chiefly dependent upon and living with taxpayer
c. If dependent is: Not more than 21, unmarried and not
gainfully employed
d. If dependent, regardless of age, is: incapable of selfsupport because of physical or mental defect
4. IN CASE OF MARRIED INDIVIDUALS Additional
exemptions may be claimed only by one of the spouses
5. IN CASE OF LEGALLY SEPARATED SPOUSES

6.
Additional exemptions may be claimed only by the spouse

who has custody of the child or children
CHANGE OF STATUS During the taxable year
CHANGE OF STATUS
Death of taxpayer
Death of dependent
Additional dependent
Dependent become
more than 21
Marriage of taxpayer
Death of spouse
TREATMENT
Estate may claim personal
exemption of 50K
Taxpayer still entitled to additional
exemption
Taxpayer still entitled to additional
exemption
Taxpayer can still claim him or year
Taxpayer entitled to full exemption
for the particular taxable year
Surviving spouse may still claim full
Page | 73

Marriage of
dependent
Gainful employment
of dependent
amount of 50K
Taxpayer can still claim him/her as
dependent for the particular taxable
year
Taxpayer can still claim him/her as
dependent for the particular taxable
year
VII. ITEMS NOT DEDUCTIBLE (Sec 36)

1. GENERAL RULE: The following are not deductible
a.
b.
c.
d.
Personal, living or family expenses

Amount paid out for new buildings or for permanent
improvements, or betterments made to increase the
value of the property or estate
Amount expended in restoring property or in making
good the exhaustion thereof for which an allowance has
been made
Premiums made on any life insurance policy covering the
life of any officer or employee, or any person financially
interested in any trade or business carried on by
taxpayer, when the taxpayer is directly or indirectly a
beneficiary under such policy
2. LOSSES FROM SALES OR EXCHANGES OF PROPERTY

BETWEEN RELATED PARTIES NO deduction shall be
allowed in respect of losses from sales or exchanges of
property directly or directly:
a. Between members of a family
b. Except in the case of distributions in liquidation between
an individual and corporation more than 50% in value of
the outstanding stock of which is owned by or for such
individual
c. Except in the case of distributions in liquidation, between
2 corporations more than 50% of which is owned by or
for the same individual, if either one of such corporations
was, with respect to the taxable year prior to the
sale/exchange, a personal holding company
d. Between grantor and fiduciary of any trust
e.
f.
Between fiduciary of a trust and the fiduciary of another

trust if the same person is grantor with respect to each
trust
Between a fiduciary of a trust and a beneficiary of such
trust
CHAPTER VI PARTNERSHIP
I. TAXATION OF GENERAL PARTNERSHIP (Sec 22.B)

Partnerships, other than GPP, whether registered or not.
General partnerships are considered as corporations and
therefore ARE TAXED AS CORPORATION
INCLUDES:
a. Partnerships, no matter how created or organized
b. Joint-stock companies
c. Joint accounts (cuentas en participacion)
NOTE: Partners are considered as stockholders and profits
distributed them are considered as dividends subject to final
tax
II. TAXATION OF GENERAL PROFESSIONAL PARTNERSHIP

or GPP (Sec 26)
GPP is a partnership formed by persons for the sole purpose of

exercising their common profession (Sec 22.B)
INCOME TAX: GPP Is not subject to income tax but the persons
engaged as partners in a GPP shall be liable in for income tax
only in their separate and individual capacities (Sec 26).
However, GPP is required to file information returns for its
income for the purpose of furnishing information as to the
share in the net income of the partnership which each partner
should include in his individual return.
NET INCOME OF GPP: For purposes of computing the
distributive share of each partner, the net income of the
partnership shall be computed in the same manner as a
corporation.
Page | 74
TAXATION I REVIEWER
ATTY. C. VILLENA
Each partner shall report his distributive share in the net
income of the partnership as gross income in his return
whether actually or constructively received.
IRREVOCABLE TRUST A kind of trust which cannot be altered

without the consent of the beneficiary
TREATMENT OF LOSSES: In case of loss, it will be divided as

agreed upon by the partners and shall be taken by the
individual partners in their respective returns.
NOTE: The income of a revocable trust is included in

computing the taxable income of the grantor without any of
the deductions allowed for estates while the income of an
irrevocable trust is a separate taxable entity subject to tax as
income after deducting the allowable deductions
CHAPTER VII ESTATES AND TRUSTS

NOTE: Estates and trusts are treated as individual taxpayers
I. APPLICATION OF TAX (Sec 60.A)

Applies to income of estates or of any kind of property held in
trust (separate taxable entities), including:
1. Income accumulated in trust:
a. For the benefit of unborn/unascertained person/s with
contingent interests
b. Held for future distribution under the terms of the will
or trust
ESTATE refers to the mass of properties left by a deceased

person.
SUBJECT TO INCOME TAX:
3. Income tax for individuals: From January to the time of
Death (Sec 24 and 25)
4. Income tax of the estate: If the estate is under
administration or judicial settlement (Sec 60)
2.
TRUST Right to property, whether real or personal, held by one

person for the benefit of another
CLASSIFICATION OF TRUSTS FOR TAX PURPOSES:
f.
Taxable and Tax-exempt trusts
g. Irrevocable and revocable trusts
h. Trust administered in the Philippines and trust
administered in a foreign country Only trusts
administered in the Philippines are subject to tax
REVOCABLE TRUST A kind of trust where the power to revert
to grantor title to any part of the corpus (body) of the trust is
vested:
c. In the grantor, either alone or in conjunction with any
person having substantial adverse interest in the
disposition of the corpus or the income therefrom; or
d. In any person not having a substantial adverse interest in
the disposition of the corpus or the income therefrom
3.
4.
II.
Income:
a. To be distributed currently by the fiduciary to the
beneficiaries
b. Collected by a guardian of an infant to be held or
distributed as the court may direct
Income received by the estates of deceased persons
during the period of administration or settlement of ht
estate
Income which, at the discretion of the fiduciary, may be
either distributed to beneficiaries or accumulated
Exception (Sec 60.B)

Not applicable to employees trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for
the benefit of his employees if: (Tax-exempt)
1. Contributions are made to the trust by such employer,
employees or both, for the purpose of distributing to
Page | 75

employees the earnings and principal of the fund
accumulated by the trust
2. Under the trust it is impossible, at any time prior the
satisfaction of all liabilities with respect to employees
under the trust, for part of the corpus or income to be
(within the taxable year or thereafter) used for, or diverted
to, purposes other than for the exclusive benefit of the
employees
Any amount distributed to any employee or distributee shall be
taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or
distribute.
b.
3. COMPUTATION AND PAYMENT (Sec 60.C)

1. IN GENERAL (Sec 60.C.1) Computed upon the
taxable income and paid by the fiduciary, except under Sec
63 (revocable trusts) and Sec 64 (income for the benefit of
the grantor)
2. CONSOLIDATION OF INCOME OF TWO OR MORE

TRUSTS (Sec 60.C.2)
REQUISITES: Two or more trusts where:
a. The creator of each of the trust is the same person
b. The beneficiary of each trust is the same person
EFFECTS:
a. Taxable income of all the trusts shall be consolidated
b. The tax provided shall be computed on such
consolidated income
c. The proportion of said tax shall be assessed and
collected from each trustee based on the taxable
income of the trust administered by him
3. TAXABLE INCOME (Sec 61) Computed in the

same manner as an individual taxpayer EXCEPT:
a. DEDUCTION ALLOWED (Sec 61.A):
(1) Amount of income of the estate/trust for the
taxable year which is to be distributed evenly by
the fiduciary to the beneficiaries and the amount of
the income collected by a guardian of an infant

which is to be held/distributed as the court may
direct
(2) Amount allowed as deduction is included in
computing the taxable income of the beneficiaries,
whether distributed or not
(3) Amount allowed as deduction under Sec 61.B
ADDITIONAL DEDUCTION (Sec 61.B):
(1) Amount of the income of the estate/trust for its
taxable year, property paid/credited during such
year to any legatee, heir or beneficiary may be
claimed as deduction. This applies in cases of:
(a) Income received by estate of deceased person
during the period of administration or
settlement of the estate
(b) Income which, in the discretion of the fiduciary,
may either be distributed to the beneficiary or
accumulated
(2) Amount paid/credited will be included in the
taxable income of the legatee, heir or beneficiary
NOTE: For trust administered in foreign country, the
deductions shall not be allowed provided that the
amount of income included in the return of said trust
shall not be included in computing the income of the
beneficiaries
4. EXEMPTION ALLOWED TO ESTATES AND TRUSTS

(Sec 62)Allowed exemption of 20K from the income of
the estate or trust
5.
REVOCABLE TRUSTS (Sec 63)The power to re-vest

in the grantor title to any part of the corpus of the trust is
vested:
a. In the grantor either alone or in conjunction with any
person not having substantial adverse interest in the
disposition of such part of the corpus/income
b. In any person not having a substantial adverse interest
in the disposition of such part of the corpus/income
Page | 76
TAXATION I REVIEWER
ATTY. C. VILLENA
EFFECT: The income of such trust shall be included in
computing the taxable income of the grantor. A revocable
trust is not taxable as a separate entity because the
income forms part of the income of the grantor
NOTE:
An estate is taxable as a separate entity when it is already

subject to a judicial proceeding
A trust is taxable as a separate entity if the trust is

irrevocable. This is because the grantor has absolutely given
up the corpus and any incidents thereto. In this case, the
grantor has no control over the corpus of the trust. The
grantor has transferred the income earning property to a
beneficiary. If there is a condition that provides that a
portion shall be reserved for the grantor, this condition does
not convert the irrevocable trust into a revocable trust, but
such portion is part of the taxable income of the grantor
If the transfer is revocable, the entire income shall be

taxable in the hands of the grantor
6. INCOME FOR BENEFIT OF GRANTOR (Sec 64.A)

REQUISITES: Where any part of the income of a trust is,
or in the discretion of the grantor or any person not having
substantial adverse interest in the disposition of such part
of the income:
a. May be held or accumulated for future distribution to
the grantor
b. May be distributed to the grantor
c. May be applied to the payment of premiums upon
policies of insurance on the life of the grantor
EFFECT: Such part of the income is included in computing
the policies of insurance on the life of the grantor
7. MEANING OF IN THE DISCRETION OF

GRANTOR (SEC 64.B) In the discretion o f the
having substantial adverse interest in the dispositions of

the part of the income in question.
CHAPTER VIII ACCOUNTING PERIODS AND

METHODS OF ACCOUNTING
I. ACOUNTING PERIODS
Taxable income of a taxpayer is figured on the basis of his
annual accounting period.
1. TAXABLE YEAR (Sec 22.P)Calendar year or fiscal
year ending during such calendar year, upon the basis of
which the net income is computed
a. CALENDAR YEAR accounting period from January
1 to December 31
b. FISCAL YEAR (Sec 22.Q)accounting period of
12 months ending on the last day of any month other
than December; allowed only to corporations
c. SHORTER PERIOD Taxpayer may have a taxable
period of less than 12 months when:
(1) Taxpayer dies
(2) Corporation is newly organized
(3) Corporation changes its accounting period
(4) Corporation is dissolved
2. GENERAL RULE ON COMPUTATION OF TAXABLE

INCOME (Sec 43)Taxable income shall be computed
on the basis of annual accounting period (calendar year or
fiscal year) in accordance with method of accounting used
CALENDAR YEAR Used when:
(1) Taxpayer is an individual
(2) Taxpayer is a partnership
(3) Accounting period is other than a fiscal year
(4) Taxpayer has no accounting period
(5) Taxpayer does not keep books
grantor, either alone or in conjunction with any person not

Page | 77

3. PERIOD IN WHICH ITEMS OF GROSS INCOME

INCLUDED (Sec 44)All items of gross income shall
be included in the gross income for the taxable year in
which received by taxpayer unless under methods of
accounting, any such amounts are to be properly
accounted for as of a different period
4. PERIOD IN WHICH DEDUCTIONS AND CREDITS

TAKEN (Sec 45)Shall be taken for the taxable year
in which PAID OR ACCRUED or PAID OR INCURRED
dependent upon the accounting method
5. CHANGE OF ACCOUNTING PERIOD (Sec 46)Shall

be computed on the basis of new accounting period subject
to provisions of Sec 47
NOTE: A separate adjustment or final return shall be made
for the period not covered by the old accounting period
and the new accounting period (Sec 47)
II.
ACCOUNTING METHODS
Except where final taxes on certain transactions are imposed,
the liability of taxpayers for income tax is determined on the
basis of a fixed period consisting normally of a taxable year
covering a 12-month period.
A taxpayer may adopt any standard method as long as it can
properly reflect his income and deductions and that it is used
by him with consistency.
1. CASH RECEIPTS AND DISBURSEMENT METHOD

Method of accounting whereby all items of gross income
received during the year shall be accounted for in such
taxable year and that only expenses actually paid shall be
claimed as deductions during the year.
o Income is realized upon actual or constructive
receipt of cash or its equivalent, and expenses are
deductible only upon actual payment thereof,
regardless of the taxable year when the service is
performed or the expense is incurred
CIR V. ISABELA CULTURAL CORP, G.R. NO 172231

(2007)
Under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the
succeeding year.
The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income
or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The amount of liability does not have to be determined exactly; it
must be determined with reasonable accuracy. Accordingly, the
term reasonable accuracy implies something less than an exact or
completely accurate amount.
The failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions
cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence
could have inquired into the amount of their obligation to the law firm
and SGV, especially so that it is using the accrual method of
accounting. For another, it could have reasonably determined the
amount of legal, retainer fees and auditing fees owing to its
familiarity with the rates charged by their long time legal consultant.
2. ACCRUAL METHOD Method of accounting for income in

the period it is earned, regardless of whether it has been
received or not. Expenses are accounted for in the period
they are incurred and not in the period they are paid.
o Net income is being measured by the excess of the
income earned during the period over the
expenses incurred during the same period. The
income that has been earned and the expenses
that have been incurred are to be reported during
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TAXATION I REVIEWER
ATTY. C. VILLENA
the year, although they have not been collected or
paid.
entire work performed under the contract. There should be

deducted from gross income all expenditures made during
the taxable year on account of the contract, accounting
being taken of the materials and supplies on hand at the
beginning and end of the taxable year for use in connection
with the work under the contract but not yet so applied.
FILIPINAS SYNTHETIC FIBER CORP V. CA, 316 SCRA

480 (1999)
"Under the accrual basis method of accounting, income is reportable
when all the events have occurred that fix the taxpayer's right to
receive the income, and the amount can be determined with
reasonable accuracy. Thus, it is the right to receive income, and not
the actual receipt, that determines when to include the amount in
gross income."
REQUISITES OF ACCRUAL METHOD:
(1) that the right to receive the amount must be valid,
unconditional and enforceable, i.e., not contingent upon future
time;
(2) the amount must be reasonably susceptible of accurate
estimate; and
(3) there must be a reasonable expectation that the amount will be
paid in due course."
3.
LONG TERM CONTRACTS (Sec 48)Percentage of

completion method is applicable in case of a building,
installation, or construction contract cover a period in excess
of 1 year, where by gross income derived from such contract
may be reported upon the basis of percentage of completion.
In determining the percentage of completion of a contract:
a. The costs incurred under the contract as of the end of
the tax year are compared with the estimated total to
be performed; or
b. The work performed on the contract as of the end of
the tax year is compared with the estimated work to
be performed
In such a case, the return should be accompanied by a
certificate of the architect or engineer showing the
percentage of completion during the taxable year of the
4.
SEC 44, RR 2-40: LONG TERM CONTRACTS Income

from long-term contracts is taxable for the period in which
the income is determined, such determination depending
upon the nature and terms of the particular contract. As
used herein the term "long-term" contracts means building,
installation, or construction contracts covering a period in
excess of one year. Persons whose income is derived in
whole or in part from such contracts may, as to such income,
prepare their returns upon the following bases:
a. Gross income derived from such contracts may be
reported upon the basis of percentage of completion. In
such case there should accompany the return certificate
of architects, or engineers showing the percentage of
completion during the taxable year of the entire work
performed under contract. There should be deducted
from such gross income all expenditures made during
the taxable year on account of the contract, account
being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in
connection with the work under the contract but not yet
so applied. If upon completion of a contract, it is found
that the taxable net income arising thereunder has not
been clearly reflected for any year or years, CIR may
permit or require an amended return.
b. Gross income may be reported in the taxable year in
which the contract is finally completed and accepted if
the taxpayer elects as a consistent practice to so treat
such income, provided such method clearly reflects the
net income. If this method is adopted there should be
deducted from gross income all expenditures during the
life of the contract which are properly allocated thereto,
taking into consideration any material and supplies
Page | 79

charged to the work under the contract but remaining on
hand at the time of the completion.
that year, assuming that the money or property would have

been income in the earlier year if then received. This is true
of a recovery for patent infringement. Bad debts or accounts
charged off subsequent to March 1, 1913, because of the
fact that they were determined to be worthless, which are
subsequently recovered, whether or not by suit, constitute
income for the year in which recovered, regardless of the
date when amounts were charged off.
Where a taxpayer has filed his return in accordance with the

method of accounting regularly employed by him in keeping
his books and such method clearly reflects the income, he will
not be required to change to either of the methods above set
forth. If a taxpayer desires to change his method of accounting
in accordance with paragraphs (a) and (b) above, a statement
showing the composition of all items appearing upon his
balance sheet and used in connection with the method of
accounting formerly employed by him, should accompany his
return.
5. INSTALLMENT BASIS (Sec 49)Installment basis of

reporting income is allowed in the following cases:
a. Sale by dealer of personal property on installments
b. Casual sale of personal property on installments where
the selling price exceeds 1K and the initial payments do
not exceed 25% of the selling price
c. Sale of realty where the initial payments do not exceed
25% of the selling price; or
d. Sale by individuals of real property, considered as capital
asset, if initial payments do not exceed 25% of the
selling price
In cases where the installment method is not permitted, the
initial installments, under the cash method, are immediately
allotted to the income portion; under the accrual method,
the income is deemed earned when the sale is
consummated.
6.
SEC 51, RR 2-40: WHEN INCOME IS TO BE REPORTED

Gains, profits, and income are to be included in the gross
income for the taxable year in which they are received by
the taxpayer, unless they are included when they accrue to
him in accordance with the approved method of accounting
followed by him. If a person sues in one year on a pecuniary
claim or for property, and money or property is recovered on
a judgment therefore in a later year, income is realized in
CHAPTER X WITHHOLDING TAXES

I.
CONCEPT OF WITHHOLDING TAX

CIR VS. SOLIDBANK CORPORATION, G.R. NO. 148191
(2003)
In a withholding tax system, the payee is the taxpayer, the person on

whom the tax is imposed. The payor, a separate entity, acts as no
more than an agent of the government for the collection of tax in
order to ensure its payment. This amount that is used to settle the
tax liability is sourced from the proceeds constitutive of the tax base.
II.
Types of Withholding Tax

1.
2.
3.
4.
1.
a.
Withholding Tax on Wages

Withholding Tax at Source
Withholding VAT
Fringe Benefit Tax
Withholding on Wages
Requirement for withholding. SEC 79 (A)
Every employer must withhold from compensation

paid to its employees
No withholding of tax shall be required on

payments to employees who are classified as
Minimum Wage earner
An employee who receives additional compensation

and benefits in excess of the allowable statutory
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TAXATION I REVIEWER
ATTY. C. VILLENA
amount of P30,000 other than the Statutory
Minimum Wage the entire amount, including the
Statutory Minimum Wage shall be subject to
withholding tax.
b.
c.
d.
Tax paid by recipient Sec. 79 (B)
Every person who is required to withhold the tax

from the compensation of an employee is liable for
the payment of such tax to the BIR. Such liability
stays even if the employee subsequently pays the
tax.
The payment of the tax by the employee does not

relieve the employer from the liability for penalties
and/or additions to the tax for failure to deduct
and withhold within the time prescribed by law or
regulations.
The employer will not be relieved of his liability for

payment of the tax required to be withheld unless
he van show that the tax has been paid by the
employee.
Refunds or credits Sec. 79 (C)
When the total amount withheld exceeds the

annual tax due for the employee, the excess shall
be credited or refunded to the employee not later
than Jan. 25 of the following year
In case of termination of employment before

December, the refund shall be given to the
employee at the payment of the last compensation
during the year.
The employer is entitled to deduct the amount

refunded from the remittable amount of taxes
withheld from compensation income in the current
month in which the refund was made, and in the
succeeding months thereafter until the amount
refunded by the employer is fully paid.
Year-end adjustments Sec. 79 (H)
On or before the end of the calendar year, and

prior to the payment of the compensation for the
e.
last payroll period, the employer shall determine

the sum of the taxable regular and supplementary
compensation paid to each employee for the entire
year, including the last compensation to be paid
and compute for the amount of income tax on the
annualized gross compensation income.
The difference between the tax due from the
employee for the entire year and the sum of taxes
withheld from Jan. Nov. shall either be withheld
from his salary in Dec. of the current calendar year
or refunded to the employee not later than Jan. 25
of the succeeding year.
Liability for tax Sec. 80
Employer
The employer shall be responsible for the withholding
and remittance of the correct amount of tax required
to be deducted and withheld from the compensation
income of his employees.
If the employer fails to withhold and remit the correct
amount of tax, such tax shall be collected from the
employer together plus penalties.
Failure to refund excess withholding tax not later than
Jan. 25 of the succeeding year, shall make the
employer liable to a penalty equal to the total amount
of refund which was not refunded to the employee plus
penalties.
Employee
Where an employee fails or refuses to file the
withholding exemption certificate or willfully supplies
false or inaccurate information thereunder after due
written notice by the employer, the tax otherwise
required o be withheld by the employer shall be
collected from him including penalties or additions to
the tax from the due date of remittance until the date
of payment.
Page | 81

For failure or refusal to file the withholding exemption
certificate or supplying false or inaccurate information,
the excess taxes withheld by the employer, if any, shall
not be refunded to the employee but shall be forfeited
in favor of the government.
2.
a.
NOTE: Deductions and/or personal exemptions are not allowed.

b.
WITHHOLDING TAX AT SOURCE
Final Withholding Taxes Sec. 57 (A) (PASSIVE INCOME)
The amount of income tax withheld by the withholding

agent is constituted as a full and final payment of the
income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on

the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of under
withholding the deficiency tax shall be collected from
the payor/withholding agent.
The payee is not required to file an income tax return

for the particular income nor is he liable for the
payment of the tax.
The finality of the withholding tax is limited only to the

payees income tax liability on the particular income.
It does not extend the payees other tax liability on
said income, such as when the said income is further
subject to a percentage tax.
RCBC VS. CIR

The liability of the withholding agent is independent from that
of the taxpayer. The former cannot be made liable for the tax
due because it is the latter who earned the income subject to
withholding tax. The withholding agent is liable only insofar as
he failed to perform his duty to withhold the tax and remit the
same to the government. The liability for the tax, however,
remains with the taxpayer because the gain was realized and
received by him.
FORMULA:
Gross Income
Final Tax Rate
Final Tax
Creditable Withholding Taxes on your ordinary income or

Expanded Withholding Tax Sec. 57 (B) (ACTIVE INCOME)
CREBA VS. ROMULO G.R. NO. 160756 (2010)

The Secretary may, upon the recommendation of the [CIR], require
the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year.
The following are creditable withholding taxes:
1.
Expanded withholding tax (EWT) on certain income
payments
2.
Withholding Tax on Wages (WTW)
3.
Withholding Tax on money payments to the Government
3.
WITHHOLDING VAT Sec. 114 (C)
(1) ON PAYMENTS TO NONRESIDENTS (Creditable Withholding

VAT)
Payments to non-resident, with respect to lease or use of
property or property rights in the Philippines owned by
such non-residents, are subject to withholding VAT. The
VAT shall be based on the contract price.
Other services rendered in the Philippines by non-resident.
General guidelines for Creditable WVAT:
The party required to withhold is the payor,

regardless of whether or not he is VAT-registered.
The VAT is passed on to the resident withholding

agent.
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TAXATION I REVIEWER
ATTY. C. VILLENA
6. Membership fees, dues and other expenses borne by the

employer for the employee in social and athletic clubs or
other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows
The payor shall claim this as input tax upon filing

of his own VAT return, subject to the rule of
allocation of input tax.
The duly filed BIR Monthly Remittance Return of
Value-Added Tax and Other Percentage Taxes
Withheld form is the proof or documentary
substantiation for the claimed input tax.
(2) ON PAYMENTS BY GOVERNMENT (Final Withholding VAT)

The government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall,
before making payment on account of its purchase of
goods or services subject to the VAT, deduct and withhold
a final VAT equivalent to 5% of the gross payment thereof;
provided, that the payment for lease or use of properties
or property rights to nonresident owners shall be subject
to 12% withholding tax at the time of payment.
The payor or person in control of the payment shall be
considered as the withholding agent who shall remit
the tax withheld to the BIR within 10 days following
tax at the time of payment.
4.
FRINGE BENEFIT TAX
Kinds of fringe benefits that are not subject to the FBT:

1.
3.
Fringe benefit is any good, service or other benefit

furnished or granted by an employer in cash or in
kind in addition to basic salaries, to an individual
employee, except a rank and file employee, such
as but not limited to:
HEV-HIM-HEEL
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and others
5. Interest on loans at less than market rate to the extent
of the difference between the market rate and the actual
rate granted
Fringe benefits which are authorized and exempted

from tax under special laws
Contributions of the employer for the benefit of the
employee to retirement, insurance and
hospitalization benefit plans;
Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not;
De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the CIR
2.
Fringe Benefits Tax (FBT) Sec. 33
A Fringe Benefit Tax (FBT) is imposed on the

grossed-up monetary value of the fringe benefit
furnished, granted or paid by the employer to
managerial and supervisory employees.
4.
III.
1.
Returns and Payments

QUARTERLY RETURNS AND PAYMENTS OF TAX
WITHHELD
Sec. 58 (A)
Filing and Payment Deadline:
Page | 83

1.
2.
2.
The return for final withholding tax shall be

filed and the payment made within 25 days
from the close of each calendar quarter.
The return for creditable withholding taxes
shall be filed and the payment made not
later than the last day of the month
following the close of the quarter during
which withholding was made.
3.
CERTIFICATE OF TAX WITHHELD

Sec. 58 (B)
Every withholding agent required to deduct and

withhold taxes under sec. 57 shall furnish each
recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement
showing the income or other payments made by
the withholding agent during such quarter or year,
and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the
request of the payee, but not later than 20th day
following close of the quarter in the case of
corporate payee, or not later than March 1
following year in the case of individual payee for
creditable withholding taxes.
For final withholding taxes, the statement should

be given to the payee on or before Jan. 31 of the
succeeding year.
ANNUAL INFORMATION RETURN Sec. 58 (C)

Every withholding agent required to deduct and withhold
taxes under sec. 57 shall submit to the Commissioner an
annual information return containing the list of
payees and income payments, amount of taxes
withheld from each payee and such other pertinent
information as may be required by the
Commissioner. In the case of final withholding taxes,
the return shall be filed on or before January 31 of
the succeeding year, and for creditable withholding
taxes, not later than March 1 of the year following
the year for which the annual report is being
submitted.
4.
INCOME OF RECIPIENT Sec. 58 (B) Sec. 58 (D)

Income upon which any creditable tax is required to be
withheld at source under Section 57 shall be included in
the return of its recipient but the excess of the amount of
tax withheld over the tax due on his return shall be
refunded to him; if the income tax collected at source is
less than the tax due on his return, the difference shall be
paid.
All taxes withheld pursuant to the provisions of this Code
and its implementing rules and regulations are hereby
considered trust funds and shall be maintained in a
separate account and not commingled with any other funds
of the withholding agent.
Page | 84

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TAXATION I REVIEWER

PART I TAXATION IN GENERAL

The power by which the sovereign raises revenue to defray the

NATURE OF INTERNAL REVENUE LAWS

The power of taxation is INHERENT IN SOVEREIGNTY as an

The right to tax exists apart from constitutions and without

HILADO V. CIR 100 PHIL 288

BY: J. Lumbres, C. Mejia and M. Mejia

PURPOSES AND OBJECTIVES

It is comprehensive, unlimited, supreme and plenary, but subject

Article VI Constitution, Section 28:

1. The rule of taxation shall be uniform and equitable. The

duties or imposts within the framework of the national

IS THE POWER TO TAX THE POWER TO DESTROY?

Power to tax INCLUDES the power to destroy. Chief

The imposition of a valid tax could not be judicially

CHAMBER OF REAL ESTATE AND

SISON V. ANCHETA 130 SCRA 654

BY: J. Lumbres, C. Mejia and M. Mejia

forth. Adversely affecting as it invalidate in appropriate cases a

SARASOLA V. TRINIDAD, 40 PHIL 259

The people of a state give to their government a right of taxing

UNDERLYING THEORY AND BASIS

PRINCIPLE OF NECESSITY (Theory of Taxation) The

COMPARISON WITH POLICE POWER AND EMINENT

Principles of a Sound Tax System

FISCAL ADEQUACY The sources of revenue should be

ABAKADA GURO PARTY LIST OFFICERS V.ERMITA

BY: J. Lumbres, C. Mejia and M. Mejia

LUTZ V. ARANETA, 98 PHIL 48

GEROCHI V. DOE (2007)

MATALIN COCONUT CO. INC. V. MUNICIPAL COUNCIL

The power to tax is a legislative power which under the

REPUBLIC V. PHILIPPINE RABBIT BUS LINE INC.

ESSENTIAL CHARACTERISTIC OF TAXES

It is generally payable in money

It is proportionate in character It is ordinarily based on the

It is levied n persons or property A tax may also be

It is levied for public purpose or purposes Taxation

It is levied by the State which has jurisdiction over the

It is paid at regular periods or intervals.

TAXES VS. DEBT

BY: J. Lumbres, C. Mejia and M. Mejia

Failure to pay tax

Caltex Philippines v. COA

FRANCIA V. IAC, 162 SCRA 753

admissible against demands for taxes levied for general or local

PHILEX MINING CORP. V. CIR AND CTA (1998)

TAXES VS. LICENSE FEE

Based on the power of Taxation

Based on police power

Normally paid at the start of

Nonpayment makes the

PROGRESSIVE DEVELOPMENT CORPORATION V. QC, 172

PAL ESSO V. CIR, 175 SCRA 149

TAX VS. SPECIAL ASSESSMENT

SPECIAL ASSESSMENT an enforced proportional contribution

Taxes are levied on

APOSTOLIC PREFECT V. TREASURER OF BAGUIO, 71

BY: J. Lumbres, C. Mejia and M. Mejia

TAX VS. TOLLS

TOLL sum of money for the use of something, generally applied

Taxes are levied for the support

Tolls are compensation for the