TAX NOTES (LEGAL GROUND)

Lectures of Atty. Japar B. Dimampao

Supplement Bar Material

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STATE POLICY
Declared Policy of the State: (Code:RDB-N)
1)

to promote sustainable economic growth through

the rationalization of the Philippine internal revenue tax
system, including tax administration;

2)

to provide, as much as possible, an equitable relief

to a greater number of taxpayers in order to improve
levels of disposable income and increase economic
activity;

3)

4)

to create a robust environment for business to

enable firms to compete better in the regional as well as
the global market;
the State ensures that the Government is able to
provide for the needs of those under its jurisdiction and
care.

THE BIR

Income tax;
Estate and donors taxes;
Value-added tax;
Other percentage taxes;
Excise taxes;
Documentary stamp taxes; and
Such other taxes as are or hereafter may be
imposed and collected by the Bureau of Internal Revenue

INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION
Q. What are the features of our present income taxation in
the light of R.A 8424?
A. We adopted the so-called COMPREHENSIVE TAX
SITUS Comprehensive in the sense that we practically
apply all possible rules of tax situs.
Criteria used: (Code: R. P. N.)
a) Residency of taxpayer;

1) Powers and duties of the BIR.

Situations where we utilized residency as basis:

The BIR shall be under the supervision and control of the DOF
and its powers and duties shall comprehend: (CODE: ACE-JP)

1)

We tax the income of a resident alien derived

from sources within the Philippines.

2)

We also tax the income from sources within of

resident foreign corporation in the Philippines.

1.
2.

the assessment;
collection of all national internal revenue taxes,
fees, and charges;

3.

the enforcement of all forfeitures, penalties, and

fines;

4.

execution of judgments in all cases decided in favor

by the CTA and ordinary courts

5.

give effect and to administer the supervisory and

police powers conferred to it by the Code and other laws.

2) POWERS
Revenue.
1.
2.

of

the Commissioner

of

the

Internal

to interpret tax laws and to decide tax cases (Sec.

4);

to obtain information and to summon, examine, and

take testimony of persons (Sec. 5);
3.
to make assessments and prescribe additional
requirements for tax administration and enforcement
(Sec. 6);
4.
to delegate powers (Sec. 7);
5.
to administer oaths and take testimony (Sec. 14);
6.
to make arrests and seizures (Sec. 15);
7.
to assign or re-assign internal revenue officers (Sec.
16 & 17).
REQUISITES OF A VALID TAX REGULATION (LIMITATION OF
THE POWER TO INTERPRET TAX LAWS)
1.
2.
3.
4.

It must be consistent with the provision of the Tax

Code

Reasonable
Useful and necessary
It must be published in the official gazette or in the
newspapers of general circulation.

SOURCES OF REVENUES
The following taxes, fees and charges are deemed to
be national internal revenue taxes: (Code:IEVPEDO or
EVE-PIDO)

b) Place/Source
Used as a basis in taxing the income of a non-resident alien
individual. We can only tax his income derived from sources
within and in taxing the same, we consider the place where
the income is derived.
c) Nationality or Citizenship in the case of individual taxpayer
We used that as a basis in imposing tax on the income of a
resident citizen. Resident citizen may be taxed from his
sources within and without. The source of income here is
immaterial what we consider is the nationality or citizenship
of the taxpayer.
Domestic corporation we can tax its income derived from
sources within and without.
On Non-resident citizen, they can only be taxed on their
income derived from the sources within tax situs is the place
/source of income.
Taxpayer
1. RC
2. NRC
3. OCW
4. ALIEN
4.1 NRA-ETB
4.2 NRA-NETB
4.3 ALIEN ERA-MNC
4.4 ALIEN OBUs
4.5 ALIEN PSCS
5. Domestic Corp.
6. Foreign Corp-RFC/NRFC

Sources
I/O (Sec. 23 [A])
I (Sec. 23 [B])
I (Sec. 23 [C])
I (Sec. 23 [D])

I
I

(Sec. 23 [E])
(Sec. 23 [F])

1. A resident citizen is taxable on all income derived from

sources within and without the Philippines.
2. A non-resident citizen is taxable only on income derived
from sources within the Philippines.
3. An overseas contract worker is taxable only on income
from sources within the Philippines; a seaman who is a
Page 1 of 46

citizen of the Philippines and who receives compensation

for services rendered abroad as a member of the
complement of
a vessel engaged exclusively in the
international trade shall be treated as an overseas
contract worker.
4. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
6. A foreign corporation, whether engaged or not in trade
or business in the Philippines, is taxable only on income
derived from sources within the Philippines.
Income Taxation may be grouped into:
1)
individual income taxation
2)
corporate income taxation
Q. What are the basic features of individual taxation?
(S.P. F. E. M.)
A.
1) Individual income
system of taxation

taxation

adopted

the

Schedular

Schedular System of Taxation is a system

employed where the income tax treatment varies and made
to depend on the kind or category of the taxpayers taxable
income (Tan vs. Del Rosario).
Characteristics of schedular system of taxation:
a)
It gives or accords different tax treatment
on the income of individual taxpayer.
b)
It classifies income.
Manifestations: (that under the individual taxation
we adopted the schedular system of taxation)
[C, B, P, Dp, I, R, R, D, A, Pw, P, P]
Under Sec. 32(a), income may be categorized as follows:
1)
compensation income,
2)
business income,
3)
professional income,
4)
income derived from dealings in property,
5)
interest income,
6)
rent income,
7)
royalties,
8)
dividends,
9)
annuities,
10) prizes,
11) winnings,
12) pensions, and
13) partners distributive share from the net income of
the general professional partnership.

This is the manifestation that as far as

individual income taxation, the income is
categorized.

2] The tax rates are progressive in character. This is

clear under Sec. 24 (a). You will notice there that the tax base
increases as the tax rate increases.
3] Modified gross income as regards compensation
earner. Modified because in determining the taxable
compensation income, the only allowable deductions are
personal and additional exemption. You cannot deduct the
allowable deductions under Sec. 34 from gross compensation
income.
But as regards those individual taxpayers that
derived business, trade or professional income, we adopted
the net income system. This is so because under Sec. 34,
allowable deductions may be claimed by individual

taxpayers who derived business trade and professional

income.
4] We employ this Pay as you File system.
5] Under certain cases, we employ the pay as you earn
system. This applies to income subject to withholding tax.
Q. What are the basic features of corporate income
taxation?
A.
1] Global Concept has been adopted. >>> Global system
where the tax treatment views indifferently the tax base and
treats in common all categories of taxable income of taxpayer
(Tan vs. Del Rosario).
Characteristics of Global system of Taxation:
a) Uniform tax treatment this is subject to diminishing
corporate tax rates of 34% (Jan. 1, 1998), 33% (Jan. 1, 1999),
32% (Jan. 1, 2000). See Chapter IV, Sec. 27).
b) Does not categorize income.
2]
Corporate
taxpayer,
particularly
domestic
corporations are entitled to deductions. So, insofar as
domestic corporation and resident foreign corporation is
concerned, we adopted here the net income tax system.

improperly
taxpayer.

New provisions under R.A. 8424: 10% tax on

accumulated earnings of a corporate

3] Pay as you file system has also been employed.

Corporate taxpayer is allowed to adopt
calendar or fiscal year period. Corporate taxpayer files
corporate income tax return quarterly. And it also files the
so-called FINAL ADJUSTED RETURN.

In the case of individual taxpayer, the

payment should not be later than April 15 of every
taxable year. Individual taxpayers are not allowed to
adopt the so-called FISCAL YEAR PERIOD.

* Individual taxpayers are allowed to adopt only the calendar

year period while corporate taxpayers have the option either
the calendar year period of the fiscal year period.
Calendar year period this covers the period of 12-month
commencing from Jan. 1 and ending Dec. 31.
Fiscal year period this is also a 12-month period
commencing on any month or ending on any month other
than Dec. 31.
DEFINITION OF CERTAIN TERMS
GROSS INCOME TAXATION is a system of taxation, where
the income is taxed at gross. The taxpayers under this system
are not entitled to any deductions.
In general, we adopted the net income taxation because
under Sec. 34, taxpayers are allowed to claim the so-called
ALLOWABLE DEDUCTIONS.
GROSS INCOME means all income derived whatever
source, including but not limited to the following: [STP-IRRDAP-PS]
1. Compensation for services;
2. Gross income from trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
Page 2 of 46

10. Pensions; and

11. Partners distributive share from the net income of the
general professional partnership.
NET INCOME TAXATION income is taxed at net. The
taxpayer may claim allowable deductions.
INCOME all wealth which flows in the taxpayer other than a
mere return of capital. It includes all income specifically
described as gain or profit including gain derived from the
sale or disposition of capital asset.
JUDICIAL DEFINITION: It also means gains derived from (1)
capital, (2) labor, or (3) both labor and capital including gains
derived from the sale or exchange of capital asset.
FOUR (4) Sources of INCOME; [ClaBS]
a. Capital
b. Labor
c. Both labor and capital
d. Sale of property
Example of income derived from capital >>> Interest Income
Example of income derived from labor >>> Compensation
Income
Example of income derived from both capital and labor >>>
Income of an independent contractor. The independent
contractor provides work force, provides capital and derives
income from such capital.
* In determining the profit from the sale of property, you
should always be guided by this formula:
Amount Received Or Realized LESS Cost of Property
= PROFIT
TAXABLE INCOME (the old term is Net Income) means all
pertinent items of gross income specified in the Tax Code less
the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by this Code or other
special laws. (Sec. 31 of the TRA of 1997).
Shoter Version: All pertinent items of gross income less
allowable deductions.
Q. What are the advantages/disadvantages of gross income
taxation and net income taxation?
Advantages of gross income taxation:
1. It simplifies our income taxation. This is so because since
no deductions are allowed, it is very easy to tax the income.
You dont have to find out whether deductions or expenses
are legitimate or not because they are not deductible.
2. This will generate more revenue to the government.
3. It minimizes cost.
Disadvantages of gross income taxation:
1. As far as the taxpayer is concerned, this is inequitable
because they cannot claim the expenses, which are incurred
in connection with his trade or business or exercise of his
profession.
2. And if this is the system, in all likelihood the taxpayers will
lose interest to earn more. It will in effect reduce the
purchasing capacity of the taxpayer.
3. Since taxpayers cannot claim those legitimate expenses as
deductions, they may resort to fraudulent scheme that will
minimize their tax ability and this may be done through the
understatement of income. So, in effect, this will encourage
tax evasion.
Advantages of net income taxation:
1. As far as the taxpayer is concerned, they will consider this
as equitable and just system.

2. This will minimize tax evasion because examiners will be

employed to check whether expenses are correct or not.
3. The consequence of no. 2 is that this will generate more
revenues.
Disadvantages of net income taxation:
1. vulnerable to graft and corruption
2. vulnerable to tax evasion
3. will give rise to loss of revenues.
SOURCES/SITUS OF INCOME
An income may be an income from within or without
the Philippines. The other term for income within is Local
Income while income without is sometimes called Global
Income or Universal Income.
In determining whether an income is an income
within or without, you have to consider the classification or
kind of income.
CLASSIFICATION OF INCOME: [C, B, P, I, R, R, D, A, P, P,
P]
1. Compensation income from services
2. Income derived from business, trade or profession in this
regard, the common forms of business are merchandising
business,
farming
business,
mining
business
and
manufacturing business.
3. Income from sale or exchange of property (either real or
personal property)
4. Interest Income
5. Rent Income
6. Royalties
7. Dividends, which may be received from domestic or foreign
corporation
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners distributive share in the net income of general
professional partnership (Professional income of a partner)
* COMPENSATION INCOME
Tax Situs: Place where services are rendered. So, if services
are rendered within the Phils., that is a Local Income. If it is a
payment for services rendered outside the Phils., that is an
income without.
RC income from within and without are taxable.
NRC only compensation income from sources within is
taxable.
RA same as NRC.
* BUSINESS INCOME [M3 F]
a) Merchandising Business
b) Farming Business
c) Mining Business
undertaken.
d) Manufacturing Business

Tax Situs: Place where these

business are

Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within
the phils. This is considered as income derived purely
within.
(2) Goods manufactured outside the Phils. and sold outside
income derived purely without.
(3) Goods manufactured within the Phils. and sold outside the
Phils. income partly within and partly without.
(4) Goods manufactured outside the Phils. and sold within the
Phils. income partly within and partly without.
* INCOME FROM SALE OR EXCHANGE OF PROPERTY
If it involves personal property, in
determining the tax situs, we have to
consider the place of sale.
Page 3 of 46

In the case of sale of transport documents,

tax situs is the place where the transport
document is sold (BOAC Case).
If it involves real property, the tax situs is
the place or location of the real property. So,
if the property sold is situated within the
Phils., the income derived from such sale is
considered as income within.

* INTEREST INCOME
Tax Situs: RESIDENCE of the DEBTOR
Case: There was this contract regarding the construction of
ocean-going vessels. There was this issuance of letter of
credit and the payment of downpayment. All the elements of
the transactions took place in Japan. The payment was made
in Japan. The letter of credit was executed in Japan. The
delivery was made in Japan. The debtor is a domestic corp.
Is the interest income on this loan evidenced by the
letter of credit taxable to the Japanese corp.?
HELD: NO, because the tax situs of interest income is not the
activity but the residence of the debtor. The place where the
contract of loan is executed is immaterial.
* RENT INCOME
Tax Situs: the PLACE of property subject of the contract of
lease.
* ROYALTIES
Tax Situs: the PLACE where the intangible property is USED
* DIVIDEND
a. Received from domestic corp. this is an income purely
within.
b. Received from foreign corp. consider the income of the
foreign corp. in the Phils. during the last preceding three (3)
taxable years;
rules:
(1) The income is purely within if the income derived from the
Phil. sources is more than 85%
(2) It is purely without if the proportion of its Phil. income to
the total income is less than 60%
(3) There should be an allocation if it is more than 50% but
not exceeding 85%
* ANNUITIES
Tax Situs: the PLACE where the contract was made
* PRIZES AND WINNINGS
Prizes may be given on account of services
rendered in which case, the tax situs is the
place
where
the
services
were
rendered.

If these prizes are not given on account of

services, the tax situs is the place where
the same was given.
Tax situs of winnings is the place where the
same was given.

*PENSION
Tax Situs: PLACE where this may be given on account of
services rendered

*PROFESSIONAL INCOME OF PROFESISONAL PARTNERS

Tax Situs: PLACE where the exercise of profession is
undertaken
GROSS INCOME
GROSS INCOME means all income derived from whatever
source, including but not limited to the following:
INCLUSION: [code: STP-IRR-DAP-PS]
1. compensation for services
2. gross income from trade or business or the exercise of a
profession
3. gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partners distributive share from the net income of the
general professional partnership (Sec. 32 of TRA of 1997)
EXCLUSIONS [code: LAGCIRM]
1. proceeds of life insurance policy
2. amount received by the insured as return of premium
3. gifts, bequests, devises or descent
4. compensation for injuries or sickness
5. income exempt under treaty
6. retirement benefits, pensions, gratuities
and others: (F, V, R, S, S, G)
a. retirement benefits received from foreign
institution whether public or private
b. veterans benefits
c. retirement benefits received from private
firms whether individual or corporate
d. separation pay
e. SSS
f.
GSIS
7. miscellaneous items:
a.
prizes and awards given in recognition of religious,
charitable, scientific, educational, artistic, literary, or
civic achievements
CONDITIONS:
1. the recipient was selected without any action
on his part to enter the contest or proceeding
2. the recipient is not required to render
substantial future services as a condition to
receiving the prize or award
b. income derived by the government or its political
subdivisions from the exercise of any essential
governmental function or from any public utility
c.
income derived from investment in the Philippines by
foreign government or financing institutions
d. prizes and awards in sports competitions
e.
gain derived from the redemption of shares of stock
issued by the mutual fund company
f.
contributions to GSIS, SSS, PAG-IBIG, and union dues
g. benefits in the from of 13th month pay and other
benefits
h. gain derived from the sale, exchange, retirement of
bonds debentures or other certificate of indebtedness
with a maturity of more than five (5) years. (Sec. 32 (b),
TRA of 1997)
*ALLOWABLE DEDUCTIONS
1. Optional Standard Deduction of ten percent (10%) of the
Gross Income available only to individual other than a nonresident alien provided he signifies in his return his intention
to elect OSD, otherwise, itemized deductions apply. Election
made shall be irrevocable for the taxable year (Sec. 34 L)
2. Itemized Deductions under Sec. 34 A-K, and M
Page 4 of 46

3. Personal and Additional Deductions/Exemptions under Sec.

35
* ITEMIZED DEDUCTIONS [code: ELIT-BDD-CRC]
1. expenses
2. loses
3. interest
4. taxes
5. bad debts
6. depreciation
7. depletion of oil, gas wells and mines
8. charitable and other contributions
9. research and development
10. contribution to pension trust
* NON-DEDUCTIBLE ITEMS
(Sec. 36 A)
1. Personal living or family expenses;
2. Amount paid for new buildings or permanent
improvements, or betterment 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 of any person financially
interested in any trade or business carried on by the taxpayer
, individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
(Sec. 36 B) Losses from sales or exchanges of property
directly or indirectly
1. Between members of a family (brother, sister of half or full
blood, spouse, ascendant, lineal descendants);
2. Except in case of distributions in liquidation, between an
individual and a corporation more than 50% in value of the
outstanding stock of which is owned directly, by or for such an
individual; or
3. Except in case of distributions in liquidation, between two
corporations more than 50% in value of the outstanding
stock of each of which is owned, directly or indirectly, by or
for same individual, if either one of such corporation is a
personal holding company or a foreign personal holding
company; or
4. Between the grantor and a fiduciary of any trust; or
5. Between fiduciary of a trust and the fiduciary of another
trust, if the same person is a grantor with respect to each
trust; or
6. Between a fiduciary of a trust and a beneficiary of such
trust.
TAXABLE INDIVIDUALS
RESIDENT CITIZENS (RC)
Income from within and without taxable
NON-RESIDENT CITIZENS (NRC)
Income from within

When an NRC returns to the Phils., his

income may also be taxed as Resident
Citizen or Non-Resident Citizen.

Illustration: A, an OCW, arrived in the Phils. sometime in June

1998. He will be taxed as a Non-Resident Citizen (NRC) as
regards the income that he earned which covers the period of
January to June. Now as regards the income that he will derive
upon his arrival from June to December, he will be taxed as
Resident Citizen (RC).

*
NRC must prove to the satisfaction of the BIR
Commissioner the fact of physical presence abroad with the
intention to reside therein.
* When an NRC decides to return to the Phils., he must prove
his intention to reside here permanently.
* Now NRC includes OVERSEAS CONTACT WORKERS (OCW),
IMMIGRANTS, and those who STAY OUTSIDE the Phils. by
virtue of an employment.
RESIDENT ALIEN (RA)
1. An individual who is not a citizen of the Phils. but a
resident of the Phils.
* Includes those who consider the Phils. as a second home.
*** Transient tourist who just sojourn, their stay is merely
temporary, thus may not be considered as RA.
* If an alien stays in the Phils. for a period of more than one
(1) year, he is considered as RA.
SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR
BUSINESS (NRA-NETB)
* He must be an alien individual who is not residing in the
Phils. and not engaged in trade or business in the Phils.
* He is one whose stay in the Phis.is not more than 180 days
SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR
BUSINESS (SNRA-NETB)
* Those employed by: (ROP)
1. Regional or Area Headquarters of Multinational
corporations;
2. Offshore Banking Units;
3. Petroleum Service Contractors
NON-RESIDENT
ALIEN
ENGAGED
IN
TRADE
OR
BUSINESS (NRA-ETB)
> considered as engaged in trade or business if his stay is
more than 180 days
> We can no longer tax his income from sources without. We
can only tax his income from sources within.
ENTITLEMENT OF DEDUCTIONS
RC entitled to deductions because the tax base is taxable
income.
Gross Income
Less: Allowable deductions
=======================
Taxable Income
NRC entitled to deductions because the tax base is taxable
income.
RA entitled to deductions because the tax base is taxable
income.
NRA-TB entitled to deductions because the tax base is
gross income. Their income is subject to 25% tax rate.

But if he is not in the Phils. from the period of January to

December 1998, he will be taxed as NRC for the said period.

SNRA-NETB subject to 15% tax rate on their income in the

from of:
S - Salaries
H - Honoraria
O - Other
W - Wages
E - Emoluments
R - Remuneration

If he will return to the Phils. and stay there from January t

December 1999, he will be taxed as RC for the same period.

EXCLUSION FROM GROSS INCOME

Page 5 of 46

PROCEEDS OF LIFE INSURANCE

Subject to tax if :
1. the insurer and insured agreed that the amount of the
proceeds shall be withheld by the insurer with the obligation
to pay interest in the same, the interest is the one subject to
tax;
2. there is transfer of the insurance policy;
Example:
A transferred to B his life insurance policy. The value
of the policy is P1 M. B paid a consideration amounting to
P300,000. B continued paying the premiums after the transfer
such that the premiums amounted to P200,000. Upon the
death of the insured, the P1 M may be received by the heirs.

As far as Sec. 85 (e) is concerned, an employer may be

considered a 3rd person.
AMOUNT RECEIVED BY INSURED AS RETURN OF
PREMIUM
Reason for Exclusion: It represents a mere return of capital.
The sources of this return of premium: (L.E.A.)
1. Life Insurance Policy
2. Endowment contracts
3. Annuity contracts
---Whether the premiums are returned during or at the
maturity of the term mentioned in the contract or upon
surrender of thee contract
Problem:

Q. Is the full amount of P1 M exempt?

A. NO, only the consideration given and the total premiums
paid may be excluded. That is, P1 M less P500,000.

A took out an endowment policy amounting to P1 M.

He paid premiums amounting to P800,000. Upon the maturity
of the policy, A received that P1M.
How much is the taxable amount?

Problem:

Answer:

A obtained a life insurance policy for B. B is the

president of As corporation. Corp. has an insurable interest in
the life of its officers, so premiums may be paid by the
employer A. Upon the death of B, his designated beneficiaries
will receive the proceeds.
a.
b.
c.

Is the amount representing the proceeds of the life

insurance policy taxable?
What about the premium paid by the employer A?
Does this amount form part of the gross
compensation income?
Does the amount representing the proceeds of life
insurance policy from part of the estate of the
decedent?

Answers:
a.

Let us first make two (2) assumptions. Let us assume

that:
1. the beneficiary designated is the employer;
2. the beneficiary designated is the heir of the
family of the insured.

The Tax Code however, makes no distinction.

Regardless of the designated beneficiary is the employer or
the heirs, or the family of the insured proceeds of life
insurance policy should always be excluded.
b.

Premiums of life insurance policy paid by the

employer may form part of compensation income;
hence, taxable if the beneficiary designated are the
heirs or the family or the employees.

It is not taxable compensation income if the designated

beneficiary is the employer because that is just a mere return
of capital.
c.

Proceeds of life insurance policy may be excluded

from the gross estate of the decedent under the
following cases:
1. if the beneficiary designated is a 3 rd person
and the designation is irrevocable;
2. it is a proceed of a group insurance policy.

However, it is included in the gross estate of the decedent:

1. if the beneficiary designated in the estate,
executor or administrator of the estate or
the family of heirs of the decedent;
2. if the beneficiary designated is a 3 rd person
and the designation is revocable [see
Section 85 (e)]

That is P1,000,000. value of endowment policy

LESS:
P
800,000. representing amount of
premium
==================================
=============
P 200,000. taxable amount
*GIFTS, BEQUESTS and DEVISES
Rationale: What is contemplated here are donations which are
purely gratuitous in character in order that it may be
excluded.
Gifts are excluded because these are
subject to donors tax.
Bequests and devises are excluded because
these may be subject to estate tax.
What
about
remuneratory
donations?
Remuneratory donations are subject to
income tax.
EXCEPTIONS to the Rule:>>> the income or fruit of such
money given by donation, bequests or devise, including the
income of this gift, bequest or devise in cases of transfer of
divided interest.

*COMPENSATION FOR INJURIES OR SICKNESS

Reason for Exclusion: This is just an indemnification for the
injuries or damages suffered. This is compensatory in nature.
The sources are:
1. The compensation may be paid by virtue of a suit;
2. It may be paid by virtue of health insurance, accident
insurance or Workmens Compensation Act
But as regards damages representing loss of anticipated
income, this is the one that is taxable.
If damages are in the nature of moral, exemplary, nominal,
temperate, actual and liquidated damages, as a rule, these
may not be subject to tax.
Example:
If a person suffered injury as a result of a vehicular
accident, and an action is filed in court, the Court awards the
following:
Moral Exemplary Actual -

P100,000.
P100,000.
P 60,000. (hospitalization expenses)
P 20,000. (repair of car)
P 60,000. (loss of income)

Page 6 of 46

*** All damages awarded are tax-exempt except damages of

representing loss of income.
Question: Are damages awarded by the Court on account of
breach of contract taxable?
Answer: Qualify your answer. With regards to damages
awarded on account of loss of earnings of the contracting
party, it is taxable.
INCOME EXEMPT UNDER TREATY
Reason for the Exclusion: Treaty has obligatory force of
contract.
Exception: As may be provided for in the treaty.
*RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND
OTHERS
- VETERANS BENEFIT
* This may be given by the US Administration.
* The recipient must be a resident veteran.
- BENEFITS GIVEN BY FOREIGN AGENCIES
INSTITUTIONS WHETHER PUBLIC OR PRIVATE

OR

Giver: Foreign government agencies or institutions whether

public or private.
Recipient: Resident citizen, non-resident citizen or resident
alien.
Observation:
Non-resident citizen should not be included in the
enumeration since it is already understood that we cannot tax
his income from without. We can only tax the income of non=resident citizen derived from sources within.
The same is true with resident alien because we can only tax
his income from sources within.
The inclusion of NRC and RA in the enumeration are mere
surplusage.
-RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM
WHETHER INDIVIDUAL OR CORPORATE
Recipient: Private employees or official of such private firm.
REQUISITES:
1. The private employee or official must be at least 50 years
of age at the time of his requirement;
2. He must have rendered at least 10 years of service to the
employer at the time of the retirement;
3. There must be reasonable private benefit plan
established by the employer;
4. The reasonable private benefit plan must be approved by
the BIR.
5. Reasonable private benefit plan may be in the nature of
pension plan, profit sharing plan, stock bonus plan, or
gratuity;
6. The employer must give contribution and no amount shall
inure to the benefit of a particular employee or official. This
must be established for the common benefit of the employees
or officials;
7. This can be availed of ONCE.
* The subsequent retirement benefits received from another
private employer is no longer exempt but subject to tax.
* If the second employer is a government entity or institution,
in which case, that is exempt because the giver here is not a
private firm. The limitation applies only when the giver of the
subsequent retirement benefits is another private employer.
-PHYSICAL DISABILITY BENEFITS
* These include death benefit, sickness benefit and other
disability benefit. Sometimes, the term used is separation
pay.

Giver: may either be public or private employer

*Sources of Separation Pay:
1. Death of an employee;
2. Physical disability of an employee;
3. Any other cause beyond the control of the employee or
official.
Example of no.3
a. Retrenchment of employees;
b. Installation of labor saving devises;
c. Dissolution of law firm.
>Resignation of an employee is a cause within his control.
>But, involuntary resignation is beyond the control of the
employee.
>The most important thing here is that the separation pay
was given on account of the above-mentioned sources.
>There is no requirement as to age of the employee or
official; there is also no requirement as to the length of
service of the employee or official.
>No requirement also as to the number of availment of
benefits.
-AMOUNT OF THE ACCUMULATED SICK LEAVE AND
VACATION LEAVE CREDITS
The monetized value of these benefits may
be subject to tax if these will not form part
of the terminal leave pay.
The monetized value of sick leave credit is
always tax exempt, if it forms part of the
terminal leave pay.
As regards UNUSED VACATION LEAVE
CREDIT, this is exempt only if the number of
days is 10 days or less in excess of 10 days,
it is already subject to tax.
If the unused sick leave benefit is
monetized, if the employer allow such
practice, and the same is given at the end
of this year, it is subject to withholding tax
because in this case, it does not form part
of the terminal leave pay.
Reason for exemption of terminal leave pay:
The accumulated value of unused sick leave
and vacation leave credits included in the
terminal leave pay is exempt from income
tax because it is one received on account of
a cause beyond the control of the
employee. This terminal leave pay is usually
given under a compulsory retirement.
Compulsory retirement is a cause beyond
the control ofte employee.
*MISCELLANEOUS ITEMS
a. Prizes and Awards in Awards Competitions
REQUISITES:
1. Competition and tournament must be
sanctioned or approved by the National
Sports Association;
2. The competition and tournament must also
be approved by the Philippine Olympic
Committee, whether local or international;
whether held in the Phils or outside.(if not
accredited- 20% tax)
b.

Prizes
and
Awards
made
primarily
in
recognition of: (RCS-SALE)
Religious, Charitable, Civic Achievement, Scientific,
Athletic, Literary, Educational
Example: P1 M reward given to Mr. Advincula for his
exemplary honesty. This may be excluded from his gross
income because it is given in recognition of civic
achievement. He was (1) selected without any action on
Page 7 of 46

his part to enter a contest or proceeding; and (2) he is

not required to render substantial future services as a
condition to receiving the award.
c.

Income derived from public utility or from the

exercise of essential government function by
the Government or political subdivisions of the
Phils.

foreign
government,
regional
or
(3)
international financing institutions established
by foreign government
REQUISITES:

1.
a.
b.

Recipient: Government or its Political Subdivision

c.

* Government of the Republic of the Phils or Government of

the Phils vs. National Government

2.

Government of the Republic of the Phils. is synonymous

with Government of the Phils.
Government of the Phils. or government of the Phils.
refers to the government corporate entity through which the
functions of the government are exercised throughout the
Phils., including save as the contrary appears from the
context, the various arms through which political authority is
made effective in the Phils., whether pertaining to the
autonomous regions, cities, provinces, municipalities,
barangays or other forms of local government. These
autonomous regions, provincial, city, municipal or barangay
subdivisions are the political subdivisions.
National government - refers to the entire machinery of the
central government. This includes the three (3) major
departments of the government: the Executive, the
Legislative and the Judiciary (Mactan Cebu International
Airport Authority vs. Marcos, Sept. 11, 1996).

It is clear that government-owned and

controlled corporations is within the
contemplation of the term national
government.
We need this distinctions because the
particular item of exclusion emphasizes the
fact that political subdivisions of the State
form part of the Government of the Phils.
You must have noticed that there is no
provision regarding government-owned and
controlled corporations. Also, there are no
provisions on agencies or instrumentalities
of the government. The item or income here
is exempt if the recipient is either the
Government of the Republic of the Phils. or
the provincial subdivisions of the State such
as provinces, cities, etc.

* Income derived by a government-owned and controlled

corporation, agency or instrumentality of the government
may be subject to tax.
*Government-owned and controlled corporations are now
subject to corporate income tax, except:
a. SSS
b. GSIS
c. Phil. Health Insurance Corp.
d. PCSO
e. PAGCOR
Situation: A municipality derived income from holding a fiesta.
Rule: The rule is settled that holding a town fiesta is
considered a proprietary function. Therefore, said income is
subject to tax.
Situation: A municipality derived income from the operation of
public market, electric power plant and other public utilities.
Rule: That income is tax exempt.
d.

Income derived from investment in the Phils.

(1) by foreign government or (2) financing
institutions, owned, controlled or financed by

Recipient must be:

foreign government;
financing institution owned, financed or
controlled by foreign government;
regional financing institution, international
financing institution established by foreign
government;
It must be an income derived from
investment in the Phils.

Sources of such income:

--- It may be in the nature of bonds. So, foreign government
here may be considered the creditor possible income here is
the interest of bonds. Now, loans may be extended
possible income here is interest on loans.
--- If a foreign government or financing institution made a
deposit in a bank, Phil. currency deposit the income here is
the nature of interest income.
--- If a foreign government made an investment in a domestic
corporation. It may be considered a stockholder. And a
stockhlder is entitled to dividend. Hence, the dividend
income received from domestic corporation is tax exempt.
** If the recipient of such dividend is a resident foreign
corporation that is also tax exempt. It is only subject to tax
if the recipient of such dividend is a non-resident foreign
corporation.
Case: EXIMBANK, which is a consortium of Japanese banks,
extended a loan in the amount of S20M to Mitsubishi Metal
Corp., a Japanese corporation. The same amount was
extended by Mitsubishi as a loan to Atlas Corp., a domestic
corporation.
The contract entered into between Mitsubishi Metal
Corp. is denominated as contract of loan and sale. It is a
contract of loan because Mitsubishi would lend Atlas S20M. It
is a contract of sale because under the contract Atlas bound
itself to sell the concentrates (this is a mining corp.) that may
be produced by the concentrator machine/equipment
purchased through the use of the S20M for a period of 15
years.
This being a contract of loan, Mitsubishi is entitled to
interest on loan.
ISSUE: Whether or not such interest on loan is subject to Phil.
income tax
ARGUMENTS: Mitsubishi contended that this is not taxable
because:
1. The source of S20M is a tax exempt entity (EXIMBANK is a
financing institution controlled and financed by a foreign
government); and
2. Mitsubishi is an agent of EXIMBANK, a tax exempt entity.
HELD: There was no evidence to the effect that Mitsubishi is
an agent of EXIMBANK. It is a mere allegation that has not
been proven.
In a contract of loan, once the loan is consummated,
the amount becomes exclusive property of the borrower. It is
no longer considered the money of EXIMBANK. Hence, the
interest of such loan should be subject to tax.
The lender is not a tax exempt entity. The creditor
here is Mitsubishi and it is not a tax exempt entity. Such being
the case, tax exemption must be strictly construed against
the taxpayer and liberally in favor of the government. When
Page 8 of 46

you claim exemption,

categorical terms.

you

should

prove

it

clear

and

* The problem may be modified by the examiner. The

examiner may clearly state the Mitsubishi is an agent of
EXIMBANK. The answer is, the interest on loan is tax exempt.
Mitsubishi then is considered as an extension of EXIMBANK. It
is as if the lender is EXIMBANK.
e. 13th month Pay and Benefits
* This applies both to private and public employees.
* Total exclusion should not exceed P30,000 subject to
increase
by the
Secretary
of
Finance upon
the
recommendation of the BIR Commissioner.
f.

Contributions to GSIS, SSS, MEDICARE, PAGIBIG, and union dues

* This is a surplusage. Even if this is not mentioned, we

cannot tax that.
g.

Sale,
exchange,
retirement
of
bonds,
debentures
and
other
certificates
of
indebtedness with a maturity of more than
FIVE (5) YEARS
- If maturity is less than 5 years, taxable.
Rule: Interest on bonds
1. issued by C.B - exempt
2. if issued by corp.- not exempt
Rule: Redemptions of share in mutual funds:
- only those gains derived from redemption of shares issued
by a mutual fund company are exempt
- it must emanate from a mutual fund
- If the term is not more than 5 years (5 years or less), the
gain derived from the sale, exchange and retirement of the
same, may be subject to tax.
Illustration:
If you are a creditor, you may sell these bonds,
debentures or certificates of indebtedness to another. Hindi
mo na mahintay ang maturity kasi long term. If there is a gain
on the sale of the same, it would be a tax exempt provided
that the bonds, etc., have a maturity or term of more than 5
years.
Retirement of bonds, debenture, etc. --- Nagbayad na
yung debtor. There may be gain derived from the same, such
as interest. This time, since the gain is in the nature of
interest, it is subject to tax. But, the gain derived from the
sale, exchange or retirement with a term of more than 5
years, is tax exempt. This is because exemptions are strictly
construed against the taxpayer and liberally in favor of the
government. Interests on bonds, debentures, etc. are taxable,
the provision is clear. It only covers sale/exchange/retirement
of bonds, debentures and other certificate of indebtedness
with a maturity of five years. Strict interpretation of tax
exemption.
TYPES/ CLASSIFICATION OF INCOME
1. COMPENSATION INCOME an income derived under an
employeeemployer relationship.
This may include the following: (WEBB-DROP)
Wages, Emoluments, Bonuses, Benefits, Directors fee,
Taxable Retirement Benefits, Other items of income of similar
nature, Taxable Pensions
* Retirement benefits may be subject to tax, if it does
not comply with the provision of Sec. 32 (b) par. 6 sub.par a.

* Pensions may be subject to tax, if it is given not in

accordance with the conditions laid down under that exclusion
provision.
* Other items of income of similar nature may include:
(CHAMP)
Clothing allowance, Hospitalization allowance, Allowances for
Food, Medical allowance, Share from the Profit sharing plan of
the employee
* TESTS TO DETERMINE WHETHER AN INCOME IS
COMPENSATION or NOT:
Find out whether it is received under an
employer-employee relationship.
Any payment received under an employeremployee relationship is compensation
income.
*TESTS TO DETERMINE THERE EXISTS AN EMPLOYEREMPLOYEE RELATIONSHIP: (AC-DC)
1. Appointment (selection and hiring)
2. Compensation
3. Dismissal power
4. Control test
N.B. : The name or designation of income is immaterial. The
basis of the income is immaterial and the manner by which it
is paid, is also not important. As long as it is given under an
employer-employee relationship, then that is compensation
income.
CANCELLATION OF INDEBTEDNESS Considered as
compensation income is the indebtedness had been cancelled
in consideration of the services rendered.
*** Share of the employee from the PROFIT SHARING PLAN of
the
employerCompensation
income
received
in
consideration of services rendered.
TAX LIABILITY OF THE EMPLOYEE PAID BY THE
EMPLOYER Compensation income if paid under an
employer-employee relationship in consideration of services
rendered.
PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE
POLICY OF THE EMPLOYEE Compensation income if the
beneficiary designated is the family of heirs of the employee.
*** The basis of the income is immaterial. Even if it is paid in
piece work, fixed rate or percentage basis as long as it is paid
under an employer-employee relationship.
REQUISITES FOR TAXABILITY OF COMPENSATION
INCOME ARE: (SPR)
1. There must be services, rendered under an employeremployee relationship.
2. If payment must be for that services rendered.
3. It must be reasonable. The compensation for services
rendered must be reasonable.
Purpose why only a reasonable amount may be taxed
as compensation income:
Take note on the part of the employer, he can claim
such compensation for services as deduction. Now, only the
amount that is reasonable under the circumstances can be
claimed as deduction. So, if the amount or the value of the
services rendered is P10,000 but the employee received
P15,000. As far as the employer is concerned, he can only
claim the reasonable amount of P10,000. In the case of an
employee, he can consider P10,000 as compensation income.
The excess of P5,000 may be treated as other income.
*** Not all payments for services rendered are considered
compensation income. Only those paid under the employeremployee relationship.
Page 9 of 46

THE FOLLOWING ARE NOT COMPENSATION INCOME: (P

I)
1. Compensation for services rendered by independent
service contractor. This may be treated as trade or business
income.
2. Income derived by professionals from the practice of
profession under professional partnership. This is treated as
professional income.
*** Fringe benefit is considered as compensation
income. This is governed by Sec. 33, TRA 1997. This is
compensation income in the sense that this is received under
an employer-employee relatioship.
DOCTRINE OF CASH EQUIVALENT
- you may be paid in cash or in property/kind
- equivalent value of property is taxable
* DIFFERENT FORMS OF COMPENSATION INCOME:
1. Property/Kind Fair Market Value (FMV) of the property. If
there is a price stipulated, it is the price stipulated that will be
followed in the absence of contrary evidence.
2. Promissory Note or other evidence of Indebtedness a. If it is not discounted, it is the face value of the
promissory note.
b. If it is discounted, it is the fair discounted value
of the promissory note.
3. Stock FMV of that shares of stock
4. Cancellation of Indebtedness Cancellation of
indebtedness has the following tax consequences:
a.
It may amount to taxable compensation income
if the indebtedness has been cancelled in
consideration of the services rendered.
b.

It may amount to taxable gift or donation if the

indebtedness has been cancelled without any
consideration at all. This is not subject to
income tax but may amount to taxable gift or
donation.

c.

It may amount to capital transaction if the

creditor is a corporation and the debtor is a
stockholder. If creditor corporation condoned
the indebtedness of the debtor stockholder,
that may amount to taxable capital transaction.
This is the form of direct dividend. Now,
property dividend is subject to tax rates of 6%,
8% and 10%. Dividend received from domestic
corporation is now subject to tax.

a.

Beneficiary is the wife of the President of a close

corporation.

b.

If the employer may secure a loan from he

insurance policy.

Premiums will be taxed under Sec. 33 par.b no.10. it is stated

there: Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
* If the payment was received by the employee when he was
no longer connected with his employer, it is still considered
compensation income. What is important here is that it must
be received during the existence of the employer-employee
relationship. Employees may be dismissed by the employer,
and they may file complaint for illegal dismissal against the
employer. Judgment was rendered by the arbiter in favor of
the employee. All the wages supposed to be paid (e.g.
backwages) can be taxed as compensation income. What
about attorneys fees? That is exempt.

FRINGE BENEFITS: code (HEV-HIM-EHEL)

FRINGE BENEFIT Any good, service, or other benefit
furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employee) such as
but not limited to the following:
1.
Housing;
2.
Expense account;
3
Vehicle of any kind;
4.
Household personnel such as maid, driver, others;
5.
Interest on loan at less than market rate to the
extent of the difference between the market rate
and the actual rate granted;
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; and
10.
Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows.(if contribution-exempt)
* Housing allowance may be exempt from tax if the
living quarters are:
a. Provided with the premises of the employer.
b. It must be made as a condition of employment.

5. Tax liability of the Employee paid by the employer in

consideration of services rendered amount of tax
liability
6. Premiums paid by the employer on the life
insurance policy of the employee.
a. It is a taxable compensation income if the
beneficiary designated are the heirs of the
employee or his family.
b.

It is not a taxable compensation income if the

beneficiary designated is the employer because
it is just a mere return of capital.

If the designation of the employer as beneficiary is

indirect (e.g.: It is the creditor of the employer that is
designated as beneficiary), that is still not taxable
compensation income.
Example of Indirect designation of the employer as a
beneficiary:

If said requisites are not present, housing

allowance may be taxed as fringe benefits.

* Meal allowance may be exempt from tax if it is

provided within the premises of the employer.
* Privilege or purchase discount are tax exempt if it
does not exceed of the basic monthly salary of the
employee. If it is more than , the excess may be as fringe
bene
* Medical or hospital allowance, clothing allowance,
rice allowance may be exempt from tax if the following
requisites are present:
1.
It must be of relatively small value (reasonable
amount). (RSV)
2.
It must be given for the following purposes: (CHEG)
a
To promote Contentment
.
b
To promote Health
.
c
To promote Efficiency
.
Page 10 of 46

d
.

To promote Goodwill

* Tax Exempt fringe benefits: (RF, DM, C, Ex, ECR)

1.
Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not.

* If the housing or living quarters are provided outside the

premises of the employer, even if that is for the convenience
of the employer, this is only exempt up to 50% of the amount.
So, 50% taxable, 50% exempt.

2.

De minimis benefits means of small amount. These

are benefits relatively of small amount.

* Vehicle Exempt but depends upon the peculiar nature of

the special needs of the business of the employer.
Example: LBC or DHL business

3.

Contributions of the employer for the benefit of the

employee to retirement, insurance and hospitalization
benefits plans.

* Household personnel such as maid, driver and others

Exempt, but depends upon the peculiar nature of the
business of the employer.

4.

Fringe benefits which are authorized or exempted from

tax under special laws.

* Membership in a social club, etc. Peculiar nature

requirement.

5.

Those given for the convenience of the employer,

including those which are required by the nature of the
trade, business or profession of the employer
(Employers Convenience Rule)

* Traveling expense benefit Peculiar nature requirement.

Example: Employer sent his employees abroad to attend a
particular seminar to improve their technical know-how.

De minimis benefits (of relatively small value) limited to

facilities or privileges furnished or offered by employer to his
employees merely as a means of promoting health, goodwill,
contentment, or efficiency of employees, such as:
a.
b.
c.
d.
e.
f.
g.

h.
i.
j.

Monetized unused vacation leave credits not

exceeding ten (10) days during the year;
Medical cash allowance to dependents of employees
not exceeding P750 per semester of P125 per month;
Rice subsidy of P350 per month;
Uniforms;
Medical benefits
Laundry allowance of P150 per month;
Employee achievement awards, for length of service
of safety achievement in the form of tangible
personal property other than cash gift certificate,
with an annual monetary value not exceeding
month of the basic salary of employee receiving the
award under an established written plan which does
not discriminate in favor of highly paid employees;
Christmas and major anniversary celebrations for
employees and their guests;
Company picnics and sports tournaments in the
Philippines and are participated in exclusively by
employees; and
Flowers, fruits, books or similar items
given to
employees under special circumstances on account
of illness, marriage, birth of a baby, etc.

BAR QUESTION: A is a driver of Congressman Magtanggol and

he received a monthly salary of P5,000 and living quarter
allowance of P2,500.
a.
Whether the P2,500 living quarter allowance is
excluded or subject to tax?
b.
Assuming the employer is an obstetrician would
your answer be the same?
ANSWER:
a. That should be subject to tax.
b. It should be excluded. Reason: Convenience of the
employers rule.
2.
GROSS INCOME
PROFESSION

* Housing benefit in determining whether the same is

exempt under the employers convenience rule, you have to
consider the peculiar nature of the special needs of the
employer.
Requisites for exemption:
1. It must be made as a condition for employment;
2. It must be provided within the premises of the employer
*** This may apply to a supervisor of a plant or a company.

BUSINESS,

TRADE

OR

BUSINESS Any activity that entails time, attention, effort

for purposes of livelihood or profit.

As regards construction business, the

taxpayer here must be an independent
contractor. He may report his income under
the percentage of completion method or
under the so-called completed contract
method.

PROFESSIONAL INCOME The recipient of the same must

be professionals.

*Principle of Employers Convenience Rule:

fringe benefits may be exempt/not subject
to tax if these are given for the benefit or
advantage of the employer.
The following are the possible fringe benefits, which
may be exempt under the Employers Convenience
Rule: (H V H M T)
a. Housing benefit
b. Vehicle
c. Household personnel
d. Membership in a social or athletic club or similar
organization
e. Traveling expense benefit

FROM

How about those who claim that they are

professionals but are not registered in the P.
R. C., can they still be tax as such?

Yes, irrespective of whether they are

licensed or not because of the rule that
gross income derived from whatever source.

3. PASSIVE INCOME
PASSIVE INCOME This is the income that is subject to final
tax.
Income subject to
(code:RPD-WIDS)

final

tax

are

the

following:

1.

Royalties

2.

Prizes

3.

Winnings

4.

Interests on bank deposit, deposit substitutes,

trust funds and
other similar arrangements.
Page 11 of 46

5.

6.

Dividend received from domestic corporation,

mutual
fund
insurance
company,
regional
headquarters of multi-national
corporation and
other corporation.
Share a partner in the net income after tax of a
taxable partnership, joint account, joint venture or
concessions.

*** Do not include passive income in the income of

your business or profession, or in your compensation
income. This is so because when you receive this income, the
tax had already been imposed and deducted.
RC, NRC, RA
ROYALTIES

PRIZES
exceeding
P10,000.00
If it is P10,000.00 or
less, it is NOT subject
to final tax but the
same
must
be
included
in
other
income
(e.g.
compensation,
business,
professional)
WINNINGS
except
PCSO & Lotto
INTERESTS
ON
BANK
DEPOSITS,
etc.
DIVIDENDS
RECEIVED
from
domestic corp., etc.

SHARE
OF
A
PARTNER in the net
income after a tax
of
a
taxable
partnership, etc.

20% except in
the
case
of
literary
works,
books
and
musical
compositions
which are subject
to 10% final tax

NRAETB

NRANETB

Same
as RC,
NRC,
RA

25%

If it is an interest on foreign currency deposit system,

it is exempt.
If the recipient is non-resident individual (NRC, NRAETB, NRA-NETB).
If the recipient is a resident individual (RC, RA), that is
subject to 7.5 %.
Interest income is also exempt if it is an interest
income on a long- term deposit or long-term
investment (this must have a term of not less than 5
years).

2.
3.

If the term is less than 5 years it is subject to the

following rates:
1
4 years to less than 5 years
5%
.
2
3 years to less than 4 years
12%
.
3
Less than 3 years
20%
.
DIVIDEND RECEIVED FROM DOMESTIC CORPORATION
1. This is exempt from tax if the recipient is a foreign
government, financing institution, regional financing
institution,
international
financing
institution
established by foreign government [see Sec.32 (B)
(7) (a)].
2.

20%

2
0%

20%

0%

20%

25%

- do-

CAPITAL GAIN DERIVED FROM SALE OF SHARES OF

STOCK

Not listed and traded through local

stock exchange this is the one subject to
income tax.

Not over P100,000.00

Amount Over P100,000.00

0%

25%

20

25%

6, 8 & 10
Question: How do you treat that share of a professional
partner from the net income of a general-professional
partnership?
Answer: This should be taxed at the rate provided under
Sec.24, that is, 5% to 34%.
But as regards the share of a partner in the
net income after tax of a taxable or business
partnership, that is one which is subject to final tax.
PRIZES may be exempt if given in sports competition and if
given primary in recognition of scientific, artistic, literary,
educational, religious, charitable, or civic achievement.
INTEREST
Rules
1.

Listed and traded through local stock

exchange this is not subject to income
tax but subject to percentage tax of of
1% of the gross selling price.

25%
2

25%

2
0%

Subject
to
increasing rates
of 6% if received
in 1998; 8% in
1999; and 10%
in 2000.

It is also exempt if the recipient of such dividend is

another domestic corporation or resident foreign
corporation [see Sec. 28(A)(7)(d)]

5%
10%

If the share of stock is not listed and traded

through local stock exchange, the basis of
the tax is net capital gain. So, you should
first deduct the capital loss.

If listed and traded through local exchange,

there is no deduction allowed because the
basis of the tax rate of of 1% of the gross
selling price.

The above-mentioned tax rates apply to all

individual taxpayers.

* CAPITAL GAIN DERIVED FROM THE SALE OF REAL

PROPERTY
- The real property involved must be considered CAPITAL
ASSET.
- The tax on capital gain derived from the sale of real property
is 6% of the gross selling price or zonal value which ever is
higher.
* CAPITAL ASSET property held by the taxpayer whether or
not connected in his trade or business except: (code: SOUR)
1.

Stock in trade or other property of any kind which

would be included in the inventory of the taxpayer
Page 12 of 46

if on hand at the end of the taxable year.

Property primarily held for sale to customers in the
Ordinary course of trade or business.
3. Property Used in trade or business subject to
depreciation
4. Real property used in trade or business.
The definition of capital asset says real property held
by the taxpayer whether or not connected with his trade
or business except real property used in trade or
business. So, in order to be a capital asset, the real
property must be one not used in trade or business.
2.

That is why, the sale of residential house and lot is

subject to 6% of capital gains because it is a real
property not used in trade or business.

But, sale of real property by a real estate dealer is

not a capital transaction because the property
involved is one primarily held for sale to customer in the
ordinary course of trade or business. That is not a capital
asset but an ordinary asset.

This covers not only sale of property; it also covers

conditional sale of real property including the so-called
pacto de retro sale under Art. 1602 of the NCC, or
disposition of property located in the Phils.

2.

If the buyer is the government or any of its political subdivisions or political agencies, including government
owned and controlled corporations, the seller have the
option to avail the 6% or under Sec. 24(A), wherein the
basis under said section is taxable income so deductions
may be allowed. The cost of the property may be
deducted but when you avail of the 6%, the basis is
gross selling price or zonal value whichever is higher.
Is this a tax on the buyer or the seller?
It is a tax on the seller. But sometimes, through an
agreement, pwede nilang I-transfer sa buyer, and theres
nothing that can prevent the seller from transferring the
tax to the buyer in the contract of sale.

b.

Value of permanent improvements on

leased premises. This may be reported
through:
b.1. Outright method at the time of permanent is
completed, he may report that as additional
rent income FMV of the building or
permanent improvement.
b.2. Spread out method by allocating the
depreciation
among
throughout
the
remaining term of the leased.

c. Advance rentals
c.1.
If in the nature of the prepaid rentals without
restriction on the use of the amount, it is
taxable.
c.2.
If it is in the nature of security deposit, it is
taxable rent income if there is a violation of
the term of the lease.
c.3.
If it is in the nature of a loan to the lessor, it
is not taxable.
2. INTEREST INCOME compensation for the use of money.
Whether it is an interest on loan pursuant to the
business of a taxpayer or personal transaction,
interest income, except if it is tax exempt, is always
taxable. This is so because the source of income is
immaterial, even if it is from an illegal source.
-

OTHER INCOME
* OTHER INCOME includes [code: R.I.D.O.]
a.
Rent income other than royalties
b.
Interest income other than interest income on bank
deposit
c.
Dividend income
d.
Income from Other sources and this may include: (BITCDC)
d.1. Bad debts recovered
d.2. Illegal
gains
derived
from
gambling
d.3. Tax funds
d.4. Compensation
for
private
property expropriated by the
government for public use.
d.5. Damages
d.6. Cancellation of indebtedness
1.

RENT

Additional rent income which includes:

a. Obligation of the lessor assumed by the
lessee The following are obligations which may
be assumed by the lessee: [R.I.D.I.O.]
a.1. Real property taxed on leased premises
a.2. Obligation to pay insurance premium on the
insured leased premises
a.3. If the lessor is a corp., the obligation to
distribute Dividends to its stockholders
a.4. Obligation to pay interest on the bonds issued
by the lessor.
a.5
Other obligations of the lessor which may be
assumed by the lessee.

Interest income on bank deposits is subject to final

tax.

3. DIVIDEND INCOME amount declared, set aside and

distributed by the Board of Directors to stockholders, on
demand or a fixed period.
Classes of Dividend: [C.L.I.P.S.S.]
Cash dividend
Liquidating
this is given upon liquidation of
dividendcorporate affairs
Indirect dividend it is given in other form and this
includes
cancellation
of
indebtedness by the corp. of the
obligation of stockholder
Property dividend - it may be in the form of stock other
than the stock of the corp.
Stock dividend stock issued by the giver corp.
Script dividend It is given in the form of promissory
note
or
other
evidence
of
indebtedness.

- Compensation for the use of ones property.

- The payment may be in cash or in kind. The property involved is either personal or real
property.
STOCK DIVIDEND as a rule not taxable. This is so
because there is no income here. It merely represents the
- In the case of personal intangible property, transfer of surplus account to the capital account.
property, copyright, trademarks etc.
EXCEPTIONS to the Rule:
Stock dividend may be subject to tax under the
THE FOLLOWING CONSTITUTES TAXABLE RENT INCOME:
following exceptional cases: [C OR D]
1. The regular rent may be monthly, semi-annually or
1.
If there is a Change in the stockholders interest in
annually
the net assets of the corp;

Page 13 of 46

2.

3.
4.

If it is one issued by Other corp. We call that

dividend stock
Stock dividend vs. dividend stock Stock
dividend as a rule is not taxable whereas dividend in
stock is taxable.
Redemption of stock dividend;
If the corp. issues Different shares of stock. If the
corp. issues two different classes of shares of stock,
the dividend that may be declared thereafter is
taxable.

* All individual taxpayers except the NRA individual may claim

this optional standard deductions.
* Itemized deduction may apply to corporate taxpayers
as well as individual taxpayers.
* FUNDAMENTAL PRINCIPLE IN DEDUCTIONS
1. The taxpayer must prove that there is law authorizing
deductions.
2. The taxpayer must prove that he is entitled to deductions.
*** NRFC are not entitled to claim deductions.
1. EXPENSES

Example:
Outstanding stock
1. Preferred
2. Common
3. Preferred
4. Common
5. Preferred/Common
6. Preferred/Common

Stock dividend
Common
Preferred
Preferred
Common
Preferred
Common

Taxable
NT
NT
NT
NT
T
T

Disguised dividend treasury stock dividend declared out

of the outstanding capital stock, the purpose of which is to
avoid the effect of taxation (Commissioner vs. Manning).

ORDINARY & NECESSARY EXPENSES

When we speak of ORDINARY, this simply refers to the
expenses which are normal, usual or common to the business,
trade or profession of the taxpayer. This may not be recurring.
Example: if an action is filed in court, it is but normal to hire
the services of a lawyer. So, the taxpayer has to pay
attorneys fees. It is an ordinary expense under this
circumstances.
NECESSARY- It is one which is useful and appropriate in the
conduct of the taxpayers trade or profession.

It is one which is made to appear as stock dividend when the

truth of the matter is that it is a dividend which is illegally
declared, such a case, since the purpose is to evade taxation,
it is taxable.

ORDINARY & NECESSARY EXPENSES

-are those which are incurred or paid in the development,
operation management of the business, trade or profession of
the taxpayer.

Remember, treasury shares of stock are not

entitled to dividends.

EXTRA-ORDINARY EXPENSES Not Deductible. These are

amortized or in lieu of the same, you may claim that so-called
allowance for depreciation. And if it involves intangible asset,
the word used is AMORTIZATION.

ALLOWABLE DEDUCTIONS (SEC. 34)

As regards individual taxpayers, the following
may claim allowable deductions:
1.
RC
2.
NRC, only those expenses incurred in the Phils.
because here, we cannot tax his income derived
from sources without.
3.
RA, only those expenses incurred in the Phils.
4.
NRA-ETB, but only those expenses incurred in the
Phils.
5.
PP (Professional Partners under Sec. 26)
Exceptions:
1. IT earning CI EE, ER REL
2. NRA-NTB
3. Aliens employed
A. RMC
B. OBU
C. PSC
4. NRFC
As regards corporate taxpayers, the following
are entitled to claim allowable deductions:
1. DC, which includes private educational institutions, nonprofit hospital, government-owned and controlled corps.
2. RFC
ITEMIZED DEDUCTIONS: [E,I.T,L,B,D,D,C,R,C]
1. Expenses
6.
Depreciation
2. Interests
7.
Depletion of oil, gas, wells and
mines
3. Taxes
8.
Charitable contributions
4. Losses
9.
Research & Development
5. Bad debts
10. Contribution to Pension Trust
* In the case of individual taxpayers, they may avail of the
optional standard deduction of 10% of gross income
* Corporate taxpayers are not allowed to claim 10% optional
standard deductions.

There is no hard and fast rule. An expense

may be ordinary insofar as a particular
taxpayer is concerned and it may not be an
ordinary as regards another taxpayer.
Example:
If you have business here in Manila and you also
have business in Tawi-tawi, what is the expense that you may
incur in Tawi-tawi which you may not possibly incur in Manila?
In Tawi-tawi, you may need people to guard your
business. But here in Manila, you may need not because of
our new President-elect.
KINDS OF ORDINARY & NECESSARY
[C.A.R.T.E.R.S.]
1. Compensation for services rendered
2. Advertising & promotional expenses
3. Rent expenses
4. Travelling expenses
5. Entertainment expenses
6. Repairs & maintenance expenses
7. Supplies and materials

EXPENSES

COMMON REQUISITES FOR DEDUCTIBILITY of these

ordinary & necessary expenses: [D.I.R.]
a.
Must be paid or incurred DURING the taxable year.
If you incur expenses in 1997, you cannot carry
this over to 1998. expenses incurred during a
particular year must be claimed as deductions during
this year when the same were incurred.
PAID to signify the fact that the taxpayer uses the
CASH
BASIS. Under the CASH BASIS, an expense is
recognized
when it is PAID.
INCURRED implies that the taxpayer employs the
Page 14 of 46

ACCRUAL
BASIS. Under the ACCRUAL BASIS, income is
recognized
when earned regardless of the receipt of the
same and
the expense is recognized when incurred.
b.

Must be paid or incurred in connection with the

trade, business or profession of the taxpayer.

c.

Must be proven by RECEIPTS.

SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE

ORDINARY & NECESSARY EXPENSES:
1. COMPENSATION FOR SERVICES RENDERED
This must be reasonable, meaning, this must not be
ostensible.
Case 1: Partnership was sold to a corp. and it was agreed
that the partners will serve the corp. and make it appear that
they render services. So, compensation for services was
ostensibly made by the corp.
Held:
These is a mere ostensible salary or
payment for services not actually rendered because that
amount really forms part of the properties purchased by the
corp.
Case 2: Corporate officers succeeded in selling the property
of the corp. So, profit was derived therefrom. Bonuses were
given to these corporate officers.
Held:
The rule is settled. Bonuses must be given
in good faith. There must be services rendered because
bonuses are additional compensation. In this particular case,
there was really no services rendered because that sale was
made through a broker. The corp. made it appear that it was
through the efforts of these corporate officers that brought
about a successful sale of property.
Bonuses must be given in good faith and in
determining whether bonuses will form part of the
compensation for services rendered, you have to consider the
(1) nature of the business, (2) the financial capacity of the
taxpayer and (3) the extent of the services rendered.
2. ADVERTISING AND PROMOTIONAL EXPENSES
It must be reasonable.
Case: Sugar Devt. Corp paid P125,000.00 to Algue Corp.
representing promotional expenses.
Held:
This is reasonable under the circumstances because
the particular budget subject for promotion involves million of
pesos. And under that circumstances, the P125,000.00 is
reasonable as this may coincide with the efforts exerted
considering that the taxpayer has no venture in that
experimental project to establish that vegetables of
investment company and this involves millions of pesos.
3. RENT EXPENSE
a
The taxpayer must NOT be the owner of the
.
property or he has no equitable title over the
property.
b
This is subject to withholding tax. You cannot claim
.
that the taxes supposed to be withheld have not
been paid or remitted to BIR.
4. TRAVELLING EXPENSES
- This must be incurred or paid while away from home.
- Home does not refer to your residence but to the station
assignment or post.

Example:
From home office to branch office, the
traveling expenses incurred are deductible. And this includes
not only the transporatiotion expenses but also meal
allowance and hotel accommodations.
5. ENTERTAINMENT EXPENSES
- This must not be contrary to law, morals, good customs,
public policy or public order.
- Hence, bribes, kickbacks, and similar payments are not
deductible.
-Also, the expenses incurred by the taxpayer in entertaining
govt officials in 5-star hotel to gain political influence are not
deductible.
6. REPAIRS AND MAINTENANCE EXPENSES
- Only ordinary or minor repairs are deductible.
- Extra-ordinary repairs cannot be claimed as deduction and
in lieu of that, the taxpayer may not be allowed to claim
depreciation.
- If the cost of the repair increases the life of an asset for a
period of more than one (1) year, that amount is considered
extra-ordinary repair. Otherwise, it is considered ordinary
repair.
7. SUPPLIES AND MATERIALS
-This must be actually consumed during the taxable year.
- RULE ON SUBSTANTIATION simply requires that ordinary
and necessary expenses must be proven. The proofs
required include:
[N.O.R.E.D.]
a
Official receipts
.
b
Adequate Recourse
.
c
Amount of Expense
.
d
Date and place where such expense is paid or
.
incurred
e
Nature of expense
.

2. INTEREST
REQUISITES FOR DEDUCTIBILITY
1
This must be paid or incurred DURING the taxable
.
year.
2
This must be paid or incurred in connection with the
.
trade, business or profession of the taxpayer
3
There must be an obligation which is valid and
.
subsisting.
4
There must be an agreement in writing to pay
.
interest.
Question 1:
What about that interest on unclaimed salaries of the
employees, is that interest deductions?
Answer/Held:
NO, because there is no obligation or indebtedness.
It is the fault of the employees in case they failed to claim
their salaries.
Question 2:
What about that interest charged to the capital of
the taxpayer, is that deductible?
Answer:
Interest on cost-keeping purposes is not deductible.
This does not arise under an interest-bearing obligation.
Page 15 of 46

THEORETICAL INTEREST an interest which is computed or

calculated, not paid or incurred, for the purposes of
determining the opportunity cost of investing in a business.
This does not arise from legally demandable interest-bearing
obligation. This is not a deductible interest.

.
d.2
.
d.3
.

Question 3:
What about interest on preferred stock, is this
deductible?

*Your knowledge of related taxpayers is also

important in
determining whether losses are
deductible or not. If losses were incurred or paid in
connections with the transactions between these
related taxpayers, these are not deductible.

Answer:

As a rule, interest on preferred stock is not

deductible, because there is no obligation to speak of. It is in
effect an interest on dividend. The reason why it is not
deductible is that the payment is dependent upon the profits
of the corp. It will only be paid if the corp. earn profits. And
would not be paid of the corp. incurs losses.

fiduciary of one trust and fiduciary of

another trust but there is only one
grantor
beneficiary and fiduciary

Question:

How much interest expense is deductible?

BUT if it is not dependent upon corporate

profits or earnings, that is deductible. If is payable on a
particular on a particular date or maturity without regard to
the corporate profits, it is deductible.

Answer: The interest that may be claimed as deductions shall

be reduced
by:
a.
41% Beginning January 1, 1998
b.
39% Beginning January 1, 1999
c.
38% Beginning January 1, 2000 of
the income subject to final tax.

The Supreme Court mentions TWO (2) FACTORS:

1. not dependent upon corporate profits; and
2. agreement as to the date or term within which payment
will be made.

EXAMPLE OF INCOME SUBJECT TO FINAL TAX:

1. interest on bank deposit
2. interest on deposit maintained under the foreign currency
deposit system

INTEREST ON GOVT SECURITIES is now taxable.

So, if the taxpayer obtained a loan from PNB and used the
proceeds in purchasing govt securities, the interest is now
taxable. Likewise, the interest expense paid on that loan, the
proceeds of the same, had been use to purchase govt
securities is now deductible.

So, if the interest income on bank deposit amounted to

P100,000.00. And the total interest expense incurred or paid
by the taxpayer is P200,000.00. If this is incurred in 1998,
41% of P100,000.00 is P41,000.00. That P200,000.00 interest
expense incurred or paid, should be reduced to P41% of that
P100,000.00 to arrive at P159,000.00 which is the interest
that may be claimed as deduction.
P200,000.00
- 41,000.00
----------------------P159,000.00

Q. What about an interest on a loan paid in advance, is this

deductible? Let us say that the taxpayer obtained a loan from
a bank and it is payable within 5 years. The loan obtained is
P50,000.00. Now, it was deducted in advance, can that be
claimed as deductions?
A. NO. You can only deduct the same when the installment is
due a particular year.

The rule has been established that TAXES are NOT

ORDINARY OBLIGATIONS. But the Supreme Court in two (2)
cases relaxed the distinction between taxes and ordinary
obligations.

INTEREST EXPENSES WHICH ARE NON-DEDUCTIBLE

[PARCAPU]
1. Interest expense on PREFERRED STOCK;

1.

The interest on deficiency donors tax is

deductible. The SC explained that taxes here are
considered obligations or indebtedness. And it ruled that
we have to relax the distinction between tax and
ordinary obligation in this respect.

2.

Interest on deficiency income tax can also be

claimed as deductible interest expense because
taxes here are considered ordinary obligations.

2. When there is NO AGREEMENT in writing to pay interest;

3. Interest expense on loan entered into between RELATED
TAXPAYERS.
4. Interest paid or calculated for COST-KEEPING PURPOSES
5. Interest paid in ADVANCE

3. TAXES

6. Interest on obligation to finance PETROLEUM EXPLORATION

REQUISITES FOR DEDUCTIBILITY:

1. This must be paid or incurred during the taxable year.

7. Interest on UNCLAIMED SALARIES of the employees

Related taxpayers:
a. members of the same family which includes:
a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
b. between two (2) corporations owned or
controlled by one individual. He must have a
controlling interest over these two corporations.
OR, if one corp. is considered as personal
holding company of another corp.
c. between a corp. and an individual; that
individual owns or controls more than 50% of
the outstanding capital stock of the such corp.
d. parties to a trust;
d.1
grant or fiduciary

2. This must be taxes paid or incurred in connection with the

trade, business or profession of the taxpayer.
*** Taxes that may be claimed as deductions may be national
or local taxes.
THE
FOLLOWING
ARE
NON-DEDUCTIBLE
TAXES
[S.I.N.E]
1. SPECIAL ASSESSMENT tax imposed on the
improvement of a parcel of land
2.

INCOME TAX This includes foreign income tax. In this

regard, the so-called foreign income tax may be
claimed as a deduction from gross income or this may
be claimed as tax credit against Phil. income tax. In the
event that he claims that as tax credit, he can no longer
claim the same as deduction.
Page 16 of 46

3.

Taxes which are NOT CONNECTED WITH THE TRADE,

BUSINESS OR PROFESSION OF THE TAXPAYER

4.

ESTATE TAX, DONORS TAX (see also discussion on tax

benefit rule)

TAX AS DEDUCTIONS vs. TAX CREDIT

Taxes as deductions may be claimed as deductions

from gross income.

Tax credit is a deduction from Phil. income tax.

Tax as deduction includes those taxes which are paid or

incurred in connection with the trade, business or
profession of the taxpayer. However, the sources of a
tax credit is foreign income tax paid, war profit tax,
excess profit tax paid to the foreign country.

The foreign income tax paid to the foreign country is

not always the amount that may be claimed as tax
credit because under the limitation provided under the
Tax Code, it must not be more than the ratio of foreign
income to the total income multiplied by the Phil.
income tax.

a.
b.
c.
d.
e.
f.
g.

5. SPECIAL LOSSES include the following:

a. loss arising from voluntary removal of buildings as an
incident to renewal or replacement
Problem:

Suppose A purchased that parcel of land of B and

included in that sale was that of the building. A
demolish this building in order to construct a new
building. Is the cost of demolition deductible
insofar as A is concerned?
NO. That can only be claimed as deductions if
the one demolishing the same is the taxpayer.
The moment that is sold to another claim that as
deductible loss. The treatment here is, the cost of
demolition should be capitalized in the selling
price.
Exception:A may claim that as deductible loss if
this was demolished by value of a court order
because the govt considered this as a fire
hazard, loss of useful value of property or capital
asset.

The following are entitled to claim tax credit:

1.RC
2. DC
4. LOSSES
CLASSIFICATION OF LOSSES [O. C. W. C. S.]
1. ORDINARY LOSSES losses sustained in the course of
trade,
business or profession of the taxpayer.

Capital
a
.
b
.
c
.
d
.

Losses include the following:

Loss arising from failure to exercise privilege to sell
or buy property
Worthless securities
Abandonment losses
resources
Loss from wash sale

in

the

case

of

natural

3. WAGERING OR GAMBLING LOSSES the amount that is

deductible
must not exceed the gains.
Example:
The winnings amounted to P1,000.00 Loss is P500.
This loss is deductible.
If the winning is P500 and if the loss is P1,000. The
amount deductible is only P500 because the amount must not
exceed the gains.
If there is no winnings and loss is P500. Deduction
losses here is ZERO.
4. CASUALTY LOSSES this must be reported to the BIR
earlier than 30
days but not later than 45 days following the date of the
loss.
Casualty losses include:

Supposed
the
taxpayer
had
a
building
constructed on a parcel of land. He owned this as
well as the building erected thereon. He had
business and his business was conducted within
the premises. Then, he decided to remove such
building as to construct a new building for new
business.
Is the cost of demolition to give way to a new
building deductible loss? YES.

Taxes are deductible only by the person upon whom the

tax is imposed
Except:
1. Share holder
2. corporate bonds - tax free Covenant clause

2. CAPITAL LOSSES the assets that must be involved there

must be
capital assets

Fire
Storm
Shipwreck
Other casualty losses
Robbery
Embezzlement
Theft

THE COMMON REQUISITES for DEDUCTIBILITY OF

LOSSES are:
1.
Losses must be actually/sustained and not mere
anticipated losses;
2.

Must not be compensated by insurance;

--- If it is partly compensated, only the amount not
compensated by insurance is deductible.

3.

Must be evidenced by a completed transaction.

Completed Transaction this means that the loss
must be fixed by identifiable event.
Example:
If it is a loss sustained from sale, the event
that may identify or complete the transaction is the
consummation of the contract of sale.
Suppose it is in the nature of casualty losses like fire?

The fire destroyed your property in 1995, no payment

has been made because the insurer and the insured
were still under negotiation. It was only in 1997 that they
agreed on the amount. The amount agrees upon is
P100,000. The taxpayer may claim that casualty losses
only in 1997 when payment was actually made. This is
the event that will complete the transaction.
5. BAD DEBTS
REQUISITES FOR DEDUCTIBLITY: [CU, W, TBP, VS, U]
1
Must be charged off and uncollectible within the taxable
.
year;
2
Must be ascertained to be worthless
.
Page 17 of 46

3
.
4
.
5
.

Must arise from trade, business or profession of the

taxpayer;
Must be valid and subsisting indebtedness;

4.

Must be uncollectible in the near future.

HOW TO PROVE THE WORTHLESSNESS OF OBLIGATION:

According to the Supreme Court, the following STEPS must be
complied:
1.
There must be a statement of account sent to the
debtor;
2.
A collection letter;
3.
If he failed to pay, refer the case to a lawyer;
4.
If lawyer may send a demand letter to the debtor;
5.
If the debtor still fails to pay the same, file an action in
court for collection.
In proving that the debtor is insolvent of bankrupt,
mere allegation of the same is not enough. You should
prove that the debtor is indeed bankrupt or insolvent.
So, you may secure a copy of that decision by the SEC
or other agency as the case may be, declaring the
debtor as bankrupt or insolvent. And then there must
be a demand letter sent to him. In case the debtor was
robbed, there must be a police report to that effect.
The debtor may be a NRFC, so you may argue that he
may not be sued here. According to the Supreme
Court, as a rule that is not an excuse. You should still
send a demand letter to that NRFC. In other words,
there must be diligent efforts to collect the
indebtedness and to prove that in the near future such
obligation is no longer collectible.
***

If the recovery of bad debts, resulted in a tax benefit

to the taxpayer, that is taxable. If it did not result in
any tax benefit to the taxpayer, that is not taxable.
(TAX BENEFIT RULE)

N.
B.

Read the case of Phil. Refining

Commissioner, a 1989 case.

Company

vs.

6. DEPRECIATION
The idea here is not to recover profit, but to recover
the cost of property invested in business. When the properties
are used in trade, business or profession of the taxpayer, the
law considers or recognizes the gradual loss or sale of
property.
DEPRECIATION refers to the gradual diminution of
the useful value of the property used in trade,
business or profession of the taxpayer, arising from
wear and tear or natural obsolence.
REQUISITES FOR DEDUCTIBILITY: [U P R A C ]
1.
The property must be used in trade, business or
profession of the taxpayer;
2.

There must be depreciable properties.

The non-depreciable properties are
a.
Personal property not used in trade, business or
profession of the taxpayer;
b.
Inventoriable stock and securities
c.
Land
d.
Mining and other natural resources

3.

The allowance for depreciation must be reasonable

5.

The method in computing the allowance for

depreciation must be in accordance with the method
prescribed by the Sec. of Finance upon the
recommendation of the BIR Commissioner.
This prescribed method includes:
a. Declining balance method
b. Sum of the years digit method
c.
Straight line method
d. Any other method as may be prescribed by the
Sec. of Finance upon the recommendation of the
BIR Commissioner
This must be charged off during the taxable year.

7. DEPLETION natural resources

This involves natural resources such as oil, gas wells and

mines. These are non-replaceable assets.

The requisites for deductibility are the same as that of

depreciation except that the properties involved are
natural resources

The idea here is not for profit but to recover the cost of
investment through this allowance for depletion.

8. CHARITABLE AND OTHER CONTRIBUTIONS

* These are fully deductible if the contributions are
given to the following: [F. A. G.]
1.
Government or its political subdivisions, agencies or
instrumentalities, for the purpose of undertaking priority
projects of the government;
These priority projects include: [S.H.E.]
a.
Sports development, science and invention
b.
Health and human settlement
c.
Educational and economic development
2.

Foreign government or institution and international civic

organizations;

3.

Accredited NGO
N.G.O. means non-profit domestic corporation which are
formed and organized for any of the following purposes:
[C.H.E.R.S.]
a. Research
b. Health
c.
Education
d. Charitable, cultural, character building
e. Sports development and social welfare

The amount of charitable contribution that

may be claimed as deduction may be:
1. In the case of individual taxpayer:
- Not more than 10% of the net income before charitable
contribution
2. In the case of corporate taxpayer:
- Not more than 5% of the net income before the charitable
contribution
IF the recipient of such contribution is any of the
following DC formed or organized for: [R.E.C.S.]
1
Religious purpose and rehabilitation of veterans
.
2
Educational purpose like educational corporations which
.
are not qualified as NGO
3
Charitable, cultural purpose
.
4
Scientific, sports development an social welfare purpose
.
Page 18 of 46

10% or 5% of the net income before charitable

contribution
Example:
If an individual taxpayer has a gross income of
P100,000 and the allowable deduction, except charitable
contribution, is P50,000. The Charitable contribution is
P5,000.

Limitations:
a. It must not be more than P2,400.00 a year. In
other words, P200.00 a month. The P2,400.00 is
the maximum amount that may be claimed as
deductions.

Deduction first P50,000 from P100,000 and the result

is P50,000.
This P50,000 is the basis of that 10% or 5% of net
income before charitable contribution. So, 10% of the
P50,000 is P5,000. Hence, the actual contribution of P5,000
may be fully claimed as deduction.
But let us say, the amount of charitable contribution
is P10,000. So, he can only deduct P5,000 as charitable
contribution, and not the actual amount of P10,000 because
the law imposes a limitation that the amount that may be
claimed as deduction must not be more than 10% of net
income before charitable contribution.
9. RESEARCH & DEVELOPMENT PROGRAM
is:

This may not be claimed as deduction if the amount

1.

2.

Spent for the acquisition or improvements of land or

for the improvement or development of natural
resources.
Paid or incurred for the purpose of ascertaining the
existence,
location, extent or quality of any
natural resources like deposits of ore or other
minerals including oil or gas.

Contribution to pension trust may refer to the current

year or past years.
CURRENT YEAR- this is considered as ordinary &
necessary expenses

The family must have an income of not more

than P250,000.00 a year.

c.

The claimant must be the spouse claiming the

additional
exemption.

Premiums on life insurance policy is also included

here because it is included under the health insurance policy.
PERSONAL EXEMPTION
This is an arbitrary amount in the nature of
deductions from gross compensation income.
If the taxpayer has no compensation income, this
can be claimed as deduction from gross income from
business, trade or profession.
Personal exemption is given to approximate the
needs of the taxpayer. It is a substitute for the disallowance
of family, personal and living expenses.
KINDS OF PERSONAL EXEMPTION:
1. Basic personal exemption:

10. CONTRIBUTION TO PENSION TRUSTS

REQUISITES OF DEDUCTIBILITY:
1
There must be a pension plan established by the
.
employer;
2
The pension must be reasonable or sound;
.
3
Contribution must be given by the employer to that
.
pension plan;
4
This must be for the benefit of the employees;
.
5
The plan must not be subject to the control of the
.
employer.

b.

a.

single or legally separated without dependent;

b.

head of the family;

c.

each married individual if both of them are earning Compensati

(in case only one of the spouses is deriving gross income,
spouse shall be allowed the personal exemptions)

2. Additional exemption
- This only applies to qualified dependent child and children such as
legitimate and illegitimate children.
Personal Exemption only individual
including estate and trust, are entitled.

taxpayers,

In case of estate and trust Php20,000.00

R.C.

N.R.C.

R.A.

Employer may also make a contribution to the

pension plan in regard to the services rendered for the past
10 years.

NRA-NTB

/subject to the
must not exce
personal exem
Personal
Exemption
Additional
Exemption

/
within

/
within

/
within

/
within

X
Rule on recipro

PERSONAL EXEMPTIONS
PERSONAL EXEMPTIONS
1. Personal and additional exemptions. (Note: Wala na
yung S.A.P.E.)
2.

Premiums on health and hospital insurance

Legend: / - available; X not available

Head of the family unmarried man or woman legally
separated man or woman who has the following qualified
dependents:
1.

Parents -

One or both parents. Must be living with th

for chief support.
Page 19 of 46

2.

Parents must be natural parents.

The President of the Republic of the Phils. cannot

Brothers or sister To be qualified theyissue
must an
be: executive order to increase the basic personal
a.
Living with the taxpayer;
exemption because the provision under the Old Tax Code
b.
Dependent upon the taxpayer for chief support;
authorizing the President to increase the personal and
c.
Unmarried;
additional exemption upon the recommendation of the Sec. of
d.
Not gainfully employed.
Finance has been removed or deleted by RA 8424.
e.
No more than 21 years old except if physically or mentally incapacitated;
must be brothers or sisters by blood
Now, you can only increase the amount of personal and
one is enough
additional exemption by legislative enactment.

NON-DEDUCTIBLE ITEMS
Must be legitimate , illegitimate, legally adopted or stepchildren
1.
Personal, living or family expenses
Living with the taxpayer;
Dependent upon the taxpayer for chief support;
2.
Those which are considered capital expenses. Capital expenditure
Unmarried;
an asset.
Not gainfully employed;
Not more than 21 years old except if physically
3. or mentally
Extra-ordinary
incapacitated.
repair expended to restore the property, or making
one that may prolong the life of an asset for more than one (1) ye
Instead, you may claim it as allowance for depreciation.
Dependent is considered living with the taxpayer even if the former or the latter are not physically together
if that is brought about by force of circumstances. Example if one of the parents will have to undergo by-pass
4.
Premiums paid on the life insurance policy of the officer or empl
operation in the U.S.
directly or indirectly designated as beneficiary.
3.

ChildrenConditions:
a.
b.
c.
d.
e.

Chief Support means more than 50% of the needs of the dependents are provided by the taxpayer.
5. Losses from sales or exchanges of property between
related taxpayers
Problem: If the child or the brother/sister got married and then he has found to be physically or mentally
incapacitated, so bumalik si tatay at dependent sa tatay for chief support,
can he qualify as dependent?
RULES:
Premiums paid on the insurance policy of the officer or
Answer:
No, physical or mental defect applies only to age requirement.
Oncebethe
child or
employee may
claimed
as brother/sister
deduction by got
the employer, If
married, he is automatically disqualified as dependent.
the beneficiary is the family or the heirs of the officer or the
employee.
CHANGE OF STATUS:
1.
Death of spouse during the taxable year;
It is not deductible on the part of the employer, If the
2.
Death of dependent during the taxable year;
beneficiary designated directly or indirectly is the employer. If
3.
Death of the taxpayer during the taxable year; estate ofthe
the
taxpayer designated
may claim isthe
personal
beneficiary
thebasic
creditor
or the heirs of the
exemption;
employer, the designation is indirect; hence, that premium is
4.
Additional dependent during the taxable year;
not deductible.
5.
Taxpayer got married during the taxable year;
6.
Gainful employment of the dependent during the taxable year On the other hand, on the part of the employees, these
7.
Dependent became more than 21 years old during the taxablepremiums
year.
may be a taxable compensation income. It is
taxable compensation income on the part of the employee if
the beneficiary designated is the family of heirs of the
Even if the above-mentioned change of status happened
employee.
during the taxable year, the taxpayer may still claim the basic
personal exemption because it is as if the change of status
happened at the end of the taxable year.
There is a provision in the Tax Code, which is not so clear.
For purposes of head of the family, in the case of natural
children or child, there is that word acknowledged or
recognized.
For purposes of the definition of head of the family, it is
clear that to qualify as dependent, the natural child or
legitimate child must be acknowledged or recognized by the
taxpayer.
But in the definition of the dependent, dependent means
legitimate, illegitimate or legally adopted child or children.
There is no word acknowledged or recognized.
Was this deliberately omitted by our Congressmen? Does
this imply that since they have so may illegitimate children,
they may not be required to acknowledge or recognize them
and they can claim this illegitimate child as their dependent?
This is not clear. If we will try to interpret the law literally,
there is no need of any recognition on the part of the
taxpayer.
Is this really the intention of law?
No. The intention of the law has always been to recognize
this illegitimate child and this is one way of compelling the
taxpayers to recognize this child.

Therefore, if these premiums are deductible on the part of

the employer, that is taxable on the part of the employee. If
these premiums are not deductible on the part of the
employer, that is not taxable on the part of the employee.
N.B. Personal, living and family expenses are deductible for
the simple reason that these are not connected with the
business, trade or profession of the taxpayer. In lieu of the
same, the taxpayer may claim the so-called Personal and
Additional Exemption in the case of individual taxpayers.
CORPORATE INCOME TAXATION

CORPORATE TAXPAYER corporation, includes partnership

no matter how created or organized, joint account companies,
insurance companies and other associations.
It excludes: [Gpp, JV-c, JC- PGE-G]
1.
General professional partnership;
2.
Joint venture for the purpose of undertaking construction
3.
Joint consortium for the purpose of engaging in petroleu
pursuant to a consortium agreement with the governmen
TAX EXEMPT CORPORATIONS:
The following organizations shall not be taxed in
respect to income received by them as such:
1.
General professional partnership devoted to a
common profession, must not engage in a business;
Page 20 of 46

2.

Joint venture for the

construction projects;

purpose

of

undertaking

3.

Joint consortium for the purpose of engaging in

petroleum, geothermal and other energy operation
pursuant to a consortium agreement under service
contract with the government there must be a
consortium agreement with the government

4.

Labor, agricultural or horticultural organization not

organized principally for profit.

So, it may derive income from such business as long

as it is merely incidental, the organization is still
exempt. What is important here is that in the articles
of incorporation of this tax-exempt organization, it
must be clearly provided that these organizations are
not formed or organized for profit.
Example:
In the course of promoting agricultural
products, the agricultural organization may sponsor
exhibits and income may be derived from the same.
That will not make this corporation taxable because
that is merely incidental. The activity has connection
with the purpose for which the corporation was
organized.

5.

6.

7.

8.

9.

Mutual savings bank not having s capital stock

represented by shares and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit.
must form and organize for mutual
purposes
Mutual savings bank and cooperative
bank must not be organized for profit.
So, it must not issue shares of stock.

A beneficiary society, order or association, operating

for the exclusive benefits of the members such as a
fraternal organization operating under the lodge
system, or a payment of life, sickness, accident, or
other benefits exclusively to the members of such
society, order or association, or non-stock corp. or
their dependents.
Lodge system one which must operate under a
parent and subsidiary associations
Cemetery company owned and operated exclusively for
the benefit of its members.
This must be non-profit cemetery.
Example: Libingan ng mga Bayani

Non-stock corporation or association organized and

operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation
of veterans; no part of its income or asset shall belong
to inure to the benefit of any member, organizer,
officer, or any specific person.

Business league, chamber of commerce, or board of

trade, not organized for profit, and no part of the net
income of which inures to the benefit of any private
stockholder or individual.
-

Makati stock exchange and Manila

stock exchange are not covered by
the exception. They are subject to
tax.

Requisites:
a. This must be established for common business
interest.
b. No part of the income shall inure to the benefit
of a particular individual.
Example: A clearing house corp. established by
member not for profit and such corp. is tax exempt.
If an association is organized by businessmen for the
purpose of encouraging prospective investors to invest
in the Phils. that association is not tax exempt because
the members of such organization have different
business interests.

10.

Civic league or organization not organized for profit

but operated exclusively for the promotion of social
welfare.
Example: Piso for Pasig Foundation is not for profit.
This is a civic organization. Homeowners Association
is subject to tax because that is not organized for
profit.

11.

Farmers associations or like associations, organized

and operated as a sales agent, for the purpose of
marketing the products of its members, and turning
back to them the proceeds of sales, less the
necessary selling expenses on the basis of the
quantity of produce finished by them.
Quantity of poduce means proportionate. This
must not be for profit.

12

Farmers cooperative or other mutual typhoon or fire

insurance company, mutual ditch or irrigation
company, or like organization of a purely local
character, the income of which consists solely of
assessments, dues and fees collected from members
for the sole purpose of meeting its expenses.

13.

Government
U.P.M.S.U.

14.

A non-stock and non-profit educational institution.

educational

institution.

These

are

Take note that the last paragraph of Sec. 30; it

provides, Not withstanding the provisions in the
preceding paragraphs. This means that even though
they are exempt, as regards certain income, they may
be subject to tax.
** So, notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any of
their properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to
tax.
** The implication is that if these tax exempt corps
mentioned under nos. 4 to 14, made an investment,
the income derived from such investment may be
subject to tax.
So, if they have real property and lease it to
another, the rent income is subject to tax.
If they have deposit in a bank, the interest income
on the same is subject to tax.
Page 21 of 46

If they sell property for profit, that is subject to tax

So, the exemption does not cover this income derived
form such investment. Thus, it must be an income
derived from their activities which may be the
purpose for which they are organized.
***
The insertion of non-stock, non-profit
educational institution, to my mind, is not in
accordance with the provision of Art.14 Sec. 3 par. 3,
because the Constitution provides for a particular test
for exemption and that is use of the property. So, if
a non-stock, non-profit educational institution has
interest income derived from bank deposit, in view of
this provision (Sec. 30, NIRC), the BIR may impose a
tax on the same, regardless of the use or disposition.
So, even if the interest on such deposit is used to
achieve educational purposes, that will not exempt it
from taxation. The Constitution says actually, directly
and exclusively used for educational purposes, the
meaning of this is, as the proceeds or income is
actually directly and exclusively used for educational
purposes, that may be exempt. But under Sec. 30, no.
That must be connected with the purposes or
purposes for which such institution has been formed
or organized. Since this runs counter to Art. 14 Sec. 4
par. 3 of the Constitution, this Sec. 30 should be
declared unconstitutional. The Constitution says use
but here (Sec. 30) it is regardless of the use or
disposition. This must yield to that Constitutional
provision.

15.

(Sec. 27 par C, TRA 1997)

GSIS (Government Service Insurance System)

16.

SSS (Social Security System)

17.

PHIC (Phil. Health Insurance Corp.)

18.

PCSO (Phil. Charity Sweepstakes Office)

19.

PAGCOR (Phil. Amusement & Gaming Corp.)

20.

NAPOCOR special law

N.B.:
The rule now is settled, Govt owned and controlled
corps. Are subject to corporate income tax except those
mentioned under Sec. 27 par C.
PARTNERSHIP -

This is an association of two or more

persons and they may contribute
money, property, or industry to a
common fund with the intention of
dividing the profits among themselves.

Tests that will determine whether a partnership exists

or not:
1.
There must be a contribution to a common fund.
2.

There must be an intention to divide the profits among

themselves.

Co-ownership is not a partnership. Co-ownership, as a

rule is a tax exempt because a co-ownership is formed
and organized not for profit but for common enjoyment
of the property or for the preservation of the property.

Partnership is considered a corporate taxpayer. Take

note that this excludes general professional partnership.
Only partnership formed or organized for profit is
excluded.

If it is formed and organized for the practice of common

profession, it is a tax-exempt partnership.

For purposes of taxation, this business partnership is

taxable irrespective of whether it is orally constituted or
in writing and whether or not it is registered in the SEC.

Case: The heirs of the decent inherited the property. There

was distribution of share. But such shares are held under
single management. In fact the income of such property after
distribution was managed by one of the co-heirs.
Held:
The fact that they agreed that the shares
shall be held by the co-heir under the single management for
profit, this according to the SC convert the co-ownership in to
a taxable unregistered partnership. (Una vs. Commissioner
Una doctrine)
Case:
The heirs inherited the properties from their
deceased mother. The property was under the administration
of an administrator. This administrator of the property was
authorized to sell these properties for profit, or leased
properties for profit and engaged in an income producing
activities.
Held:
When these heirs inherited the property from their
deceased mother, co-ownership exists. At the particular
stage, it is exempt from tax when the heirs decided to invest
such property in an income producing activity that coownership is converted in to a taxable unregistered ownership
(Sea vs. Commissioner Sea doctrine)
Case: There was two sisters who form a common fund for
the purpose of engaging in a series of transaction for profit.
Held:

There is a taxable unregistered partnership here.

**Test that will determine whether co-ownership is

taxable unregistered partnership Find out whether the
heirs made a substantial improvements on the inherited
property. The heirs made a substantial improvement on the
inherited property, the implication is that they will engage in
a business for profit, (Evangelista vs. Commissioner
Evangelista doctrine). If that happens, that co-ownership
will be taxed as unregistered.
Case: Obelio Sr. entered into a contract with Ortigas limited
company. Under that contract, Ortigas limited company will
distribute parcels of land to the Children of Obelio Sr. for their
residential houses. After the subdivision of such parcel of land
to the children of Obelio Sr., these children decided to sell this
parcel of land to Wide City Corp. Was there a taxable
partnership formed by the children of Obelio Sr.?
Held:
There was no partnership formed because there was
no intention to divide the profits among themselves. This was
a mere isolated transaction. Isolated transaction will negate
any intention to divide the profits among themselves. Thus,
there was no taxable partnership formed.
Case: Pascual and Dragon purchased 3 parcels of land from
Bernardino and 2 parcels of land form Mr. Roque. Thereafter,
the three parcels of land which were purchased from
Bernardino, were sold to Marimer Corp. with a profit of
P165,222.70 while the parcel of land purchased from Mr.
Roque were sold at a profit of P60,000 to Reyes.
Held:
there was no partnership organized because this is
just a mere sharing of gross return. And as you have learned
in partnership, the law says, the partners share in the net
Page 22 of 46

profits of a taxable partnership. So, mere sharing of gross

return does not of itself establish a partnership.
Joint account When two persons form or create a common
fund and such persons engaged in a business for profit, this
may result in a taxable unregistered association or
partnership.
Registration is not a requisite for purposes of taxation. What
is important here is they must engage in a business or activity
for profit.
Joint stock companies This is the midway between
corporation and partnership. This has what you call hybrid
personality. It is somewhat a partnership because it is an
association, and persons or members of the same contribute
fund, money to a common fund. And this us managed by
Board of Directors; this means: it has that feature of a
corporation. And these persons may transfer their share
without the consent of others.
Emergency operation These may be formed by two
corporations.
This
two
corporations
have
separate
personalities. If they form that emergency operation (it is
really a special activity) to engage in a joint venture,
corporation 1 may be taxed only from the income derived
from such business. The income derived from such
emergency operation should also be included in that taxable
income subject to corporate income tax. In the same way,
that corporation 2, has a separate and distinct personality; if
it a part of that emergency operation, the income derived
from such special activity should also be included in the
income of that corporation 2, subject to corporate income tax,
even if it is not registered with the SEC (Securities and
Exchange Commission).
But if two corporations are managed by one manager, and
this 2 corporations leased services, managed by one person
and it has 2 separate accounts, it is not an association formed
which is subject to tax.
Domestic Corporation (DC) corp. formed or organized
under Phil. Laws
Resident Foreign Corporation (RFC) foreign corporation
engaged in trade or business within the Phils.

derived. But there was that activity that was undertaken in

the Phil. from which income was derived and that refers to the
sale of transport document. According to the Supreme Court,
the sale was made in the Phil. and the payment was made in
the Phil. This particular activity enjoys protection of the Phil.
government. So, it should share the burden of tax. BOAC was
considered doing business in the Phil. under this particular
situation because there were series of transactions made in
the Phil. and BOAC was appointed a permanent agent in the
Phil. This implies that the Phil. and the BOAC had no intention
to establish continuous business here in the Phil. Continuity of
conduct is the peculiar circumstance referred to in the case.
**If these were mere isolated transaction (lets modify the
facts of the case) and BOAC has no permanent agent in the
Phil., such airline is not considered doing business in the
Philippines. Remember, international carrier is taxed on gross
Philippine billings.
Case:

A foreign vessel unloaded cargoes in the Phil. twice.

Held:
We cannot consider that as resident foreign corp.
These are mere isolated transactions.
Case: If a corporation made an investment in another
corp., the Supreme Court held that, it will not make the corp.
as doing business in the Phil. because it has no intention to
establish continuous business.
Case:
Marubeni corp. is a foreign corp. it invested in a
domestic corp. This foreign corp. has a branch office in the
Phil. it made a direct investment in that domestic corp. So, it
received dividend from that domestic corp.
Held:
That will not make such foreign corp. a resident
foreign corp. because of that absence of intention to establish
continues business. It would be different if it was coursed
through the branch office of such foreign corp.
GENERAL RULES
Classificatio
n
DC

Sources
I/O

Tax
Base
Taxable
Income

Entitled
Deduction
/

Non-Resident Foreign Corporation (NRFC) foreign corp.

not engaged in trade or business within the Phil.
There is no fix criterion as to what constitute
engaged in trade or business. Each case shall be judged in
the light of peculiar environmental circumstances. But
engaged in business implies continuity of commercial
transaction or dealings continuity of business; there must be
continuity of intention to conduct continuous business.
Case: BOAC is an offline international airline. Offline
because it does not render any services and no landing rights
in the Phils.
BOAC claimed that it is not subject to tax with
respect to the sale of transport documents or airline tickets in
the Phils because it is an offline international airline. It does
not render any service and it has no lending rights.
Held:
The contention of BOAC is not tenable. The
income derived from the sale of that transport documents in
the Phil. is subject to tax. The subject of income may be
property, activity or service that produce the same. For an
income to be considered as an income derived from sources
within the income must be derived from activity conducted or
undertaken in the Phil.
It is true that BOAC had no property in the Phil. from
which its income may be derived. It is true that BOAC did not
render any service in the Phil. from which its income may be

RFC

NRFC

Taxable
Income

Gross
Income

Tax
Rate
34%1998
33%1999
32%
2000
34%
1998
33%
1999
32%
2000

Question: Can Congress pass a law imposing tax on the

income of a RFC derived from sources without?
Answer:
No, because this will violate the principle of
territoriality in taxation. We cannot extend protection to that
particular subject of taxation. The fundamental basis of the
power to tax is the capacity of the taxing authority to extend
protection to the subject of taxation.
The 34%, 33% 32% tax rates mentioned may not be
applied except if it is lower than the 2% of gross income of
such corporate taxpayer. This is called minimum corporate
income tax rate of 2% of gross income.
Example:
If a corporate taxpayer has a gross income
of P20M. 2% of that is P400,000. In this case, the tax to be
paid must not be lower than P400,000. If the net income is
Page 23 of 46

P20M and the deduction is P19M, we only have P1M . You

multiply that by 34% because now is 1998, so that will give
you P340,000. This is the corporate income tax applying that
tax rate (34%) is lower than 2% which is P400,000 (this is the
amount supposed to be paid). Applying the minimum
corporate income tax rate of 2% if the gross income, the
amount to be paid as tax is P400,000.
So, the minimum corporate income tax rate of 2% of
gross income means that the corporate taxpayer must pay
corporate income tax not lower than 2% of its gross income. If
the actual corporate income tax is lower than the 2% tax that
is supposed to be paid, it is the 2% minimum. But, if the
actual corporate income tax applying that 34% is P600,000,
this is the tax that should be paid.
SPECIAL RULES
A.
SPECIAL
DC
1.
PRIVATE
EDUCATIONA
L
INSTITUTION

SOURCES

Tax Base

Tax Rate

I/O

Taxable
Income

1998:10%or34%
1999: 33%
2000: 32%

Notes:

Tax rate is 10% if its income derived from unrelated

trade, business or activity does NOT exceed 50% of its gross
total income.

But its income is subject to 34% tax rate if its income

from unrelated, trade or business or activity exceeds 50% of
its gross income.
Example: Its income derived from unrelated trade, business
or activity amounted to P20M. And income derived from
related trade, business or activity is P10M. So, the total
income is P30M. If the allowable expenses amounted to P10M,
the taxable income now would be P20M.
66.67% =

20M
3

vs.

Income derived from

Unrelated TBA

10M___
3

33.3%

Income derived from

Related TBA

So, the amount from unrelated TBA (66.67%) is more

than 50% of its gross income (P30M). Thus, this P20M taxable
income is subject to 34% tax rate.
But, if the income from related TBA is P20M and its
income derived from unrelated TBA is P10M. So:
Related TBA --------------
Unrelated TBA

vs.

<-----------------

The income from unrelated TBA is not more than 50% of its
gross income. Thus, this P20M is subject to P10% preferential
tax rate.

***For purposes of non-profit hospital, this must be income

derived from activities which are substantially related in
achieving the primary purpose of that hospital, which is to
render services to the public.
The explanation as to when the 10% or 34% tax rate
applies is the same as that of private educational institution.
B. SPECIAL RFC
1.
INTERNATIONAL
AIR CARRIER
2.
INTERNATIONAL
SHIPPING

Sources

Tax Base

GROSS
PHILIPPINE
BILLINGS

(Income
Within)

Tax Rate
2.5%
(2.
____
%)

*** For purposes of International Air Carrier, GROSS PHIL.

BILLINGS refer to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
uninterrupted flight irrespective of the place of sale or issue,
and the place of payment of the ticket or passage document.
* Gross Phil. billings for purposes of International
Shipping means gross revenue whether from passenger,
cargo or mail originating from the Phils. up to final
destination, regardless of the place of sale or payments of the
passage or freight documents.

C. SPECIAL NRFC
1.
LESSOR
OF
CINEMATOGRAPHI
C FILMS
2.
LESSOR
OF
VESSELS
CHARTERED
TO
FILIPINO
NATIONALS
OR
CORP.;
The
Charter
Agreement
of
which
is
approved
by
Maritime Industry
Authority
3.
LESSOR
OF
AIRCRAFT,
MACHINERY
&
EQUIPMENT

Sources

Tax Base

Tax Rate

GROSS

25%

GROSS

4.5%

GROSS

7.5%

*** Lessor of CD and video is not included in no. 1. So, it is

subject to 34% tax rate.
*** Lessor of personal properties is not included in no. 2,
so, it is also subject to 34% tax rate.

INCOME DERIVED FROM RELATED TRADE, BUSINESS OR

ACTIVITY
This must be an income derived from an activity which is
substantially related to the performance of educational
functions. This may include income from bookstore, canteen
or dormitory.

2.NONPROFIT
HOSPITAL

Sources

Tax Base

Tax Rate

I/O

Taxable
Income

1998-10%or
34%
1999-33%
2000-32%

OTHER RULES
1.
INTEREST

DC

RFC

NRFC

20%

20%

This should be
included in its
Page 24 of 46

INCOME
BANK
DEPOSIT

ON

2. INTEREST
INCOME
ON
BANK
DEPOSIT
UNDER
THE
EXPANDED
FOREIGN
CURRENCY
DEPOSIT
SYSTEM
3. ROYALTIES
DERIVED
WITHIN
THE
PHILIPPINES
4.
CAPITAL
GAINS
DERIVED
FROM
ITS
SALE
OF
SHARES
OF
STOCK
a. If it is
listed
and
trade
d
thru
local
stock
excha
nge:
Of 1% of
the
Gross
Selling Price
b. If it is
NOT
listed
or
trade
d
thru
local
stock
excha
nge:
Not
over
P100,000.:
5%
Over
P100,000:
10%
5.
CAPITAL
GAINS
DERIVED
FROM
THE
SALE OF REAL
PROPERTY
WHICH
IS
NOT USED IN
TRADE
OR
BUSINESS
6.
***

7.5%

7.5%

gross
income
subject
to
34% tax. BUT
in the case of
interest
on
loans
which
have
been
made on or
after August 1,
1986,
the
same
is
subject
to
20% final tax.

BRANCH
PROFIT
REMITTED
BYA BRANCH
OFFICE (this
only applies
to RFC)

Tax-exempt

CASE:

NOT
APPLICAB
LE

to Branch
Profit
Remittan
ce Tax of
15%
NOW, the
basis
of
the tax is
the
amount
applied
for
or
earmarke
d
for
remittanc
e

NOT
APPLICABLE

Marubeni Corp. is a foreign corp. it has a branch

here. It made a direct investment in a Domestic Corp., so it
received cash dividends. Do we have to include that in that
profit to be remitted and subject to 15%?
HELD:
20%

20%

34%

NO.
This is not effectively connected with the
conduct of trade or business of their branch office. That
should be excluded from the profits that should be remitted to
that Marubeni Corp. The condition is, it must be an income or
profit effectively connected with the conduct of trade or
business of such corp. through its branch office.
7.
DIVIDENDS
RECEIVED
FROM DC

This rule applies BOTH to corporate

and individual taxpayers.

EXEMPT

EXEMPT

* These dividends
received from DC
by NRFC is subject
to 15% Final Tax
IF: the foreign govt.
of that foreign corp.
allows a tax credit
at least 19% of
the taxes deemed
paid
in
the
Philippines
by
NRFC.
*
So,
the
implication is that if
that foreign govt.
does not allow a
tax credit of at
least 19%, that is
subject to 34%
and not 15%.

Note: These incomes must be derived from the Phils. So,

this is an interest income on bank deposit maintained
OUTSIDE the Phils., that is not subject to final tax but should
be included in the gross income of the DC.

INTRACORPORATE DIVIDENDS EXPLAINED

6% of the
Gross
Selling
Prize
or
Zonal
Value
whichever
is Higher

TAX SPARING CREDIT (Sec. 28.B (5) b) >>> 19%

Purpose:
To attract investors in the Phils.
Should be treated as
OTHER INCOME SUBJECT
to 34%

Subject

Situation:
NRFC received dividend, cash or property
dividend from DC. That dividend
received from DC is subject to 15% FINAL
WITHOLDING TAX.
This 15% may be imposed on this dividend received
from DC if the foreign govt. of the NRFC allows a tax
credit at least 19% (1998), 18% (1999), 17% (2000).
Page 25 of 46

It should be credited from the taxes deemed paid by

this NRFC in the Phils.

and he may derive gain therefrom, that is

considered as Capital Transaction.

So, if the foreign govt. does not allow a tax credit of

at least 19%, the tax there is not 15% but 34%.
Thus, the tax spared or saved is 19% because
normally the tax is 34%. So, 34% less 15% equals
19%, that is the tax saved and that represents the
tax credit allowed by the foreign govt.

N.B.
It is therefore safe to say that all properties not used
in trade or business are considered as Capital Assets.

Question: Must the foreign govt. actually grant a tax credit

or is it enough that the
foreign govt. allow such tax credit?
Answer: There is no statutory provision that requires actual
grant. Neither is there a
Revenue Regulation requiring actual grant. It is clear
that the provision of the law says allows. So, it is
enough to prove that the foreign corp. allows a tax
credit. It is not incumbent upon the foreign corp. to
prove the amount actually granted.
Question: Does a withholding agent or a subsidiary corp.
have the personality to file a
written claim or refund?
Answer: The withholding agent has the personality to file a
written claim for refund. A
withholding agent is technically a taxpayer because
it is required to deduct and withhold the tax, and it
has the obligation to remit the same to the govt. So,
withholding agent is liable for tax. It has therefore
the personality to file a written claim for refund.
Withholding agent is not only an agent of the
taxpayer but also an agent of the
govt. Since it is an agent of the taxpayer, it is ipso
facto authorized to file a written claim for refund.
CAPITAL TRANSACTIONS EXPLAINED
Capital Transaction Involves Capital Asset.
CAPITAL ASSET means property held by the taxpayer whether
or not connected with his trade or business EXCEPT: [S.O.U.R.]
1. Stock in trade or property of the taxpayer which
may be properly included in the inventory at the end of the
taxable year [inventoriable property may include finished
goods, raw materials or work in process.]
2. Property primarily held for sale to customers in the
Ordinary course of trade or business.
3. Property Used in trade or business subject to
depreciation, which means that this must be depreciable
property.
4. Real property used in trade or business.
These 4 properties
ORDINARY ASSETS.

enumerated

are

called

ASSETS WHICH ARE CONSIDERED AS CAPITAL ARE:

1. Properties not included in those above enumerated
2. Properties used in trade or business classified as capital
assets:
a. accounts receivable
b. property for investment in stock
c. subdivision of lots to tenants at the instance of
the government. The sale of these subdivided
lots at the instance of the govt. to the tenants is
considered as Capital Transaction.
d. Interest of a partner in a partnership. The
partner may transfer that interest to another

Capital Asset can be Converted into an Ordinary Asset.

Example:
A property was inherited by the heirs from
their deceased parents. That property is considered as Capital
Asset.
In the event that this property (a parcel of land) is
improved by the heirs substantially and sell the same at a
profit, said capital property is now converted into an Ordinary
Asset. The profit derived from the sale of the land which has
been substantially improved by the heirs is considered as
ordinary gain.
Ordinary Asset can be converted into a Capital Asset.
Example:
If the taxpayer is engaged in real estate
business, if he dies, these properties will be transmitted to his
heirs. And if the heirs will discontinue the business of that
deceased parent, that properties which are ordinarily held for
sale to customers maybe converted into a Capital Asset.
FACTORS that should be considered in DETERMINING
whether it is CAPITAL or NOT:
1. It may be the vocation of the taxpayer.
In one case, if the taxpayer is engaged in
hotel management and he inherited jewelry
from his parents and hell sell the same, the
Court said that it is a Capital Transaction.

It would be different if the one selling a

parcel of land is a real estate dealer and he
developed the same before this property
may be sold to another, this time such
taxpayer is engaged in a business, in which
case that sale of parcel of land is considered
as Ordinary Transaction.

2. Sometimes the period or the extent of activities may

play an important role.
Case:
If a taxpayer is engaged in a lumber business and he
has been unsuccessful for a period of 11 years and he tried
again on the 12th year. The sale that may be made on the 12 th
year may not be considered ordinary transaction.
But those sales which, would have been made during
that 11th year when such taxpayer is engaged in trade or
business may be considered Ordinary Asset.
If the taxpayer stop his business and then undertake
another business, that may be considered Capital Transaction.
SPECIAL CAPITAL TRANSACTIONS these transactions are
deemed capital transactions.
SPECIAL CAPITAL TRANSACTIONS INCLUDE:
1. Failure to exercise option or privilege to buy or sell
property.
Example:
B offers his land to A. B gives A 5 days
within which to make up his mind to buy this parcel
of land for P500,000.00 Now, A pays B P5,000 for
giving him time to think whether he will buy that
during the 5 day-period. If A fails to buy the same, he
incurred a loss and we call this Capital Loss. So, the
loss of A is considered a gain on the part of B
because the latter received that P5,000.
Page 26 of 46

So, failure to exercise option to buy may result in a

capital loss on the part of the offeree or buyer. As regards the
seller, the gain is considered Capital Gain.

Under this rule, if the property has been held by the

taxpayer for a period of not more than 12 months, the gain or
loss is 100% recognized. If it is more than 12 months, the gain
or loss is 50% recognized.

2. Distribution of assets or shares of stock

stockholder upon liquidation of a corporation.

to

So, the gain or loss may be 100% or 50% taxable

deductible as the case may be.

Example:
After liquidation, the stockholders are
entitled to the return of their capital if there is still something
left. If A made an investment and the value of his shares of
stock is P100,000, after liquidation of the corporate affairs,
the corp. gives A P150,000. The gain of A which is P50,000 is
considered Capital Gain.

Example:
You sell your personal car. This is a capital
transaction because the asset involved is a capital asset. Let
us say that you sell the car at P200,000 and the cost of the
car is P150,000. Here, there is a gain of P50,000.

3. Readjustment of partners interest in a partnership.

Example:
A partnership is earning a profit, let us say,
P100,000. Then it increases to P1M. So, the
partnership may readjust the partners interest in the
partnership. Or it may also arise if for example, A
made an additional contribution. So, As interest will
change.
Now, in making readjustment of interest, the partner
may derive gain therefrom, and that is a Capital Gain.
4. Retirement of bonds.
Example:
The debtor issues bonds and after one (1)
year, he pays the same. The value of the bonds is P100,000.
Upon redemption, the debtor pays P120,000 to the creditor.
So the P20,000 is a gain to the creditor and we consider that
as a Capital Gain. But if there is a loss, that is considered as
Capital Loss.
5. Wash Sale

This has been described as 61 days sale

The seller here is not a dealer in securities.

It is described as 61 days sale because here, 30 days
before the sale, the seller acquired substantially identical
securities OR 30 days before the sale, he acquired identical or
substantially the same stocks or securities. Sale may also
include exchange or option to sell securities.
Example:
Today is June 10, Now, here is A who is not a
dealer in securities or stocks. He sells securities.
Can that be classified as wash sale?
You must find out whether 30 days before June 10, he
purchased identical securities. Or he ma not have purchased
identical securities within that 30 day period before the sale
but it is possible that within 30 days after June 10, he may
have purchased identical securities.
The tax treatment here is, the gain is taxable, meaning that is
classified as Capital Gain because the seller is not engaged in
such business. If there is a loss, since it is classified as Capital
Transaction, that is considered Capital Loss.
The capital gain is taxable but the capital loss incurred from
wash sale transaction is not deductible.
6. Short Sale a transaction wherein a person sells
securities which he does not own yet. The seller here is a
mere speculator; he is selling securities which he is yet to
acquire, provided however, that he has ownership of the
securities at the time of delivery he has the right to transfer
ownership. (See further discussion on p. 77).
RULES THAT GOVERN CAPITAL TRANSACTIONS:
1. Holding Period Rule

You must find out the date of the acquisition and the
date of sale or disposition. If the date of acquisition and the
date of sale fall within the 12 month period, this P50,000 is
P100,000 taxable. But if exceeding 12 months, this P50,000 is
only tacable up to P25,000. This is an example of tax
avoidance.
N.B.
This rule is applicable only to individual taxpayers.
This is so because the capital gain derived from capital
transaction of corporate taxpayers is always 100% recognized
respective of the number of months during which the property
was in the possession of the corp. taxpayer.
2. Capital Loss Limitation Rule
meaning, capital losses are deductible only
to the extent of capital gain
so, it follows that there is no capital gain,
there is no deductible losses.
Capital loss cannot be deducted from
capital gain
Ordinary loss is deductible from ordinary
gain.
N.B.
This rule applies to individual and corporate
taxpayers EXCEPT on banks and trust companies because
they are considered as dealer in securities as far as issuance
of bond and evidence of indebtedness are concerned.
Net Capital Loss Carry-over Rule
-meaning, the capital loss that may be carried over in the
succeeding taxable year must not exceed the net income
during the year that it was incurred.
Example:
In 1996, the capital gain is P100,000 and
capital loss is P200,000. SO, there is a capital loss of
P100,000 which may be carried over in 1997 by the taxpayer.
This net capital loss in 1996 may be claimed as deductions
from the capital gain in 1997.
But if in 1996 the net income is P150,000 and the
net capital loss is P100,000, so the net capital loss does not
exceed the net income. Thus, the entire amount of P100,000
net capital loss can be carried over in 1997.
Can that P100,000 net capital loss be carried over in 1998?
NO, because the law says during the succeeding taxable
year. Tax exemption must be strictly construed against the
taxpayer and liberally in favor of the govt.
N.B.
This rule applies to individual taxpayers.
In this regard, there is such a thing as no operating
loss carry over. OPERATING LOSS are losses incurred in the
course of trade or business of the taxpayer. Net operating loss
may be carried over by the taxpayer, whether corporate or
individual, to the next three (3) consecutive years provided
that during that year, such taxpayer is not exempt from
taxation and there must be no substantial change in
ownership of the corporation, in the case of the corporation.
Substantial change may arise if less than 75% of the
outstanding capital stock or paid up capital stock is held by
the same person.
Page 27 of 46

Case: The BOI registered industries are allowed to carry

over operating losses. This time, those losses that were
incurred during that period of 16 years operation may be
carried over to succeeding taxable year.
The rule that we have established is: expenses
must be paid or incurred during the taxable year. You
can claim those expenses as deduction during the year when
the same were incurred or paid. The exception to this rule
are net operating loss carry-over and net capital loss carryover.
Meaning of Terms:
CAPITAL GAIN gain from sale or exchange of capital asset.
CAPITAL LOSS loss incurred from sale or exchange of
capital asset.
NET CAPITAL GAIN excess of capital gain over capital loss.
NET CAPITAL LOSS excess of capital loss over capital gain.
Gains derived from dealings in property form part of
Gross Income
(Sec. 32 A. no. 3)
This may include sale or exchange of goods
or properties.
If the property is sold for cash, that is
considered as sale.
If it property for another property, this may
be classified as exchange.
There may be a gain in regard to exchange of property
if the following concur:
1. The property received must have a fair market value;
2. The property disposed of must be substantially different
from the property received.
So, a like kind transactions are not taxable
transactions.
If a land has been substantially improved
and then it is exchanged with another land,
that may not be taxable. However, there is
that BIR ruling that this is no longer
applicable even if these are like kind
transactions, it may be taxable. But Prof.
Geronimo of Ateneo disagreed. He said, you
cannot change that by BIR ruling. So, we
can compromise that this will not apply to
capital
transactions
but to
ordinary
transactions.
In determining the gain or loss in the sale or
exchange of property, this is the basic formula:
Amount received or realized LESS

Cost or adjusted basis.

How to determine the cost or adjusted basis?

*** It depends upon the manner of acquisition.
1. If it was acquired through purchase, it is the cost of
the property.

3. If the property sold was acquired through donation,

the basis shall be the same as if it would be in the
hands of the donor.
Situation:
A, the donor donated property to B, the donee. Subsequently,
such donated property was sold by the donee for P200,000.
What must be the cost?
Answer:
The law says, the same basis in the hands of the donor. So,
the donee should ask the donor the basis.
It is also that A, the donor acquired the property from another
either through purchase or donation. So, you should ask A,
the last donor, his basis.
Exception to the general rule:
If the basis is greater than the FMV of the property at the time
of the donation/gift then, for the purpose of determining loss,
the basis shall be such FMV.
4. If the property sold was acquired for less than an
adequate consideration in money or moneys worth,
the basis of such property is the amount paid by the
transferee for the property.
Situation:
The seller acquired the property from A in the amount of
P70,000. The FMV of said property is P100,000. So, the seller
here is the transferee and A is the transferor. The seller sold
the property at P200,000. What must be the cost?
Answer:
It is the amount paid by the transferee. And the amount paid
by the transferee who subsequently sold the property is
P70,000. So, he will have a gain of P130,000.
*** Remember, it is not the FMV of the property but the
amount paid bv the transferee.
Suppose the property was acquired in a transaction
where gain or loss is not recognized? (NO GAIN, NO
LOSS RECOGNIZED)
Before we answer that, we should know these transactions
where the gain is not recognized (meaning it is not taxable)
and the loss is not recognized (meaning, it is not deductible).
The basic rule is, in the sale or exchange of property if there
is a gain, the gain taxable; If there is loss, the loss is
deductible).
Exception to the basic rule (no gain or loss shall be
recognized):
1. Transactions made pursuant to plan of merger or
consideration. Sometimes, we call this Tax Exempt
Transactions or Transactions Solely in Kind.
a.

A corporation, party to merger or consolidation

exchanges its properties solely for stock in corp.,
which is a party to the merger or consolidation.

Illustration:

Example:
I sell a property in the amount of P100,000. It is previously
purchased the same at P60,000, this P60,000 is the cost of
property.
2. If the property sold was previously acquired through
inheritance, it is the fair market value (FMV) of the
property at the time of the acquisition.
At the time of acquisition means at the time of the
death of the decedent or testator.

Property
Corp. A
property for Stock

Corp. B

Stock
b.

A stockholder of a corp. party to a merger or

consolidation exchanges his stock solely for stock in
another corp. party to that merger or consolidation.
Page 28 of 46

Illustration:
Security or Stock

Now, you deduct the cost of the stock disposed of. Let us say
that the cost of stock is P80,000. So, Corp. B derived gain of
P120,000. Is this taxable?

Stockholder ------------------------ Corp.

1. Stock for Stock
2.
Securities for stock
3.
Securities for Securities

Answer:

Security or Stock
** Sometimes, we call the above-mentioned transactions as
Transactions solely in kind or Tax Exempt
Transactions.
2. If a person alone or together with others or not exceeding
four (4) (so, the total number should be five (5) exchanges his
property for stock in a corp. and this person or persons, after
this exchange, acquired controlling interest over that corp.
This means that they acquired at least 15% of the shares of
stock of such corp.
- This is also a transaction solely in kind.
Question:
Suppose these persons, at the time of
transaction, already acquired controlling interest over such
corp., is the transaction or exchange taxable?

YES, but only P100,000 is the amount that is taxable. This is

so because of the limitation that it must not exceed the total
cash and the FMV of the property. And if you add the FMV of
the property and the total cash given, the total is P100,000.
Under the law, there is that limitation in transactions which
involves not only the property but also cash. The gain is
recognized or taxable but the taxable gain must not exceed
the cash given and the FMV of the property which forms part
of the consideration.
On the other hand, supposed the cost of stock disposed of or
transferred to Corp. A is P250,000. So, there is a loss of
P50,000, is this recognized or deductible? NO.
If this property received under this transactions which
is not solely in kind is subsequently disposed of, how
do you determine the basis of that?
Answer:
The basis of the property in the hands of
the transferor less the FMV of the property, less cash received
plus the gain recognized, if any, plus the dividend that may
be treated as such, if there is any.

Answer:
Even if these persons acquired controlling
interest at the time of the transaction, the rule is still
applicable in which case that is still tax exempt.

Basis in the hands of the transferor

Less: FMV of the property
Cash received

Question:
So, if these properties acquired under this
tax exempt transactions are subsequently disposed of, how
will you determine the basis?

Plus: Gain recognized, if any

Dividend recognized, if any

Answer:
The basis of the stock or properties acquired
under this no gain, no loss recognized shall be the same basis
in the hands if the transferor.
Suppose the property was acquired under transactions
where gain is recognized and loss is not recognized?
(GAIN RECOGNIZED, LOSS NOT RECOGNIZED)
Transaction solely in kind this means that there are other
consideration given other than those mentioned under
transactions solely in kind (nos. 1 and 2 above, but cash is
added).
Example:
Corp. A party merger or consolidation
transfers its cash and property to Corp. B, also a party to such
merger or consolidation.
Corp. B, in exchange, transfers its stocks to Corp. A.
Illustration:

SHORT SALE
-

Property and Cash

Pr

operty: P50,000
Cash: P50,000

Transactions were gain is recognized and loss is not

recognized (meaning, if there is a gain, the gain is
taxable and if the loss is not deductible) are: [W.I.R.N.]
1. Wash Sale
2. Illegal transactions
3. Those transactions involving Related taxpayers
4. Transactions Not solely in kind.

Corp. A

Corp. B

P100,000
Stock: P100,000

Stock

FMV

Let us say that FMV of stock given by Corp. B is P100,000. The

value of the property transferred by Corp. A is P50,000 while
cash is also P50,000.
So if you add all of these, the amount received or realized is
P200,000.

this
is
also
considered
as
Capital
Transaction.
Short sale is really an obligation payable
not in cash but in goods. The seller of
securities or stock will decline. And if it
declines, he earns profit. However, if the
price of securities increases, he incurs loss.
Example:
I borrow your securities on
June 10 and Ill pay it on June 15. The price
of securities on June 10 is P50 and you
speculate that said price will decline on June
15. On June 15, the price has been lowered
to P40. So, you earn a profit of P10 because
I will pay my obligation at P50 on June 15
and not P40.

Tax consequence of short sale:

** If there is a gain, the gain is taxable. We
call this Capital Gain.
** If there is a loss, the loss is deductible
-

WASH SALE vs. SHORT SALE

* BOTH may be classified as Capital Transactions.
* The basic distinction is in wash sale, the loss that may be
incurred is not deductible, whereas in short sale, the loss is
deductible.
TRANSFER TAXES
Page 29 of 46

ESTATE & TRUSTS

incurred in connection with the business of

that estate or trust.

ESTATE refers to the mass of properties left by decedent or

testator to his heirs or
beneficiaries.

Estate and trust are entitled to personal

exemptions P20,000.

TRUST is the right to the property, real or personal,

exercised by one person for the benefit of another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust
b. Trustee or fiduciary one who may hold the
property for the benefit of other person known as
beneficiary. Sometimes, the fiduciary is also the
nbeneficiary.
c. Beneficiary

Estate may be the subject to tax, if it is

under your administration. It may only be
under administration or settlement if the
properties of the decedent are settled under
judicial settlement.

If the estate is under extra-judicial

settlement, it is not subject to tax because
that will not earn income considering that
the heirs agreed to settle the estate extrajudicially.

When we speak of judicial settlement, this

may
include
estate
or
intestate
proceedings.

Trust may be subject to tax if the trust

is irrevocable.

Non-taxable trust are:

1. Revocable Trust. The income here will be taxed in so far
as the recipient of the same is concerned.
2. Employees Trust. If an employer establishes a pension
trust for the benefit of the employees, that pension trust is
not taxable.
The trust is revocable if the power to revest the title to
the property of the trust is vested:
1. in the grantor or in conjunction with other person who does
not have the substantial adverse interest in the disposition of
the property
2. in any person who does not have substantial adverse
interest in the disposition of the property.

In irrevocable trust, you cannot transfer or

revest the title of the property.

No substantial interest in the disposition of

the property he must not be the
beneficiary.

If the properties of the estate is not

invested in a business, so ten heirs are just
co-owners of the property, that is not
taxable because co-ownership as a rule is
not taxable.

If the heirs decide to continue the business,

such that the administrator may manage
the same, that will become an unregistered
taxable partnership.

Estate and trust may be taxed on the same

manner and on the same basis as in the
case of individual taxpayers. So, they may
claim the deductions under Section 34 as
long as these deductions were paid or

SPECIAL DEDUCTIONS (this can be availed of only by

estate and trust):
1. In the case of intestate, the executor, or administrator may
deduct the income distributed to the heirs during the
particular year when such estate is still under settlement.
2. In the case of a trust, the income may be distributed to the
beneficiaries during that year may also be deducted. The
trustee or fiduciary may distribute the income or accumulate
the income. The trustee has the discretion whether to
distribute the income to the beneficiaries during the taxable
year or to accumulate the same and distribute such income
after the lapse of certain period of time or year. In the event
that income of the trust is distributed to the beneficiary, this
particular amount may also be claimed as deductions.
Questions:
If there are two (2) trust created by one
trustor or grantor, how do we tax the income of that trust?
Answer:
Under the law, the taxable income of these
two (2) trust must be consolidated. That trust should be taxed
as if they constitute one trust.
Situation:
Grantor X created 2 trust. One is A trust created and
the other is B trust. There is only one beneficiary named Y.
Let us assume that the taxable income of trust A is
P10,000. The taxable income of B trust is P20,000. The total
taxable income is P30,000. We will tax these 2 trust
separately but through consolidation.
In paying the tax after applying the applicable tax
rate to the taxable income of P30,000, the tax due should be
apportioned to trust A and B.
So, for purposes of income tax, the taxable income
of these 2 trust should be consolidated, but for purposes of
paying the tax, the tax due should be apportioned.
TRANSFER TAXES
Taxes may be imposed on onerous transmission of
properties or on the gratuitous transmission of properties.
Transfer taxes that are imposed on the onerous
transmission of properties:
1. VAT (value-added tax)
2. Percentage Tax (excluded this 1998 Bar)
3. Excise Tax (also excluded)
CONTENTS OF THE BACK PAGES
DIVISION OF GROSS ESTATE:
1. INDIVIDUAL WHO DIED SINGLE
- G. E. includes all that he owns at the time of death
2. MARRIED DECEDENT
- his estate includes his exclusive properties and his shares in
the conjugal properties BUT NOT the exclusive properties of
the surviving spouse
PROPERTY OWNERSHIP bet. SPOUSES
- NCC before Aug. 3, 1988
> CPG
- EXCLUSIVE PROPERTY under N.C.C.
1. brought into the marriage as his/her own
2. acquired during the marriage by LUCRATIVE TITLE
3. acquired by RIGHT of REDEMPTION or EXCHANGE with
other exclusive properties
4. purchased with exclusive money
- CPG under N.C.C.
1. acquired by ONEROUS TITLE
Page 30 of 46

- common fund
2. acquired by INDUSTRY/WORK, SALARY or either
3. FRUITS< RENTS or INTERESTS [conjugal/exclusive]
4. all properties not determined to be exclusive shall be
presumed to be conjugal
FAMILY CODE - after Aug. 3, 1988
- ACP
- EXCLUSIVE PROPERTY under the F.C.
1. gift, donation, contribution exclusively given to one of the
spouses only
- gift and fruits/income considered exclusive
2. INHERITANCE given exclusively to one spouse
- gift or fruits/income considered exclusive
3. acquired of personal and exclusive use
- except JEWELRY
4. exclusively owned before marriage including fruits /income
IF spouse has children from the former marriage
5. purchased from exclusive fund.
EXEMPTIONS FROM ESTATE TAX
- special laws
1. Benefits received [GSIS, SSS]
2. proceeds of GSIS life insurance
3. Benefits received U. S. Veterans
4. REPARATIONS WW II Veterans
5. RETIREMENT BENEFITS
- if included in gross estate
6. proceeds of group insurance
DECEDENTS INTEREST
assets that are still
the time of death to
or interest in any
exclusive owner,
common owner.

must
be
undiminished
mortgage/indebtedness

by

said

3. must not include:

A. any income tax upon income received after the
death of decedent
B. property taxes not accrued before his death
C. any estate tax
LOSSES fire, storm, shipwreck or other casualty, robbery,
theft, embezzlement
RULES:
1. must not be compensated by insurance
2. must have been incurred during the settlement of the
estate BUT NOT LATER than the last day for the payment of
the estate tax (6 mos.)
3. not claimed as deduction in an income tax return of the
taxable estate
TAXES which are not DEDUCTIBLE
1. income tax or income received after death
2. property taxes not accrued before death
3. estate tax
COMPUTATION of VANISHING DEDUCTION FORMULA:
INITIAL BASIS
GROSS ESTATE
X
E. L. I. T. and transfers
for public purposes

owned by
the extent
property
conjugal

COMPOSITION OF GROSS ESTATE

[DI, T-GPA, RT, T-IC, P-LI, T-CD]
1. DECEDENTS INTEREST
2. TRANSFER by VIRTUE OF GENERAL
APPOINTMENT
3. REVOCABLE TRANSFER
4. TRANSFER for INSUFFICIENT CONSIDERATION
5. PROCEEDS from LIFE INSURANCE
6. TRANSFER in CONTEMPLATION of DEATH

decedent at
of his equity
whether as
owner, or

POWER

OF

FUNERAL EXPENSES INCLUDE:

1. expenses for interment
2. mourning clothing [widow, children]
3. expenses for wake before burial
4. charges for rites and ceremonies incident to interment
5. cost of burial plot
6. tombstone or monument
7. obituary or death notices
JUDICIAL EXPENSES
1. accountants fee
2. appraisers fee
3. administrators fee
4. attorneys fee
5. docket fee
6. stenographers fee
7. other expenses of court hearings
CLAIMS AGAINST THE ESTATE
- obligations of the decedent contracted in good faith while
still alive but remains unpaid at the time of death
UNPAID MORTGAGES OR INDEBTEDNESS RULES: (claimed as
deductions)
1. the said mortgage/indebtedness must have been
contracted during the decedents lifetime in good faith for an
adequate and full consideration in money or moneys worth
2. the value of the decedents interest in the property
mortgaged is included in the value of the gross estate

SHARE OF SURVIVING SPOUSE

RULES:
1. the gross conjugal estate shall be diminished by expenses
and charges EXCEPT those chargeable to the exclusive
properties
2. the NET amount shall be divided into two (2)
3. goes to the surviving spouse and deducted from the
estate of the decedent
ALLOWABLE DEDUCTIONS
- NON-RESIDENT DECEDENT [ELIT-TVS]
1. ELIT (expenses, losses, indebtedness, taxes)
FORMULA:
PHIL. GROSS ESTATE
WORLD GROSS ESTATE
x ELIT
2. transfer for public purposes
3. vanishing deductions
4. share of the surviving spouse
NOTICE OF DEATH
- if value exceeds Php20,000
- FILE notice with BIR within two mos. Of decedents death or
within two mos. After election of qualified executor or
administrator
ESTATE TAX RETURN
if gross value of estate exceeds P200,000 or
if gross estate consists of registered
property, FILE in duplicate and under OATH
if value of gross estate exceeds P2,000,000,
return must be supported by a certificate of
C.P.A.
TIME FOR FILING RETURN
within 6 mos. From decedents death
EXTENSION: not exceed 30 days
PAYMENT OF ESTATE TAX
upon filing of the estate tax return and
before delivery to any beneficiary of his
distributions share of the estate
EXTENSION: not to exceed 5 years
If extra-judicially settled, 2 years
It must file bond not to exceed double the
value to be paid
Page 31 of 46

SURCHARGE
- 25% for late filing, for late payment
- 50% for filing of false or fraudulent return
INTEREST 20% per annum
PARTIES TO A DONATION
1. DONOR gratuitously disposes
2. DONEE receives and accepts
KINDS OF DONATION
1. PERSONAL PROPERTY may be orally or in writing
EXCEPT: exceeds P5,000 donation and acceptance must be
in writing
2. REAL PROPERTY PUBLIC DOCUMENT
ACCEPTANCE - same deed of donation or separate instrument;
done during the lifetime of the donor
RULE: HUSBAND AND WIFE
G.R.: Every donation between Husband and Wife during the
marriage is VOID
EXCEPTION:
1. donation mortis causa
2. moderate gifts - family affair
*** gifts coming from the conjugal property made by both
spouses are taxable, to each spouse
RULE on INADEQUATE CONSIDERATION
* if the property transferred is real property classified as
capital asset, the transfer is subject to capital gains tax of 6%
and not to donors tax
* where the consideration is fictitious, the entire value of the
property transfer shall be subject to donors tax
* the amount by which the value of the property exceed the
amount of consideration shall be deemed a gift for purposes
of the donors tax
VALUATION OF GROSS GIFTS
- FMV at time of donation
1. Real Property
- BIR zonal value or FMV fixed by city/provincial assessor
whichever is higher
2. Shares of Stock
A. If listed average value at the date of donation
B. If not listed book value at the date of donation
3. Personal Properties FMV at the time of donation
* FMV = pawn value x 3
EXEMPTIONS/ALLOWABLE DEDUCTIONS
1. DOWRIES
RULES:
A. Exempt up to 1st P10,000;
B. Legitimate recognized or legally adopted children;
C. Made before marriage or within one year thereof.
2. GIFTS TO NATIONAL GOVT. or POL. SUB.
- not conducted for profit
3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs.
- not more than 30% used for administrative purposes
- may be a school or non-stock entity
DEDUCTIONS ALLOWABLE
1. ENCUMBRANCES or donated property, if assumed by the
donee
2. DIMINUTION of the donated property as specified by the
DONOR
RULE (non-resident donor)
1. Same allowable deductions as resident donors except that
the same must be connected with donated property situated
in the Phils.
2. NO deductions for dowries
RULE if Donee is a Stranger
1. TAX PAYABLE 30% of net gift

STRANGER one who is not a brother, sister (whole or halfblood), spouse, ancestor, lineal descendant or relative by
CONSANGUINITY in the COLLATERAL LINE within the 4 th
degree.
RULE ON POLITICAL CONTRIBUTIONS
- considered TAXABLE GIFTS
- donee in this case is deemed to receive a financial
advantage gratuitously
ADMINISTRATIVE PROVISIONS
- donors tax return must be filed under oath and in duplicate
- filed within 30 days from date of donation
EXTENSION: not exceeding 30 days
- WHEN PAID
- time the return is filed
EXTENSION: not exceeding 6 mos.
PROVIDED BOND- double the amount of TAX
TAX CREDIT for donors tax paid to a foreign country
- donor was a Filipino citizen or resident alien at the time of
foreign donation
- donors taxes of any character or description are imposed
and paid by the authority of a foreign country
LIMITATIONS:
1. The amount of credit in respect to the tax paid to any
country shall NOT EXCEED the same proportions of the tax
against which such credit was taken
2. The total amount of credit shall not exceed the same
portion of the tax against which such credit is taken
Transfer taxes imposed on gratuitous transmission of
properties are:
1. Estate tax
2. Donors Tax
ESTATE TAX tax imposed on the right or privilege to
transmit properties upon death of a decedent or testator
DONORS TAX tax imposed on the right or privilege to
transmit properties gratuitously in favor of another who
accepts the same. This transmission of properties occurs
during the lifetime of the donor and the donee.
ESTATE TAX
NATURE OF ESTATE TAX It is an excise tax since the
subject of the tax is the right or privilege to transmit
properties and not the property itself.
PURPOSES OF ESTATE TAX to avoid the undue
accumulation or concentration of wealth
1. The primary purpose is to raise revenue in order to support
the government;
2. To supplement income tax;
3. To reduce successive inequalities in wealth, meaning, to
achieve social equality.
KINDS OF ESTATE TAXPAYER:
1. Resident estate taxpayer includes citizen of the Phils.,
resident alien who died in the Phils., and such alien, at the
time of his death, is a resident of the Phils;
2. Non-resident estate taxpayer is limited to nonresident alien individual.

Real properties, personal tangible properties

and personal intangible properties of
resident decedent (RD) are taxed wherever
situated.

Real and personal tangible properties of

non-resident decedent (NRD) are taxable
only if they are located in the Phils.
Page 32 of 46

Real and personal tangible properties of

NRD are taxable only if they acquire tax
situs in the Phils.

Personal intangible properties that are deemed to

have acquired Phil. situs are: [F, SOB (DC, FC-85%, FCSP), SR P]
1. Franchise which is exercised in the Phils.
2. Shares of stock, obligation or bonds issued by domestic
corporation or sociedad anonima
3. Shares of stock, obligation or bonds issued by foreign corp.,
85% of the business of which is conducted in the Phils
4. Shares, obligations or bonds acquire business suits in the
Phils.
> Such shares, obligations or bonds acquire business
situs in the Phils. of they are used by foreign corp. in
furtherance of its trade or business.
5. Shares or rights in any partnership, business or in any
partnership, business or industry, established in the Phils.
If the personal intangible properties of a NRD does not
belong to the above-mentioned enumeration, they may not
form part of his gross income or we may also apply the
doctrine of mobilia sequntur personam.
Mobilia sequntum personam, according to the Supreme
Court, is a mere fiction of law. So, it must yield to the
provision of law which provides tax situs.
Question:
Suppose the personal intangible properties of NRD
acquired tax situs in the Phils., can this be exempt from real
estate tax?
Answer:
YES, by applying the rule on reciprocity.
RULE ON RECIPROCITY the foreign country of that NRD
does not impose or allows exemption on tax on the properties
of the citizens of the Phils. who died in that foreign country.
The phrase does not impose and allows exemption are
different from each other.
When we say does not impose, this means totally
exempt. Allows exemption means this may not cover all
properties but only certain properties.
Case:

Country of Morocco has no international personality.

If it grants exemptions to the intangible personal properties if
Filipino citizens who died in that country, will you apply also
that rule on reciprocity?
Held:
YES. It does not matter whether the country has
international personality or not. What is important is it allows
or grants exemption from estate tax.
Sec. 85, Gross Estate The value (FMV) of the gross
estate of the decedent shall be determined by including the
value, at the time of his death, of all property, real or
personal, tangible or intangible, wherever situated: Provided,
however, That in the case of a non-resident decedent who at
the time of his death was not a citizen of the Philippines, only
that part of the entire gross estate which is situated in the
Philippines shall be included in his taxable estate.
The composition of the gross estate may include:
1. Decedents Interest. (includes yields, fruits and interest)
The gross estate may include the fruits and
income of the properties and that may
constitute the decedents interest.
In the case of parcel of land, it may produce
income in the form of harvest which harvest
may form part of the gross estate.

In the case of apartment, the rental of such

apartment should also be included, not only
the value of the property.
Dividends
Partnership profits
Rights of usufruct

2. Transfer by virtue of general power of appointment

It implies that if the transfer is made under
special power of appointment that should
be excluded from gross estate.
In general power of appointment, the power
is exercisable or in favor of the estate,
executor, administrator or a creditor of the
estate. If the power is exercisable other
than
these
(estate,
administrator,
administrator or creditor of the estate), that
may be considered as special power of
appointment.
3. Revocable Transfer Any transfer made by the decedent
during his lifetime where the decedent has reserved the right
to ALTER, AMEND, TERMINATE, or REVOKE. such transfer; it is
sufficient that the decedent had the power to REVOKE, though
he did not exercise such power.
Irrevocable transfers should be excluded
from gross estate.
Revocable transfers are transfers which are
subject
to
alteration,
termination,
amendment
or
modification
by
the
decedent.
4. Transfers for Insufficient Consideration
The amount that may form part of the gross
estate is the difference between the FMV of
the property and the consideration given.
Example:
If the property has a FMV of
P100,000 and the consideration given is only
P50,000, the difference of P50,000 represents
insufficient consideration.
5. Proceeds of Life Insurance Policy
Proceeds of life insurance policy may
be included if:
a. the beneficiary designated is the estate
executor, administrator or heirs of the
decedent whether revocable or not
revocable
b. the beneficiary designated is a 3 rd person
who is revocably designated as beneficiary
Proceeds of life insurance policy is
excluded from the gross estate in the
following cases:
a. 3rd person is irrevocably designated as
beneficiary
b. proceeds of group insurance policy taken
out by the co. for its employees
c. proceeds of accident insurance policy
except accident insurance policy as
characteristic
d. proceeds of GSIS Life Insurance Policy (govt.
employees)
e. proceeds of life insurance payable to the
heirs of deceased U. S. and Phil. Army
Note:
As regards the estate executor,
administrator or heirs as beneficiary, it is
immaterial
whether
the
designation
is
irrevocable or revocable.
-

6. Transfer in Contemplation of Death

If such transfer was induced by the thought
of death principally, REGARDLESS of
Page 33 of 46

whether
the
death
is
impending
forthcoming or not
TRANSFER may be done before, at the time
of or even after the decedents death
3-YEAR PRESUMPTION [deleted by P.D.
1705. Aug. 1, 1986)

[MU-NT, F, T-1ST-B, B-SCC]

EXCEPTINS/EXCLUSIONS from GROSS ESTATE
1) merger of USUFRUCT in the MAKED TITLE
2) FIDEICOMISSARY
3) transmission from 1st heir to another beneficiary
- will of the testator
4) BEQUEST, DEVISEES, LEGACIES or TRANSFER
- SOCIAL WELFARE, CULTURAL and CHARITABLE institutions
- no part of net income inures to any individual
- not more than 30% for admin. purposes
DEDUCTIONS FROM GROSS ESTATE
DEDUCTIONS FROM GROSS ESTATE THAT MAY BE:
1. Conjugal deductions [FH, JE, FE, ME, CAE, L, U(M/I),T, SD,
SP, C-IP]
2. Absolute deductions
3. Exclusive deductions [VD, T-PU, UM, E-EP] (share of SS)
OTHERS: [M-U, F, T-1ST-B, G-CI]
I. CONJUGAL AND ABSOLUTE DEDUCTIONS include:
1. Family home
2. Judicial of funeral expenses
3. Casualty losses
4. Indebtedness/unpaid claim against the estate
5. Accrued taxes (before the death of the decedent)
6. Standard Deduction
7. Separation pay given to the heirs of the decedent on
account of death
Discussion:
1. Family home (even unmarried person may have a
family home) subject to the following conditions:
a. there must be only one (1) family home;
b. there must be certification issued by the Barangay
Captain that the decedent is a resident of and own
that family home in that particular locality;
c. the amount that is deductible or the FMV of the
family home should not be more than P1M; excess
shall be subject to tax
d. the FMV must be included in the gross estate of the
decedent.
If the FMV of the family home is P5M, this should be
included in the gross estate of the decedent. But when
you claim deductions, you can only claim up to P1M.
2. Expenses which may be in the nature of judicial
expenses or funeral expenses.
Medical expenses are also deductible subject to the
following conditions:
a. the amount deductible, is limited only to P500,000;
b. it must be incurred within one (1) year before the
death of the decedent;
c. this must be substantiated by receipts
In the case of funeral expenses, the amount deductible is
the actual funeral expenses on the amount which is not more
than 5% of the gross estate whichever is lower, but in no case
to exceed P200,000.
There is no limitation as to amount with regard to judicial
expenses. As long as it is paid or incurred in connection with
the preservation, administration or settlement of the estate, it
may be claimed as deductions. Judicial expenses also include
extra-judicial expenses.

3. Losses that may arise from casualty or casualty losses

such as fire, storm, shipwreck, robbery, embezzlement, theft
and other casualty losses.
These losses must be sustained not later than six (6)
months after the death of the decedent.
not compensated by insurance
4. Indebtedness which partake of the nature of the unpaid
claims against the estate.
These must be supported by notarized documents. These
obligations must be incurred within three (3) years prior to
death of the decedent.
Another indebtedness which may be claimed as deduction
is claim against insolvent persons. Here, the claimant is the
decedent. In order to be deductible, this claim must be
included in the gross estate.
deduction from the gross estate shall be the collectible
portion
5. Taxes which must accrue before the death of the
decedent.
6. Standard deduction

The amount is P1M. So, this may only be applied if

the gross estate of the decedent is more than P1M.
7. Separation pay given to the heirs of the decedent on
account of death.

The procedure is to include the amount in the gross

estate and then claim this thereafter deductions.
II. EXCLUSIVE DEDUCTIONS

These are deductions against exclusive properties.

These may include: (VP-CE)
1. Vanishing deductions whether inherited or
acquired by Donation
2. Transfer for public use
3. Other charges against the exclusive property
4. Encumbrance on exclusive property
Discussion:
1. VANISHING DEDUCTION [5, IP, I-GE, PD, PT, N-P-VD]
is an allowable deduction against the
exclusive property of the decedent
may be claimed as deduction under the
following conditions:
a.

Death of a decedent which must take place within

FIVE YEARS from the death of the prior incident or
before gift was given.

Situation:
A died. B is the heir. Now, you may recall that
properties acquired through gratuitous title during the
marriage is classified as exclusive property.
One of the properties of A which forms part of his
gross estate had already been taxed. This property will
be transmitted to B by way of succession. If B died, take
note that one of his properties was acquired through
inheritance from A and that is an exclusive property. This
property had already been taxed because that forms part
of the gross estate of A. Again, this same property may
be subject to estate tax because this exclusive property
forms part of the gross estate of B. There seems to be
double taxation. That is why, the purpose of vanishing
deduction is to mitigate the harshness of double taxation.
Page 34 of 46

So, B may be entitled to that vanishing deduction which

may reduce his estate tax.
The condition set by law is that B must have died
within the 5-year period. If B died 6 years after the death
of A, B can no longer claim such vanishing deductions.
b.

Identity of Property located in the Phils.

So, there must be evidence to that effect that this is
the same property which forms part of the gross
estate of A.

c.

Inclusion of the tax property in the gross

estate of the prior decedent.

d.

Previous taxation
The estate of A which included the property
subject of vanishing deduction had been taxed;
meaning, that estate tax had been paid by prior
estate.

e.

No previous vanishing deductions.

Question:
So, if B died and the property is transmitted to C, his
heir, that property is also considered as exclusive
property of C because it was acquired through
inheritance.
Can C claim vanishing deductions?
Answer:
NO, because this had already been claimed by B. You
can only claim vanishing deduction once.
It is impossible that B acquired the property not
through inheritance but through donation. Donors tax
had already been paid. This is an exclusive property of B
because under the law, property acquired during the
marriage by gratuitous title is an exclusive property and
forms part of his gross estate.
Can we apply this vanishing deduction?
YES. Here, B must have died within the 5-year period
from the date of donation.
Acquisition and transmission exempt from estate
tax are:
a.
b.
c.
d.

The merger of usufruct in the owner of the naked

title
Transmission or delivery of the inheritance or legacy
by the fiduciary heir or legatee of the
fideicommisssary.
Transmission of the property from the first heir,
legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
Bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions, no part
of the net income of which inures to the benefit of
any individual and not more than 30% of said
bequests, devises, legacies or transfers be used by
such institutions for administrative purposes.

So, transfers to non-stock, non-profit educational

institution is not exempt from estate tax because this is
not included from the enumeration BUT exempt from
donors tax.
2. Transfer For Public Use
The donee must be the government or any political
subdivision. It must be used exclusively for public use.
The transfer must be done orally but testamentary
disposition and must be at its present value.
3. Other Charges Against The Exclusive Property

So, if the property has been mortgaged with a bank,

we consider that as unpaid mortgage.
4. Encumbrance On Exclusive Property
VALUATION OF THE GROSS ESTATE: valuation as of the
time of death
1. Real Property
The FMV equivalent to the value as determined by
the BIR or zonal value OR that of the value as determined by
the provincial or city assessor whichever is higher.
2. Personal Property
a. Tangible Personal Property if not being sold; pawn
value x 3; The FMV is equivalent to the selling price
of the property. (Brand new items)
b. Intangible Property includes interest, shares of
stock
It must be the FMV of the interest or shares
of stock.
If the intangible personal property is
account receivable, it should be Principal
PLUS interest unpaid upon the death of the
decedent except if worthless)
If it is in the nature of usufruct, we must
take into consideration the basic standard
of mortality rate.
American tropical experience table
IF LISTED mean or ave. value between the
highest and lowest stock quotation
IF NOT LISTED BOOK value
DONORS TAX
DONORS TAX is an excise tax because what is being tax
here is the right or privilege to transmit or dispose of property
gratuitously in favor of another.
Tax imposed on the privilege of transmitting
property by and living person to another by
way of donation
Prevents avoidance of estate tax
PURPOSE OF DONORS TAX:
1. The primary purpose is to raise revenue;
2. To supplement income tax and estate tax.
DONATION the act of liberality whereby a person disposes
gratuitously of a THING or a RIGHT in favor of another who
accepts it.
DONATIONS SUBJECT TO DONORS TAX
trust or not
real or personal
tangible or intangible
1. Indirect donation Example: Cancellation of indebtedness
2. Direct donation
Donors tax applies to both natural and
juridical persons
The law says, donors tax apply whether
the transfer is in trust or otherwise. So,
property held in trust may be the subject of
donation. But, this contemplates of a
transfer where the dominion, the right over
such property, use, enjoyment of the same
other rights, must all be transferred to the
donee so that it will constitute as taxable
donation.
Read Section 104.
CHARACTERISTICS OF VALID DONATION: [F, A, C, I, D]
1. It must be given during the lifetime of the donor.
2. It must be irrevocable.
3. It must comply with the formalities of donation.
4. Acceptance of the donee.
Page 35 of 46

REQUISITES OF VALID DONATION

1. It must comply with the formalities of donation.
If the amount of personal property is P5,000
or less, the donation may be made orally.
If the amount of personal property is more
than P5,000 the acceptance shall be in
writing.
Donation of real property must be made in a
public instrument irrespective of the
amount
2. Acceptance by the donee of the donation.
Acceptance must be made during the
lifetime of the donor.
If the amount of personal property is P5,000
or less, acceptance may be made orally.
If the amount of personal property is more
than P5,000, the acceptance shall be in
writing.
In the case of donation of real property,
acceptance must be made in the same deed
of donation or in a separate public
instrument.
3. Capacity of the donor and the donee:
a. Those made between persons who were guilty of
adultery or concubinage at the time of the donation.
b. Those made between persons found guilty of the
same criminal offense, in consideration thereof;
c. Those made to a public officer or his wife,
descendants and ascendants by reason of his office.
Incapacitated donees are: [P, R-P, G, D, NPL]
a. The priest who heard the confession of the donor
during his illness, or the minister of the gospel who
extended spiritual aid to him during the same period.
b. The relatives of such priest or minister of the gospel
within the 4th degree, the church, order, chapter,
community, organization or institution to which such
priest or minister belongs.
c. A guardian with respect to donation made by a ward
in his favor before the final accounts of the
guardianship have been approved, even if donor
should die after the approval thereof; nevertheless,
any donation made by ward in favor of the guardian
when the latter is his ascendant, brother and sister,
or spouse, shall be valid.
d. Any physician, surgeon, nurse, health officers or
druggist who took care of the donor during his last
illness.
e. Individuals, association & corporations not permitted
by the law to receive donations.
*The following are also incapable of receiving
donations by reason of unworthiness:
[P (AC, ID, AV), C-AL, A-6 yrs., H-KVD, A or C, F-D, F]
a.
b.
c.
d.

e.

Parents who have abandoned their children or

induced their daughters to lead a corrupt or immoral
life, or attempted against their virtue.
Any person who has been convicted of an attempt
against the life of the donor, his or her spouse,
descendants or ascendants.
Any person who has accused the donor of a crime for
which the law prescribes imprisonment for 6 years or
more, if the accusation has been found groundless.
Any heir full of age who, having knowledge of the
violent death of the donor, should fail to report it to
an officer of the law within a month unless the
authorities have already taken action, this prohibition
shall not apply to cases wherein, according to law,
there is no obligation to make an accusation.
Any person convicted of adultery or concubinage
with the spouse of the donor.

f.
g.

h.

Any person who by fraud, violation, intimidation, or

undue influence should cause the donor to make a
donation or to change one already made.
Any person who by the same means prevents
another from making a donation, or from revoking
one already made, or who supplants, conceals, or
alters the latters donation.
Any person who falsifies or forges a supposed
donation of the decedent.

Under Art. 87 of the F.C., husband and wife are prohibited

from making donation to each other.
4. Intention to donate the property of the donee (or
DONATIVE INTENT).
Exception: Transfer of insufficient consideration in the case
of a contract of sale.
Example:
If the FMV of the property is P100,000 and P50,000
was the consideration given. The difference of P50,000 is
considered a donation.
* The amount received by a disinherited heir is subject to
donors tax because he has no right to such property and the
same was gratuitously given, so there is no donative intent.
5. Delivery of the property.
Note: If there is no valid donation, the recipient is subject to
income tax because of the provision from whatever source
derived.
Classification of donor subject to donors tax:
1. Resident donor (RD) - this includes citizen of the Phils.
or a resident alien.
2. Non-resident alien (NRD) he must be a non-resident
alien.
RD Real properties, personal tangible properties, and
personal intangible properties of resident donor are subject to
donors tax wherever situated.
NRD Real properties and personal tangible properties of a
non-resident donor are subject to donors tax only if they are
located in the Phils Personal intangible properties of NRD
are subject to donors tax only if they acquire tax situs in the
Phils
Personal Intangible properties that are deemed
situated or acquire situs in the Phils. are: GROSS GIFTS
[F, SOB (DC, FC-85%, FC-SP), SR, P]
1. Franchise which is exercised in the Phils.
2. Shares of stock, obligation or bonds issued by domestic
corp. or sociedad anonima.
3. Shares of stock, obligations or bonds issued by foreign
corporation, 85% of the business of which is conducted
in the Phils.
4. Shares, obligations, bonds issued by a foreign corp.
which acquires business situs in the Phils.
Such shares, obligations or bonds acquires business
situs in the Phils. if they are used by such foreign corp. in
furtherance
5. Shares or rights in any partnership, business or industry
established in the Phils.
6. Real, Intangible and Intangible Personal property or
Mixed
Even if the personal intangible properties of the NRD
acquired tax situs in the Phils. it may still be exempt from
donors tax by applying the rule on reciprocity.
Rule on Reciprocity If the foreign country of that
NRD does not impose, or allows exemption on the donors tax
Page 36 of 46

on the properties of citizens of the Phils. who died in that

foreign country.

c.2. there was violation of the Customs

law committed within the Phils.

Sec. 104 is applicable to both estate tax and donors

As regards smuggled goods imported not in

accordance with the provisions of the Customs law, it may be
pursued by the BOC even if it is transported through air, land
or water.

tax.
TARIFF AND CUSTOMS CODE
CUSTOMS LAW does not refer only to the provisions of Tariff
and Customs Code. It also includes other laws and regulations
subject to enforcement by the Bureau of Customs.
Other laws subject to enforcement by the Bureau of
Customs:
1. NIRC Sec. 107. Importation of goods or articles subject to
VAT. The VAT must be paid before these goods are released
from Customs Custody.
2. NIRC Sec. 131. Importation of Articles subject to excise
taxes. The payment of excise tax must be made before the
goods are released from Customs custody.
3. Regulations that may be issued by the CB, the
implementation of such regulation is vested in the Bureau of
Customs.
Customs duties are duties which are charged upon
commodities on their being imported in or exported out of a
country.

Consistent with this power, the BOC may enter in a

building, house, structure, enclosure and warehouse. No
search warrant is required. As long as they reasonably
believed that the place store smuggled goods, seizure or
search may be made. But it must be shown that the place
must not constitute a dwelling place or unit. This is also
because if it is a dwelling place that is covered by the
Constitutional provision where warrant must be secured.
Situation:
Suppose the watchman or security guard
and his family live in that place or building where smuggled
goods are stored can there be seized without search warrant?
Can we consider that a dwelling place?
Answer:
No, that will make the building a dwelling
place. Even if it is outside of its district such that it came from
Zamboanga and was unloaded at Cebu, the collector of Cebu
may still seize the goods. What is only required is that it came
from a port of entry within the Phils.
2. Enforcement of the Tariff and Customs Law including other
laws and regulation affecting the administration of Tariff laws.

Tariff means a book of rates; a table or catalogue drawn

usually in alphabetical order containing the names of several
states that hold commerce together.

3. Recommend to the Sec. of Finance needed rules and

regulations necessary for the effective enforcement of the
provisions of the TCC.

Offices charged with enforcement or administration of

Customs laws
1. Tariff Commission (TC)
2. Bureau of Customs (BOC)

4. Assessment and collection of lawful revenues from

imported articles. Also, assessment and collection of fines,
penalties, fees and other charges accruing under the
provisions of the TCC.

Powers of TC: (TRACER)

The power of the TC are investigatory in nature: They
investigate the following matters:
1. Matters relative to Tariff relations between the Philippines
and the foreign countries. So, that includes commercial
treaties.
2. Relation between the rate on raw materials and finished
products.
3. Matters relative to the Arrangement of schedules of values
4. Matters pertinent to the Classification of articles
5. It shall also investigate the Effects of foreign competition.
6. It shall investigate the operation of the Tariff Laws and
submit Report regarding the same.

5. It has the exclusive and original jurisdiction over Seizure

and forfeiture cases. Meaning, to the exclusion of regular
courts.
Articles subject to Customs duties:
Articles means wares, merchandise, goods and
anything which may be made subject of importation or
exportation. Articles include Philippine money. So, if the
Philippine money is transmitted or taken out of the Phils.
without authority from the Central Bank, that may be the
subject matter of seizure.

After investigation, TC shall submit its report to the

Bureau Commissioners or to Secretary of Finance.

2. Prohibited articles:
a. Absolutely prohibited articles: (SWING)
1. those prohibited by Special Laws
2. Weapons of War
3. Insidious, obscene or immoral articles
4. Narcotic or prohibited drugs
5. Gambling devices
b. Qualifiedly prohibited meaning subject to
restrictions or limitations. IF these limitations are not
complied with. They will be prohibited.

POWERS OF THE BOC: (PERAS)

1. BOC has the power to Prevent and suppress smuggling and
other frauds upon BOC.
Consistent with this power, the BOC has:
a. Power to control and supervise the clearance, as well
as the entrance of vessels, aircrafts originating from
foreign countries.
b. Police power to exercise over Harbor, Airport, River
and Port.
c. The right of pursuit against vessel subject to seizure
even if it is seized beyond the maritime zone. This is
called the extra-territorial jurisdiction of the
BOC. Sometimes, we call this right of pursuit. The
BOC may exercise this power when:
c.1. the vessel was subject to seizure or
forfeiture

Articles subject to Customs duties:

1. Dutiable articles are articles subject to Custom duties

3. Duty free imported articles these are articles not subject

to custom duties.
These are: (MASARAP)
a. Medals, badges used as trophies or awards
b. Animals and plants for experimental purposes
c. Sample articles
d. Aquatic resources
e. Repair materials
f. Articles necessary for the take-off and landing of
an airplane or for safe
navigation of vessels
Page 37 of 46

g. Articles for Public exposition. Included here are

historical books and personal
household effects
Customs duties may be classified as:
1. Regular or ordinary custom duties these are the ad
valorem tax and specific tax.

Countervailing duty duty equal to the ascertained or

estimated amount of the subdsidy or bounty or subvention
granted by the foreign country on the production,
manufacture, or exportation into the Phils. of any article likely
to injure an industry in the Phils. or retard or considerably
retard the establishment of such industry.

For purposes of determining the ad valorem tax, the

basis must be the home consumption value. Home
consumption value is the price stated in the commercial,
trade or sales invoice. If there is a reasonable doubt as to this
value, recourse may be had to the commercial and revenue
attach report, the BOC should refer to the available
information that may help the BOC determine the applicable
ad valorem tax.
Case: NCR-Japan has a subsidiary in the Phils. which is
NCR-Phil. Ten adding machines were imported from NCR-Japan
and they used, for purposes for determining ad valorem, the
home consumption value, the price stated in the sales
invoice. Instead, we should refer to the commercial revenue
attach report to determine the basis of that ad valorem tax.
2. Special custom duties: (DCMD)
a. Dumping duties
b. Countervailing duties
Note: The purpose of dumping and countervailing
duties is to protect our local products against
unfair foreign competition
c. Marking duties the purpose of this is to prevent
possible public deception.
d. Discriminatory duties duties which are imposed for
the purpose of protecting our national interest
Dumping duty duty levied on imported goods where it
appears that a specific kind or class of foreign article being
imported into or sold is likely to be sold in the Phils. at a price
less than its fair value.

Imposed on specific kind or class of foreign

article which is being imported into, or sold
or is likely to be sold for exportation to or in
the Phils. at a price less than its fair value,
the importation or sale of which is likely to
injure an industry imposing like goods in the
Philippines.
The duty is equal to the difference between
the actual purchase price and the fair value
of the articles in question in the country or
exportation as determined by the Sec. of
Finance.

These are special duties imposed on imported

articles. This may be imposed subject to the ff. requisites:
1. There must be a deliberate and continuous sale of imported
article in the Philippines as price lower than the prices in the
exporting country.
2. This must prejudice or cause or likely to cause injury to our
local industry.
Situation:
There are articles of foreign origin the
prevailing price of which in the US is equivalent to P100.
These articles are sold or dumped in the Phils. at lower than
the prevailing price in the US because they are saleable in the
U.S.
So, this will prejudice our local industries. In order to
protect our local product or to discourage people from buying
this imported product, we should be impose special duties in
addition to the regular duties. Dumping duties should be
imposed.

Imposed on articles, upon the production,

manufacture or export of which any bounty
or subsidy is directly or indirectly, granted
in the country of origin and/exportation. No
need to show proof that the imports cause
injuries to domestic industries producing the
same products. The duty is equal to the
ascertained or estimated amount of the
bounty or subsidy given.

Situation:
Sometimes
imported
products
enjoys
certain subsidy from their government. So, they have an
advantage. Our local products for example, does not enjoy
similar subsidy. We should counter that advantage by
imposing countervailing duties. The purpose there is to
protect our local products against unfair competition.
This represents the inland excise tax on locally
manufactured articles of the same kind to off-set this
advantage.
As regards dumping duties, the extent of the special
duty is the amount that represents under-pricing.
As regards countervailing duties, the extent is the
excise inland tax or the amount of advantage enjoyed by that
imported article.
Marking duty duty on ad valorem basis imposed for
improperly marked articles. The requirement that foreign
importation must be marked in any official language of the
Phils., the name of the country of origin of the article.

The purpose is to prevent deception of

consumers.
The articles must be properly marked,
otherwise a special duty of 5% of the value
shall be imposed.

Retaliatory or Discriminatory duty duty

imposed on imported goods whenever it is found as a fact
that the country of origin discriminates against the commerce
of the Philippines in such manner as to place it at a
disadvantage compared with the commerce of any foreign
country.

The amount may be increased in an amount

not exceeding 100% ad valorem when the
President finds the public interest may be
served thereby.

This may be imposed by the President of

the Philippines when our goods are
discriminated against.

As regards dumping, countervailing and

marking duties, it is the Sec of Finance,
upon
recommendation
of
the
Tariff
Commission, who may impose these duties.

Question:
What is the extent of the flexible power of
the President of the Phils. under the TCC?
Answer:
That includes the power to impose
discriminatory duties. The President upon recommendation of
the Tariff Commission may increase the tariff rates by not
more than 5x or meaning 500x of the tariff rates. He may also
decrease the tariff rates by not less than 50%.

Page 38 of 46

He can only exercise these powers in the interest of

the national economy, national security and general welfare
of the people.

Case:
Jose had a vessel, M/V Maria Victoria. It was
unlawfully used for the importation of cargo. When
this was seized by the government, Jose raised the
defense of good faith.

2. Other duties:
a. Storage fee this is charged on the goods or
articles stored in a warehouse under the control and
supervision of the BOC.
Articles owned by the government are
exempt from storage fee is these articles are stored
in a government warehouse.
b.

Held:
(1)
It is an action directed against the articles
and in fact, the caption of the case is Republic of the
Phils. vs. M/V Maria Victoria. It is a proceeding in
rem, so good faith is not a defense.
(2)
Even if the vessel did not carry the
contraband, that may be the subject matter of
seizure if the vessel facilities the importation of that
contraband.
It is not also required that the vessel must
come from the foreign country.

*Wharfage dues
Even if there is no wharf where the goods
may be unloaded, wharfage dues may still be
imposed because it is not a duty or charge on the
use of the wharf. Even if the goods are unloaded in a
private wharf or seashore, wharfage dues still be
imposed because this is a duty imposed on the
cargoes or articles which are unloaded. These are
taxes. These are not really custom duties. The
significance of this is that when tax exemption is
granted from all forms of taxes, this may be
included. If the exemption is only from custom
duties, wharfage dues is not included.

c.

Arrastre charges this is a duty imposed on goods

or articles for handling, receiving or custody of such
articles.

d.

Tonnage fees this is based on weight or tonnage

of vessel.

e.

Harbor fees

f.

Berthing fees this is imposed on the vessel for

mooring berthing at a particular pier or port.

Case: Cruz was caught carrying a bulk of foreign

currencies. These were seized by the government
because she had no license issued by the CB to carry
said sum of foreign currency.
Held:
Cruz must prove that she had a license
otherwise seizure was proper.
The burden of proof lies on the importer.
(b)

Excessive sea stores.

Sea stores are the provisions of the vessel necessary
for administration and maintenance.

(c)

Excessive sea stores for aircraft.

Sea stores must be in the place where it should be
displayed. If these are kept in the cabin of the crew,
these may be the subject matter of seizure because
these are considered excessive.

(d)

Unlawful transfer of cargoes from one vessel to

another before reaching the point of destination.

Steps in the imposition of custom duties:

1.
Declaration of goods or articles
2.
Assessment by an appraiser. Determine the value
applying the schedule of values stated in the tariff
rates and that is subject to the approval of the
Collector of Customs.
3.
Liquidation which may be:
(a)
Partial means the value cannot be
promptly ascertained.
(b)
Final
- meaning custom duties had been
ascertained or finally
determined.

(e)

Unmanifested articles

(f)

Prohibited articles

(g)

Devices, receptacles

(h)

Envelopes, boxes, trunks

(i)

Beast

If these duties are not paid by the taxpayer, the

government or the BOC has the
power to impose the following administrative
sanctions:

Tax Remedies under the Tariff and Customs Code:

Berthing fees may only be imposed if the

vessel is wharfed or berthed at national port. So, if it
is wharfed at privately owned port, that is not
subject to berthing fees.

(1)
situations
(2)
situations
(3)

Surcharges may be imposed under certain

Fines

may

be

imposed

under

certain

Seizure or forfeiture

Forfeiture is the penalty , seizure is the remedy.

Situations where goods may be seized or forfeited by the
government:
(a)

Articles, vessels, aircraft may be the subject matter

of seizure if they are unlawfully used in the
importation of foods into the Philippines or
exportation of goods form the Phils.

(j)
Thing of value or money which is intended to
influence BIR officers.

Remedies

Government

Importer

(1)
Administrative
or
extra-judicial

(a) Enforcement of
tax lien
(b) Seizure

(a) Tax refund

(b) Abandonement
(c) Protest

(2) Judicial

(a) Filing of civil

action
(b) Filing of criminal
action
if there is fraud
and it
must be serious

(a) Appeal to CTA,

CA, SC
(b)
Filing
of
criminal
action against
erring
Customs
officials
Page 39 of 46

ENFORCEMENT OF TAX LIEN

Requisites:
(1)
(2)

Articles must neither be prohibited nor irregular

The articles must be in the possession of the BOC

If the articles are prohibited or irregular, the remedy

is seizure
Abandonment may be express or implied.

Estate may be the subject to tax if it is under

administration. It may only be under
administration or
settlement if the properties of the decedent are settled under
judicial settlement.
If the estate is under extra-judicial settlement, it is not
subject to tax because that will not earn income considering
that the heirs agreed to settle the estate extra-judicially.

Cases cognizable by the BOC

When we speak of judicial settlement, this may include

estate or intestate proceedings.

(1)
(2)

Trust may
irrevocable.

Seizure cases on the part of the government and

Protest case on the part of the importer

Seizure cases: The issue here pertain to the validity of the

importation because you may raise the defense that these are
not prohibited importation.
Protest:
The issue here is the validity of the
assessment or collection, or the validity of the classification of
articles where customs duties are imposed.
PROCEDURE IN PROTEST
Remedy
(1) File
protest

Where to file
a

(2)
If
protest
is
denied,
Appeal
collectors
ruling
(3) If CC
affirm
collectors
ruling,
Appeal
(4) If CTA
affirm
collectors
ruling,
Appeal
(5) If CA
affirm
CTA,
Appeal

Collector
Customs

of

Customs
Commissione
r (CC)

CTA

CA

SC

[Issues
which may
be raised]
(a) Validity if
the
assessment
or collection
(b) Validity of
classification
of articles
Questions of
fact
or
Question of
law
Question
fact
Question
law

of
or
of

Question
fact or
Question
law

of

Question
law

of

of

Prescriptive
Period
15
days
from
the
payment of
Customs
duties
Within
15
days
from
receipt of the
Collectors
ruling
Within
30
days
from
receipt of the
decision
of
the CC.
Within
15
days
from
receipt
of
CTA decision
Within
15
days
from
receipt of CA
decision

TRANSFER TAXES
ESTATES & TRUSTS
ESTATE refers to the mass of properties left by decedent or
testator to his heirs or
beneficiaries.
TRUST is the right to the property, real or personal,
exercised by one person for the benefit of another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust.
b. Trustee or fiduciary one who may hold the
property for the benefit of other person known as
beneficiary. Sometimes, the fiduciary is also the
beneficiary.
c. Beneficiary

be

subject

to

tax

if

the

trust

is

Non-taxable trust are:

1. Revocable Trust. The income here will be taxed insofar
as the recipient of the same is concerned.
2. Employees Trust. So, if an employer establishes a
pension trust for the benefit of the employees, that pension
trust is not taxable.
The trust is revocable if the power to revest the title to
the property of the trust is vested:
1. In the grantor or in conjunction with other person who does
not have substantial adverse interest in the disposition of the
property.
2. In any person who does not have substantial adverse
interest in the disposition of the property.
In irrevocable trust, you cannot transfer or revest the title
of the property.
No substantial interest in the disposition of the property
he must not be the beneficiary.
If the properties of the estate is not vested in a business,
so the heirs are just co-owners of the property, that is not
taxable because co-ownership as a rule is not taxable.
If the heirs decide to continue the business, such that the
administrator may manage the same, that will become an
unregistered taxable partnership.
Estate and trust may be taxed on the same manner and on
the same basis as in the case of individual taxpayers. S, they
may claim the deductions under Section 34 as long as these
deductions were paid or incurred in connection with the
business of that estate or trust.
Estate and trust are entitled to personal exemptions to
P20,000.
SPECIAL DEDUCTIONS (this can be valid of only by
estate and trust):
3. In the case of estate, the executor or administrator may
deduct the income distributed to the heirs during the
particular year when such estate is still under settlement.
4. In the case of trust, the income may be distributed to the
beneficiaries during that year also be deducted. The trustee
or beneficiary may distribute the income or accumulate the
income. The trustee has the discretion whether to distribute
such income after the lapse of certain period of time or year.
In the event that income of the trust is distributed to the
beneficiary, this particular amount may also be claimed as
deductions.
Question:
If these are two (2) trust created by one trustor or
grantor, how do we tax the income of that trust?
Answer:
Under the law, the taxable income of these two (2)
trust may be consolidated. That trust should be taxed as if
they constitute one trust.
Page 40 of 46

 Situation:
Grantor X created 2 trust. One is A and the other is
B. There is only one beneficiary named Y.
Let us assume that the taxable income of trust A is
P10,000. The taxable income of B trust is P20,000. The total
taxable income is P30,000. We will tax these
2 trust
separately but through consolidation.
In paying the tax after applying the applicable tax
rate to the taxable income of P30,000, the tax due should be
apportioned to trust A and B.
So, for purposes of income tax, the taxable income
of these 2 trust should be consolidated, but for purposes of
paying the tax, the tax due should be apportioned.
TRANSFER TAXES
Taxes may be imposed on the onerous
transmission of properties or on the gratuitous
transmissions of properties.
Transfer taxes that are imposed on the onerous
transmission of properties:
1. VAT (value-added tax) (excluded this 2000 Bar)
2. Percentage Tax (also excluded)
3. Excise Tax (also excluded)
Transfer taxes imposed on gratuitous transmission of
properties are:
1. Estate Tax
2. Donors Tax
ESTATE TAX tax imposed on the right or privilege to
transmit properties upon death of the decedent or testator.
DONORS TAX tax imposed on the right or privilege to
transmit properties gratuitously in favor of another who
accepts the same. This transmission of properties occurs
during the lifetime of the donor and the donee.
ESTATE TAX
NATURE OF ESTATE TAX
It is an excise tax since the subject of the
tax is the right or privilege to transmit
properties and not the property itself.
PURPOSES OF ESTATE TAX:
1. The primary purpose is to raise revenue in order to support
the government;
2. To supplement income tax;
3. To reduce excessive inequalities in wealth; meaning, to
achieve social equality.
KINDS OF ESTATE TAXPAYER:
1. Resident estate taxpayer includes citizen of the Phils.,
resident alien who died in the Phils., and such alien, at the
time of his death, is a resident of the Phils.;
2. Non-resident estate taxpayer is limited to nonresident alien individual.
Real properties, personal tangible properties and personal
intangible properties of resident decedent (RD) are taxed
wherever situated.
Real and personal tangible properties of non-resident
decedent (NRD) are taxable only if they are located in the
Phils.
Personal intangible properties of NRD are taxable only if
they acquire tax situs in the Phils.
Personal intangible properties that are deemed
situated or deemed to have acquired Phil. situs are:
1. Franchise which is exercise in the Phils.
2. Shares of stock, obligation or bonds issued by domestic
corporation or sociedad anonima
3. Shares of stock, obligations or bonds issued by foreign
corp. 85% of the business of which is conducted in the Phils.

4. Shares, obligations, bonds issued by a foreign corp. which

acquired business situs in the Phils.
Such shares, obligations or bonds or in any
partnership,
business
or
industry
established in the Phils. if they are used by
such foreign corp. in furtherance of its trade
or business.
5. Shares or rights in any partnership, business or in any
partnership, business or industry established in the Phils.
If the personal intangible properties of a NRD does not
belong to the above-mentioned enumeration, they may not
from part of his income or we may also apply the doctrine of
mobilia sequntur personam.
Mobilia sequntur personam, according to the Supreme
Court, is a mere fiction of law. So, it must yield to the
provision of law which provides tax situs.
Question:
Suppose the personal intangible properties of NRD
acquired tax situs in the Phils., can this be exempt from
estate tax?
Answer:
YES, by applying the rule on reciprocity.
RULE ON RECIPROCITY the foreign country of that NRD
does not impose or allows exemption on estate tax on the
properties of citizens of the Phils. who died in that foreign
country.
The phrase does not impose and allows exemtion
are different from each other.
When we say does not impose, this means totally
exempt. Allows exemption means this may not cover all
properties but only certain properties.
Case:
Country of Morocco has no international personality
or not. What is important is it allows or grants exemption from
estate tax.
Sec. 85. Gross Estate. The value of the gross estate of
the decedent shall be determined by including the value, at
the time of his death, of all property, real or personal, tangible
or intangible, wherever situated. Provided, however, That in
the case of a non-resident decedent who at the time of his
death was not a citizen of the Philippines, only that part of the
entire gross estate which is situated in the Philippines shall be
included in his taxable estate.
The composition of the gross estate may include:
1. Decedents Interest.
The gross estate may include the fruits and
income of the properties and that may
constitute the decedents interest.
In the case of parcel of land, it may produce
income in the form of harvest which harvest
may form part of the gross estate.
In the case of apartment, the rental on such
apartment should also be included, not only
the value of the property.
2. Transfer by virtue of general power of appointment
It implies that if the transfer is made under
special power of appointment that should
be excluded from gross estate.
The general power of appointment, the
power is exercisable or in favor of the
estate, executor, administrator or a creditor
of the estate. If the power is exercisable
other than these (estate, administrator or
Page 41 of 46

creditor of the
considered
as
appointment.

estate), that may

special
power

be
of

3. Revocable Transfer
Irrevocable transfer should be excluded
from gross estate.
Revocable transfers are transfers which are
subject
to
alteration,
termination,
amendment
or
modification
by
the
decedent.

when you claim deductions, you can only claim up to

P1M.
2. Expenses which may be in the nature of judicial
expenses or funeral expenses.

4. Transfer for Insufficient Consideration

The amount that may form part of the gross
estate is the difference between the FMV of
the property and the consideration given.
Example:
If the property has a FMV of P100,000 and the
consideration given is only P50,000, the
difference of P50,000 represents that insufficient
consideration.
5. Proceeds of Life insurance policy.
Proceeds of life insurance policy may
be included if:
a. 3rd person is irrevocably designated is the
estate executor, administrator or heirs of
the decedent
b. the beneficiary designated is a 3 rd person
who is revocably designated as beneficiary
Proceeds of life insurance policy is
excluded from the gross estate in the
following cases:
1.
3rd person is irrevocably designated as
beneficiary
2. proceeds of group insurance policy
3. proceeds of accident insurance policy
except if accident insurance policy has a
characteristic
4. Proceeds of GSIS Life Insurance Policy
-

Note:
As regards the estate executor,
administrator or heirs as beneficiary, it is
immaterial whether the designation is
irrevocable or revocable.

DEDUCTIONS FROM GROSS ESTATE:

DEDUCTIONS FROM THE GROSS ESTATE MAY BE:
1. Conjugal deductions
2. Absolute deductions
3. Exclusive deductions
I. CONJUGAL AND ABSOLUTE DEDUCTIONS include:
1. Family home
2. Judicial or funeral expenses
3. Casualty losses
4. Indebtedness/unpaid claim against the estate
5. Accrued taxes (before the death of the decedent)
6. Standard Deduction
7. Separation pay given to the heirs of decedent on
account of death.
Discussion:
1. Family home, subject to the following conditions:
a. there must be only one (1) family home;
b. there must be certification issued by the Barangay
Captain that the decedent is a resident of and own
that family home, in that particular locality;
c. the amount that is deductible or the FMV of the
family home should not be more than P1M;
d. the FMV of the family home is P5M, this should be
included in the gross estate of the decedent. But

In the case of funeral expenses, the amount

deductible is the actual funeral expenses or
the amount deductible is limited only to
P500,000;

There is no limitation as to amount with

regard to judicial expenses. As long as it is
paid or incurred in connection with the
preservation, administration or settlement
of the estate, it may be claimed as
deductions, judicial expenses also include
extra-judicial expenses.

3. Losses that may arise from casualty or casualty losses

such as fire, storm, shipwreck, robbery, embezzlement, theft
and other casualty losses.
These losses must be sustained not later
than six (6) months after the death of the
decedent.
4. Indebtedness which partake of the nature of unpaid
claims against the estate.
There must be supported by notarized
document. These obligations must be
incurred within three (3) years prior to the
death of the decedent.
Another indebtedness which may be
claimed as deduction is claim against
insolvent persons. Here, the claimant is the
decedent. In order to be deductible, this
claim must be included in the gross estate.
5. Taxes
decedent.

which must accrue before the death of the

6. Standard Deduction
The amount is P1M. So, this may only be
applied if the gross estate and the decedent
is more than P1M.
7. Separation pay is given to the heirs of the decedent on
account of death.
The procedure is to include the amount in
the gross estate and then claim this
thereafter as deductions.
II. EXCLUSIVE DEDUCTIONS
These are deductions against exclusive
properties.
These may include: (VP-CE)
1. * Vanishing deduction
2. Transfer for public use
3. Other charges against exclusive property
4. Encumbrance on exclusive property
Discussion:
1. * VANISHING DEDUCTION
is an allowable deduction against the
exclusive property of the decedent.
May be claimed as deduction under the
following conditions:
a.

Death of the decedent which must take place

within FIVE (5) YEARS from the death of the
prior incident.
Situation:

Page 42 of 46

A died. B is the heir. Now, you may recall that

properties acquired through gratuitous title during the
marriage is classified as exclusive property.
One of the properties of A which forms part of his
gross estate had already been taxed. This property will be
transmitted to B by way of succession. If B died, take note
that one of his properties was acquired through inheritance
from A and that is an exclusive property. This property had
already been taxed because that forms part of the gross
estate of A. again, this same property may be subject to
estate tax because this exclusive property forms part of the
gross estate of B. There seems to be double taxation. That is
why, the purpose of vanishing deduction is to mitigate the
harshness of double taxation. So, B may be entitled to that
vanishing deduction which may reduce his estate tax.
The condition set by law is that B must have died
within the five-year period. If B died 6 years after the death of
A, B can no longer claim such vanishing deductions.
b.

Identity of Property
So, there must be evidence to the effect that this is
the same property which forms part of he gross estate of A.
c.

Inclusion of the property in the gross estate of

the prior decedent.

4. Encumbrance on Exclusive Property

VALUATION OF THE GROSS ESTATE:
1. Real Property
The FMV equivalent to the value as determined by the BIR
or zonal value and that of the value as determined by the
provincial or city assessor whichever is higher.
2. Personal Property
a. Tangible Personal Property The FMV is
equivalent to the selling price of the property.
b. Intangible Personal Property includes interest,
shares of stock.
it must be the FMV of the interest or shares
of stock
If the intangible personal property is
account receivable, it should be Principal
PLLUS interest unpaid upon the death of the
decedent.
If it is in the nature of usufruct, we must
take into consideration the basic standard
of mortality rate.
TAX REMEDIES

d.

Previous taxation
The estate of A which included the property subject
of vanishing deduction had been taxed; meaning, that estate
tax had been paid by prior estate.
e.

No previous vanishing deductions.

Question:
So, if B died and the property is transmitted to C, his
heir, that property is also considered as exclusive property of
C because it was acquired through inheritance.
Can C claim vanishing deduction?
Answer:
NO, because this had already been claimed by B. You
can only claim vanishing deduction at once.
If it is impossible that B acquired the property not
through inheritance but through donation. Donors tax had
already been paid. This is an exclusive property of B because
under the law, property acquired during the marriage by
gratuitous title is an exclusive property and forms part of his
gross estate.

If the tax law is silent on administrative

remedies, the taxpayer may still avail of the
usual administrative remedies of protest
and refund for purposes of convenience and
expediency.

If the tax law is explicit on administrative

remedies, the taxpayer must observe the
principle of exhaustion of administrative
remedies. Under the Tax Code, if an
assessment is made by the BIR, the remedy
of the taxpayer is to protest first the
assessment. It is the decision of the BIR on
that disputed assessment that is being
appealed to the CTA.

In claiming for tax refund, the taxpayer

have to file first a written claim for refund
with the BIR Commissioner.

Exception
to
the
Principle
of
Exhaustion
of
Administrative
Remedies:
a. if it involves judicial questions
b. if it involves disregards of due
process
c. if it involves an illegal act.

Can we apply this vanishing deduction?

YES. Here, B must have died within 5-year period
from the date of donation.
Acquisitions and transmissions exempt from estate tax
are:
1. The merger of usufruct in the owner of the naked title
2. Transmission or delivery if the inheritance or legacy by the
fiduciary heir or legatee to the fideeeicommissary.
3. Transmissions of the property from the first heir, legatee or
donee in favor of another beneficiary in accordance with the
desire of the predecessor.
4. Bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income
of which inures to the benefit of any individual and not more
than 30% of said bequests, devises, legacies or transfers shall
be used by such institutions for administrative purposes.
2. Transfer for Public Use
The donee must be the government or any
political subdivision. It must be used
exclusively for public use.
3. Other Charges Against the Exclusive Property
- So, if the property has been mortaged with a bank, we
consider that as unpaid mortgage.

According to the SC, government and

taxpayers must stand on reasonably equal
terms.
Basically, the remedies that may be availed
of by the Government or the taxpayer may
be grouped into:
a. Administrative remedies
b. Judicial remedies
If the tax law is silent on administrative
remedies, the government may still avail of
the usual administrative remedies such as
Distraint of personal property, or Levy on
real property. But that may be resorted to
by the government in the collection of taxes
are:
a. Distraint of personal property
b. Enforcement of tax lien
c. Levy on real property.
Distrain and levy can only be done if notice
is given.

Judicial Remedies:
Page 43 of 46

IF the tax law is silent on judicial remedies,

the government can still avail of the usual
judicial remedy. Example: filing an action for
collection with the court.
If the tax is silent on judicial remedies, the
taxpayer may file a special civil action for
declaratory relief. But this does not apply as
far as the NLRC or the TCC is concerned
because these particular tax laws are
explicit on this judicial remedies.
If the tax law is explicit on judicial remedies,
the government should observe the
provisions of the law.
Example:
The filing of an action for collection
with the Court must be
approved by the BIR Commissioner.

Distinction between the Distraint and Levy

Distraint of personal property
1. The subject matter is personal property, stocks and
securities, bank accounts, debts and credits.
2. In the event that the taxpayer failed to pay the tax, the
BIR will issue warrant of distraint.
3. The only requirement is posting of notice of sale in 2 public
or conspicuous places
4. If the bid is not equal to the amount of tax liability, the BIR
may purchase the property distrained for and in behalf of the
government.
5. There is no right of redmption
6. There is that remedy of constructive distraint of personal
property.
Levy of real property
1. The subject property is real property
2. What is issued is in the nature of an authenticated
certificate describing the property and stating the name of
the taxpayer as well as the amount due
3. Requires not only posting but also publication of the notice
of sale in a newspaper of general circulation in 3 consecutive
weeks.
4. If the bid is not equal to the tax liability of there is no
bidder, the BIR may forfeit such real property levied by the
government.
5. There is right of redemption within 1 year from the date of
sale plus 15% interest.
6. There is no such remedy as constructive levy of property.
Constructive Distraint can only be resorted to under
the following situation: Code: C.A.R.L.)
1. When a taxpayer cancels or hides his property
2. If he performs any act which will obstruct the collection
efforts of the BIR
3. If he is retiring from business subject to tax
4. When he is about to leave the Philippines
Enforcement of the tax lien:
If the taxpayer failed despite receipt of
notice to pay the BIR, a lien is created
against the properties of the taxpayer.

It is the discretion of the BIR to avail itself of

remedies which may result in the
expeditious collection of taxes.

Case: Which is preferred, the claim of the government

arising from tax lien or the claim of the workers predicated on
the judgment rendered by the NLRC?
Held:
The claim of the government arising from tax lien is
superior to the claim of a private litigant predicated on a
judgment.

Exception:
The claim of the laborers may be superior
under Art. 110 of the Labor Code when the employer was
declared bankrupt of judicial liquidation.

*In observing the provisions of the tax code

in regard to distraint or levy, the BIR cannot
apply or invoke the presumption of
regularity in administrative proceedings.
So, if the procedure had been
questioned by the taxpayer, it is not for the
taxpayer to prove that the procedures
under the NLRC in regard to distraint on
levy had been complied with.

Revenue taxes are self-assessing taxes.

Requisites of Assessment:
1. Written notice stating that the amount is due as tax.
2. Written notice must contain a demand for the payment of
such tax.

Assessment is not a condition sine qua non

for purposes of collecting taxes. This is so
because demand is not required. The rule
under Art. 1169 of the NCC that demand is
required before a person may incur in delay
cannot be applied. Taxpayer incurred in
delay if he fails to pay the tax on date fixed
by Tax Code.

Assessments,
made
by
the
BIR
Commissioner are presumed correct. The
presumption does not violate the due
process under the Constitution because the
presumption is merely disputable.

Normally, the BIR may require the taxpayer

to submit reports, documents, books of
accounts and other report to establish his
tax liability. In the absence of these reports,
documents, etc., the BIR may determine the
tax liability by using other methods.

*The BIR can determine the tax liability of

the taxpayer on the basis of that so-called
best evidence obtainable in the absence of
said reports etc. In one case, agents of the
BIR used the books of account seized as a
result of raid by means of search warrant.

NET WORTH OR INVENTORY METHOD (also called Net

Investigatory Method)
This is another method that may be
employed by the BIR in determining the tax
liability of the taxpayer. This is an expansion
of that accounting principle, assets less
liabilities equals net worth.
Assessment is made when it is mailed, released or
sent.
Example:
If it was received by the taxpayer in a
particular date (Dec. 5, 1997), you should count the
prescriptive period for making an assessment from the date it
was mailed, released or sent by the BIR and not from the
receipt of the notice of assessment by the taxpayer.
The assessment may be subject to revision by the
BIR. If revised, the prescriptive period will commence to run
from the safe when such revised assessment is mailed,
released or sent. So, it is not from the date the original
Page 44 of 46

assessment is mailed etc. but from the date the revised

assessment has been mailed.
The making of assessment is prescriptible.

The rule is, the BIR may collect taxes

with or without prior assessment.

PRESCRIPTIVE PERIOD FOR MAKING

AN ASSESSMENT & COLLECTION
With
prior
assessment
I. Return filed is not false
or fraudulent
a. Return was file
but there exist
a deficiency
b. Return
was
filed but no
payment
has
been made

II.
Failure/Falsify/Fraudulent
a. Intentional
failure to file a
return
b. False return
c. Fraudulent
return

3 years from
the date of
actual filing.
If it was filed
earlier than the
date fixed by
the Tax Code.
COLLECTION:
Within 3 years
from the date
of assessment
10 years from
the discovery
of
such
omission
of
failure,
falsity
or fraud
COLLECTION:
3 years from
the
date
of
assessment.

Without
prior
assessment
3 years from
the date of
actual filing
or from the
last day fixed
by
law
for
filing
such
return.

Taxes may be
collected even
without prior
assessment
and
prescriptive
period is 10
years
from
the discovery
of failure or
omission,
falsity
or
fraud.

Notes:
The rule is if prior assessment has been
made, the BIR can avail of the administrative and judicial
remedy. But if without prior assessment, the BIR can only
avail of the judicial remedies.
Return must be the one prescribed by the
BIR. SO, if you file your Books of Accounts in lieu of that
return, that does not constitute return.
PRINCIPLES GOVERNING THE FILING OF AN ACTION FOR
COLLECTION
BY THE BIR
Collection is proper under the following situations:
a. BIR assessment is considered final and executory, if
no protest or dispute has been made by the
taxpayer. IF protested by the taxpayer but he did not
appeal, the BIR decision on such protest, the effect is
that the BIR decision shall be considered final and
executory.
b. IF he appeal the decision of the BIR of the
Commissioner to the CTA but he did not appeal the
decision of the CTA to CA, the decision of the CTA
shall be final and executory.
c. If he appeal to the CA but the CA decision affirming
that decision of the BIR was not appealed to the SC,
CA decision shall be final and executory.
d. If appealed to SC but SC affirm the decision of the
CA, SC decision is final and executory.

If the decision of the BIR is final and

executory, the assessment made cannot be
questioned. The issue of prescription can no
longer be raised except if the BIR submitted
the particular issue for the resolution of the
Court, that is considered as waiver on the

part of the BIR and such issue of

prescription may be subject to resolution.
There is no provision in the TAX Code that
prohibits the BIR from filing an action for
collection even if the resolution on the
motion
for
reconsideration
on
the
assessment made is still pending.
When the case is pending before the CTA,
collection may also be made by filing of an
answer to the petition for review with the
CTA. This is tantamount to a filing of
collection of tax. This will also stop the
running of the prescriptive period for
collection of taxes.
Collection of taxes is prescriptible.

GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE

PERIOD IN THE COLLECTION OF TAXES:
(Code:
N.A.P.O.C.A.R.)
1. No property could be allocated;
2. Agreement between the BIR and the taxpayer to the effect
that the prescriptive period shall be suspended pending the
negotiation;
3. If the BIR is Prohibited from a distraint or levy of real
property;
4. If the taxpayer is Out of the Philippines;
5. If the address of the taxpayer Cannot be located;
6. The filing of an Answer to the petition for review executed
by a taxpayer with the CTA;
7. When a Request for reinvestigation has been granted by
the BIR.
PRINCIPLES IN CRIMINAL ACTION
1. The filing of an action requires the approval of the BIR
Commissioner. Also, the filing of civil action requires the
approval of the BIR Commissioner. BUT this is not
jurisdictional. This is merely a formal defect which can be
cured.
2. The purpose of filing criminal action is to impose statutory
penalties.
3. The payment of tax liability does not extinguish the
criminal liability of the taxpayer arising from the violation of
the provision of the Tax Code. This is so because the civil
liability arises from the failure of the taxpayer to pay and this
does not arise from felonious act.
4. The acquittal of the taxpayer from criminal liability does
not carry with it the extinguishments of civil liability.
5. The penalty of subsidiary imprisonment applies only to the
failure of the taxpayer to pay the penalties. But, the Tax Law
is silent on the failure of the taxpayer to pay his deficiency or
delinquency tax.
DEFICIENCY VS. DELINQUENCY

In deficiency, the taxpayer filed a return but

the same was deficient. Deficiency is the
difference between the tax due and the tax
paid.

In delinquency, the taxpayer did not file a

return.

FALSE RETURN vs. FRAUDULENT RETURN

In the case of false return, this is a deviation from
the truth. It may be the result of mistake, error, or negligence
of the taxpayer. It is not always intentional because it may be
the result of an honest opinion of the CPA.
In fraudulent return, there is always the intent to
defraud the government to evade taxes. It is always
intentional and deliberate.

Criminal action may be suspended if the

taxpayer is absent from the Philippines.
Page 45 of 46

FIVE (5) years the prescriptive period for

filing a criminal action for violations of the
provision of the Tax Code.

In the case of refusal to pay the tax, the 5year prescriptive period will commence to
run from the date final notice or demand
has been served upon the taxpayer.

As regards violation of the Tax Code, if the

violation is known the 5-year prescriptive
period shall commence to run from the date
of the discovery of the violation and the
institution of judicial proceedings for
investigation and punishment. The law uses
the conjunction and. So, it will commence
to run only from the time the BIR referred
the case to the Fiscals Office or City
Prosecutor. In effect, it is always in the
control of the BIR.

REMEDIES OF THE TAXPAYER

BEFORE PAYMENT, the taxpayer may dispute or protest the
assessment. He ma also invoke the power of the BIR
Commissioner to compromise tax liability.
If you RECEIVED AN ASSESSMENT by the BIR, the remedies
are:
a. File a request for reconsideration of the assessment
or this is a claim for re-evaluation of the assessment
based on the existing records.
b. File a request for investigation of the assessment --it is also a claim for a re-evaluation of the
assessment on the basis of newly discovered
evidence, or additional evidence that the taxpayer
intends to present in the reinvestigation.
WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner
ISSUES which may be raised >>>>> Question of law or fact
or both questions
of law and fact
WHEN
>>>>>>>>>>>>>>>>>>>>>>> Within 30
days from
receipt of such
assessment
IF the request for investigation or reconsideration has
been denied by the BIR:
1. File a motion for reconsideration of the decision with the
BIR; OR
2. Appeal the decision with the CTA.

c
t
O
R
b
o
t
h
If CTA affirms the decision of the BIR:
Appeal the CTA decision to CA.
ISSUES
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Questions of law
WHEN
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Within 15 days from receipt of the
CA
decision
The taxpayer may, instead of filing a protest, file a written
claim for refund.
REQUISITES FOR FILING REFUND:
1. This must be filed within the two (2) year period from the
date of payment;
2. The fact of withholding must be proven;
3. This must be included in the income tax return of the
taxpayer;
4. It must be shown that the payment or the amount stated in
the return was received by the government.
WHERE TO FILE REFUND:
ISSUES:

--- BIR
--- Questions of law or fact OR
--- both OR
--- the taxes are
illegally or erroneously collected
ILLEGALLY
COLLECTED
TAX
vs.
ERRONEOUSLY
COLLECTED TAX:
Illegally collected tax means it violates certain
provision of the law. It may not be authorized by a peculiar
Tax Law or statute.
Erroneously collected tax means there may be a
law passed but there was a mistake in the collection.
WHEN TO FILE: Within 2 years from the date of payment
> Payment must be proven in contemplation of Tax Law, there
is payment when the tax liability is fully paid. So, if it is
payable in installment, there can only be payment when the
final installment has been paid.

*** Motion for reconsideration must raise new grounds,

meaning grounds which have not been raised in that request
for reconsideration or reinvestigation. Otherwise, it is just a
pro-forma motion, it will not suspend the period within which
to appeal the BIR decision to the CTA which is 30 days from
receipt of the BIR decision.
ISSUES that may be raised on appeal with the CTA >>>
Questions of
L
a
w
o
r
f
a
Page 46 of 46