DIVIDENDS
SECTION 73 (A) TO (C), TAX CODE
CIR VS. CA (JANUARY 20, 1999)
After the death of Don Andres Soriano, ANSCOR
(company he founded), in several occasions:
1. Exchanged some common shares from
Don Andres estate with preferred shares
2. Redeemed common shares from Don
Andres estate
In 1973, BIR issued a ruling that ANSCOR should be
assessed for deficiency withholding taxes based on
these transactions. CTA reversed the BIR ruling after
finding sufficient evidence to overcome the prima
facie correctness of the questioned assessments.
BIRS ARGUMENT: The exchange transaction is
tantamount to cancellation under Section 83(b)
making the proceeds thereof taxable. Said Section
applies to stock dividends which is the bulk of stocks
that ANSCOR redeemed and that under the net
effect test, the estate of Don Andres gained from the
redemption. Accordingly, it was the duty of ANSCOR
to withhold the tax-at-source arising from the two
transactions, pursuant to Section 53 and 54 of the
1939 Revenue Act.
ANSCORS ARGUMENT: It has no duty to withhold
any tax because the same were done for legitimate
business purposes which are (a) to reduce its
foreign exchange remittances in the event the
company would declare cash dividends, and to
(b)subsequently filipinized ownership of ANSCOR,
as allegedly envisioned by Don Andres/
It also claimed invoked tax amnesty claimed under
a PD.
ANSCORS REDEMPTION OF STOCK DIVIDENDS IS
CONSIDERED AS ESSENTIALLY EQUIVALENT TO A
DISTRIBUTION OF TAXABLE DIVIDENDS: ANSCOR
redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares).
But where did the shares redeemed come from?
If its source is the original capital
subscriptions upon establishment of the
corporation or from initial capital investment in
an existing enterprise, its redemption to the
concurrent value of acquisition may not invite
the application of Sec. 83(b) under the 1939 Tax
Code, as it is not income but a mere return of
capital.
if the redeemed shares are from stock dividend
declarations other than as initial capital
investment, the proceeds of the redemption is
additional wealth, for it is not merely a return of
capital but a gain thereon.
o It is not the stock dividends but the
proceeds of its redemption that may be
deemed as taxable dividends.
o Here, at the time of the last redemption, the
original common shares owned by the
estate were only 25,247.5. This means that
from the total of 108,000 shares redeemed
from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come
from stock dividends.
PROFITS DERIVED FROM THE CAPITAL INVESTED
CANNOT ESCAPE INCOME TAX: 3 elements in the
imposition of income tax are: (1) there must be gain
or profit, (2) that the gain or profit is realized or
received, actually or constructively, and (3) it is not
exempted by law or treaty from income tax. Any
business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income
tax is assessed on income received from any
property, activity or service that produces the
income because the Tax Code stands as an
indifferent neutral party on the matter of where
income comes from
As stated above, the test of taxability under the
exempting clause of Section 83(b) is, whether
income was realized through the redemption of
stock dividends. The redemption converts into
money the stock dividends which become a realized
profit or gain and consequently, the stockholders
separate property. Profits derived from the capital
invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock
dividends can be reached by income taxation
regardless of the existence of any business purpose
for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the
redemption is supported by legitimate business
reasons would defeat the very purpose of imposing
tax on income.

WISE & CO., INC. VS. MEER (JUNE 30, 1947)
The plantiffs, all non resident aliens were
stockholders of Manila Wine Merchants, Ltd.
(Hongkong Company), a foreign corporation duly
authorized to do business in the Philippines.
Pursuant to the recommendation of its Board of
Directors, the stock holders adopted a resolution that
would enable the board to sell its business and
assets to Manila Wine Merchants, Inc. (Manila
Company), a Philippine corporation for the sum of
P400,000.The Board later on passed several
resolutions to declare dividends, wherein the
Hongkong Company made a distribution from its
earnings for the year 1937 to its stockholders. At a
special general meeting of the shareholders of the
Hongkong Company, the stock holders directed that
the company be voluntarily liquidated and its capital
distributed among the stockholders.
The appointed liquidator gave deficiency
assessments for the payment of income tax of the
plaintiffs based on the dividends they received.
Sections 250-254, and 256, RR 2
BIR RULING 322-87 (OCTOBER 19, 1987)
A company is in the process of liquidation and
individual stockholders will receive their liquidating
dividends in excess of their investment.
TAX AMNESTY IS PERSONAL TO TAX PAYER,
WITHOLDING AGENT NOT ENTITLED THERETO.
THE DIVIDENDS RECEIVED BY THE PLAINTIFFS
ARE LIQUIDATING DIVIDENDS AND NOT ORDINARY
DIVIDENDS; THUS TAXABLE.
The distributions were not in the ordinary course of
business and with intent to maintain the corporation
as a going concern but rather, they were after the
liquidation of the business had been decided upon,
which makes them payments for the surrender and
relinquishment of the stockholders' interest in the
corporation, or so-called liquidating dividends.
Where a corporation, etc. distributes
all its assets in complete liquidation
or dissolution, the gain realized or
loss sustained by the stockholder is a
taxable income or a deductible loss
as the case may be, in effect treated
such distributions as payments in
exchange for the stock or share.
THE PLAINTIFFS ARE SUBJECT TO BOTH INCOME
TAX AND ADDITIONAL TAXES: When a solvent
corporation dissolves and liquidates, it
distributes to its stockholders not only any
earnings it may have on hand, but it also
pays to them their invested capital, namely,
the amount which they had paid in for their
stocks, thus wiping out their interest inthe
company.
THE PROFIT REALIZED CONSTITUTE
INCOME FROM THE PHILIPPINES AND
THUS SUBJECT TO PHILIPPINE TAXES:
Hongkong Company was incorporated
for the purpose of carrying on
business in the Philippine Islands the
business. Hence, its earnings, profits,
and assets, including those from
whose proceeds the distributions in
question were made, the major part
of which consisted in the purchase
price of the business, had been
earned and acquired in the
Philippines.
1. Since the individual stockholders of your company
will receive, upon complete liquidation,all its assets
as liquidating dividends, they will thereby realize
capital gain or loss. The gain,if any, derived by the
individual stockholders consisting of the difference
between thefair market value of the liquidating
dividends and the adjusted cost to thestockholders of
their respective shareholdings in the said corporation
(Sec. 83(a),Sec. 256, Income Tax Regulations) shall
be subject to income tax at the ratesprescribed under
Section 21(a) of the Tax Code.
2. Moreover, pursuant to Section 34(b) of the Tax
Code, only 50% of the aforementionedcapital gain is
reportable for income tax purposes if the shares
were held by the individualstockholders for more

BIR RULING 039-02 (NOVEMBER 11, 2002)
TA Bank is planning to decrease its authorized
capital stock. TMBC holds some TA shares. To
accomplish the decrease in capital stock, it entered
into a deal with TMBC wherein TMBC shall
surrender the TA shares it currently holds and give it
back to TA. In exchange, TA shall transfer to TMBC
both real and personal, tangible and intangible
properties.
BIR RULING 479-11 (DECEMBER 5, 2011)
APC is a corporation duly registered with the
Securities and Exchange Corporation on15
December 195614 December 2006 - the corporate
term of APC expired and accordingly, APC ceasedto
exist as a corporate entity and was dissolved ipso
facto.1 December 2009 - a majority of the members
of the Board of Directors of APC in their capacity as
Trustees of the corporate assets, approved and
adopted a resolution ordering the distribution of the
remaining assets of APC to its stockholders by way
of liquidating dividend.
APCs argument: APC is not liable for income tax
either on its transfer of the properties to MI
asliquidating dividend or in its receipt of the
surrendered shares of MI, citing BIR Ruling No.039-
02 dated 11 November 2002.
FROM WHATEVER SOURCE
SECTION 34 (C)(1), TAX CODE
JAMES VS. UNITED STATES, 366 US 213 (MAY 15,
1961)
James, was an official in a labor union who had
embezzled more than $738,000 in union funds, and
did not report these amounts on his tax return. He
was tried for tax evasion, and claimed in his defense
that embezzled funds did not constitute taxable
income. His argument was that just as the receipt of
loan proceeds is not taxable to the borrower
(because of the borrower's corresponding obligation
to repay the loan), the person who embezzles
money should not be treated as having received
income, since that person is legally obligated to
return those funds to their rightful owner.
than twelve months and 100% of the capital gains if
the shares wereheld for less than twelve months
The SC ruled that TA is not liable for income tax on
receipt of surrendered shares or in the transfer of the
distributed assets. No documentary stamp tax
("DST") is due on the surrender and cancellation of
the TA shares. The transfer by TA to TMBC of real
property is not subject to DST on sale or transfer of
real property. The transfer by TA of its Loan Portfolio
to TMBC is not subject to DST. Transfer or
Assignment of any mortgage which stands as
security for TA's Loan Portfolio shall be subject to
DST.
Liquidating gain or loss is in the nature of capital gain
or loss, as the case may be, and therefore treated in
the manner stated in Section 39 of the Tax Code of
1997. Liquidating gain, while characterized as gain
from sale or exchange of shares, is subject to the
ordinary income tax rates provided under Sections
24(A)(1)(c), 25(A)(1), 27(A) and (E), 28(A)(1) and (2)
and (B)(1) of the Tax Code of 1997, depending on
the status of the shareholder, and not to the 5%/10%
final tax.
BIR RULING 039-02 REVERSED: Please be informed
that it is the position of this Office that your request
cannot be granted for lack of legal basis under the
National Internal Revenue Code of1997, as
amended; Consequently, the previously issued BIR
Ruling No. 039-02 cited in your letter and the BIR
Rulings cited in the said ruling are reversed and set
aside.
INCOME DERIVED FROM BOTH LAWFUL AND UNLAWFUL
ACTIVITIES ARE TAXABLE: the receipt of embezzled
funds was includable in the gross income of the
wrongdoer and was taxable to the wrongdoer, even
though the wrongdoer had an obligation to return the
funds to the rightful owner.
The absence of the "lawful" modifier indicated that
the framers of the Sixteenth Amendment had
intended no safe harbor for illegal income. The
Court expressly overruled Commissioner v. Wilcox
and ruled that James was therefore liable for the
federal income tax due on his embezzled funds. The
Court also ruled, however, that Eugene James could
not be held liable for the willful tax evasion because

COMMISSIONER OF INTERNAL REVENUE VS. SPOUSES
MANLY (NOVEMBER 24, 2014)
Spouses Manly are into the rental business and the
BIR observed that they have been underdeclaring
their income for the past 6 years. Petitioner contends
that in filing a criminal case for tax evasion, a prior
computation or assessment of tax is not required
because the crime is complete when the violator
knowingly and willfully filed a fraudulent return with
intent to evade a part or all of the tax. Manly
spouses income and expenditure shows that their
cash expenditure is grossly disproportionate to their
reported or declared income, leading CIR to believe
that they under declared their income. In computing
the unreported or undeclared income, which was
likely sourced from respondent Antonios rental
business, CIR used the expenditure method of
reconstructing income, a method used to determine
a taxpayers income tax liability when his records are
inadequate or inaccurate. And since respondent
spouses failed to explain the alleged unreported or
undeclared income, CIR asserts that criminal
charges for tax evasion should be filed against them.
RMC 16-2013 (FEBRUARY 8, 2013)
Section 50, RR 2
RMC 88-2012 (DECEMBER 27, 2012)
it is not possible to willfully violate laws that were not
established at the time of the violation.
INFERRED SOURCE OF THEIR UNREPORTED OR
UNDECLARED INCOME IS VALID BASED ON SPS.
MANLEYS UNJUSTIFIED REFUSAL TO EXPLAIN: In
Ungab v. Judge Cusi, Jr., we ruled that tax evasion
is deemed complete when the violator has
knowingly and willfully filed a fraudulent return with
intent to evade and defeat a part or all of the tax.
Corollarily, an assessment of the tax deficiency is
not required in a criminal prosecution for tax
evasion. However, in CIR vs CA (1992), we clarified
that although a deficiency assessment is not
necessary, the fact that a tax is due must first be
proved before one can be prosecuted for tax
evasion.
In the case of income, for it to be taxable, there must
be a gain realized or received by the taxpayer, which
is not excluded by law or treaty from taxation. The
government is allowed to resort to all evidence or
resources available to determine a taxpayers
income and to use methods to reconstruct his
income. A method commonly used by the
government is the expenditure method, which is a
method of reconstructing a taxpayers income by
deducting the aggregate yearly expenditures from
the declared yearly income. The theory of this
method is that when the amount of the money that a
taxpayer spends during a given year exceeds his
reported or declared income and the source of such
money is unexplained, it may be inferred that such
expenditures represent unreported or undeclared
income.
CIR used this method to determine Manly spouses
tax liability.
TAXABILITY OF DEPOSITS AND CASH ADVANCES:
Whenever a taxpayer receives a deposit or advance
from a client, the taxpayer is required to immediately
issue an Official Receipt (OR) for said payment. The
amount received shall be recorded as income and
shall be subject to Value-Added Tax or Percentage
Tax, as the case may be. The client who made the
payment may deduct the same as an expense,
provided an OR was issued in the clients name for
the said payment.
Any income or gain obtained by the employees from
the exercise of stock options is additional
compensation subject to income tax and,
consequently, to withholding tax on
compensation.
It, however, clarified that the income or gain obtained
by employees in managerial or supervisory positions
which qualifies as a fringe benefitis subject to
the fringe-benefit tax. The tax on compensation or
fringe-benefit tax applies, whether the shares of
stock involved are those of a domestic corporation or
a foreign one.
 Inventories
Section 41, Tax Code
BIR RULING DA 128-08 (AUGUST 11, 2008)
Shell requests for an authority to change
theinventory method used by Shell Companies from
WAVE (Weighted Average Method) to FIFO (First-in-
First-Out). The change in inventory valuation will be
used for statutory and tax reporting purposes for the
taxable year 2008 for SGTAP and SGEI, and taxable
year 2009 for PSPC.
Exclusions
Section 32 (B), Tax Code
Republic Act 10653, July 28, 2014
Retirement benefits, etc.
COMMISSIONER OF INTERNAL REVENUE VS. COURT OF
APPEALS (MARCH 23, 1992)
GCL Retirement Plan is an employees' trust
maintained by the employer, GCL Inc., to provide
retirement, pension, disability and death benefits to
its employees. The Plan as submitted was approved
and qualified as exempt from income tax by the
CIR.
In 1984, Respondent GCL made investments and
earned therefrom interest income from which was
witheld the fifteen per centum (15%) final witholding
tax imposed by PD 1959.
COMMISSIONER OF INTERNAL REVENUE VS. COURT OF
APPEALS (OCTOBER 17, 1991)
Efren Castaneda worked at the Philippine Embassy
in London. Upon retirement, he received, among
other benefits, terminal leave pay from which CIR
withheld P12,557.13 allegedly representing income
tax thereon.
Castaneda filed a formal written claim for a refund of
the P12,557.13, contending that the cash equivalent
of his terminal leave is exempt from income tax.
Considering that the purpose of Shell Companies'
change in its inventory method will best conform to
its accounting practice as said valuation will clearly
reflect the income of the said companies, this Office
hereby grants authority to Shell Companies the use
of FIFO method in its inventory costing.
INCOME INTEREST FROM PENSION PLANS ARE EXEMPT:
Final withholding tax is collected from income in
respect of which employees' trusts are declared
exempt (Sec. 56 [b], now 53 [b], Tax Code). The
application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source.
If an employees' trust like the GCL enjoys a tax-
exempt status from income, we see no logic in
withholding a certain percentage of that income
which it is not supposed to pay in the first place. RA
1893 expressly includes income, the law is clear and
unambiguous:
all contributions collected and payments of
sickness, unemployment, retirement,
disability and death benefits made
thereunder together with the income of the
pension trust are exempt from any tax,
assessment, fee, or charge.
PURPOSE OF THE EXEMPTION: The tax advantage in
RA1983 and Section 56(b), was conceived in order
to encourage the formation and establishment of
such private Plans for the benefit of laborers and
employees outside of the Social Security Act.
Minor issue addressed by the SC:
*PD 1959, the general law, cannot trump the
exemption under RA 1893 (specific law)
TERMINAL LEAVE PAY RECEIVED BY A GOVERNMENT
OFFICIAL OR EMPLOYEE ON THE OCCASION OF HIS
COMPULSORY RETIREMENT FROM THE GOVERNMENT
SERVICE IS NOT SUBJECT TO WITHHOLDING (INCOME)
TAX: In fine, not being part of the gross salary or
income of a government official or employee but
a retirement benefit, terminal leave pay is not subject
to income tax.
In the exercise of sound personnel policy,
the Government encourages unused
leaves to be accumulated. The Government

RE: REQUEST OF ATTY. BERNARDO ZIALCITA
(OCTOBER 18, 1990)
Atty. Zialcita rendered government service from
March 13, 1962 up to February 15, 1990. The next
day, or on February 16, 1990, he reached the
compulsory retirement age of 65 years.
NOTE: The previous ruling in favor of Zialcita
already binds the CIR. As for other employees
similarly situated with Zialcita, the SC ruled that they
have to file a separate claim.
INTERCONTINENTAL BROADCASTING CORPORATION VS.
AMARILLA (OCTOBER 27, 2006)
IBC implemented an optional retirement scheme
where the company agreed to shoulder the taxes to
entice them to voluntarily retire early. Respondents
agreed and relied on the commitment of petitioner.
In bad faith, IBC withheld the salary differentials due
its retired employees to offset the tax due on their
retirement benefits. The retirees thus lodged a
complaint with the NLRC questioning said
withholding. They averred that their retirement
benefits were exempt from income tax; and IBC had
no authority to withhold their salary differentials.
RMC 27-2011 (JULY 1, 2011)
recognizes that for most public servants,
retirement pay is always less than
generous if not meager and scrimpy. A
modest nest egg which the senior citizen
may look forward to is thus avoided.
Terminal leave payments are given not only
at the same time but also for the same
policy considerations governing retirement
benefits.
COMMUTATION OF SALARY V. COMMUTATION OF LEAVE
OF CREDITS: There can be no commutation of
salary when a government retiree applies for
terminal leave because he is not receiving it as
salary. What he applies for is a commutation of
leave credits. It is an accumulation of credits
intended for old age or separation from service
COMPULSORY RETIREMENT IS A CAUSE BEYOND THE
CONTROL OF THE EMPLOYEE AS UNDER SEC. 28 (B) 7
(B): Upon his compulsory retirement, he is entitled to
the commutation of his accumulated leave credits to
its money value. Within the purview of the above-
mentioned provisions of the NLRC, compulsory
retirement may be considered as a cause beyond
the control of the said official or employee.
Consequently, the amount that he received by way of
commutation of his accumulated leave credits as a
result of his compulsory retirement, or his terminal
leave pay, fags within the enumerated exclusions
from gross income and is therefore not subject to
tax.
RETIREMENT BENEFITS ARE EXEMPT FROM INCOME TAX,
PROVIDED THAT CERTAIN REQUIREMENTS ARE MET: the
taxpayer is burdened to prove the concurrence of the
following elements:
(1) a reasonable private benefit plan is maintained by
the employer;
(2) the retiring official or employee has been in the
service of the same employer for at least ten (10)
years;
(3) the retiring official or employee is not less than
fifty (50) years of age at the time of his retirement;
and
(4) the benefit had been availed of only once.
The retirees were qualified to retire optionally from
their employment with IBC. However, there is no
evidence on record that the 1993 CBA had been
approved or was ever presented to the BIR;
hence, the retirement benefits of respondents are
taxable.
IBC IS ESTOPPED FROM RENEGING ON ITS AGREEMENT
WITH RESPONDENT TO PAY FOR THE TAXES ON SAID
RETIREMENT BENEFITS: An agreement to pay the
taxes on the retirement benefits as an incentive to
prospective retirees and for them to avail of the
optional retirement scheme is not contrary to law or
to public morals. Petitioner had agreed to shoulder
such taxes to entice them to voluntarily retire early,
on its belief that this would prove advantageous to it.
Respondents agreed and relied on the commitment
of petitioner.
subjects to withholding tax on
compensation the voluntary contributions
 to SSS, GSIS, PHIC and HDMF covers all
voluntary contributions made beginning
July 1, 2011 only.

Income derived by foreign government

COMMISSIONER OF INTERNAL REVENUE VS. Mitsubishi is not exempt from taxation, as

MITSUBISHI METAL CORPORATION (JANUARY 22, Mitsubishi is not an agent of Eximbank. By
1990) principle of Relativity of Contract, the interest
Atlas has Loan and Sales contract with paid by Atlas was based on the transaction
Mitsubishi Metal. Mitsubishi agreed to provide only between Atlas and Mitsubishi. Eximbank
$20 million loan to Atlas. In order to give the has nothing to do with such transaction. As
$20 million to Atlas, Mitsubishi also had a loan such, Mitsubishi is not exempt from taxation in
agreement with Eximbank (Japanese favor of foreign government banking
Government Banking Institution) also for the institutions.
amount of $20 million. An interest of
P13,143,966.79 was paid by Atlas to
Mitsubishi. However, it was assessed by the
CIR with 15% income tax, in the amount of
P1,971,595.01, which was withheld pursuant to
NIRC. Mitsubishi claimed tax credits from the
CIR, claiming that it is an agent of Eximbank,
and within the exemption as granted in NIRC in
favor of foreign government Banking
Institutions.

De minimis/ PERA
Republic Act 9505

RR 8-00 (August 21, 2000)

RR 5-2011 (March 16, 2011)
RR 17-2011 (October 27, 2011)
RR 8-2012 (May 11, 2012)
RR 1-2015 (January 5, 2015)

3. General Principles

Section 23, Tax Code

4. Source of Income Rules

Section 42, Tax Code

Gross income from sources within Phils.

COMMISSIONER OF INTERNAL REVENUE VS. MARUBENI
CORPORATION (DECEMBER 18, 2001)
Marubeni, a non-resident foreign corporation,
entered a contractors contract with the NDC and
Philphos. Marubeni was to construct a complex for
the fertilizer industry. Marubeni claims that the
contract consisted of 3 parts. Parts 1 & 2 (offshore
portion) which involve the designing and
engineering, were done in Japan, hence done
outside the taxing jurisdiction of the Philippines.
While Part 3 (onshore portion), which involves the
erection and installation, was done in our country.
The services of designing, engineering and
fabricating the equipment used in the construction
were done in Japan, none of which was done in the
Philippines. Therefore, whatever income Marubeni
may derive from such services, is not taxable in the
Philippines, but in Japan, where the services were
rendered. The equipments were merely shipped to
the Philippines and thenafter assembled within.
The services which were rendered outside our taxing
jurisdiction is not taxable. Only those actually done
here are taxable.
The BIR assessed deficiency in contractors tax. It
contends that the agreement is actually one
contract and income derived therefrom is wholly
taxable in the Philippines. The SC held that the BIR
is incorrect.
COMMISSIONER OF INTERNAL REVENUE VS. BOAC
(APRIL 30, 1987)
British Overseas Airways Corporation (BOAC) is a
100% British Government-owned corporation. It is
engaged in the international airline business. It did
not carry passengers or cargo to or from the
Philippines. However, BOAC maintains a general
sales agent in the Philippines which sold BOAC
tickets within the country for offline flights. BOAC
did not pay income tax for such ticket sales. And
hence, CIR assessed deficiency taxes against
BOAC which BOAC paid under protest. Eventually,
the CTA ruled that the sale of BOAC tickets by its
general sales agent does not constitute income
from Philippine sources. It held that the income from
transportation is income from services and the place
where the service is rendered determines the
source. And since the services of transportation
were not done in the Philippines, then BOAC had no
income derived from Philippine sources.
Commissioner v. CTA and Smith Kline & French
Overseas (January 17, 1984)
Smith Kline and French Overseas Company, a
multinational firm domiciled in the US, is licensed to
do business in the Philippines. It is engaged in the
importation, manufacture and sale of
pharmaceuticals, drugs and chemicals. In its 1971
ITR, Smith Kline declared a net taxable income and
among the deductions claimed from gross
income was P501,040 ($77,060) as its share of
the head office overhead expenses. However,
subsequent certified audit reports showed that the
unallocated overhead expenses of the main office
for the year ended was actually Php1,427,484
($219,547). This was computed on the basis of the
percentage of gross income in the Philippines to
gross income of the corporation as a whole. The
new adjustment shows that there was
underdeduction of home office overhead expenses
hence, Smith Kline made a formal claim for the
refund of alleged overpayment of taxes. Tax court
approved this. The Commissioner appealed. Smith
Kline is correct.
IN SHORT, Smith & Kline & French Overseas Co. is
What is a contractors tax? A contractors tax is a tax
imposed upon the privilege of engaging in
business. It is generally in the nature of an excise tax
on the exercise of a privilege of selling services or
labor rather than a sale on products; and is directly
collectible from the person exercising the privilege.
Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or business
are done or performed within the jurisdiction of
said authority.Like property taxes, it cannot be
imposed on an occupation or privilege outside the
taxing district
(Correct Ruling) Upon appeal, the SC reversed the
CTAs ruling and stated that the sale of the tickets
within the Philippines is the activity that produces the
income.
For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In ABCs
case the sale of the tickets in the Philippines is the
activity that produces the income. The tickets
exchanged hands here in the country and the
payments for fares were also made with Philippine
currency. The site of the source of payments is the
Philippines. The absence of flight operations to and
from the Philippines is not determinative of the source
of income/site of income taxation for the test of
taxability is the source.
Justice Feliciano dissents and votes to affirm the
decision of the CTA. Place of performance test a
For purposes of income taxation, the source of
income relates not to the physical sourcing of a flow
of money or the physical situs of payment but rather
to the property, activity or service which produced
the income
It is manifest that where an expense is clearly related
to the production of Philippine-derived income or to
Philippine operations (e.g. salaries of Philippine
personnel, rental of office building in the Philippines),
that expense can be deducted from the gross income
acquired in the Philippines without resorting to
apportionment.
However, the overhead expenses incurred by the
parent company in connection with finance,
administration, and research and development, all of
which directly benefit its branches all over the world,
including the Philippines, fall under a different
category however. These are items which cannot be
definitely allocated or identified with the operations of
the Philippine branch.
RULE: Deductions Allowed on Gross income from
sources in the Phil include:
Apportioned or allocated expenses, losses,
and other deductions
AND a ratable part of any expenses, losses,
or other deductions which cannot definitely
beallocated to some item or class of GI
The ratable part is based upon the ratio of
gross income from sources within the
claiming a tax refund in the amount of 324, 255
because of audited statements prepared by the
audit firm Peat, Marwick, Mitchell and Company. It
is contended by the CIR that the Private Res has no
right to deduct the same because it is not an
expense incurred from operations in the Philippines.
The CTA ruled in favor of Private Res. The SC
affirmed citing Sec. 160 of the NIRC which actually
says that you can deduct that stuff. (So what was
the issue in the first place diba?)
PHILIPPINE GUARANTY CO., INC. VS. COMMISSIONER OF
INTERNAL REVENUE (APRIL 30, 1965)
Phil. Guaranty entered into reinsurance contracts
with several foreign companies. They were
subjected to withholding taxes so they protested the
assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing
business in the Philippines are not subject to
withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals. Petitioner
maintains that the reinsurance premiums in
question did not constitute income from sources
within the Philippines because the foreign reinsurers
did not engage in business in the Philippines, nor
did they have office here.
HOWDEN & CO., LTD. VS. COLLECTOR OF INTERNAL
REVENUE (APRIL 14, 1965)
Commonwealth Insurance Co., a domestic
corporation, entered into reinsurance contracts with
32 British insurance companies not engaged in
trade or business in the Philippines, collectively
represented by Alexcander Howden & Co, Ltd.
Commonwealth agreed to cede to these insurance
companies a portion of the premiums on insurances
it has underwritten in the Philippines. The
reinsurance contracts were prepared and signed by
the foreign reinsurers in England and sent to Manila
where Commonwealth Insurance Co. signed them.
Thenafter, Commonwealth remitted the reinsurance
premiums to Howden & Co. Subsequently,
Commonwealth then filed an income tax return on
behalf of Howden. However, Howden filed a claim
for refund arguing that a)
The contracts of reinsurance, out of which the
reinsurance premiums were earned, were prepared
and signed abroad b) the reinsurers, not being
engaged in business in the Philippines, received the
reinsurance premiums as income from their
business conducted in England and, as such,
taxable in England.
Philippines to the total gross income.
The remainder, if any, shall be included in
full as net income from sources within the
Philippines.
The reinsurance contracts, show that the transactions or
activities that constituted the undertaking to reinsure
Philippine Guaranty Co., Inc. against losses arising from the
original insurances in the Philippines were performed in the
Philippines. Taxes on premiums imposed by Section 259 of
the Tax Code for the privilege of doing insurance business in
the Philippines were payable by the foreign reinsurers when
the same were not recoverable from the original assured.
Section 24 of the Tax Code subjects foreign corporations to
tax on their income from sources within the Philippines. The
word "sources" has been interpreted as the activity, property
or service giving rise to the income.
Reinsurance premiums
-- Where obligation to indemnify risks or insurable
events occur in PH
o PH source income-> even if contracts were made
abroad (see: Howden vs. CIR)
First of all, the reinsurance contracts were perfected
in the Philippines because Commonwealth Insurance
Co. signed them last in Manila.
- As to the source of income, identify which activity
produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance
contracts, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance
Co. against liability. Said undertaking is the activity
that produced the reinsurance premiums, and the
same took place in the Philippines. And in the first
place, the reinsured, the liabilities insured and the
risks originally underwritten by Commonwealth
Insurance Co., upon which the reinsurance
premiums and indemnity were based, were all
situated in the Philippines.
- Appellants should not confuse activity that creates
income with business in the course of which an
income is realized. An activity may consist of a single
act; while business implies continuity of transactions.
An income may be earned by a corporation in the
Philippines although such corporation conducts all its
businesses abroad. The Tax Code does not require a
foreign corporation to be engaged in business in the
Phil. in order for its income from sources within the
Philippines to be taxable.
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC.
VS. COURT OF TAX APPEALS CA-GR SP. NO. 31283
(APRIL 25, 1995)
PHILAMLIFE Inc, a domestic corporation, entered
into a management services agreement with
American International Reinsurance Co., Inc.
(AIRCO), a non-resident foreign corporation. AIRCO
was to perform the following services for PHILAM
Life: investment, underwriting and marketing,
education and training, accounting and auditing,
etc. Subsequently, AIRCO merged with AIGI, with
the AIGI as the surviving corporation. On the basis
of a Tax Credito Memo, PHILAMLIFE filed a claim
for the refund of erroneous tax payment with the
CIR. However, CIR cancelled the Tax Credit Memo,
CTA upheld, hence this petition. The SC held that
clearly PHILAMLIF is erroneous; its income on the
Management Services Agreement is taxable
income. A reading of the various management
services enumerated in the agreement between
PHILAMLIFE and AIGI will show that AIGI can
easily fall under any of the expanded meanings of
royalties.
COMMISSIONER OF INTERNAL REVENUE VS. BAIER-
NICKEL (AUGUST 29, 2006)
Juliane Baier-Nickel, a non-resident German citizen,
is the President of JUBANITEX, Inc., a domestic
corporation. Incidentally, she was also appointed by
the corporation as a commission agent. It was
agreed that she will receive sales commission on all
sales actually concluded and collected through her
efforts. Jubanitex withheld the tax from her sales
commission and remitted the same to BIR. Baier-
Nickel now claims for refund of the amount alleged
to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. The issue here is whether
respondents sales commission income is taxable in
the Philippines.
Note: Since Baier-Nickel is a non-resident alien, the
sales commission must be considered to be earned
within the Philippines to be subject to tax.
CIR: The commission is taxable in the Philippines
because the source thereof is JUBANITEX, a
domestic corporation located in the City of Makati.
Baier-Nickel: The services were rendered in
Germany, hence an income earned without/outside
the Philippines.
A. SORIANO Y CIA VS. COLLECTOR OF INTERNAL
REVENUE (AUGUST 31, 1955)
Petitioner was engaged in the business of selling
surplus goods acquired from the FLC. Part of the
surplus goods consisted of tractors which were in
the various military bases or depots in the
Philippines. UACs representative, Gibson,
contracted to buy tractors from the petitioner, to be
delivered f.a.s. (freight alongside ship) Manila. The
In our jurisdiction, the test of taxability is the 'source',
and the source of an income is "that activity . . .
which produced the income". It is not the presence of
any property from which one derives rentals and
royalties that is controlling, but rather as expressed
under the expanded meaning of "royalties", it
includes" royalties for the supply of scientific,
technical, industrial, or commercial knowledge or
information; and the
technical advice, assistance or services rendered in
connection with the technical management and
administration of any scientific, industrial or
commercial undertaking, venture, project or
scheme". The services rendered by AIGI to
PHILAMLIFE clearly fall under the expanded
meaning.
SC held that "source of income" relates to the property,
activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it
is the place where the labor or service was performed that
determines the source of the income. There is therefore no
merit in CIRs interpretation which equates source of income
in labor or personal service with the residence of the payor or
the place of payment of the income. However, Baier-Nickel
failed to prove with substantial evidence that the sale
transactions were actually consummated in Germany or that
her appointment as commission agent is exclusively for
Germany and other European markets. She failed to
discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax
refund should be denied.
The SC held that petitioner is liable for the payment of the
taxes. One who acquires title to surplus equipment found in
U. S. army bases or installations within the Philippines by
purchase, and then brings them out of those bases or depots,
is an importer, and sales made by him by such surplus goods
to the general public are taxable under sections 185 and 186
of the Tax Code.
tractors were delivered by petitioner to the pier in
Manila by means of barges as soon as notice was
received from the representative of its foreign buyer
that a carrying vessel was ready. The PRC (affiliate
of foreign buyer) shipped the 57 tractors acquired
from petitioner from the port of Manila UAC at Dares
Salaem, East Africa. The issue in this case is
whether or not petitioner is liable for the payment of
percentage or sales tax on its gross sales of the 57
tractors in question under the provisions of Sec. 186
of the NIRC.
QUILL CORP. VS. NORTH DAKOTA, 504 US 298 (MAY Quill is not liable for use tax. The Court ruled that a business
26, 1992) must have a physical presence in a state for that state to
require it to collect sales taxes. The due process clause did
Quill is a corporation engaged in selling office not bar the enforcement of the tax against Quill BUT a
equipment and supplies through mail-order. It did vendor, whose only connection with customers in a taxing
not have offices or warehouses in North Dakota. state is by common carrier or the United States mail, is free
North Dakota imposed a use tax upon property from state-imposed duties to collect sales and use taxes,
purchased within the state, requiring every retailer because such a vendor lacks the substantial nexus with the
to collect tax from the consumer and remit it to the taxing state required by the commerce clause. The Supreme
State. Subsequently, the state amended the Court, however, conceded that Congress is free to disagree
statutory definition of retailer to include those who with the ruling and is in a better position to decide whether,
regularly solicit a consumer market. Thus, Quill, when, and to what extent the states may burden interstate
being a mail-order company, was subjected to tax mail-order concerns with a duty to collect use taxes. The
even if it did not maintain a property or personnel in Congress may legislate for this purpose anytime.
North Dakota. Quill contends that this would violate
the Federal Constitutions Commerce Clause and
the due process clause provided by the Fourteenth
Amendment
VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UNION The contention of VIH was held to be correct. The Indian
OF INDIA & ANR. (SUPREME COURT OF INDIA, CIVIL Supreme Court ruled that VIH had no liability to withhold
APPEAL NO. 733 OF 2012; JANUARY 20, 2012) tax as the transaction was between two nonresidents with no
taxable presence in India. Under Section 9(1) of the Income
Vodafone International Holdings (VIH), a Tax Act of India, all income accruing or arising, whether
corporation in the Netherlands, acquired a directly or indirectly through transfer of capital assets
controlling interest of CGP holdings, a company in situated in India shall be deemed to accrue or arise in India.
the Cayman Islands. By virtue of this controlling The Supreme Court stated that the section clearly applied to
interest, VIH acquired a 52% stake in Hutchinson a transfer of capital asset situated in India and could not be
Essa Limited (HEL) in India from Hutchinson expanded to cover indirect transfers of capital assets or
Telecom International Limited (HTIL). Simply stated, property situated in India. The words directly or indirectly
VIH acquired control over CGP and its subsidiaries, go with the income and not with the transfer of a capital
including HEL. The Indian tax authorities contended asset.
that the transfer of shares was subject to income
tax. VIH argues that the transfer of shares took
place outside the Indian taxing jurisdiction, and,
hence, is not taxable.

RAMO 1-95 (March 21, 1995)

RAMO 4-86 (April 5, 1986)

5. Deductions

Sections 34-36, Tax Code

Business expenses
Republic Act 10028 (Sections 3 & 14 only)
Republic Act 8502
 Republic Act 8525 (Sections 1 to 5 only)
Republic Act 9999
Republic Act 7277 (Section 8 only)
COMMISSIONER OF INTERNAL REVENUE VS. ISABELA
CULTURAL CORPORATION [ICC] (FEBRUARY 12,
2007)
ICC failed to claim the deductible business
expenses for professional services that accrued in
1984 and 1985. Instead, it sought to claim them as
deductions during the taxable year of 1986.
CIRs argument: Since ICC uses the accrual method
of accounting, the professional fees expense that
accrued in 1984 and 1985 should have been
declared as deductions from income during the
said years, and the failure of ICC to do so bars it
from claiming said expenses as deduction for the
taxable year 1986.
ING BANK, N.V. VS. COMMISSIONER OF
INTERNAL REVENUE (JULY 22, 2015)
ING Bank accrued bonuses in the taxable
years 1996 and 1997 (year of accrual),
although no withholding taxes were withheld in
the year of accrual. The bonuses were actually
distributed in 1998 (year of distribution). ING
Bank was then assessed for deficiency
withholding taxes in the year of accrual. ING
Bank maintained that the liability of the
employer to withhold the tax does not arise
until such bonus is actually distributed, citing
Section 72 of the 1977 NIRC which states that
every employer making payment of wages
shall deduct and withhold upon such wages.
Since the supposed bonuses were not
distributed to the officers and employees in
1996 and 1997 but were distributed in 1998
when the amounts of bonuses were finally
determined, ING Bank asserts that its duty to
withhold tax during those years did not arise.
COMMISSIONER OF INTERNAL REVENUE VS. GENERAL
FOODS (PHILS.) INC. (APRIL 24, 2003)
General Foods (GF) filed its income tax return and
claimed as deduction the amount of P9.4M for the
media advertising for its product Tang. CIR
disallowed 50% or P4.7M of the deduction claimed
by GF and assessed GF for deficiency income
taxes. CTA affirmed CIRs decision and held that the
said expenses were not business expenses but
capital expenditures, hence, not deductible under
NIRC.
AGUINALDO INDUSTRIES CORPORATION VS. CIR
(FEBRUARY 25, 1982)
Aguinaldo Industries Corp (AIC) sold its land in
Muntinlupa. When AIC filed it income tax return, BIR
examiner found out that it deducted from its gross
1 "reasonable accuracy" implies something less than an exact or completely accurate amount.
ICC used the accrual method. A Revenue Audit
Memorandum Order provides that under the accrual
method of accounting, expenses not being claimed
as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as
deduction from income for the succeeding year.
Accrual Method is permitted when the all events test
is satisfied: (1) the obligation to pay is already fixed;
(2) the amount can be determined with reasonable
accuracy;1 and, (3) it is already knowable or the
taxpayer can reasonably be expected to have known
at the closing of its books for the taxable year.
TAXPAYER IS LIABLE FOR THE WITHHOLDING TAX
ON THE BONUSES SINCE IT CLAIMED THE SAME AS
EXPENSE IN THE YEAR THEY WERE ACCRUED.
ING Bank already recognized a definite liability
on its part considering that it had deducted as
business expense from its gross income the
accrued bonuses due to its employees. An item
that is reasonably ascertained as to amount
and acknowledged to be due has "accrued";
actual payment is not essential to constitute
"expense."
ING Bank accrued or recorded the bonuses as
deductible expense in its books. Therefore, its
obligation to withhold the related withholding
tax due from the deductions for accrued
bonuses arose at the time of accrual and not at
the time of actual payment.
CAPITAL EXPENDITURE V. BUSINESS EXPENSES: The
media advertising expense for TANG by respondent
corporation was a capital expenditure, paid in
order to create goodwill and reputation for GF
corporation and/or its products. Thus, the same was
not deductible.
See Requisites of Business Expenses: 1st
Requisite was not met (ordinary and necessary)
Protecting brand franchise is tantamount to
efforts to establish a reputation. This was akin
to the acquisition of capital assets and therefore
were not to be considered as business
expenses but as capital expenditures.
BONUSES GIVEN TO THE CORPORATE OFFICERS
SHOULD NOT BE AN ALLOWABLE DEDUCTION SINCE IT
HAS NOT BEEN SHOWN THAT PERSONAL SERVICES HAVE
ACTUALLY BEEN RENDERED BY THESE CORPORATE
OFFICERS: The sale was carried out through a broker
income the bonuses paid to corporate officers (i.e
President, VP, Board Members, etc). Deductions
were reported as part of the selling expenses in
connection with the Muntinlupa sale. CIR disallowed
deduction.
ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION VS. COMMISSIONER OF INTERNAL
REVENUE (JANUARY 27, 1981)
Atlas incurred (1) expenses for the services
rendered b a public relations firm labeled as
stockholders relation service fee and (2) litigation
expenses incurred by Atlas to protect its title over its
mining properties
ZAMORA VS. CIR (MAY 31, 1963)
Zamora, a hotel owner, claimed as deduction
promotion expenses incurred by his wife for the
promotion of said hotel. On appeal, the CTA only
allowed 50% of the promotional expenses as
deductions, because it was found in the Central
dollar allocation application of his wife that she went
abroad on a combined business and medical trip.
C.M. HOSKINS & CO., INC. VS. CIR (NOV. 28, 1969)
C.M. Hoskins paid supervision fees in the amount of
P100,000 annually to Hoskins, its founder and
controlling stockholder, for a three-year project with
Paradise Farms. The total amount received by
Hoskins is double the net income of C.M. Hoskins.
CALANOC VS. CIR (NOVEMBER 29, 1961)
Calanoc incurred expenses for police protection and
for gifts and parties in connection with the boxing
and wrestling exhibition that Calanoc financed and
promoted. The proceeds would be given to the
orphans and destitute children of the Child Welfare
Workers Club of the Social Welfare Commission.
KUENZLE & STREIFF, INC. (K&SI) VS. COLLECTOR OF
INTERNAL REVENUE (OCTOBER 20, 1959)
K&SI was assessed by the CIR to be liable for
who was paid commissionactual services were not
rendered by the corporate officers.
Whenever a controversy arises on the deductibility
for the purpose of income tax, of certain items for
alleged compensation of officers of the tax taxpayer,
two questions become materials:
1. Have personal services been actually rendered
by said officers?
2. In the affirmative case, what is the reasonable
allowance therefor?
COMPENSATION PAID TO THE PR FIRM IS NOT
DEDUCTIBLEAS BUSINESS EXPENSE: The expenditure
failed to satisfy the requirement of necessary and
ordinary. Not only must the taxpayer meet the
business test, he must substantially prove by
evidence or record the deductions claimed under the
law, otherwise, the same will be disallowed.
LITIGATION EXPENSES INCURRED IN DEFENSE OR
PROTECTION OF TITLE ARE CAPITAL IN NATURE AND
NOT DEDUCTIBLE: The mining properties are capital in
nature. Since they litigation expenses were incurred
to protect such capital, they are not deductible.
PROMOTIONAL EXPENSES ARE DEDUCTIBLE BUT MUST
BE SUBSTANTIATED: When some of the
representation expenses claimed by the taxpayer
were evidenced by vouchers or documents, but
other claims were not supported, it is not possible to
determine the actual amount covered by supporting
papers and the amount without supporting papers,
the court should determine from all available data
the amount properly deductible as representation
expenses. In view of this, the SC held that CTA did
not commit error in allowing as promotion expenses
Zamoras income tax returns at merely one-half.
SUPERVISION FEES WERE NOT DEDUCTIBLE FOR
FAILING TO PASS THE REASONABLENESS TEST: If
allowed, Hoskin would be receiving on his salary,
bonus, and supervision fees a total of P185,000
which is double the companys reported net
income. The SC stated that if it was a one-time
payment, it could have been deducted since Hoskin
was an experienced realtor. However, the P100,000
supervision fee was being paid every year (for three
(3) years) for the entire duration of the companys
project with Paradise Farms.
POLICE PROTECTION, GIFTS AND PARTIES: Police
protection fees were not deductible as they are
illegal since it was consideration for the performance
of functions required of policemen by law. As to the
gifts and parties, they were deemed excessive
considering that the purpose of the exhibition was
for a charitable cause.
Application for exemption from payment of
amusement tax will be denied where the net
proceeds of the exhibition conducted for
charitable purposes are not substantial or
where the expenses incurred by the taxpayer
are exorbitant.
BONUS FOR RESIDENT OFFICERS AND EMPLOYEES WAS
NOT REASONABLE (2ND ITEM): resident officers and
employees had higher bonuses than non-resident
deficiency income taxes for 1950 to 1952 because it
deducted from its gross income certain items
representing:
1st item: salaries, directors' fees and bonuses of its
non-resident president and vice-president;
2nd item: bonuses of its resident officers and
employees;
3rd item: interests on earned but unpaid salaries and
bonuses of its officers and employees
CIR allowed the deduction of the 1st item, but
disallowed the bonuses insofar as they exceed the
salaries of the recipients, as well as the interests on
earned but unpaid salaries and bonuses (2nd and 3rd
item). This was upheld by the CTA in its ruling.
K&SI disputes this ruling insofar as the resident
officers and employees (2nd item) are concerned
contending that the same is not in accordance with
the usual pattern to be followed in determining the
reasonableness of a given compensation because it
ignores the nature, extent and quality of the services
actually rendered by its resident officers and
employees.
RR 10-2002 (JULY 10, 2002)
RR 1-2009 (DECEMBER 9, 2008)
PRESCRIBES THE RULES AND REGULATIONS TO
IMPLEMENT RA NO. 9442 RELATIVE TO THE TAX
PRIVILEGES OF PERSONS WITH DISABILITY AND
TAX INCENTIVES FOR ESTABLISHMENTS GRANTING
20% SALES DISCOUNT
Coverage:
1. Hotels and similar lodging establishments
and restaurants;
2. Sports and recreation centers;
3. Theaters, cinema houses, concert halls,
circuses, carnivals, and other similar places
of culture, leisure and amusement;
4. All drugstores regarding purchase of
medicine;
5. Medical and dental services in government
facilities, such as but not limited to
diagnostic and laboratory fees;
6. Medical and dental services in all private
hospitals, such as but not limited to
diagnostic and laboratory fees, including
professional fees of attending doctors;
7. Domestic air and sea transportation; and
8. Public railways, skyways and bus fares.
ones even if they do basically the same amount of
service and contribution, which petitioner even
admitted; therefore, the bonuses were
unreasonable.
SITUATION MUST BE CONSIDERED AS A WHOLE: There is
no fixed test for determining the reasonableness of a given bonus
as compensation. This depends upon many factors, one of them
being the amount and quality of the services performed with relation
to the business. Other tests suggested are:
payment must be 'made in good faith';
the character of the taxpayer's business, the volume and
amount of its net earnings, its locality, the type and extent of
the services rendered, the salary policy of the corporation';
'the size of the particular business';
the employees' qualifications and contributions to the
business venture'
and 'general economic conditions.
However, 'in determining whether the particular salary or
compensation payment is reasonable, the situation must be
considered as a whole.
AUTHORIZES THE IMPOSITION OF A CEILING ON
ENTERTAINMENT, AMUSEMENT AND RECREATIONAL
EXPENSES: Sec. 5 provides the ceiling
(1) The deduction shall not exceed 0.50% of
net sales for tax payers engaged in the sale
of goods and properties
(2) The deduction shall not exceed 1.00% of
net revenue for tax payers engaged in the
sale of services
However, if the tax payer engages in both sale of
goods and services, the deduction will be
apportioned using this formula:
Net sales/Net revenue x Actual expenses
Total Net Sales/Revenue
EXCLUSIONS/CONDITIONS
PROMOTIONAL AIRFARE: 20% discount is not
applicable to promotional air and sea fares,
in such a way that if the promotional fare is
higher than the 20% discount privilege, the
claimant may choose the promotional fare
and accordingly shall no longer be entitled
to 20% discount.
DOUBLE DISCOUNTS: Hence, the 20 percent
sales discount for persons with disability
may not be availed of in combination with
or on top of other discount programs of
either the establishments themselves
(promos and privilege card holders) or the
government (senior citizens discount).
TOLL FEES: since only car- owners may
avail of the at least 20 percent discount on
toll fees, toll operators may further require
claimants to present the necessary car
registration documents
 RR 7-2010 (JULY 20, 2010)
EXPLAINS THE TAX TREATMENT OF THE 20%
DISCOUNT AND EXEMPTION FROM PAYMENT
OF VAT OF SENIOR CITIZENS.
Senior Citizens, in addition to the 20% discount on
purchases of certain goods and services, will also
enjoy exemptions from Value-Added Tax, as
mandated by Republic Act No. 9994 otherwise
known as the Expanded Senior Citizens Act of
2010.All establishments, supplying any goods and
services to senior citizens with discount, may claim
the discounts grant as a tax deduction based on the
cost of goods sold or services rendered to Senior
Citizen. The selling price to be charged by the seller
must be net of VAT because the sale to Senior
Citizen is exempt from VAT. The discounts granted
by the seller of qualified goods and services shall be
treated as an ordinary and necessary expenses
deductible from gross income of the seller falling
under the category of itemized deductions.