TAX NOTES (LEGAL GROUND) 2) Estate and donors taxes;

Lectures of Atty. Japar B. Dimampao 3) Value-added tax;

Supplement Bar Material 4) Other percentage taxes;
5) Excise taxes;
STATE POLICY 6) Documentary stamp taxes; and
7) Such other taxes as are or hereafter may be imposed
Declared Policy of the State: (Code:RDB-N) and collected by the Bureau of Internal Revenue
1) to promote sustainable economic growth through INCOME TAX
the rationalization of the Philippine internal revenue
tax system, including tax administration; FEATURES OF OUR PRESENT INCOME TAXATION
2) to provide, as much as possible, an equitable relief to
a greater number of taxpayers in order to improve Q. What are the features of our present income taxation in the
levels of disposable income and increase economic light of R.A 8424?
activity; A. We adopted the so-called COMPREHENSIVE TAX
3) to create a robust environment for business to enable SITUS Comprehensive in the sense that we practically
firms to compete better in the regional as well as the apply all possible rules of tax situs.
global market;
4) the State ensures that the Government is able to Criteria used: (Code: R. P. N.)
provide for the needs of those under its jurisdiction a) Residency of taxpayer;
and care. Situations where we utilized residency as basis:
1) We tax the income of a resident alien derived
THE B.I.R. from sources within the Philippines.
2) We also tax the income from sources within of
1) Powers and duties of the BIR. resident foreign corporation in the Philippines.
The BIR shall be under the supervision and control of the
DOF and its powers and duties shall comprehend: b) Place/Source
(CODE: ACE-JP) Used as a basis in taxing the income of a non-resident alien
1) the assessment; individual. We can only tax his income derived from sources
2) collection of all national internal revenue taxes, fees, within and in taxing the same, we consider the place where the
and charges; income is derived.
3) the enforcement of all forfeitures, penalties, and
fines; c) Nationality or Citizenship in the case of individual taxpayer
4) execution of judgments in all cases decided in favor We used that as a basis in imposing tax on the income of a
by the CTA and ordinary courts resident citizen. Resident citizen may be taxed from his sources
5) give effect and to administer the supervisory and within and without. The source of income here is immaterial
police powers conferred to it by the Code and other what we consider is the nationality or citizenship of the
laws. taxpayer.

2) POWERS of the Commissioner of the Internal Revenue. Domestic corporation we can tax its income derived from
1) to interpret tax laws and to decide tax cases (Sec. 4); sources within and without.
2) to obtain information and to summon, examine, and
take testimony of persons (Sec. 5); On Non-resident citizen, they can only be taxed on their
3) to make assessments and prescribe additional income derived from the sources within tax situs is the
requirements for tax administration and place /source of income.
enforcement (Sec. 6);
4) to delegate powers (Sec. 7); Taxpayer Sources
5) to administer oaths and take testimony (Sec. 14); 1. RC I/O (Sec. 23 [A])
6) to make arrests and seizures (Sec. 15); 2. NRC I (Sec. 23 [B])
7) to assign or re-assign internal revenue officers (Sec. 3. OCW I (Sec. 23 [C])
16 & 17). 4. ALIEN I (Sec. 23 [D])
4.1 NRA-ETB
REQUISITES OF A VALID TAX REGULATION 4.2 NRA-NETB
(LIMITATION OF THE POWER TO INTERPRET TAX LAWS) 4.3 ALIEN ERA-MNC
1) It must be consistent with the provision of the Tax 4.4 ALIEN OBUs
Code 4.5 ALIEN PSCS
2) Reasonable 5. Domestic Corp. I (Sec. 23 [E])
3) Useful and necessary 6. Foreign Corp-RFC/NRFC I (Sec. 23 [F])
4) It must be published in the official gazette or in the
newspapers of general circulation. 1) A resident citizen is taxable on all income derived
from sources within and without the Philippines.
SOURCES OF REVENUES
The following taxes, fees and charges are deemed to be 2) A non-resident citizen is taxable only on income
national internal revenue taxes: (Code:IEVPEDO or EVE- derived from sources within the Philippines.
PIDO)
1) Income tax;

3) An overseas contract worker is taxable only on
income from sources within the Philippines; a
seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad
as a member of the complement of a vessel engaged
exclusively in 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
2
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.

6] A foreign corporation, whether engaged or not in trade 4] We employ this Pay as you File system.
or business in the Philippines, is taxable only on income
derived from sources within the Philippines. 5] Under certain cases, we employ the pay as you earn
system. This applies to income subject to withholding tax.
Income Taxation may be grouped into:
1) individual income taxation Q. What are the basic features of corporate income taxation?
2) corporate income taxation A.
1] Global Concept has been adopted. >>> Global system
Q. What are the basic features of individual taxation? (S.P. F. E. where the tax treatment views indifferently the tax base and
M.) treats in common all categories of taxable income of taxpayer
A. (Tan vs. Del Rosario).
1) Individual income taxation adopted the Schedular system
of taxation Characteristics of Global system of Taxation:
a) Uniform tax treatment this is subject to diminishing
Schedular System of Taxation is a system corporate tax rates of 34% (Jan. 1, 1998), 33% (Jan. 1, 1999), 32%
employed where the income tax treatment varies and made to (Jan. 1, 2000). See Chapter IV, Sec. 27).
depend on the kind or category of the taxpayers taxable b) Does not categorize income.
income (Tan vs. Del Rosario). 2] Corporate taxpayer, particularly domestic corporations are
entitled to deductions. So, insofar as domestic corporation and
Characteristics of schedular system of taxation: resident foreign corporation is concerned, we adopted here the
a) It gives or accords different tax treatment net income tax system.
on the income of individual taxpayer. New provisions under R.A. 8424: 10% tax on
b) It classifies income. improperly accumulated earnings of a
corporate taxpayer.
Manifestations: (that under the individual taxation we
adopted the schedular system of taxation) 3] Pay as you file system has also been employed.
[C, B, P, Dp, I, R, R, D, A, Pw, P, P] Corporate taxpayer is allowed to adopt
calendar or fiscal year period. Corporate
Under Sec. 32(a), income may be categorized as follows: taxpayer files corporate income tax return
1) compensation income, quarterly. And it also files the so-called
2) business income, FINAL ADJUSTED RETURN.
3) professional income, In the case of individual taxpayer, the
4) income derived from dealings in property, payment should not be later than April 15 of
5) interest income, every taxable year. Individual taxpayers are
6) rent income, not allowed to adopt the so-called FISCAL
7) royalties, YEAR PERIOD.
8) dividends,
9) annuities, * Individual taxpayers are allowed to adopt only the calendar
10) prizes, year period while corporate taxpayers have the option either the
11) winnings, calendar year period of the fiscal year period.
12) pensions, and
13) partners distributive share from the net income of Calendar year period this covers the period of 12-month
the general professional partnership. commencing from Jan. 1 and ending Dec. 31.

This is the manifestation that as far as Fiscal year period this is also a 12-month period
individual income taxation, the income is commencing on any month or ending on any month other than
categorized. 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-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.
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).
3
Shorter 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
 4
8. Annuities HELD: NO, because the tax situs of interest income is not the
9. Prizes and winnings activity but the residence of the debtor. The place where the contract
10. Pensions of loan is executed is immaterial.
11. Partners distributive share in the net income of general
professional partnership (Professional income of a partner)
* RENT INCOME
* COMPENSATION INCOME Tax Situs: the PLACE of property subject of the contract of lease.
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 * ROYALTIES
income without. Tax Situs: the PLACE where the intangible property is USED
RC income from within and without are taxable.
NRC only compensation income from sources within is
taxable. * DIVIDEND
RA same as NRC. a. Received from domestic corp. this is an income purely within.

* BUSINESS INCOME [M3 F] b. Received from foreign corp. consider the income of the
a) Merchandising Business foreign corp. in the Phils. during the last preceding three (3)
b) Farming Business Tax Situs: Place where these taxable years;
c) Mining Business business are
undertaken. rules:
d) Manufacturing Business (1) The income is purely within if the income derived from the
Phil. sources is more than 85%
Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within (2) It is purely without if the proportion of its Phil. income to the
the phils. This is considered as income derived purely within. total income is less than 60%

(2) Goods manufactured outside the Phils. and sold outside (3) There should be an allocation if it is more than 50% but not
income derived purely without. exceeding 85%
(3) Goods manufactured within the Phils. and sold outside the
Phils. income partly within and partly without. * ANNUITIES
Tax Situs: the PLACE where the contract was made
(4) Goods manufactured outside the Phils. and sold within the * PRIZES AND WINNINGS
Phils. income partly within and partly without. Prizes may be given on account of services
rendered in which case, the tax situs is the
* INCOME FROM SALE OR EXCHANGE OF PROPERTY place where the services were rendered.
If it involves personal property, in determining
the tax situs, we have to consider the place of If these prizes are not given on account of
sale. services, the tax situs is the place where the
same was given.
In the case of sale of transport documents, tax
situs is the place where the transport
document is sold (BOAC Case). Tax situs of winnings is the place where the
same was given.
If it involves real property, the tax situs is the
place or location of the real property. So, if *PENSION
the property sold is situated within the Tax Situs: PLACE where this may be given on account of services
Phils., the income derived from such sale is rendered
considered as income within.
*PROFESSIONAL INCOME OF PROFESISONAL
* INTEREST INCOME PARTNERS
Tax Situs: RESIDENCE of the DEBTOR Tax Situs: PLACE where the exercise of profession is undertaken

Case: There was this contract regarding the construction of GROSS INCOME
ocean-going vessels. There was this issuance of letter of credit
and the payment of downpayment. All the elements of the GROSS INCOME means all income derived from whatever
transactions took place in Japan. The payment was made in source, including but not limited to the following:
Japan. The letter of credit was executed in Japan. The delivery
was made in Japan. The debtor is a domestic corp. INCLUSION: [code: STP-IRR-DAP-PS]
1. compensation for services
Is the interest income on this loan evidenced by the 2. gross income from trade or business or the exercise of a
letter of credit taxable to the Japanese corp.? 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 non-
resident 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
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
5
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).
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.
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.

* 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.
SNRA-NETB subject to 15% tax rate on their income in the
from of:
S - Salaries
6
H - Honoraria
O - Other
W - Wages
E - Emoluments
R - Remuneration
EXCLUSION FROM GROSS INCOME
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.
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.
Problem:
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. Is the amount representing the proceeds of the life
insurance policy taxable?
b. What about the premium paid by the employer A?
Does this amount form part of the gross
compensation income?
c. 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)]
7
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:

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

3rd person. Moral - P100,000.
Exemplary - P100,000.
AMOUNT RECEIVED BY INSURED AS RETURN OF Actual - P 60,000. (hospitalization expenses)
PREMIUM P 20,000. (repair of car)
Reason for Exclusion: It represents a mere return of capital. P 60,000. (loss of income)

The sources of this return of premium: (L.E.A.) *** All damages awarded are tax-exempt except damages of
1. Life Insurance Policy representing loss of income.
2. Endowment contracts
3. Annuity contracts Question: Are damages awarded by the Court on account of
---Whether the premiums are returned during or at the maturity of breach of contract taxable?
the term mentioned in the contract or upon surrender of thee
contract Answer: Qualify your answer. With regards to damages
awarded on account of loss of earnings of the contracting
Problem: party, it is taxable.
A took out an endowment policy amounting to P1 M.
He paid premiums amounting to P800,000. Upon the maturity INCOME EXEMPT UNDER TREATY
of the policy, A received that P1M. Reason for the Exclusion: Treaty has obligatory force of contract.
How much is the taxable amount?
Exception: As may be provided for in the treaty.
Answer:
That is P1,000,000. value of endowment policy *RETIREMENT BENEFITS, PENSIONS, GRATUITIES
LESS: P 800,000. representing amount of premium AND OTHERS
==========================================
===== - VETERANS BENEFIT
P 200,000. taxable amount * This may be given by the US Administration.
* The recipient must be a resident veteran.
*GIFTS, BEQUESTS and DEVISES
Rationale: What is contemplated here are donations which are - BENEFITS GIVEN BY FOREIGN AGENCIES OR
purely gratuitous in character in order that it may be excluded. INSTITUTIONS WHETHER PUBLIC OR PRIVATE

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.
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.
8
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 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.
Recipient: Government or its Political Subdivision
* Government of the Republic of the Phils or Government of the Phils
vs. National Government
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 foreign government,
regional or (3) international financing institutions
established by foreign government
REQUISITES:
1. Recipient must be:
a. foreign government;
b. financing institution owned, financed or
controlled by foreign government;
c. regional financing institution, international
financing institution established by foreign
government;
9
2. 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 you
claim exemption, you should prove it clear and categorical
terms.

* 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, PAG-IBIG,
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
employee-
employer relationship.
This may include the following: (WEBB-DROP)
10
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 employer-
employee relationship is compensation
income.
*TESTS TO DETERMINE THERE EXISTS AN EMPLOYER-
EMPLOYEE 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
employer- Compensation 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 employer-
employee 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 employer-
employee relationship.
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
11
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.
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:
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.
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
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.
2. De minimis benefits means of small amount. These are
benefits relatively of small amount.
3. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefits plans.
4. Fringe benefits which are authorized or exempted from
tax under special laws.
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)
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. Monetized unused vacation leave credits not
exceeding ten (10) days during the year;
b. Medical cash allowance to dependents of employees
not exceeding P750 per semester of P125 per month;
c. Rice subsidy of P350 per month;
d. Uniforms;
e. Medical benefits
f. Laundry allowance of P150 per month;
g. Employee achievement awards, for length of service
12
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;
h. Christmas and major anniversary celebrations for
employees and their guests;
i. Company picnics and sports tournaments in the
Philippines and are participated in exclusively by
employees; and
j. Flowers, fruits, books or similar items given to
employees under special circumstances on account of
illness, marriage, birth of a baby, etc.
*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
* 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.
* 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.
* Vehicle Exempt but depends upon the peculiar nature of
the special needs of the business of the employer.
Example: LBC or DHL business
* Household personnel such as maid, driver and others
Exempt, but depends upon the peculiar nature of the business
of the employer.
* Membership in a social club, etc. Peculiar nature
requirement.
* Traveling expense benefit Peculiar nature requirement.
Example: Employer sent his employees abroad to attend a
particular seminar to improve their technical know-how.
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?
 13
ROYALTIES 20% except in
ANSWER: the case of
a. That should be subject to tax. literary works,
b. It should be excluded. Reason: Convenience of the books and Same as 25%
employers rule. musical RC, NRC,
compositions RA
2. GROSS INCOME FROM BUSINESS, TRADE OR which are
PROFESSION subject to 10%
final tax
BUSINESS Any activity that entails time, attention, effort for PRIZES
purposes of livelihood or profit. exceeding
P10,000.00
As regards construction business, the taxpayer If it is P10,000.00
here must be an independent contractor. He or less, it is NOT
may report his income under the percentage subject to final 20% 20% 25%
of completion method or under the so-called tax but the same
completed contract method. must be included
in other income
PROFESSIONAL INCOME The recipient of the same must (e.g.
be professionals. compensation,
business,
How about those who claim that they are professional)
professionals but are not registered in the P. WINNINGS
R. C., can they still be tax as such? except PCSO & 20% 20% 25%
Lotto
Yes, irrespective of whether they are licensed INTERESTS ON
or not because of the rule that gross income BANK 20% 20% 25%
derived from whatever source. DEPOSITS, etc.
DIVIDENDS Subject to
3. PASSIVE INCOME RECEIVED increasing
from domestic rates of 6% if 20% 25%
PASSIVE INCOME This is the income that is subject to final corp., etc. received in
tax. 1998; 8% in
1999; and 10%
Income subject to final tax are the following: (code:RPD- in 2000.
WIDS) SHARE OF A
PARTNER in
1. Royalties the net income
after a tax of a - do- 20% 25%
2. Prizes taxable
partnership, etc. 6, 8 & 10
3. Winnings
Question: How do you treat that share of a professional
4. Interests on bank deposit, deposit substitutes, trust partner from the net income of a general-professional
funds and partnership?
other similar arrangements.
Answer: This should be taxed at the rate provided under
5. Dividend received from domestic corporation, Sec.24, that is, 5% to 34%.
mutual fund insurance company, regional
headquarters of multi-national corporation and But as regards the share of a partner in the net
other corporation. income after tax of a taxable or business partnership, that is
one which is subject to final tax.
6. Share a partner in the net income after tax of a
taxable partnership, joint account, joint venture or PRIZES may be exempt if given in sports competition and if
concessions. given primary in recognition of scientific, artistic, literary,
educational, religious, charitable, or civic achievement.
*** Do not include passive income in the income of your
business or profession, or in your compensation income. This is INTEREST
so because when you receive this income, the tax had already
been imposed and deducted. Rules
1. If it is an interest on foreign currency deposit system, it is
exempt.
If the recipient is non-resident individual (NRC, NRA-
RC, NRC, RA NRA-ETB NRA-
ETB, NRA-NETB).
NETB
2. If the recipient is a resident individual (RC, RA), that is
 14
subject to 7.5 %. 1. Stock in trade or other property of any kind which
3. Interest income is also exempt if it is an interest income would be included in the inventory of the taxpayer
on a long- term deposit or long-term investment (this if on hand at the end of the taxable year.
must have a term of not less than 5 years). 2. Property primarily held for sale to customers in the
Ordinary course of trade or business.
If the term is less than 5 years it is subject to the following 3. Property Used in trade or business subject to
rates: depreciation
1. 4 years to less than 5 years 5% 4. Real property used in trade or business.
2. 3 years to less than 4 years 12% The definition of capital asset says real property held by
3. Less than 3 years 20% the taxpayer whether or not connected with his trade or
business except real property used in trade or business.
DIVIDEND RECEIVED FROM DOMESTIC So, in order to be a capital asset, the real property must be one
not used in trade or business.
CORPORATION
1. This is exempt from tax if the recipient is a foreign
That is why, the sale of residential house and lot is subject
government, financing institution, regional financing
to 6% of capital gains because it is a real property not
institution, international financing institution
used in trade or business.
established by foreign government [see Sec.32 (B) (7)
(a)].
But, sale of real property by a real estate dealer is not a
capital transaction because the property involved is one
2. It is also exempt if the recipient of such dividend is
primarily held for sale to customer in the ordinary course
another domestic corporation or resident foreign
of trade or business. That is not a capital asset but an
corporation [see Sec. 28(A)(7)(d)]
ordinary asset.
CAPITAL GAIN DERIVED FROM SALE OF SHARES OF
This covers not only sale of property; it also covers
STOCK
conditional sale of real property including the so-called
pacto de retro sale under Art. 1602 of the NCC, or
Listed and traded through local stock
disposition of property located in the Phils.
exchange this is not subject to income tax
but subject to percentage tax of of 1% of
If the buyer is the government or any of its political sub-
the gross selling price.
divisions or political agencies, including government owned
and controlled corporations, the seller have the option to
Not listed and traded through local stock
avail the 6% or under Sec. 24(A), wherein the basis under
exchange this is the one subject to income
said section is taxable income so deductions may be
tax.
allowed. The cost of the property may be deducted but
when you avail of the 6%, the basis is gross selling price
Not over P100,000.00 5%
or zonal value whichever is higher.
Amount Over P100,000.00 10%
Is this a tax on the buyer or the seller?
It is a tax on the seller. But sometimes, through an
If the share of stock is not listed and traded
agreement, pwede nilang I-transfer sa buyer, and theres
through local stock exchange, the basis of the
nothing that can prevent the seller from transferring the
tax is net capital gain. So, you should first
tax to the buyer in the contract of sale.
deduct the capital loss.
OTHER INCOME
If listed and traded through local exchange, there
is no deduction allowed because the basis of
* OTHER INCOME includes [code: R.I.D.O.]
the tax rate of of 1% of the gross selling
a. Rent income other than royalties
price.
b. Interest income other than interest income on bank
deposit
The above-mentioned tax rates apply to all
c. Dividend income
individual taxpayers.
d. Income from Other sources and this may include: (BIT-
CDC)
* CAPITAL GAIN DERIVED FROM THE SALE OF REAL
d.1. Bad debts recovered
PROPERTY
d.2. Illegal gains derived from
- The real property involved must be considered CAPITAL
gambling
ASSET.
d.3. Tax funds
d.4. Compensation for private property
- The tax on capital gain derived from the sale of real property
expropriated by the government
is 6% of the gross selling price or zonal value which ever is
for public use.
higher.
d.5. Damages
d.6. Cancellation of indebtedness
* CAPITAL ASSET property held by the taxpayer whether or not
connected in his trade or business except: (code: SOUR)
1. RENT - Compensation for the use of ones property.
- The payment may be in cash or in kind. The propert
 15
property. indebtedness by the corp. of the
obligation of stockholder
- In the case of personal intangible property, subject to final tax ifdividend
Property it involves
- intellectual
it may be in the form of stock other
property, copyright, trademarks etc. than the stock of the corp.
Stock dividend - stock issued by the giver corp.
THE FOLLOWING CONSTITUTES TAXABLE Script dividend - It is given in the form of promissory
note or other evidence of
RENT INCOME: indebtedness.
1. The regular rent may be monthly, semi-annually or
annually
STOCK DIVIDEND as a rule not taxable. This is so because
there is no income here. It merely represents the transfer of
2. Additional rent income which includes:
surplus account to the capital account.
a. Obligation of the lessor assumed by the lessee
The following are obligations which may be
EXCEPTIONS to the Rule:
assumed by the lessee: [R.I.D.I.O.] Stock dividend may be subject to tax under the following
a.1. Real property taxed on leased premises exceptional cases: [C OR D]
a.2. Obligation to pay insurance premium on the 1. If there is a Change in the stockholders interest in the
insured leased premises net assets of the corp;
a.3. If the lessor is a corp., the obligation to 2. If it is one issued by Other corp. We call that
distribute Dividends to its stockholders dividend stock
a.4. Obligation to pay interest on the bonds issued Stock dividend vs. dividend stock Stock dividend as
by the lessor. a rule is not taxable whereas dividend in stock is
a.5 Other obligations of the lessor which may be taxable.
assumed by the lessee. 3. Redemption of stock dividend;
4. If the corp. issues Different shares of stock. If the
b. Value of permanent improvements on leased corp. issues two different classes of shares of stock,
premises. This may be reported through: the dividend that may be declared thereafter is
b.1. Outright method at the time of permanent is taxable.
completed, he may report that as additional
rent income FMV of the building or
permanent improvement.
b.2. Spread out method by allocating the
Example:
Outstanding stock Stock dividend Taxable
depreciation among throughout the
1. Preferred Common NT
remaining term of the leased.
2. Common Preferred NT
3. Preferred Preferred NT
c. Advance rentals
4. Common Common NT
c.1. If in the nature of the prepaid rentals without
5. Preferred/Common Preferred T
restriction on the use of the amount, it is
6. Preferred/Common Common T
taxable.
c.2. If it is in the nature of security deposit, it is
Disguised dividend treasury stock dividend declared out of
taxable rent income if there is a violation of
the outstanding capital stock, the purpose of which is to avoid
the term of the lease.
the effect of taxation (Commissioner vs. Manning).
c.3. If it is in the nature of a loan to the lessor, it is
not taxable.
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
2. INTEREST INCOME compensation for the use of money.
declared, such a case, since the purpose is to evade taxation, it
- Whether it is an interest on loan pursuant to the
is taxable.
business of a taxpayer or personal transaction, interest
income, except if it is tax exempt, is always taxable.
Remember, treasury shares of stock are not entitled
This is so because the source of income is immaterial,
to dividends.
even if it is from an illegal source.
ALLOWABLE DEDUCTIONS (SEC. 34)
- Interest income on bank deposits is subject to final tax.

3. DIVIDEND INCOME amount declared, set aside and As regards individual taxpayers, the
distributed by the Board of Directors to stockholders, on following may claim allowable deductions:
demand or a fixed period. 1. RC
2. NRC, only those expenses incurred in the Phils.
Classes of Dividend: [C.L.I.P.S.S.] because here, we cannot tax his income derived from
Cash dividend sources without.
Liquidating dividend- this is given upon liquidation of 3. RA, only those expenses incurred in the Phils.
corporate affairs 4. NRA-ETB, but only those expenses incurred in the
Indirect dividend - it is given in other form and this Phils.
includes cancellation of 5. PP (Professional Partners under Sec. 26)
 16
Exceptions: There is no hard and fast rule. An expense may
1. IT earning CI EE, ER REL be ordinary insofar as a particular taxpayer is
2. NRA-NTB concerned and it may not be an ordinary as
3. Aliens employed regards another taxpayer.
A. RMC
B. OBU Example:
C. PSC If you have business here in Manila and you also have
4. NRFC business in Tawi-tawi, what is the expense that you may incur
As regards corporate taxpayers, the following are in Tawi-tawi which you may not possibly incur in Manila?
entitled to claim allowable deductions:
1. DC, which includes private educational institutions, non- In Tawi-tawi, you may need people to guard your
profit hospital, government-owned and controlled corps. business. But here in Manila, you may need not because of our
2. RFC new President-elect.

ITEMIZED DEDUCTIONS: KINDS OF ORDINARY & NECESSARY

[E,I.T,L,B,D,D,C,R,C] EXPENSES [C.A.R.T.E.R.S.]
1. Expenses 6. Depreciation 1. Compensation for services rendered
2. Interests 7. Depletion of oil, gas, wells and 2. Advertising & promotional expenses
mines 3. Rent expenses
3. Taxes 8. Charitable contributions 4. Travelling expenses
4. Losses 9. Research & Development 5. Entertainment expenses
5. Bad debts 10. Contribution to Pension Trust 6. Repairs & maintenance expenses
7. Supplies and materials
* In the case of individual taxpayers, they may avail of the
optional standard deduction of 10% of gross income COMMON REQUISITES FOR DEDUCTIBILITY of these
ordinary & necessary expenses: [D.I.R.]
* Corporate taxpayers are not allowed to claim 10% optional a. Must be paid or incurred DURING the taxable year.
standard deductions. If you incur expenses in 1997, you cannot carry this
over to 1998. expenses incurred during a particular
* All individual taxpayers except the NRA individual may year must be claimed as deductions during this year
claim this optional standard deductions. when the same were incurred.

* Itemized deduction may apply to corporate taxpayers as PAID to signify the fact that the taxpayer uses the
well as individual taxpayers. CASH
* FUNDAMENTAL PRINCIPLE IN DEDUCTIONS BASIS. Under the CASH BASIS, an expense is
1. The taxpayer must prove that there is law authorizing recognized
deductions. when it is PAID.
2. The taxpayer must prove that he is entitled to deductions.
*** NRFC are not entitled to claim deductions. INCURRED implies that the taxpayer employs
the ACCRUAL
1. EXPENSES BASIS. Under the ACCRUAL BASIS, income
is recognized
ORDINARY & NECESSARY EXPENSES when earned regardless of the receipt of the
When we speak of ORDINARY, this simply refers to the same and
expenses which are normal, usual or common to the business, the expense is recognized when incurred.
trade or profession of the taxpayer. This may not be recurring.
b. Must be paid or incurred in connection with the trade,
Example: if an action is filed in court, it is but normal to hire the business or profession of the taxpayer.
services of a lawyer. So, the taxpayer has to pay attorneys fees.
It is an ordinary expense under this circumstances. c. Must be proven by RECEIPTS.

NECESSARY- It is one which is useful and appropriate in the SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE
conduct of the taxpayers trade or profession. ORDINARY & NECESSARY EXPENSES:

ORDINARY & NECESSARY EXPENSES 1. COMPENSATION FOR SERVICES RENDERED

-are those which are incurred or paid in the development,
operation management of the business, trade or profession of
the taxpayer.
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.
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. Question 2:
- Home does not refer to your residence but to the station taxpayer, is that deductible?
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.
17
- 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.
What about that interest charged to the capital of the
Answer:
Interest on cost-keeping purposes is not deductible.
This does not arise under an interest-bearing obligation.
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.

- Hence, bribes, kickbacks, and similar payments are not deductible. Question 3:
-Also, the expenses incurred by the taxpayer in entertaining What about interest on preferred stock, is this
govt officials in 5-star hotel to gain political influence are not deductible?
deductible.
Answer:
6. REPAIRS AND MAINTENANCE EXPENSES
 18
As a rule, interest on preferred stock is not deductible, d.1. grant or fiduciary
because there is no obligation to speak of. It is in effect an d.2. fiduciary of one trust and fiduciary of
interest on dividend. The reason why it is not deductible is that another trust but there is only one
the payment is dependent upon the profits of the corp. It will grantor
only be paid if the corp. earn profits. And would not be paid of d.3. beneficiary and fiduciary
the corp. incurs losses.
*Your knowledge of related taxpayers is also
BUT if it is not dependent upon corporate profits or important in determining whether losses are
earnings, that is deductible. If is payable on a particular on a deductible or not. If losses were incurred or paid in
particular date or maturity without regard to the corporate connections with the transactions between these related
profits, it is deductible. taxpayers, these are not deductible.

The Supreme Court mentions TWO (2) FACTORS: Question: How much interest expense is deductible?
1. not dependent upon corporate profits; and
2. agreement as to the date or term within which payment will Answer: The interest that may be claimed as deductions shall
be made. be reduced
by:
INTEREST ON GOVT SECURITIES is now taxable. a. 41% - Beginning January 1, 1998
So, if the taxpayer obtained a loan from PNB and used the b. 39% - Beginning January 1, 1999
proceeds in purchasing govt securities, the interest is now c. 38% - Beginning January 1, 2000 of the
taxable. Likewise, the interest expense paid on that loan, the income subject to final tax.
proceeds of the same, had been use to purchase govt securities
is now deductible. EXAMPLE OF INCOME SUBJECT TO FINAL TAX:
1. interest on bank deposit
Q. What about an interest on a loan paid in advance, is this 2. interest on deposit maintained under the foreign currency
deductible? Let us say that the taxpayer obtained a loan from a deposit system
bank and it is payable within 5 years. The loan obtained is
P50,000.00. Now, it was deducted in advance, can that be So, if the interest income on bank deposit amounted to
claimed as deductions? 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
A. NO. You can only deduct the same when the installment is P100,000.00 is P41,000.00. That P200,000.00 interest expense
due a particular year. incurred or paid, should be reduced to P41% of that
P100,000.00 to arrive at P159,000.00 which is the interest that
INTEREST EXPENSES WHICH ARE NON-DEDUCTIBLE may be claimed as deduction.
[PARCAPU] P200,000.00
1. Interest expense on PREFERRED STOCK; - 41,000.00
-----------------------
2. When there is NO AGREEMENT in writing to pay interest; P159,000.00

3. Interest expense on loan entered into between RELATED The rule has been established that TAXES are NOT
TAXPAYERS. ORDINARY OBLIGATIONS. But the Supreme Court in two (2)
cases relaxed the distinction between taxes and ordinary obligations.
4. Interest paid or calculated for COST-KEEPING PURPOSES
1. The interest on deficiency donors tax is deductible. The
5. Interest paid in ADVANCE SC explained that taxes here are considered obligations or
indebtedness. And it ruled that we have to relax the
6. Interest on obligation to finance PETROLEUM distinction between tax and ordinary obligation in this
EXPLORATION respect.

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;
2. Interest on deficiency income tax can also be claimed as
deductible interest expense because taxes here are
considered ordinary obligations.
3. TAXES
REQUISITES FOR DEDUCTIBILITY:
1. This must be paid or incurred during the taxable year.
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.
 19
d. Loss from wash sale

THE FOLLOWING ARE NON-DEDUCTIBLE TAXES 3. WAGERING OR GAMBLING LOSSES the amount that is
[S.I.N.E] deductible
1. SPECIAL ASSESSMENT tax imposed on the must not exceed the gains.
improvement of a parcel of land Example:
The winnings amounted to P1,000.00 Loss is P500.
2. INCOME TAX This includes foreign income tax. In this This loss is deductible.
regard, the so-called foreign income tax may be claimed If the winning is P500 and if the loss is P1,000. The
as a deduction from gross income or this may be claimed amount deductible is only P500 because the amount must not
as tax credit against Phil. income tax. In the event that he exceed the gains.
claims that as tax credit, he can no longer claim the same If there is no winnings and loss is P500. Deduction
as deduction. losses here is ZERO.

3. Taxes which are NOT CONNECTED WITH THE 4. CASUALTY LOSSES this must be reported to the BIR
TRADE, BUSINESS OR PROFESSION OF THE earlier than 30
TAXPAYER days but not later than 45 days following the date of the loss.

4. ESTATE TAX, DONORS TAX (see also discussion on Casualty losses include:
tax benefit rule) a. Fire
b. Storm
TAX AS DEDUCTIONS vs. TAX CREDIT c. shipwreck
Taxes as deductions may be claimed as deductions from d. Other casualty losses
gross income. e. Robbery
Tax credit is a deduction from Phil. income tax. f. Embezzlement
g. Theft
Tax as deduction includes those taxes which are paid or
incurred in connection with the trade, business or 5. SPECIAL LOSSES include the following:
profession of the taxpayer. However, the sources of a a. loss arising from voluntary removal of buildings as an incident
tax credit is foreign income tax paid, war profit tax, to renewal or replacement
excess profit tax paid to the foreign country.
Problem:
The foreign income tax paid to the foreign country is Supposed the taxpayer had a building constructed
not always the amount that may be claimed as tax credit on a parcel of land. He owned this as well as the
because under the limitation provided under the Tax building erected thereon. He had business and his
Code, it must not be more than the ratio of foreign business was conducted within the premises.
income to the total income multiplied by the Phil. Then, he decided to remove such building as to
income tax. construct a new building for new business.

Taxes are deductible only by the person upon whom the Is the cost of demolition to give way to a new
tax is imposed building deductible loss? YES.
Except:
1. Share holder Suppose A purchased that parcel of land of B and
2. corporate bonds - tax free Covenant clause included in that sale was that of the building. A
demolish this building in order to construct a new
The following are entitled to claim tax credit: building. Is the cost of demolition deductible
1.RC 2. DC insofar as A is concerned?

4. LOSSES NO. That can only be claimed as deductions if the

one demolishing the same is the taxpayer. The
CLASSIFICATION OF LOSSES [O. C. W. C. S.] moment that is sold to another claim that as
1. ORDINARY LOSSES losses sustained in the course of deductible loss. The treatment here is, the cost of
trade, demolition should be capitalized in the selling
business or profession of the taxpayer. price.
Exception:A may claim that as deductible loss if
2. CAPITAL LOSSES the assets that must be involved there this was demolished by value of a court order
must be because the govt considered this as a fire hazard,
capital assets loss of useful value of property or capital asset.

Capital Losses include the following: THE COMMON REQUISITES for

a. Loss arising from failure to exercise privilege to sell DEDUCTIBILITY OF LOSSES are:
or buy property 1. Losses must be actually/sustained and not mere anticipated
b. Worthless securities losses;
c. Abandonment losses in the case of natural resources

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
3. Must arise from trade, business or profession of the taxpayer;
4. Must be valid and subsisting indebtedness;
5. 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.
20
*** 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 Company vs.
Commissioner, a 1989 case.
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
4. 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
5. 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
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.
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.
21
9. RESEARCH & DEVELOPMENT PROGRAM
This may not be claimed as deduction if the amount is:
1. Spent for the acquisition or improvements of land or
for the improvement or development of natural
resources.
2. 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.
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.
Contribution to pension trust may refer to the current year
or past years.
CURRENT YEAR- this is considered as ordinary &
necessary expenses
Employer may also make a contribution to the
pension plan in regard to the services rendered for the past 10
years.
PERSONAL EXEMPTIONS
PERSONAL EXEMPTIONS
1. Personal and additional exemptions. (Note: Wala na yung
S.A.P.E.)
2. Premiums on health and hospital insurance
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.
b. 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.
 22
the taxpayer and dependent upon the
PERSONAL EXEMPTION taxpayer for chief support.
This is an arbitrary amount in the nature of - Parents must be natural parents.
deductions from gross compensation income.
2. Brothers or sister - To be qualified they must be:
If the taxpayer has no compensation income, this can be a. Living with the taxpayer;
claimed as deduction from gross income from business, trade b. Dependent upon the taxpayer for chief
or profession. support;
c. Unmarried;
Personal exemption is given to approximate the needs d. Not gainfully employed.
of the taxpayer. It is a substitute for the disallowance of e. No more than 21 years old except if physically
family, personal and living expenses. or mentally incapacitated;
must be brothers or sisters by blood
KINDS OF PERSONAL EXEMPTION: one is enough

1. Basic personal exemption:

3. Children- Must be legitimate , illegitimate, legally
a. single or legally separated without dependent; adopted or stepchildren
Conditions:
b. head of the family; a. Living with the taxpayer;
b. Dependent upon the taxpayer for chief
c. each married individual if both of them are earning Compensation income support;
c. Unmarried;
(in case only one of the spouses is deriving gross income, onlyd.such Not gainfully employed;
spouse shall be allowed the personal exemptions) e. Not more than 21 years old except if
physically or mentally incapacitated.

Dependent is considered living with the taxpayer even if

2. Additional exemption
- This only applies to qualified
dependent child and children such
as legitimate and illegitimate
children.
Personal Exemption only individual taxpayers, including
estate and trust, are entitled.
In case of estate and trust Php20,000.00
the former or the latter are not physically together if that is
Php8,000.00 for every brought about by force of circumstances. Example if one of the
qualified dependent parents will have to undergo by-pass operation in the U.S.
child but not to exceed
4 Chief Support means more than 50% of the needs of the
dependents are provided by the taxpayer.
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?

R.C. N.R.C. R.A. NRA-NTB NRA- Answer: No, physical or mental defect applies only to age
NETB requirement. Once the child or brother/sister got married, he is
/subject to automatically disqualified as dependent.
the rule on
reciprocity. CHANGE OF STATUS:
/ / / But it must 1. Death of spouse during the taxable year;
Personal within within not exceed X 2. Death of dependent during the taxable year;
Exemption the 3. Death of the taxpayer during the taxable year; estate of the
maximum taxpayer may claim the basic personal exemption;
allowable 4. Additional dependent during the taxable year;
personal 5. Taxpayer got married during the taxable year;
exemption. 6. Gainful employment of the dependent during the taxable
X year
Additiona / / Rule on 7. Dependent became more than 21 years old during the
l / within within reciprocity X taxable year.
Exemption does not
apply. Even if the above-mentioned change of status happened during the
taxable year, the taxpayer may still claim the basic personal
Legend: / - available; X not available exemption because it is as if the change of status happened at the end
of the taxable year.
Head of the family unmarried man or woman legally separated
man or woman who has the following qualified dependents: 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
1. Parents - One or both parents. Must be living with

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.
The President of the Republic of the Phils. cannot issue an
executive order to increase the basic personal exemption
because the provision under the Old Tax Code authorizing the
President to increase the personal and additional exemption
upon the recommendation of the Sec. of Finance has been
removed or deleted by RA 8424.
Now, you can only increase the amount of personal and additional
exemption by legislative enactment.
NON-DEDUCTIBLE ITEMS
1. Personal, living or family expenses
2. Those which are considered capital expenses. Capital
expenditures may be one that may increase the value of an
asset.
3. Extra-ordinary repair expended to restore the property, or
making good its exhaustion. Extra-ordinary repair is one
that may prolong the life of an asset for more than one (1)
year. You cannot claim the same as deduction. Instead,
you may claim it as allowance for depreciation.
4. Premiums paid on the life insurance policy of the officer
or employee of the employer, when the employer is
directly or indirectly designated as beneficiary.
5. Losses from sales or exchanges of property between related
taxpayers
RULES:
Premiums paid on the insurance policy of the officer or employee
may be claimed as deduction by the employer, If the beneficiary is
the family or the heirs of the officer or the employee.
It is not deductible on the part of the employer, If the beneficiary
designated directly or indirectly is the employer. If the
beneficiary designated is the creditor or the heirs of the employer, the
designation is indirect; hence, that premium is not deductible.
23
On the other hand, on the part of the employees, these
premiums 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 employee.
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 projects;
3. Joint consortium for the purpose of engaging in
petroleum, geothermal and other energy
operations pursuant to a consortium agreement
with the government
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;
2. Joint venture for the purpose of undertaking
construction projects;
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. 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.
6. 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
7. Cemetery company owned and operated exclusively for
the benefit of its members.
- This must be non-profit cemetery.
Example: Libingan ng mga Bayani
8. 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.
9. 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.
24
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 educational institution. These are U.P.M.S.U.
14. A non-stock and non-profit educational institution.
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.
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.
(Sec. 27 par C, TRA 1997)
15. 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
25
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 co-ownership 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 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.
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
26
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
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
Classification Sources Tax Base Entitled Tax
Deduction Rate
 27
DC I/O Taxable 34%- Example: Its income derived from unrelated trade, business or
Income / 1998 activity amounted to P20M. And income derived from related
33%- trade, business or activity is P10M. So, the total income is
1999 P30M. If the allowable expenses amounted to P10M, the
32% - taxable income now would be P20M.
2000
RFC I Taxable 34% - 66.67% = 20M vs. 10M___ = 33.3%
Income / 1998 3 3
33% -
1999 Income derived from Income derived from
32% - Unrelated TBA Related TBA
2000
NRFC I Gross X So, the amount from unrelated TBA (66.67%) is more
Income than 50% of its gross income (P30M). Thus, this P20M taxable
income is subject to 34% tax rate.
Question: Can Congress pass a law imposing tax on the
income of a RFC derived from sources without? But, if the income from related TBA is P20M and its
income derived from unrelated TBA is P10M. So:
Answer: No, because this will violate the principle of territoriality
in taxation. We cannot extend protection to that particular Related TBA -------------- vs. <-----------------
subject of taxation. The fundamental basis of the power to tax is the Unrelated TBA
capacity of the taxing authority to extend protection to the subject of
taxation. The income from unrelated TBA is not more than 50% of its
gross income. Thus, this P20M is subject to P10% preferential
The 34%, 33% 32% tax rates mentioned may not be applied tax rate.
except if it is lower than the 2% of gross income of such corporate
taxpayer. This is called minimum corporate income tax rate of INCOME DERIVED FROM RELATED TRADE, BUSINESS
2% of gross income. OR ACTIVITY

Example: If a corporate taxpayer has a gross income of This must be an income derived from an activity which is
P20M. 2% of that is P400,000. In this case, the tax to be paid substantially related to the performance of educational functions.
must not be lower than P400,000. If the net income is P20M and This may include income from bookstore, canteen or
the deduction is P19M, we only have P1M . You multiply that dormitory.
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 Sources Tax Base Tax Rate
lower than 2% which is P400,000 (this is the amount supposed 2.NON- 1998-10%or
to be paid). Applying the minimum corporate income tax rate PROFIT I/O Taxable 34%
of 2% if the gross income, the amount to be paid as tax is HOSPITAL Income 1999-33%
P400,000. 2000-32%

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.
***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.

SPECIAL RULES
B. SPECIAL RFC Sources Tax Base Tax
A. SPECIAL DC SOURCES Tax Tax Rate Rate
Base 1.
1. PRIVATE 1998:10%or34% INTERNATIONAL I GROSS
EDUCATIONAL I/O Taxable 1999: 33% AIR CARRIER (Income PHILIPPINE 2.5%
INSTITUTION Income 2000: 32% 2. Within) BILLINGS (2. ____
INTERNATIONAL %)
Notes: SHIPPING
Tax rate is 10% if its income derived from unrelated trade,
business or activity does NOT exceed 50% of its gross total income. *** For purposes of International Air Carrier, GROSS PHIL.
BILLINGS refer to the amount of gross revenue derived from
But its income is subject to 34% tax rate if its income from carriage of persons, excess baggage, cargo and mail originating
unrelated, trade or business or activity exceeds 50% of its gross from the Philippines in a continuous and uninterrupted flight
income. irrespective of the place of sale or issue, and the place of
payment of the ticket or passage document.
 28
BANK
DEPOSIT
* Gross Phil. billings for purposes of International Shipping UNDER THE 7.5% 7.5% Tax-exempt
means gross revenue whether from passenger, cargo or mail EXPANDED
originating from the Phils. up to final destination, regardless of FOREIGN
the place of sale or payments of the passage or freight CURRENCY
documents. DEPOSIT
SYSTEM
3.
ROYALTIES
C. SPECIAL NRFC Sources Tax Base Tax Rate DERIVED 20% 20% 34%
1. LESSOR OF WITHIN THE
CINEMATOGRAPHIC I GROSS 25% PHILIPPINES
FILMS 4. CAPITAL
2. LESSOR OF GAINS
VESSELS DERIVED
CHARTERED TO FROM ITS
FILIPINO I GROSS 4.5% SALE OF
NATIONALS OR SHARES OF
CORP.; The Charter STOCK
Agreement of which is a. If it is
approved by Maritime listed This rule applies BOTH to corporate and
Industry Authority and individual taxpayers.
3. LESSOR OF trade
AIRCRAFT, I GROSS 7.5% d
MACHINERY & thru
EQUIPMENT local
stock
*** Lessor of CD and video is not included in no. 1. So, it is excha
subject to 34% tax rate. nge:
Of 1% of the
*** Lessor of personal properties is not included in no. 2, so, it Gross Selling
is also subject to 34% tax rate. Price
b. If it is
NOT
listed
or
trade
d
thru
local
stock
excha
nge:
OTHER RULES Not over
DC RFC NRFC P100,000.: 5%
1. This should Over
INTEREST 20% 20% be included in P100,000: 10%
INCOME ON its gross 5. CAPITAL 6% of the
BANK income GAINS Gross Selling
DEPOSIT subject to DERIVED Prize or
34% tax. BUT FROM THE Zonal Value Should be treated as
in the case of SALE OF whichever is OTHER INCOME
interest on REAL Higher SUBJECT to 34%
loans which PROPERTY
have been WHICH IS
made on or NOT USED
after August IN TRADE
1, 1986, the OR
same is BUSINESS
subject to 6. *** Subject to
20% final tax. BRANCH NOT Branch
2. INTEREST PROFIT APPLICABLE Profit
INCOME ON REMITTED Remittance
 29
BYA Tax of 15% Situation: NRFC received dividend, cash or property
BRANCH NOW, the dividend from DC. That dividend
OFFICE (this basis of received from DC is subject to 15% FINAL
only applies to the tax is NOT WITHOLDING TAX.
RFC) the APPLICABLE
amount This 15% may be imposed on this dividend received
applied for from DC if the foreign govt. of the NRFC allows a tax
or credit at least 19% (1998), 18% (1999), 17% (2000). It
earmarked should be credited from the taxes deemed paid by
for this NRFC in the Phils.
remittance
So, if the foreign govt. does not allow a tax credit of at
CASE: least 19%, the tax there is not 15% but 34%. Thus, the
Marubeni Corp. is a foreign corp. it has a branch here. tax spared or saved is 19% because normally the tax is
It made a direct investment in a Domestic Corp., so it received 34%. So, 34% less 15% equals 19%, that is the tax
cash dividends. Do we have to include that in that profit to be saved and that represents the tax credit allowed by
remitted and subject to 15%? the foreign govt.

HELD: Question: Must the foreign govt. actually grant a tax credit or
NO. This is not effectively connected with the is it enough that the
conduct of trade or business of their branch office. That should foreign govt. allow such tax credit?
be excluded from the profits that should be remitted to that
Marubeni Corp. The condition is, it must be an income or Answer: There is no statutory provision that requires actual
profit effectively connected with the conduct of trade or grant. Neither is there a
business of such corp. through its branch office. Revenue Regulation requiring actual grant. It is clear
that the provision of the law says allows. So, it is
7. * These dividends enough to prove that the foreign corp. allows a tax
DIVIDENDS EXEMPT EXEMPT received from DC credit. It is not incumbent upon the foreign corp. to
RECEIVED by NRFC is prove the amount actually granted.
FROM DC subject to 15%
Final Tax IF: the Question: Does a withholding agent or a subsidiary corp. have
foreign govt. of the personality to file a
that foreign corp. written claim or refund?
allows a tax
credit at least Answer: The withholding agent has the personality to file a
19% of the taxes written claim for refund. A
deemed paid in withholding agent is technically a taxpayer because it
the Philippines by is required to deduct and withhold the tax, and it has
NRFC. the obligation to remit the same to the govt. So,
* So, the withholding agent is liable for tax. It has therefore the
implication is that personality to file a written claim for refund.
if that foreign
govt. does not Withholding agent is not only an agent of the
allow a tax credit taxpayer but also an agent of the
of at least 19%, govt. Since it is an agent of the taxpayer, it is ipso facto
that is subject to authorized to file a written claim for refund.
34% and not 15%.
CAPITAL TRANSACTIONS EXPLAINED
Note: These incomes must be derived from the Phils. So,
this is an interest income on bank deposit maintained Capital Transaction Involves Capital Asset.
OUTSIDE the Phils., that is not subject to final tax but should
be included in the gross income of the DC. 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
INTRACORPORATE DIVIDENDS EXPLAINED goods, raw materials or work in process.]

TAX SPARING CREDIT (Sec. 28.B (5) b) >>> 19% 2. Property primarily held for sale to customers in the
Purpose: To attract investors in the Phils. 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 enumerated are called
ORDINARY ASSETS.
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 and he may
derive gain therefrom, that is considered as
Capital Transaction.
N.B. It is therefore safe to say that all properties not used
in trade or business are considered as Capital Assets.
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.
30
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 12th
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.
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.
2. Distribution of assets or shares of stock to stockholder
upon liquidation of a corporation.
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.
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
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.
So, the gain or loss may be 100% or 50% taxable
deductible as the case may be.
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.
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
31
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.
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 carry-over.
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.
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.
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.
32
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:
Property
Corp. A Corp. B
property for Stock
 33
Property:
Stock P50,000
Cash:
b. A stockholder of a corp. party to a merger or P50,000
consolidation exchanges his stock solely for stock in Corp. A Corp. B
another corp. party to that merger or consolidation. P100,000

Illustration: Stock FMV Stock:

Security or Stock P100,000

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

Stockholder ------------------------ Corp. 1. value of the property transferred by Corp. A is P50,000 while
Stock for Stock cash is also P50,000.
2. Securities
for stock So if you add all of these, the amount received or realized is
3. Securities P200,000.
for Securities
Now, you deduct the cost of the stock disposed of. Let us say
Security or Stock that the cost of stock is P80,000. So, Corp. B derived gain of
P120,000. Is this taxable?
** Sometimes, we call the above-mentioned transactions as
Transactions solely in kind or Tax Exempt Transactions. Answer:

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?
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.
Question: So, if these properties acquired under this
tax exempt transactions are subsequently disposed of, how
will you determine the basis?
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.
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.
Basis in the hands of the transferor
Less: FMV of the property
Cash received
Plus: Gain recognized, if any
Dividend recognized, if any
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.

Illustration: SHORT SALE

Property and Cash - 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
ESTATE & 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
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 extra-
judicially.
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:
34
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 incurred in
connection with the business of that estate or
trust.
Estate and trust are entitled to personal
exemptions P20,000.
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.
 35
5. purchased from exclusive fund.
Situation:
Grantor X created 2 trust. One is A trust created and EXEMPTIONS FROM ESTATE TAX
the other is B trust. There is only one beneficiary named Y. - special laws
Let us assume that the taxable income of trust A is 1. Benefits received [GSIS, SSS]
P10,000. The taxable income of B trust is P20,000. The total 2. proceeds of GSIS life insurance
taxable income is P30,000. We will tax these 2 trust separately 3. Benefits received U. S. Veterans
but through consolidation. 4. REPARATIONS WW II Veterans
In paying the tax after applying the applicable tax rate 5. RETIREMENT BENEFITS
to the taxable income of P30,000, the tax due should be - if included in gross estate
apportioned to trust A and B. 6. proceeds of group insurance
So, for purposes of income tax, the taxable income of
these 2 trust should be consolidated, but for purposes of DECEDENTS INTEREST
paying the tax, the tax due should be apportioned. assets that are still owned by decedent at the
time of death to the extent of his equity or
TRANSFER TAXES interest in any property whether as exclusive
owner, conjugal owner, or common owner.
Taxes may be imposed on onerous transmission of
properties or on the gratuitous transmission of properties. COMPOSITION OF GROSS ESTATE
[DI, T-GPA, RT, T-IC, P-LI, T-CD]
Transfer taxes that are imposed on the onerous transmission 1. DECEDENTS INTEREST
of properties: 2. TRANSFER by VIRTUE OF GENERAL POWER OF
1. VAT (value-added tax) APPOINTMENT
2. Percentage Tax (excluded this 1998 Bar) 3. REVOCABLE TRANSFER
3. Excise Tax (also excluded) 4. TRANSFER for INSUFFICIENT CONSIDERATION
5. PROCEEDS from LIFE INSURANCE
CONTENTS OF THE BACK PAGES 6. TRANSFER in CONTEMPLATION of DEATH

DIVISION OF GROSS ESTATE: FUNERAL EXPENSES INCLUDE:

1. INDIVIDUAL WHO DIED SINGLE 1. expenses for interment
- G. E. includes all that he owns at the time of death 2. mourning clothing [widow, children]
2. MARRIED DECEDENT 3. expenses for wake before burial
- his estate includes his exclusive properties and his shares in 4. charges for rites and ceremonies incident to interment
the conjugal properties BUT NOT the exclusive properties of 5. cost of burial plot
the surviving spouse 6. tombstone or monument
7. obituary or death notices
PROPERTY OWNERSHIP bet. SPOUSES
- NCC before Aug. 3, 1988 JUDICIAL EXPENSES
> CPG 1. accountants fee
- EXCLUSIVE PROPERTY under N.C.C. 2. appraisers fee
1. brought into the marriage as his/her own 3. administrators fee
2. acquired during the marriage by LUCRATIVE TITLE 4. attorneys fee
3. acquired by RIGHT of REDEMPTION or EXCHANGE with 5. docket fee
other exclusive properties 6. stenographers fee
4. purchased with exclusive money 7. other expenses of court hearings
- CPG under N.C.C.
1. acquired by ONEROUS TITLE CLAIMS AGAINST THE ESTATE
- common fund - obligations of the decedent contracted in good faith while still
2. acquired by INDUSTRY/WORK, SALARY or either alive but remains unpaid at the time of death
3. FRUITS< RENTS or INTERESTS [conjugal/exclusive]
4. all properties not determined to be exclusive shall be UNPAID MORTGAGES OR INDEBTEDNESS RULES:
presumed to be conjugal (claimed as deductions)
1. the said mortgage/indebtedness must have been
FAMILY CODE - after Aug. 3, 1988 contracted during the decedents lifetime in good faith for an
- ACP adequate and full consideration in money or moneys worth
- EXCLUSIVE PROPERTY under the F.C. 2. the value of the decedents interest in the property
1. gift, donation, contribution exclusively given to one of the mortgaged is included in the value of the gross estate
spouses only - must be undiminished by said
- gift and fruits/income considered exclusive mortgage/indebtedness
2. INHERITANCE given exclusively to one spouse
- gift or fruits/income considered exclusive 3. must not include:
3. acquired of personal and exclusive use A. any income tax upon income received after the
- except JEWELRY death of decedent
4. exclusively owned before marriage including fruits /income B. property taxes not accrued before his death
IF spouse has children from the former marriage C. any estate tax
 36
- If extra-judicially settled, 2 years
LOSSES fire, storm, shipwreck or other casualty, robbery, - It must file bond not to exceed double the
theft, embezzlement value to be paid

RULES:
1. must not be compensated by insurance SURCHARGE
2. must have been incurred during the settlement of the estate - 25% for late filing, for late payment
BUT NOT LATER than the last day for the payment of the - 50% for filing of false or fraudulent return
estate tax (6 mos.)
3. not claimed as deduction in an income tax return of the INTEREST 20% per annum
taxable estate
PARTIES TO A DONATION
TAXES which are not DEDUCTIBLE 1. DONOR gratuitously disposes
1. income tax or income received after death 2. DONEE receives and accepts
2. property taxes not accrued before death
3. estate tax KINDS OF DONATION
1. PERSONAL PROPERTY may be orally or in writing
COMPUTATION of VANISHING DEDUCTION FORMULA: EXCEPT: exceeds P5,000 donation and acceptance must be in
INITIAL BASIS writing
GROSS ESTATE X E. L. I. T. and transfers 2. REAL PROPERTY PUBLIC DOCUMENT
for public purposes ACCEPTANCE - same deed of donation or separate
instrument; done during the lifetime of the donor
SHARE OF SURVIVING SPOUSE
RULES: RULE: HUSBAND AND WIFE
1. the gross conjugal estate shall be diminished by expenses G.R.: Every donation between Husband and Wife during the
and charges EXCEPT those chargeable to the exclusive marriage is VOID
properties EXCEPTION:
2. the NET amount shall be divided into two (2) 1. donation mortis causa
3. goes to the surviving spouse and deducted from the estate 2. moderate gifts - family affair
of the decedent *** gifts coming from the conjugal property made by both
spouses are taxable, to each spouse
ALLOWABLE DEDUCTIONS
- NON-RESIDENT DECEDENT [ELIT-TVS] RULE on INADEQUATE CONSIDERATION
1. ELIT (expenses, losses, indebtedness, taxes) * if the property transferred is real property classified as capital
FORMULA: asset, the transfer is subject to capital gains tax of 6% and not
PHIL. GROSS ESTATE to donors tax
WORLD GROSS ESTATE x ELIT * where the consideration is fictitious, the entire value of the
property transfer shall be subject to donors tax
2. transfer for public purposes * the amount by which the value of the property exceed the
3. vanishing deductions amount of consideration shall be deemed a gift for purposes of
4. share of the surviving spouse the donors tax

NOTICE OF DEATH VALUATION OF GROSS GIFTS

- 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
- 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 half-
blood), 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.
37
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 non-resident
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.
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%, FC-SP), 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.
38
- 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
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.
39
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. 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. The merger of usufruct in the owner of the naked
title
b. Transmission or delivery of the inheritance or legacy
by the fiduciary heir or legatee of the
fideicommisssary.
c. Transmission of the property from the first heir,
legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
d. 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.
40
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.
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.
41
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. Parents who have abandoned their children or
induced their daughters to lead a corrupt or immoral
life, or attempted against their virtue.
b. Any person who has been convicted of an attempt
against the life of the donor, his or her spouse,
descendants or ascendants.
c. 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.
d. 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.
e. Any person convicted of adultery or concubinage
with the spouse of the donor.
f. Any person who by fraud, violation, intimidation, or
undue influence should cause the donor to make a
donation or to change one already made.
g. 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.
h. 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
on the properties of citizens of the Phils. who died in that
foreign country.
Sec. 104 is applicable to both estate tax and donors
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.
42
Customs duties are duties which are charged upon
commodities on their being imported in or exported out of a
country.
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.
Offices charged with enforcement or administration of
Customs laws
1. Tariff Commission (TC)
2. Bureau of Customs (BOC)
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.
After investigation, TC shall submit its report to the
Bureau Commissioners or to Secretary of Finance.
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
c.2. there was violation of the Customs law
committed within the Phils.
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.
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.
3. Recommend to the Sec. of Finance needed rules and
regulations necessary for the effective enforcement of the
provisions of the TCC.
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.
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.
Articles subject to Customs duties:
1. Dutiable articles are articles subject to Custom duties
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.
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
g. Articles for Public exposition. Included here are
historical books and personal
household effects
Customs duties may be classified as:
43
1. Regular or ordinary custom duties these are the ad
valorem tax and specific tax.
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.

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.
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.
44
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%.
He can only exercise these powers in the interest of
the national economy, national security and general welfare of
the people.
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. *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.
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.
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.
 45
If these duties are not paid by the taxpayer, the (f) Prohibited articles
government or the BOC has the
power to impose the following administrative (g) Devices, receptacles
sanctions:
(h) Envelopes, boxes, trunks
(1) Surcharges may be imposed under certain
situations (i) Beast
(2) Fines may be imposed under certain
situations (j) Thing of value or money which is intended to
(3) Seizure or forfeiture influence BIR officers.

Forfeiture is the penalty , seizure is the remedy. Tax Remedies under the Tariff and Customs Code:

Situations where goods may be seized or forfeited by the

government: Remedies Government Importer

(a) Articles, vessels, aircraft may be the subject matter of (1) (a) Enforcement of (a) Tax refund
seizure if they are unlawfully used in the importation Administrative tax lien (b) Abandonement
of foods into the Philippines or exportation of goods or (b) Seizure (c) Protest
form the Phils. extra-judicial

Case: (2) Judicial (a) Filing of civil (a) Appeal to CTA,

action CA, SC
Jose had a vessel, M/V Maria Victoria. It (b) Filing of (b) Filing of
was unlawfully used for the importation of cargo. criminal action criminal
When this was seized by the government, Jose raised if there is fraud action against
the defense of good faith. and it erring
must be serious Customs
Held: officials

(1) It is an action directed against the articles ENFORCEMENT OF TAX LIEN

and in fact, the caption of the case is Republic of the
Phils. vs. M/V Maria Victoria. It is a proceeding in Requisites:
rem, so good faith is not a defense.
(2) Even if the vessel did not carry the (1) Articles must neither be prohibited nor irregular
contraband, that may be the subject matter of seizure (2) The articles must be in the possession of the BOC
if the vessel facilities the importation of that
contraband. If the articles are prohibited or irregular, the remedy
It is not also required that the vessel must is seizure
come from the foreign country. Abandonment may be express or implied.

Case: Cruz was caught carrying a bulk of foreign Cases cognizable by the BOC
currencies. These were seized by the government
because she had no license issued by the CB to carry (1) Seizure cases on the part of the government and
said sum of foreign currency. (2) Protest case on the part of the importer

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.
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.

(c) Excessive sea stores for aircraft.

Sea stores must be in the place where it should be PROCEDURE IN PROTEST
displayed. If these are kept in the cabin of the crew,
these may be the subject matter of seizure because Remedy Where to file [Issues Prescriptive
these are considered excessive. which may Period
be raised]
(d) Unlawful transfer of cargoes from one vessel to (1) File a Collector of (a) Validity if 15 days from
another before reaching the point of destination. protest Customs the the payment
assessment or of Customs
(e) Unmanifested articles collection duties
 46
(b) Validity of 1. In the grantor or in conjunction with other person who does
classification not have substantial adverse interest in the disposition of the
of articles property.
(2) If Within 15 2. In any person who does not have substantial adverse
protest is Customs Questions of days from interest in the disposition of the property.
denied, Commissioner fact or receipt of the
Appeal (CC) Question of Collectors In irrevocable trust, you cannot transfer or revest the title of
collectors law ruling the property.
ruling
(3) If CC Question of Within 30 No substantial interest in the disposition of the property
affirm CTA fact or days from he must not be the beneficiary.
collectors Question of receipt of the
ruling, law decision of If the properties of the estate is not vested in a business, so
Appeal the CC. the heirs are just co-owners of the property, that is not taxable
(4) If CTA Question of Within 15 because co-ownership as a rule is not taxable.
affirm CA fact or days from
collectors Question of receipt of If the heirs decide to continue the business, such that the
ruling, law CTA administrator may manage the same, that will become an
Appeal decision unregistered taxable partnership.
(5) If CA Within 15
affirm SC Question of days from Estate and trust may be taxed on the same manner and on
CTA, law receipt of CA the same basis as in the case of individual taxpayers. S, they
Appeal decision may claim the deductions under Section 34 as long as these
deductions were paid or incurred in connection with the
TRANSFER TAXES business of that estate or trust.

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
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.

Estate may be the subject to tax if it is under administration. Question:

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.
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.

When we speak of judicial settlement, this may include Situation:

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 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:
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 non-resident
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.
47
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 creditor of the
estate), that may be considered as special
power of appointment.
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.
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
48
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 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.
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 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 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:
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.
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:
49
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.
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.
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
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.
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.
Judicial Remedies:
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
50
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
 51
the NLRC in regard to distraint on levy had
been complied with. The rule is, the BIR may collect taxes with
or without prior assessment.
Revenue taxes are self-assessing taxes.
PRESCRIPTIVE PERIOD FOR MAKING
Requisites of Assessment: AN ASSESSMENT & COLLECTION
1. Written notice stating that the amount is due as tax.
2. Written notice must contain a demand for the payment of With prior Without
such tax. assessment prior
assessment
Assessment is not a condition sine qua non I. Return filed is not false or 3 years from the 3 years from
for purposes of collecting taxes. This is so fraudulent date of actual the date of
because demand is not required. The rule a. Return was file filing. If it was actual filing
under Art. 1169 of the NCC that demand is but there exist a filed earlier than or from the
required before a person may incur in delay deficiency the date fixed by last day
cannot be applied. Taxpayer incurred in b. Return was filed the Tax Code. fixed by law
delay if he fails to pay the tax on date fixed but no payment for filing
by Tax Code. has been made COLLECTION: such return.
Within 3 years
Assessments, made by the BIR from the date of
Commissioner are presumed correct. The assessment
presumption does not violate the due II.
process under the Constitution because the Failure/Falsify/Fraudulent 10 years from Taxes may
presumption is merely disputable. a. Intentional failure the discovery of be collected
to file a return such omission of even
Normally, the BIR may require the taxpayer b. False return failure, falsity or without
to submit reports, documents, books of c. Fraudulent return fraud prior
accounts and other report to establish his tax assessment
liability. In the absence of these reports, COLLECTION: and
documents, etc., the BIR may determine the 3 years from the prescriptive
tax liability by using other methods. date of period is 10
assessment. years from
*The BIR can determine the tax liability of the
the taxpayer on the basis of that so-called discovery of
best evidence obtainable in the absence of failure or
said reports etc. In one case, agents of the omission,
BIR used the books of account seized as a falsity or
result of raid by means of search warrant. fraud.

Notes: The rule is if prior assessment has been

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 assessment is
mailed etc. but from the date the revised assessment has been
mailed.
The making of assessment is prescriptible.
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
52
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.
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 5-
year 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.
*** 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.
53
ISSUES: --- 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.

ISSUES that may be raised on appeal with the CTA >>>

Questions of

L
a
w

o
r

f
a
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: --- BIR