University of the Philippines

College of Law

LAW 129-A
AY 2017
Prof. Ma. Elizabeth Peralta-Loriega

COURSE OUTLINE
Module 2 Income Taxation

References:

National Internal Revenue Code of the Philippines, as amended by RA 9337

Philippine Income Tax, Mamalateo, Latest Edition

The National Internal Revenue Code Annotated, Volume 1, De Leon and De Leon, Jr.,
Latest Edition

Tax Law and Jurisprudence, Vitug and Acosta, Latest Edition

A. Overview of income taxation

1. Income tax
2. Income tax law
3. Features of Philippine income tax law
4. Criteria in imposing Philippine income tax
5. Types of Philippine income tax
6. When is income taxable
Conwi vs. Commissioner, 213 SCRA 83
Limpan Investment Corporation vs. Commissioner, 17 SCRA 703
7. Effects of application of tax treaties

B. Definition of terms
Section 22, NIRC

C. Kinds of income taxpayers

1. Individual taxpayers
Section 22(E), (F), (G)
Sec. 5 and 6, Rev Regulations No. 2
2. Domestic corporations
Section 22 (B), (C)
Collector vs. Batangas Transportation Co., 102 Phil 882
Gatchalian vs. Collector, 67 Phil 666
Evangelista vs. Collector, 102 Phil 140
3. Foreign corporations
 Section 22 (D), (H), (I)
Marubeni Corporation vs. Commissioner, 177 SCRA 500
British Overseas Airways Corporation vs. Commissioner, 149 SCRA 395

D. Computation of Taxable Income

1. Definition of Taxable Income

Section 31, NIRC

2. Computation of Gross Income

a. Items of Gross Income Subject to Tax

Section 32 (A), Tax Code

i. Compensation income
Sec. 2.78, Rev. Reg. 2-98, as amended
Brother hood Labor Unity Movement of the Philippines vs. Zamora,
147 SCRA 49
Henderson vs. Collector, 1 SCRA 649
ii. Fringe benefits
Section 33 (B) and (C), NIRC
Section 2.33 (A) and (B), Revenue Regulations No. 3-98, as amended
Rev. Regs. 10-2000
iii. Business income
Commissioner vs. BOAC, supra
Imperial vs. Collector, 97 Phil. 992
Arguelles vs. Meer, 92 Phil. 14
iv. Gains derived from dealings in property
Capital gains vs. ordinary gains, Section 39, NIRC, Section 22(Z), NIRC
Determination of amount and recognition of gain or loss, Section 40, NIRC
Review Section 42 (A)(5) and (6), (C)(5) and (E)
v. Interests
Distinctions between interest and dividend
vi. Rents
Revenue Regulations No. 19-86
Limpan Investment Corporation vs. Commissioner, 17 SCRA 703
vii. Royalties
Review Section 42 (A)(4)
Distinction between royalty and service income
viii. Dividends
Bachrach vs. Seifert, 87 Phil. 483
Commissioner vs. Manning, 66 SCRA 14
Commissioner of Internal Revenue vs. CA, 301 SCRA 152
Nielson & Co. vs. Lepanto Consolidated Mining Co.
ix. Annuities
x. Prizes and winnings
xi. Pensions
 xii. Partners distributive share from the net income of the general professional
partnership
xiii. Income from any source whatever
Gutierrez vs. Collector, 101 Phil. 713
Sec. 50 and 54, Rev. Regs. 2
Wise vs. Meer, 78 Phil. 655
BIR Ruling No. 039-2002, November 11, 2002

b. Exclusions from Gross Income

Section 32(B)

i. Life Insurance
ii. Amount received by insured as return of premium
iii. Gifts, bequests and devises
Pirovano vs. Commissioner, 14 SCRA 832

iv. Compensation for injuries and sickness

v. Income exempt under treaty
vi. Retirement benefits, pensions, gratuities, etc.
vii. Miscellaneous items

aa. Income derived by foreign government

bb. Income derived by a government or its political subdivisions
cc. Prizes and awards
dd. Prizes and awards in sports competition
ee. 13th month pay and other benefits
ff. GSIS, SSS, Medicare and other contributions
gg. Gains from sale of bonds, debentures or other certificate of indebtedness
hh. Gains from redemption of shares in mutual fund

c. Exempt Corporations
Section 30, NIRC
Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998

d. Deductions from Gross Income

Section 34, NIRC
Western Minolco vs. Commissioner, 124 SCRA 121
Commissioner of Customs vs. Philippine Acetylene Co., 39 SCRA 70
Commissioner vs. Arnoldus Carpentry Shop G.R. No. L-71122, March 25, 1988
Bank of the Philippines Islands vs. Trinidad, 45 Phil. 384

i. Itemized deductions
(Note: Study requirements for deductibility of each type of deduction)

aa. Expenses
Alhambra Cigar vs. Commissioner, 21 SCRA 1111
 Aguinaldo Industries vs. Collector, 112 SCRA 136
Commissioner vs. Smith Kline & French Overseas Co., G.R.
No. L-54108, Jan. 17, 1984
Hospital de San Juan De Dios vs. Commissioner, 185 SCRA 273
Section 120, Revenue Regulations No. 2
BIR Ruling No. 102-97
Section 68, Rev. Reg. No. 2
Section 5, Rev. Reg. No. 10-2002
Republic vs. MERALCO, G.R. No. 141369, November 15, 2002
bb. Interests
cc. Taxes
dd. Losses
Priscilla Estate vs. CTA, G.R. No. L-18282, May 29, 1964
ee. Bad debts
Coll vs. Goodrich, L-22265, December 22, 1967
Rev. Reg. 5-99
ff. Depreciation
gg. Depletion
hh. Charitable and other contributions
ii. Research and development
jj. Pension Trusts
kk. Additional requisites fro deductibility of certain payments

ii. Optional standard deduction

iii. Additional deductions available to individual taxpayers

aa. Premium payments on health or hospitalization insurance, Section

34(M), NIRC
bb. Personal exemptions, Section 35, NIRC

e. Items not deductible

Section 36, NIRC

f. Income and deductions of insurance companies

E. Tax Base and Tax rates

1. Individual income taxpayers

a. Citizen and resident alien

i. Global rates-Section 24 (A) (taxable income other than income under

Section 24 (B), (C), (D)

ii. Schedular rates

aa. Interest, royalties, prizes and other winnings, Section 24(B)(1)

 bb. Cash and/or property dividends, Section 24 (B)(2)

cc. Capital gains from sale of shares of stock not traded in the stock
exchange, Section 24(C)

dd. Capital gains from sale of real property

b. Non-resident alien individual

i. Non-resident alien engaged in trade or business in the Philippines

aa. Global rates Section 25(A)(1)

bb. Schedule rates Section 25(A)(1) and (2)

- Dividends
- Share in the distributable net income of a partnership, etc.
- Interests
- Royalties
- Prizes
- Other winnings
- Capital gains from sale of shares of stock not traded in the stock
exchange
- Capital gains from sale of real property

ii. Non-resident alien not engaged in trade or business in the Philippines

aa. Global Rate Section 25(B)

bb. Schedule Rates Section 25(B)

- Capital gains from sale of shares of stock not traded in the stock
exchange
- Capital gains from sale of real property

iii. Alien individual employed by regional or area headquarters of

multinational companies
iv. Alien individual employed by offshore banking units
v. Alien individual employed by petroleum service contractor and sub-
contractor

c. Members of general professional partnerships, Section 26

2. Corporate Taxpayers

a. Domestic corporations

i. Global rate, Section 27(A), (B), (C)

-domestic corporations in general
-proprietary educational institutions and hospitals
-government-owned or controlled corporations, agencies or
 instrumentalities

ii. Schedular rates, Section 27(D)

-certain interest from deposit and yield or any other monetary benefit
from deposit substitutes, trust funds and similar arrangements
-capital gains from sale of shares of stock not traded in the stock
exchange
-capital gains from sale of real property

iii. Minimum Corporate Income Tax, Section 27(E)

b. Resident Foreign corporations

i. Global rate, Section 28(A)(1)

ii. Minimum Corporate Income Tax, Section 28(A)(2)

iii. Schedular rates, Section 28(A)(7)

-certain interest from deposit and yield or any other monetary benefit
from deposit substitutes, trust funds and similar arrangements
-income derived under the expanded foreign currency deposit system
-capital gains from sale of shares of stock not traded in the stock
exchange
-intercorporate dividends

iv. International carrier, Section 28(A)(3)

v. Offshore banking units, Section 28(A)(4)
vi. Tax on branch profit remittances, Section 28(A)(5)
vii. Regional or area headquarters and regional operating headquarters of
multinational companies, Section 28(A)6)

c. Non-resident foreign corporation

i. Global rate, Section 28(B)(1)

ii. Schedular rates, Section 28(B)(5)

- interest on foreign loans
- intercorporate dividends
- capital gains from sale of shares of stock not traded in the stock
exchange

iii. Nonresident cinematographic film owner, lessor or distributor, Section

28(B)(2)
iv. Nonresident owner or lessor of vessels chartered by Philippine nationals,
Section 28(B)(3)
v. Nonresident owner or lessor of aircraft, machineries and other
equipment, Section 28(B)(4)
F. Improperly accumulated earnings tax
Section 29
Revenue Regulations No. 2-2001
Commissioner vs. Antonio Tuason, Inc. G.R. No. 85749, May 15, 1989
Manila Wine Merchants vs. Commissioner, G.R. No. L-26145, February 25, 1984
Basilan Estates vs. Commissioner, 21 SCRA 17

G. Tax-free exchanges
Section 40(C)

H. Accounting methods and periods, and filing of income tax returns

1. Accounting methods, Sections 43, 48, 49

a. In general
b. Methods of accounting authorized under the Tax Code
i. cash
ii. accrual
iii. installment
iv. percentage of completion
v. crop year basis

2. Accounting periods, Section 44, 45, 46, 47

3. Filing of income tax returns

a. Individual return, Section 51

b. Corporation returns, Section 52 and 53
c. Returns of receivers, trustees in bankruptcy, assignees, Section 54
d. Returns of general professional partnerships, Section 55
e. Fiduciary returns, Section 65

4. Payment and Assessment of Income Tax, Section 56

5. Withholding of tax at sources, Section 57

6. Returns and Payment of taxes withheld at source, Section 58

7. Declaration of income tax for individuals, Section 74

8. Declaration of quarterly corporate income tax, Section 75

9. Final Adjustment Return, Section 76

10. Place and time of filing of quarterly corporate income tax, Section 77

I. Withholding Taxes

1. Withholding of tax at source

Section 57
Revenue Regulations No. 2-98
British Traders Insurance Co. vs. CIR, G.R. No. L-20501, April 30, 1965
 Commissioner vs. Malayan Insurance Company, G.R. No. L-21913, November 18, 1967
Commissioner vs. Procter & Gamble, G.R. No. 66838, December 2, 1991
Gibbs vs. Commissioner, 15 SCRA 318

a. Final withholding tax

b. Creditable withholding tax

2. Returns and payment of taxes withheld at source, Section 58

3. Withholding on wages, Sections 78 to 83

K. Estates and Trusts

Sections 60 to 66