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Introduction 5/23/2017 8:50:00 PM

Favorite Bar Exam Topics (1999-2008):


Excluded: NIRC Sec. 116-201
 Percentage Taxes (Title V, NIRC; Sec. 116-128)
o Except:
 Exempt Transactions (S.109 a, b, c, d, e)
 Excise Tax (Sec. 129-172)
 Documentary Stamp Tax (Sec. 173-201)

Tax Pyramiding (Ppl v. Sandiganbayan)

Sources of Bar Exam Questions in Tax


1. Income Tax (8.4%  8 Qs)
2. Tax Remedies (6%  7 Qs)
3. General Principles (3%  4 Qs)
4. Estate Tax (1.1%)
5. Donor’s Tax (1.1%)
6. Local Government Taxation (1.2%)
7. Real Property Taxation (0.8%)
8. TCCP / Customs Duties (1.5%)
9. Value Added Tax (0.5%)

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Title I 5/23/2017 8:50:00 PM

Sources of Income Tax Law


1. 1997 Tax Reform Act (NIRC): Secs 22-83
 favorite: Secs 22-42
 50 new rules

10 Salient Features of The Present Income Tax System:


1. Schedular
2. Global
3. Gross Income Taxation
4. Net Income Taxation
5. Income tax Situs
6. Test of Income taxation
7. Basis
8. Income Tax Rates
9. Pay as you file system
10. Substituted Filing

Basic/Salient Features of the Present Income Tax System in the light of


amendments introduced by RA 8424 (p.70 Mamalateo)
 Also the same as:
o Systems of income taxation / methods / tax treatment
o Features of a Schedular Tax System: 12 Systems of Income Taxation
o Method of taxation to which the NIRC belongs
o How does the tax code tax income?
 Answer:
o Schedular Tax System / Treatment – system in law, where the
income tax rules / treatment varies and made to depend on the kind /
category of taxable income of the tax payer (Tan v. del Rosario). It
operates under the following characteristics: (p.1 Dimaampao IT)
1. Categorizes/classifies income: Sec. 32a (memorize!) cf: Secs
24, 25 & 26 (imposes different tax rates) – categorizes income
of individual taxpayers (11 types)
2. Provides for different tax treatment
3. Imposes different tax rates
o Global Tax System / Treatment – a system or tax treatment which
views, indifferently the tax base, and generally treats in common all
categories of taxable income of the taxpayer (Tan v. del Rosario) (p.2
Dimaampao IT)

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 Provides for uniform tax rules / tax rates
 Income Tax of Corporations (Secs 27 & 28) - generally does not
categorize/classify income
 Imposes uniform corporate tax rates
 Covers:
i. Domestic Corporations (Sec 27)
ii. Resident Foreign Corporations (Sec. 28A)
iii. Non-resident Foreign Corporations (Sec. 28B)
 As amended by RA 9337: corporate rate = 30%
effective Jan 1, 2009

Distinguish: Schedular Tax System v. Global Tax System (p.15 UP Bar Ops
Reviewer)
As to… Schedular Global
Tax Treatment Different tax treatment / Uniform tax treatment /
rules rules
Classification of Income Categorizes / classifies Does not generally classify /
income categorize income
Tax Rates Imposes different tax rates Imposes uniform tax rates
Applicability Applies to individual income Applies to corporate income
taxation taxation

Net / Gross Income Taxation

What is the method of income taxation that allows deductions and grants personal
exemptions? (Allows Taxpayers to claim allowable deductions (Sec 34) & Grants
personal exemptions (Sec 35)) (2000 Q.10)
 A: Net income taxation - characteristics
o Allows taxpayers to claim deductions and personal exemptions
o The tax base / the basis of the tax rates is net / taxable income

What is taxable /net income? (Sec. 31) [1977]


 A: gross income less allowable deductions and personal exemptions

T/F: Our tax system does not use the gross income taxation
 Under exceptional cases, we have adopted gross income taxation w/c applies
to:

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o Non-resident aliens not ETB (Sec. 25: B, C, E)
o Non-resident foreign corporations or NRFCs (Sec 28, B 1, 2, 3 & 4)

What is meant / discuss gross income taxation / what is gross income for purposes of
income tax? (Sec. 32A: enumerate 11 different kinds of income; p. 11 Dimaampao
IT)
 Gross income does not allow deductions and grants no exemptions.
 The tax base is gross income

Distinction between gross income taxation and net income taxation: (p. 13 Dimaampao
IT)
As to… Gross Income Taxation Net Income Taxation
Taxpayer’s claim for Allows no deductions, Allows deductions, grants
deduction / exemption grants no exemptions exemptions
Tax base Gross income Net / taxable income
Applicability 1. NRA not ETB Applies to the following
2. NRFCs individual & corporate
taxpayers:

Individual taxpayers
1. RC: Resident Citizen
2. NRC: Non-resident
Citizen
3. RA: Resident Alien
individual
4. NRA ETB

Corporate taxpayers
1. DC: Domestic
Corporations
2. RFCs: Resident Foreign
Corporations

What is your opinion on the advantages / disadvantages of GI / NI Taxation? (p.13


Dimaampao IT)
 GIT
o minimize of source of graft & corruption (margin of discretion exercised
by Revenue District Officers)

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o simplifies income tax system
 NIT
o Just, fair & reasonable (RA 8424 Sec 2) = equitable relief to taxpayers,
improve levels of disposable income & increase economic activities
 Equitable relief = deductions and exemptions
 Taxpayers encouraged to engage in income-generating
activities
 More revenues to the government
o Minimizes fraud in claiming deductions
 Counter-checking by the BIR

Income Situs (Tan v. del Rosario) = Comprehensive income tax situs (RPN)
1. Residence (Sec. 23)
a. Resident citizen
b. Resident alien individual
c. Resident corporation
2. Place / source of income
a. Could only be taxed from sources within:
i. Non-resident citizen (Sec. 23 b & c)
ii. NRA
iii. RA (amendment)
b. Could be taxed from income sources without:
i. RC
ii. DC
 Basis: nationality / citizenship
o State-Partnership Theory (Comm v. Liglig) – state shall provide
PRIC: protection, resources, incentives, climate for production of
income
 Emanates between the partnership between the State & its
inhabitants
o Protection Theory - Sources of income: PAS - Property, Activity,
Service (British Overseas Airways Corp v. Commissioner)
 BOAC was an Offline international airline but due to transfers,
enjoyed protection of Philippine law (place of sale)  not
applicable due to modified meaning of GROSS PHILIPPINE
BILLINGS (p.34 UP Bar Ops reviewer)
 Origin of passengers (basis of tax) as per Sec 28A3, as
implemented by RR 25-2002

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3. Nationality / citizenship of taxpayer

Test of Taxable Income


It’s not the actual receipt, it is the right to receive, that determines when to include an
amount in the gross income. (Filipinas Synthetic Fiber Corp v. CA)
 Doctrine of Constructive Receipt (RR 2, Sec 52) – p.8-9 Dimaampao I.T.
o The right to receive must be unconditional, valid and enforceable.
o Such amount must be credited to the account of the taxpayer.
 If subject to legal restriction – not considered as constructively
realized:
 E.g. Interest income of bank deposits (Sec. 53, RR 2)
o Examples of income constructively realized:
 Cash / Property Dividends received by RC, NRC, RA (Sec. 24B
item 2)
 Cash / Property Dividends received by NRA ETB (Sec. 25 A 2)
 Share of a partner from the NI of a GPP (Sec 26 last par)
 Share of a partner from a taxable / business partnership (Sec.
73 D)
 Rent income deposited in court by the lessee of the property in
view of the unjustified refusal of the lessor (Limpian Investment
Corp v. Commissioner) cf: Art. 1261 NCC

Basis of the computation of Taxable Income (Sec. 43)


Taxable income shall be computed on the basis of taxpayers’ annual accounting period.
 2 Accounting Periods:
a. Calendar Year – an accounting period of 12 months that starts on Jan 1 and
ends on Dec 31
o May be adopted by individual and corporate taxpayers
b. Fiscal Year – an accounting period of 12 months, ending on the last day of
any month other than December (Sec. 22q)
o Can only be adopted by corporate taxpayers
 Relevance of accounting periods: Tax Remedies (Sec. 229, Sec. 43 & 77b):
Prescriptive period for filing of tax refund is 2 yrs from the date of payment.
o As far as corporate taxpayers are concerned, the 2yr period
commences to run from the filing of the final adjustment corporate tax
return. – April 15 if calendar year (TMX Inc)

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 If a corporate taxpayer filing tax refund has adopted the fiscal
year period, the deadline for the filing of the final adjustment
corporate tax return is on / before the 15th day of the 4th month
following the close of the fiscal year period. (Sec. 77b)
 E.g. accounting period ended on June 30, 2005. The
deadline of the filing of the final adjustment tax return is
on October 15, 2005. The 2yr period / deadline for filing
of claim of refund is on October 15, 2007.

Income Tax Rates


Individual
 Progressive Rates (Sec. 28) – tax rate increases as the tax base increases
o Equitable tax (Art. VI Sec 28 par 1, 2nd sentence 1987 Consti)
o Re: VAT & the constitutional provision that Congress shall provide for a
progressive tax system: direct taxes should be preferred, and indirect
taxes should be minimized as much as possible. The mandate of
Congress is not to prescribe, but merely a directive. Thus the VAT law
has been sustained. (Abakada Guro)
o Tax Pyramiding (People v. Sandiganbayan) – a tax on tax; it does not
have basis in law and has been rejected by Congress.
Corporate
 Uniform Corporate Rate of 30% as applied to DC, RFCs (Sec. 27 & 28)

2 Systems
1. Final withholding tax system (Sec 57)
2. Creditable withholding tax system (Sec. 78)
As to… Final withholding tax Creditable withholding
system tax system

Items of income 28 items of income subject Compensation for services


to FWT (focus on 6: rendered – e.g.
RPWIDS) compensation income
1. Royalties (salaries, wages,
2. Prizes - amount more commissions)
than P10K (if less:
regular income, subject

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to regular income tax,
not subject to final tax)
3. Winnings – except PCSO
& lotto
4. Interests Income on
Bank deposits
5. Dividends received from
domestic corporations -
If received by a DC or
RFC  tax exempt
 Received by
individual
taxpayers
 Received by
NRFC
6. Share of a partner from
the NIAT of a business
partnership
 If received from
a GPP: part of GI

Tax Withheld Cannot be claimed as a tax Can be claimed as tax credit


credit to income tax due / payable
- final, complete payment - withholding agent:
of TP’s tax liability employer

Effect on the Subject Extinguishes taxpayers’ tax Does not extinguish the
Income liability taxpayer’s liability
- need not be reported as - has to be reported as part
part of the gross income of of the gross income of the
the taxpayer taxpayer (thru the ITR)
Filing of IT Return TP is no longer required to Taxpayers are required to
file IT Return if the only file IT returns
sources of income are those
subjected to FWT under
Sec. 57 (Sec. 51A2c)
e.g.

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1. NRA not ETB (Sec. 25
B, C, D, E cf: Sec.
51A2c)
2. NRFCs (Sec. 28B items
1, 2, 3, 4) – explains
the following concept:
 Sec. 52F – Every
corporation except
NRFCs are required to
file quarterly corporate
income tax return

Deductible Tax v. Creditable Tax


Deductible Tax Creditable Tax
may be deducted from gross income (one deducted, credited against taxpayers’
of the allowable deductions) income tax due / payable

Pay as You File System (Sec. 56A1) – payment is done when you file your income tax
1. Individuals and Estates (Sec. 62) – annual payment on or before Apr 15 (Sec 51c1)
2. Corporate – Domestic corporations file their IT quarterly (Secs 75 & 76)  qualify
by:
 For the 1st, 2nd, and 3rd quarters, it must file the summary of its gross income
and expenses, which shall be reported on a cumulative basis. Thereafter, it
shall file its final adjustment return, showing the entire income for the whole
taxable year.
 Rationale for quarterly payment & filing:
o Ensures timeliness of collection of the corporate income tax
o Payment in installment eases burden on domestic corporations
o Improve the liquidity / cash flow of the government (cf: consistent
with Administrative Feasibility)

Fundamental Principles of a Sound Tax System (FAT)


1. Fiscal Adequacy – sources of revenue must be adequate to meet government
expenditures
2. Administrative Feasibility

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3. Theoretical Justice
 Any violation of the first 2 principles will not render the law invalid, because
they have no constitutional basis (unlike the principle of theoretical justice)
 Determination of the wisdom, expediency, necessity of the tax-measure
belongs to the law-making body of the State

Substituted Filing of Income Tax Return (RR 3-2002) – if an individual taxpayer has
complied with the following conditions, he is no longer required to file income tax return:
1. Only source of income is compensation income (purely compensation income earner)
2. One employer in the Philippines
3. The tax withheld by the employer should be equal or the same as the income tax due
 If income tax due is more than tax withheld: required to file ITR
 A compensation owner whose annual income is not more than P60K. (RR 3-
2002)  mere BIR regulation
o The tax law, however, imposes no limitation (cf: Sec 51A2b)
o BIR Regulations are valid if they are consistent / in harmony with the
tax code
4. Employer must file BIR form 1604 showing tax withheld on employee’s compensation
income
 Such tax withheld is tantamount to a subsequent filing of an income tax
return.

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Title II 5/23/2017 8:50:00 PM

General Principles of Income Taxation


 Sources: Only provides rules on sources within & without (Sec 23)
 Tax base (WON you could claim deductions) – (Secs 24 & 25: Individual, 27,
28: Corporate)
o answers if a taxpayer could claim allowable deductions
 Accounting periods that may be adopted
o TP’s annual accounting period: Calendar year / fiscal year (Sec 43)
 Tax rates (Sec 24, 25, 27, 28)
 Income Tax Due / Payable
 Filing of ITR (Sec 51, 51, 75, 76)

Classification of Sources of Tax base Annual Tax Filing of


Taxpayers income Accounting Rates IT Return
Period
Individual: Sec Sec 23 Secs 24, Sec 43 Secs 24, Secs 51,
23 a, b, c, d cf: 25 25, 27, 28 52, 75 & 76
Sec 22
RC W/n & w/o GI Calendar 5-32% Required
(Sec 23A) 1
Less: AD (Sec Year Progressive (Sec
24A1a) Rates (Sec 51A1a)
Taxable Inc 24A1c)

Less: PE

IT Payable

NRC W/n2 (Sec GI Calendar 5-32% Required


23B & C) Less: AD (Sec Year Progressive (Sec
24A1b) Rates (Sec 51A1b)
Taxable Inc 24A1c)

Less: PE

IT Payable


RA W/n3 GI Calendar 5-32% Required
Less: AD (Sec Year Progressive (Sec
24A1c) Rates (Sec 51A1c)
Taxable Inc 24A1c)

1 Secs 34 & 35
2 Effective Jan 1, 1998

3 Effective Jan 1, 1998


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Less: PE

IT Payable

NRA ETB45 W/n (Sec GI Calendar 5-32% Required


23D) Less: AD (Sec Year Progressive

25A1) Rates (Sec

Taxable Inc 24A1c)

Less: PE6

IT Payable

NRA not ETB W/n GI (no AD/PE) Calendar FIT: Not


Year 25% required
(Sec
Special NRA Not 15% (b) 51A1c)
ETB
1. Offshore Banking

Units

2. Regional HQ of

MNCs

3. Employees of
petroleum

contractors/subcon

Corporate: Secs 27,


Sec 23 e, f 28
cf: Sec 22
DC W/n & w/o GI CY/FY (Sec Uniform Required
(Sec 23) Less: AD 23) Corporate (Sec 52A
Taxable Inc IT Rate cf: 72 &
(Sec 27a) 30%7 76)

4 e.g. Mr..., having stayed in the Phils for more than 180 days could only be taxed on
income from sources within…may claim AD & PE, subject to recip, may be taxed for his
income earned during the CY, applying progressive rates, required to file ITR.
5 aggregate stay in the Philippines for more than 180 days (Sec 25A1) – e.g. June 15-Dec

15 = 183 days
6 but may only claim PE subject to the rule on reciprocity (Sec 34)
7 Effective Jan 1, 2009 (RA 9337)

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RFC8 W/n (Sec GI CY/FY Uniform Required
23F) Less: AD Corporate (Sec 52A)
Taxable Inc IT Rate
(Sec 28A1) 30%9

NRFC W/n (Sec GI CY/FY FIT: 30% Required


23F) (Sec
28B1)
Special NRFCs GI Not
(Sec 28B2) Required
1. NR Dist of FIT: 25%
Cinematographic

Films

2. NR Lessor of Vessels FIT: 4.5%


Chartered to Phil

Citizens

3. NR Lessor of Aircraft,

Mach & Equipment FIT: 7.5%

NRA ETB v. NRA not ETB


NRA ETB NRA not ETB
Sources No distinction: only taxable on income from sources within
Tax Base Can claim deductions, PE Cannot claim deductions
subject to the rule on recip
Tax Rates Progressive Rates: 5-32% FIT (25%, 15%)
Filing of ITR Required Not required

Tests to determine WON a foreign corp is doing business in the Phils:


1. Transactions must be in line with its Ordinary business
2. Continuity of Commercial Transactions (Mentholatum case)
3. Intention to carry out the body / substance of the foreign corporation

8Tax Code is silent. But there are tests to determine WON a foreign corp is doing
business in the Phils.

9 Effective Jan 1, 2009 (RA 9337)

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4. Actual specific, commercial transaction consummated in the Phils. Therefore,
mere exporting of goods does not result in ETB, pursuant to RA 7042 Sec 3B.
(Val. Brothers v. GBTL Mfg Corp)

RA 7742?: Opening of offices, branches, performance of, continuity of


commercial transactions, perfection of contract, entering into a dealership
agreement, management, supervision of business

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Requisites for Validity of BIR Regulations
1. Consistent – in harmony with the Tax Code
2. Reasonable
3. Useful & necessary
4. Published in the OG / NGC
- mere interpretive rules should not change / modify the tax code.

Memorize: Sec 32A


What is GI for purposes of IT?
Codal PBC-PRP-WPD-PARI
1. Compensation for services rendered 1. Professional income
2. Business / Trade, Professional Income 2. Business / Trade Income
3. Property Income 3. Compensation Income
4. Interests 4. Property Income
5. Rents 5. Rent Income
6. Royalties 6. Prizes
7. Dividend Income* 7. Winnings
8. Annuities 8. Pensions
9. Prizes, winnings 9. Dividend Income*
10. Pensions 10. Partner’s Distributive Share from NI of
11. Partner’s Share from NI of GPP GPP
11. Annuities
12. Royalties
13. Interests*

Income
1. Gross Compensation Income – compensation for services in whatever form paid,
may include salaries, commissions & similar items (NIRC)
o Gross Compensation income refers to all renumeration for services
rendered or performed by an employee for his employer, arising
under an employer-employee relationship, unless specifically
excluded by the Tax Code (RR 2-98 Sec. 2.78.1)
o Determinative Test: Presence of the employer-employee relationship
(SPDC)

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 Selection
 Payment - compensation
 Dismissal
 Control
o Payment made by a contractor to a contractee, in the absence of an ER-EE
relationship is business / trade income
o Payment made to a professional for services rendered, in the absence of
an ER-EE relationship should be taxed as professional income
- Importance (Sec. 34 cf: Sec. 35): Allowable Deductions
o Personal exemptions
o Premiums on life / hospital insurance (Sec 34 m)
 P2400/yr
 Gross Annual income P250,000
 Claimed by spouse who will claim additional AD
- Taxable compensation income is not only limited to payment made in cash;
payment may be made in kind. (Sec 32A1: in whatever form paid)
o Life Insurance premiums on the life of the insurance policy of the EE
o Cancellation / forgiveness of indebtedness
-

2 Tax Implications of Payment made for services rendered (tax implication = tax
effect = tax consequence = tax incidents):
 EE: Income Tax (Sec 32A1)
 ER: Ordinary, unnecessary Expense (Sec 34A1) – reasonable allowance for salaries
and wages, and other compensation for personal services actual rendered
o How much can be treated as compensation?  Reasonable, and FV of
services rendered (Sec 34A1a.i.)
 P30K (ER)
 P30K compensation income and P20K income derived from whatever
source (EE)
o Claim of Right Doctrine – illegal / unlawful income, profit / gain is subject
to tax

 Death Benefit for the EE from the ER (Sec 32B qualifies Sec 32A) – enumerates
exclusions from gross income
o No income there

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 Rules on Life Insurance Premiums
o ER:
 ER who pays insurance premiums on the LIP of his manager /
supervisor  Taxable Fringe Benefit subject to FT (Sec 33B 10)
 When insured is a rank & file EE  compensation income: in whatever
form paid (Sec 32E.A1)
 LIP paid by the taxpayer - May not be claimed as a deductible expense by the
ER if it is designated as the beneficiary (Sec 36A4 Non-deductible items )

 Tax treatment of LIP paid by the ER


Beneficiary Designated ER (expense) EE (Income)
Executor, Administrator, Deductible ordinary & 1. Mgr/Sup: subject to
Estate necessary expense (Sec 34 FBT, which is a FT (Sec
A 1: other forms of 33 B 10)
compensation for personal 2. R&F: taxable comp inc
services actual rendered) (Sec 32 A 1)
ER Non-deductible expense – No taxable income
whether the ER is  No benefits received
directly/indirectly since basis for IT is
designated as the benefit/gain
beneficiary (Sec 36 A 4)

Rationale: mere return on


capital

 Cancellation / forgiveness of indebtedness (RR 2, 1940 Sec 50)


1. May result in taxable compensation income for services rendered
2. May constitute a taxable donation
3. May also be considered as a taxable capital transaction

o Tax Treatment of Cancellation / Forgiveness of Indebtedness


Situation CR DR
ER-Cr Allowable deduction Taxable compensation
EE-Dr income
(Sec 34A1a.i.: Other forms
Consideration: services of compensation for (Sec 32A1: Compensation
rendered personal services rendered) for services in whatever

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form paid)
ER-Cr Subject to donor’s tax on a Not subject to income tax
EE-Dr direct / indirect donation;
(Sec 32B item 3: donation /
Consideration: Liberality May be claimed as a bad gifts are excluded from GI)
(Donation) debts expense
(Sec 34 e) No more donor’s tax10

Unpaid obligation of P100K; The transaction is a taxable


Dr declared insolvent, Cr capital transaction
agreed to accept payment
through dacion en pago
Cr-corporation condoned Interest on capital / Taxable as dividend income
the debt of the Dr-SH preferred shares of stock is
a non-deductible interest. (taxable as dividend)
- must be condoned / No exceptions. (RMC 17-
renounced w/o prejudice to 71, Jul 12, 1971)
the Trust Fund doctrine

Compensation Income (Sec 32A) v. Fringe Benefits (Sec 33)


Compensation Income Fringe Benefits*
Rates Progressive Rates of 5-32% Final Tax
Reporting Must be reported by the Need not be reported by the
compensation earner manager / supervisor
Except:
Sec 33C item 3:
FB given to R&F EEs – not
taxable subject to final tax
(but should be reported as
part of gross compensation
income)

Bar Qs
 2001 # 1
 2003 # 3

10 Abolished by PD 69

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 2004 # 5
 2007 #

Definition of FB: *Memorize Sec 33B


 Form: cash, goods, services, other benefits
 Recipient: mgrl, supervisory EEs (RR 3-98 adopted Labor Code def’ns), except
R&F EEs
 Source: ER
 10 Taxable FBs: (HEV-HIM-EHEL)
i. Housing*
ii. Expense Account
iii. Vehicle
iv. Household personnel
v. Interest on Loan**
vi. Membership benefit in social / other athletic clubs
vii. Expenses for foreign travel***
viii. Holiday & vacation expenses
ix. Educational benefit****
x. Life / health / non-life / accident Insurance Premiums*****

*Housing Benefit: Employer’s Convenience Rule (RR 3-98) – tax-exempt (MTB):


1. Housing unit situated w/n ER’s Business premises
 Housing unit outside the business premises – as long as adjacent (w/n a 50m
perimeter) from the business premises of the ER (RR 3-98)
2. Temporary Housing Unit (RR 3-98)
 3 mo’s or less
3. Military Housing unit - Traditionally exempt housing benefit11

**Actual rate of interest must be less than the market rate


 Market Rate: 12% (RR 3-98)
 Examples: ER granted loan. Will this result in taxable interest benefit if
interest rate is…:
o 14% - no
o 12% - no
o 0-11.99% - yes

11 asked in 1995

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***Expenses for foreign travel – Requisites / Conditions / Situations under w/c expenses
for foreign travel may not be subject to FBT (RR 3-98):
a. Must be paid / incurred in connection with the business of the ER (business
expense) – e.g. conventions, seminars, business meetings
b. Must be supported by receipts / documents (Substantiation)
c. Exempt only up to $300
d. Cost of airplane ticket:
i. Economic class: exempt
ii. First class: exempt up to 70%

****Educational Benefit – 2 categories:


1. Granted to the Mgrl / Supervisory EE – in the nature of a scholarship grant;
requisites:
 Agreement between mgr / supervisor that the EE will stay in the employ of
the ER within a certain period of time, as an expression of gratitude
2. Dependent of the EE – ER may adopt competitive exams to be administered by the
ER

******Life / health / non-life / accident Insurance Premiums:


1. SSS
2. GSIS
3.

De Minimis Benefits – Implication; Definition & 2 Characteristics:


1. Minimum amount – relatively of small amount
2. Purpose/s for grant: Promote CHEG
 Contentment
 Health
 Efficiency
 Goodwill

Tax Exempted De Minimis Benefits


Amount Type of FB
P125 Medical Cash Benefits Given to the dependent of the EE
300 Laundry Allowance
1,500 (NEW!) Rice Subsidy / Allowance (increased from P1000 by RR 5-2008,
RR 10-2008)

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4,000 (NEW!) Clothing / uniform benefit (increased from P3000 by RR 5-2008,
10-2008)
5,000 Christmas / Anniversary gift (cf: Sec 32 B 7 e – lump sum
limitation of P30K to Christmas bonus / productivity allowance)
10,000 Employees’ achievement award
Medical benefit granted to EEs (cf: P125 limit if granted to
dependents)
No minimum amount Commuted value / monetized of unused VL / SL
(RR 3-98 as amended 1. Govt – exempt from receipt of commuted value of unused
by RR 5-2008, RR 10- VL / SL (no more 10-day rule)
2008) 2. Private – Apply the 10-day rule
 VL – unused up to the 10 day VL credits; in excess: taxable
 SL – taxable (applying strictissimi juris)
 Retiree – exempt from receipt of all monetized VL / SL
benefits (Zialcita case)

Zialcita (190 SCRA 851) – monetized value of unused VL


credits may form part of terminal leave pay, which is exempt 
received by the EE on account / cause beyond his control
(compulsory retirement)
Fruits, books & cars, gifts on account of occasions of the EE
Reasonable
Overtime pay - not more than 25% of the basic minimum wage

Also considered as taxable FBs (Goods, services or other benefits)


1. Laptop
2. Motor vehicle
3. Courtesy discount

Sec 32 (Prof income, Business / Trade Income) cf: Sec 74 – define self-employment
income; what are considered as self-employment income?
1. Business / Trade Income
 Is business / trade income the same as gross income from gross sales /
receipts? NO.

Formula:

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Gross sales12/ receipts13:
Less: SD, SRA
Net Sales
Less: CGS & mfg’d/ Cost of Sales
Gross Income from conduct of trade / business

 1) Gross income from conduct of trade or business (32.A.2) - to come up with this start with

GROSS SALES or RECEIPTS

 (2) Gross sales or receipts -. apply to sale of services. Deduct the COST OF INVESTMENT. If

manufacturing, cost of goods sold and manufactured. If merchandising, cost of sales. And also

deduct sales discounts, sales returns and allowances.

2. Professional Income
3. Share of a partner from the income of partnership

Gains Derived from Dealings in Property (Sec 32A) / Property Income cf: Secs 39 & 40
 Ordinary v. Capital Asset (Memorize Sec 39A1) –
o Ordinary asset – Ordinary assets are limited to the following…
 4 Kinds of Ordinary Assets (Expressio unios est exlusio alterius) –
SOUR:
 Stock in trade – inventoriable assets (e.g. Mfg)
o Raw materials
o Finished Goods
o Work-in-process Goods
 Ordinary course of trade / business – property primarily held for
sale to customers in the ordinary course of trade / business
(e.g. Real Estate dealers)
 Used in trade / business – depreciable assets used in trade /
business (e.g. machinery, furniture / fixture in Mfg / Service)
 Real Property used in trade / business – if not, it will be a
capital asset
o Capital assets – property held by the TP WON connected to his trade /
business but does not include SOUR (defined by way of exclusion)
 Exercises:

12 from sale of goods


13 for sale of services

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o All properties held by the TP in connection with his trade / business are
ordinary assets  FALSE. The definition of a capital asset includes properties
held by a TP in connection to his trade / business, but not covered by SOUR
 E.g. Think other assets in B/S: Accounts receivable, collectibles,
marketable securities, investment in stocks, goodwill in business, other
intangible assets from which extra-ordinary gain will be derived if sold,
etc)
o Capital assets are always capital assets  FALSE.
 Capital assets may also become ordinary assets in certain situations.
 E.g. Real estate assets of a real estate dealer inherited by heirs,
property w/c was formerly not used in business but improved to
be used in business
 Property primarily held for sale to customers in the ordinary
course of trade / business – TEST: Substantial Improvement:
When a property has been substantially improved / actively
sold, it may be a property primarily held for sale in the ordinary
course of business. The improvement is substantial if the
amount of the improvement is double the original cost of the
property. (Calazans v. Commissioner, 144 SCRA 664)
 Valuable improvement: The improvement is considered valuable
if there is an unmistakable intention of the TP, not only to
liquidate the estate of the decedent, but also to make the
property saleable to the general public. (Tuazon Jr v. Lingad, 58
SCRA 170)
o Valuable improvements include: (BASIC)
 Broker relationship established between the seller
& the broker – did he really engage in the
business of buy & sell?
 Area improved – e.g. 7ha of land in the Tuazon
case
 Subdivision – were the lots subdivided? And the
subdivided lots SOLD to the general public?
 Improvement – there must be an unmistakable
intention of making the lots attractive to the
general public
 Continuity of the business
o Conversely, ordinary assets may also be converted into capital assets.

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o Factors to consider when an ordinary asset may still be considered as
an ordinary asset (RR 7-2003) FENCIA – inconsistent with Sec 39 A1
 Failed business of a real estate business (real estate
developer)*
 Engaged in R/E business (developer, lessor)
 No longer engaged in the business of real estate
 Change in business
 Involuntary Transfer of Property – may include expropriation or
foreclosure of property
 Abandoned, Idle Property

Special Rules (that apply to capital transactions):


1. Holding Period – 12months (Sec 39B) – a form of tax avoidance
 Reduces taxpayer’s taxable capital gain by 50% if capital asset is sold after
the 12month holding period (Statute of Partial Exemption)
o If sold within the 12month holding period, it will be completely taxable
 Only applies to capital assets and individual taxpayers.
o If the asset were an ordinary asset, the 12month holding period would
not be applicable
o If the taxpayer were a corporate taxpayer, it would not be applicable.
2. Capital Loss Limitation (Sec 39C) –
 Principles:
o Capital loss is deductible only from capital gain.
o Capital loss cannot be deducted from ordinary gain.
o Ordinary Loss may be deductible from capital Gain – no prohibition in
the tax code
 Rationale: Matching (of costs against revenues) principle - Capital loss is a
non-business connected expense, which is not an allowable deduction in Sec
34. Only business expenses are deductible from ordinary income.
 Application:
o Individual
o Corporate
 Except trust bank & trust companies
3. Net Capital Loss Carry-over (NELCO) (Sec 39D) –
NELCO Sec 39D NOLCO Sec 34D
Net Capital Loss Carry Over Net Operating Loss Carry Over

Scope Capital assets / transactions Ordinary asset / transaction


Applies to…TP Individual Individual / Corporate

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Period (when Loss 1 yr (only in the succeeding 3 yr period (X: mining
deductible) year) companies – 5 yrs)

Net Capital Loss (definition in Sec 39A3) - the excess of the capital loss over capital
gain. (if the capital loss is more than the capital gain)

Statute of Partial Exemption - Long-term capital asset which may result in the
reduction of capital gain (held for more than 12 months)
 How do you construe provisions of the Tax Code re: capital transactions?
o A: Strictly construed against taxpayer holding the capital asset
(partakes the nature of exemptions. Therefore strictissimi juris)

Not all capital transactions are covered / subject to Special Rules, but are subject to
other certain special rules (Sec 24, 25, 26, 27):
1. Sale of shares of stock – considered as a capital transaction (applies to individual &
corporate taxpayers alike)
 Listed – considered as capital asset (Title V, Sec 127a): ½ of 1% of the gross
selling price (GSP)
 Not listed – considered as income tax (FIT)
o P100K & below - 5% (before: 10%)
o Any amount in excess of P100K – 10% (before: 20%)
2. (Sec 24D vs Sec 27D sec 5)
Sale / disposition of real Sec 24D Sec 27D5
property not used in trade /
business
Applicability Individual Taxpayers Domestic Corporations
Coverage Real Property (except Land and building
machinery – cf: Sec 199,
RA 716014)
Tax Base Higher amount between: GSP & zonal value
Tax Rate 6% (before 5%)

14
Sec 199 of RA 7160 (LGC) – amplified definition of machinery in the NCC: Machinery –
tend to meet the needs of the business of the owner
1. Whether permanently attached / temporarily attached
2. Must be actually, directly and exclusively used to meet the needs of a particular
business / authority e.g. the business of mining, agricultural, other business

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Option of applying tax rate Option granted to the No option granted to
individual seller domestic corporations
If the buyer is the gov’t –
buyer may apply
progressive rates of 5-32%
Tax Avoidance Scheme Tax avoidance Scheme in
Sec 24D2: Principal
Residence is the subject of
sale

5 Conditions for Exemption under Sec 24D2 (1-4) and RR17-03 (5):
1. Proceeds of the sale must be used to construct / purchase a new principal residence
 Dwelling characterized by the element of permanency: animus revertendi (RR
13-99)
2. 30-day notice to the BIR
3. Comply with the 18th month period – within which to construct / purchase a new
principal residence
4. 10 yr limitation – can only be availed of once every 10yrs
5. RDO & authorized agent bank should execute an ESCROW AGREEMENT with the
seller
 the 6% CGT should be deposited under the ESCROW ACCOUNT
 within 30 days from the lapse of the 18th month period, the seller could
withdraw the amount.

Presumptive Gain Principle (presumed gain) a.k.a. Gain by Legal Fiction (Sec
24D1) – even if the seller incurred a loss, he can still be made to pay the 6% CGT
 remember: the tax base is the higher of the GSP / zonal value; cost not
deductible
 applies only to sale of real property considered as capital asset; does not take
into account the costs / loss sustained by the seller because as far as the law
is concerned, there is a presumption that the seller acquired gain
 exception to the rule that cost is allowed as deduction to the amount realized
(GR: Formula in Sec 40A)

Formula in Determining Taxable Gain from Deductible Loss from Sale of an Asset /
Property (Sec. 40A)
Selling Price / Amount Received or Realized
Less: Cost / Adjusted Basis - (determined by mode of acquisition)

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Taxable Gain / Deductible Loss

How did you acquire the property that you disposed of? (to determine Cost / Adjusted
Basis): PIDI
 Purchase (it’s really the cost)
 Inheritance – FMV of property at time of death of decedent
 Donation – FMV of property at time of donation (same basis for the donor)
 Insufficient / inadequate Consideration – same basis in the hands of the 1st
transferor of the property
o If property was acquired way below its FMV

Alternative Tax Treatment: No Gain / Loss Recognized (Sec 40C2, an exeption to Sec
40A) – gain from initial sale is tax-exempt, but the subsequent sale is taxable
 Exempt exchanges of property, shares of stock and securities
 Situations covered: 
o In accordance with a plan of merger / consolidation =another form of
tax-avoidance!
o Corporate control (Sec 40C6c) – 51% (same definition as corporate
control under the Corpo Code) acquired by 5 people (max: a person,
alone or together with others, not exceeding 4 persons in Sec 40C2
last paragraph)
 Transactions solely in kind: no cash given
 Property for stock
 Stock for Stock
 Security for Stock
 Effect:  Gain = tax-exempt; loss = non-
deductible
 Transaction not solely in kind - If additional cash is given
 Effect: Gain = recognized; loss = not recognized
 Merger / consolidation includes the ordinary meaning of merger
/ consolidation and expanded to cover the acquisition / transfer
of all assets in exchange solely for shares of stock (Sec 40C6b)
 even if no PLAN of merger/consolidation

Recap: Examples of Tax-Avoidance:


1. Holding Period Rule
2. Sale of Real Property considered as capital asset in Sec 24D

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3. Exchange of property/ shares of stock / securities in line with a plan of merger /
consolidation
4. Exchange of property/ shares of stock / securities by maximum of 5 people to gain
control

Gain Recognized, Loss Not Recognized – applicable tax treatment to:


1. Transactions not solely in kind
2. Illegal transaction (e.g. income from bribery)
 Illegal / unlawful (Sec 32A) – Income derived from whatever source in
accordance with the CLAIM OF RIGHT DOCTRINE (US v. Ratkin)
 Illegal loss is non-deductible
3. Related taxpayers (Sec 36B) – non-arms length transactions
 4 Groups:
o Members of the same family
o Stockholder & corporation – factor: corporate control
o Sister corporations: 2 corporations who are owned & controlled by
same stockholders
o Parties to a trust (Trustor, Trustee, Fiduciary, Beneficiary)
 Cf: concept / definition of Stranger (in Donor’s Tax) – (Sec 99B)
4. Wash sale transaction (Sec 38)
 Subject:
o Shares of stock
o Securities
o Stock options
 Seller: must NOT be a dealer in securities
 Period:
o 30 days before the sale till 30 days after the sale a.k.a. 61-day sale–
seller acquires substantially identical securities
 Tax treatment: Gain from wash sale = taxable; Loss = non-deductible
o Rationale: Loss from wash sale is artificial loss. It is not actually
sustained or incurred.
 Sec 34D prescribes requisites for a deduction of a loss
 Actually sustained or incurred

Wash Sale (Sec 38) v. Short Sale (Sec 39F1)


Wash Sale Short Sale
Gain Taxable Treated as capital gain

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Loss Not deductible Treated as capital loss,
which is deductible from
capital gain

Concept of a Short Sale Transaction – represents an obligation payable in kind / goods


Seller merely speculates that on this day the price of the security or share will increase.
If the price decreases, he earns an income. If the price increases, he incurs loss. Hence
there is a short sale, He just borrowed the security or share of another person and he
may promise to buy them in goods / securities.

Failure to Exercise Option to Buy / Sell -

Additional Capital Transactions (in addition to Sec 39 of NIRC)


1. Adjustment of partner’s interest in a partnership (Secs 142 & 142 of RR-3)
2. Liquidation of a corporation (Secs 143 of RR-3)

Item 4: Interest Income


GR: Taxable
X: (Sec 32B7a)
1. Foreign government
2. Financial institution financed / controlled by foreign government
3. International / regional foreign institution established by foreign government
o Interest income on deposits made in the Philippines
o Interest income from loans extended
o Interest income on long-term debentures
4. Income derived from long-term deposits / investment / management account (Sec
22w)
 Term: 5yrs
 Denomination: P10K
 Subject to BSP Regulations
 Provisions on exemption
o If depositor is a RC, NRC, RA - exempt (Sec 24B1)
o If depositor is a NRA (Sec 25A2)
 ETB – exempt
 NETB – not exempt (Sec 25B)
o If depositor is a corporate taxpayer – not exempt

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5. Interest income from FCDA system – same whether individual / corporate taxpayer
 If depositor is a non-resident - exempt
 If depositors is a resident – non-exempt (7.5%)

*Interest income from government securities is taxable. (Sec 32B)

Items 5 & 6: Rent Income v. Royalties


Rent Income Royalties
Tax Treatment Subject to regular tax Subject to FIT
Reporting Must be reported Need not be reported

Additional Taxable Rent Income (in addition to Lease Income)


1. Obligations of the lessor assumed paid by the lessee
 E.g. Real Property Tax on lease premises
 Lessee pays interest of Lessor’s debt
 Insurance Premiums of Lessor’s property paid by the lessee
2. Value of permanent improvement
 long-term contract of lease – may contain stipulation that ownership of lease
shall pass to the lessee at the end of the lease contract
 2 methods of reporting of value of permanent improvements
o Outright method – upon the completion of such permanent
improvement, such FMV of the same shall be reported as additional
rent income of the lessor in addition to the regular rentals
o Spread-out method – the depreciated value of the permanent
improvement upon the expiration of the contract of lease; aliquot
portion reported as rent income throughout the remaining period of
lease

Item 7: Dividend Income


Type of Dividend Source Recipient Tax Treatment
Cash, Property Domestic RC, NRC, RA FIT: 10% (Sec
Dividend Corporation 24B2)
NRA ETB FIT: 20% (Sec
25B2)
NRA NETB FIT: 25% (Sec
25B3)

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Domestic Tax-exempt (Sec
Corporation 27D)
RFC Tax-exempt (Sec
28Ad)
NRFC FIT: 15% (Sec.
28B5b)
FC: Any
Income derived
from sources w/n =
at least 50% of the
NI must be derived
from Phil sources for
the last 3 preceding
taxable yrs (Sec
42A2b)
Stock tax exempt

rationale: no flow
of wealth so no
realized gain:
Transfer from
surplus account to
capital (Sec 73Bb)

Exeption re: Redemption of Shares of stock – may or may not result in taxable stock
dividend
Source: original capital investment / initial capital subscription – redemption does not
result in a taxable gain, as it is merely a return on capital
Source: stock dividend declarations – taxable since it may result in a flow of wealth, in
such time and manner essentially equivalent to the declaration of taxable dividend
There has to be flow of wealth so stock redemption may result into taxable income.
(Commissioner v. Andres Soriano Corp 301 SCRA 152)

Is stock dividend received by usufructuary taxable? 2 Views:


Massachusetts view: Tax-exempt

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Pennsylvania view: Taxable  in accord with Art 566 of the NCC: Usufructruary shall be
entitled to all natural, industrial & civil fruits of the usufruct. Stock dividends are fruits
of the thing in usufruct.
(Basrach v. SEIFERT 87 Phil Rep)

Disguised dividends in Income taxation  Taxable


Board declared stock dividends declared not in accordance with the Corporation Law,
requiring presence of unrestricted R/E. But they made it appear that dividends declared
were stock dividends so they could evade the payment of tax on dividends.

 Dividends deemed stock: Stocks distributed as dividends were sourced from
another corporation  Taxable
 Change in SH’s interest in a corporation
 Common Preferred Shares of Stock issued by a corporation
(Commissioner v. Marin cf: Q1, 1994)

Income Subject to FIT:


 Interest Income from Bank Deposit (Arroyo case)
 Div received from DC by NRFC, NRA
 RPWADS

RPWADS
Royalties
Prizes
 More than P10K
Winnings
 Exempt:
o PCSO
o Lotto
Annuities
Dividends Received
Share of a partner from the NIAT of a Taxable Partnership (Sec 24B2 & 25A2)

Income subject to FIT – income governed by the Final W/holding Tax system. Under
this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is not required to report the same as part of his income
because such final tax w/held shall serve as full payment / settlement of the tax liability
on income.

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Income subject to CWT – income governed by the Creditable W/holding Tax System.
Under this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is required to report the same as part of his gross income.
Such tax w/held will not extinguish TP’s tax liab on such income. The tax w/held can be
claimed by the TP as creditable tax.

Cash dividend received by an RC/RA from a DC is subject to FIT & not progressive
rates of 5-32% (Sec 24B2)
Rationale:
1. Ensure collection of tax on dividend, which will immediately go to the coffers of gov’t.
(NIT: no assurance that individual TP’s will report dividend income.
2. Easier compliance: By shifting responsibility to the corporations, the BIR could easily
monitor the compliance. (NIT: It would be extremely difficult for the BIR to check
compliance with individual TP)
3. Sure revenue to the government
4. Reportable income which could be offset against a loss
5. Lessen the burden on the taxpayer
 Same reasons why Interest Income from bank deposits is subject to FIT (just
qualify individual TPs w/ the term depositors, and substitute banks for
corporations)

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Exclusions from GI 5/23/2017 8:50:00 PM

Exclusions from Gross Income (Sec 32B) LAGCIRM (formerly: LAGICIRM, I =


interest income from bank deposits now subject to income tax)
 Life Insurance Policy proceeds*
o Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be
included / excluded from the Gross Estate)
 Included:
 Beneficiary is estate, executor, administrator
(irrevocable / revocable designation)
 Third person (may include ER) is revocably designated
beneficiary (determine WON revocable)
 Irrevocable designation will exclude LIP proceeds
from the GE
 Excluded: Received by any beneficiary
 Proceeds of group insurance policy
 LIP taken on own life
 Irrevocable designation will exclude LIP proceeds from
the GE
 Awards & Prizes
 Gifts, Donations
 Compensation for injuries / sickness**
 I
 Retirement Benefits, Exemptions, Etc**
 Miscellaneous Items****

Donation: Donor-Donee
Tax Implication of Donation Inter Vivos
1. Donor – subject to donor’s tax
2. Donee – not subject to donee’s tax (abolished by PD 69)
- also not subject to income tax (because donation is excluded from GI)

Tax Implication of Donation Mortis Causa


1. Testator – subject to estate tax
2. Heirs – not subject to inheritance tax (abolished by PD 69; Jan 1972)

*Life Insurance Policy proceeds

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 Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be
included / excluded from the Gross Estate)
o Included:
 Beneficiary is estate, executor, administrator (irrevocable /
revocable designation)
 Third person (may include ER) is revocably designated
beneficiary (determine WON revocable)
 Irrevocable designation will exclude LIP proceeds from
the GE
o Excluded: Received by any beneficiary
 Proceeds of group insurance policy
 LIP taken on own life
 Irrevocable designation will exclude LIP proceeds from the GE

**Compensation for Injuries / Sickness – not taxable, no income realized


Q: WON the foregoing damages are taxable:
 Hospitalization expenses – NOT TAXABLE.
 Moral damages – 2 views:
o Taxable - Sec 32A “income derived from whatever source”; no
exemptions granted; strictissimi juris
o NOT TAXABLE– In effect, imposing tax on grounds for MD:
 Sec 2217 (NCC): 9 grounds for Moral Damages (MBA-SWS-PAF)
 Moral shock, Besmirched reputation, mental Anguish,
Social humiliation, Wounded feelings, Similar injury,
Physical suffering, serious Anxiety, Fright
 Cf: Art 2219 par 7 was applied in the Filipinas Broadcasting
case, awarding moral damages to a corporation for defamation
 Exemplary damages – NOT TAXABLE: Based on sound public policy
 Cost of repair of damaged car – NOT TAXABLE. Indemnification
 Lost profit – TAXABLE. He could have earned this if he were not hospitalized

***Retirement Benefits, Pensions, etc


 A. Retirement Benefits
o Received from private ER - 4 requisites for exemption:
 Source: BIR-approved retirement plan
 Age of retiree EE: 50yrs of age

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 Length of service: at least 10yrs
 Limitation: can only be availed of once
o All retirement benefits received from the GSIS (given to public / gov’t
EEs) are EXEMPT.
 B. Separation pay
o Must be received on account of causes BEYOND the control of the EE /
official
 Includes termination due to labor-saving devices, losses
incurred by the ER
o Kinds
 Death benefit (Sec 32B6)
 Physical disability benefit
 Sickness benefit
o Compulsory retirement is considered a cause beyond the control of the
EE, hence all benefits received, including the so-called terminal leave
pay is exempt. The terminal leave pay covers monetized value of
unused VL/SL credits. (Zialcita case)

^_^Check out 1999 Bar Qs^_^

Q (1999): A Co., a Philippine corporation, has two divisions — manufacturing and


construction. Due to the economic situation, it had to close its construction division and
layoff the employees in that division. A Co. has a retirement plan approved by the BIR,
which requires a minimum of 50 years of age and 10 years of service in the same
employer at the time of retirement.
There are 2 groups of employees to be laid off: 1) Employees who are at least 50 years
of age and has at 10 years of service at the time of termination of employment. 2)
Employees who do no meet either the age or length of service A Co. plans to give the
following:
For category (A) employees - the benefits under the BIR approved plan plus an ex gratia
payment of one month of every year of service.
For category (B) employees - one month for every year of service.
For both categories, the cash equivalent of unused vacation and sick leave credits.
A Co. seeks your advice as to whether or not it will subject any of these payments to
withholding tax. Explain your advice.

A:

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All of the payments are not subject to income tax and should not also be subject to
withholding tax. The employees were laid off, hence separated for a cause beyond their
control. Consequently, the amounts to be paid by reason of such involuntary separation
are excluded from gross income, irrespective of whether the employee at the time of
separation has rendered less than ten years of service and/or is below fifty years of age.
(Section 32(B), NIRC)

Does it necessary follow that retirement benefits are exempt from estate tax? (Sec
86A7) – YES. An allowable deduction from Gross Estate, by virtue of RA 7641 in relation
to the LC.

RA 7641 cf: RA 4917, 86A7 – salient points:


 Retirement benefits that may be given to EEs under the CBA or any other
agreement are exempt.
 If there is no established retirement plan given by the ER, likewise exempt
provided:
o Tenure: Rendered at least 5yrs of service
o Age: 60-65yrs old

Q: What are tax implications of receipt of GSIS benefits and their subsequent deposit in
the bank?
A: GSIS benefits are EXEMPT; If deposited in the bank, interest income therefore will be
subject to tax. (Same as SSS benefits)

****Miscellaneous Items
A. Interest income that derived / may be received by a foreign government, , ,
B. financing institution
C. finance controlled by a foreign gov’t
D. regional financial institution established by a foreign government

 Sources of investment: loans, deposits, stocks, LT cert of indebtedness,


dividends, interest income

Case (Commissioner v. Mitsubishi Metal, 1990): EXIM Bank, an international


financing institution extended loan to Mitsubishi Metal and used it to extend loan to a
Philippine corporation, Atlas Mining Corp. Mitsubishi Metal claimed that the interest
income was exempt since the amount likewise came from an exempt institution. Loan –

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P20M Sale – Atlas will purchase mining equipment to be sold to Mitsubishi for P50M.
BIR: Mitsubishi is taxable. CTA: Mitsubishi is an agent of the EXIM Bank.

SC: Interest on the loan is taxable. The source is tax-exempt, therefore the interest
should not be taxed. However, there was no clear & convincing evidence that Mitsubishi
was indeed an agent of Japan. When the contract between Mitsubishi & EXIM was
consummated, the money ceased to belong to EXIM 15; it was already owned by
Mitsubishi. The other contract of loan was executed between Mitsubishi & Atlas.
Exemptions should be construed strictly against the TP, hence it could claim no
exemption.
 Of course, different answer if Mitsubishi were indeed an agent

Income derived by Government / Political Subdivisions


From
 Public utility
 Exercise of essential governmental function
Accruing to:
 Government of the Philippines – National / Local (does not qualify
“government” as national)
o Mactan Cebu Int’l Airport Case – Gov’t of the Philippines is
synonymous as Republic of the Phils. Republic of the Philippines may
include instrumentalities, where GOCCs belong.
o Cf: Sec 27C – Exempt GOCCs from Corporate Income Tax:
 GSIS
 SSS
 Phil Health Ins Corp
 PCSO
o Exemption of PAGCOR was withdrawn by RA 9337 (July 1, 2005)

Prizes & Awards (Sec 32B7c & d)


(C) (D)
Requisites for Exemption 3
Conditions must concur: SCRA-LEC: Received by an athlete who

15Citing Art. 1953: When such contract is consummated, the borrower acquires
exclusive ownership over the thing borrowed.

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Scientific, charitable, participated in a
religious, artistic, literary, competition – whether here
educational, civic or abroad
achievement
No action on his part to Sanctioned by the National
enter the contest Sports Association – The
Philippine Olympic
Committee must approve
(Law creating the Philippine
Sports Commission)
Unconditional receipt:
should not be required to
render future services

cf: RA 7549:
 The recipient of such an award, exempt from Income Tax.
 The donor of such an amount, exempt from Donor’s Tax. (not yet in the Tax
Code; not in Sec 101A3)
 Such amount can be claimed as a deductible contribution. (not yet in the Tax
Code; not in Sec 34H)

Gains from the Sale of Bonds, Debentures or Other Certificates of Indebtedness



Sale/Exhange/Retirement of Bonds, Debentures / Other CIs – more than 5yrs:
exempted; 5yrs or less: taxable

Informer’s Reward
 No longer an exclusion from GI (Sec 32B)
 Taxable with 10% FIT (Sec 282)

FCDA
 Recipient
o resident individual / corporate: 7.5%
o non-resident: exempt

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Corporate Income Taxation 5/23/2017 8:50:00 PM

18 Exempt Associations, JVs, Entities:


 Sec 22B – Exempts 3
o GPPs
o Joint venture for purpose of undertaking construction projects
o Joint construction for purpose of engaging in petroleum, coal,
geothermal & other energy operations in accordance with the
consortium agreement with the government
 Sec 27C – Exempts 4 GOCCs
o GSIS
o SSS
o Phil Health
o PCSO
 Sec 30 – Exempts 11: remember common characteristics
o Non-stock, non-profit corporations
o No part of the income must inure to the benefit of a particular
member/individual
o Social welfare, Religious, Charitable and other non-profit purposes
o Par E: 6 exempt corporations: CARS
 Charitable
 Cultural
 Athletic
 Religious
 Rehabilitation of veterans
 Scientific Organizations
 Non-stock, non-profit educational institution (H)
 Government educational institution (I)
o Memorize Sec 30 last par: …income of whatever kind / character from
any of their properties, real / personal or any activities conducted for
profit, regardless of the disposition made of such an income shall
be subject to tax imposed under this code.
o YMCA v. Commissioner 298 SCRA 83: YMCA is a religious &
charitable institution, but did not qualify as a non-stock, non-profit
educational institution. YMCA advanced that it was exempt under Art
VI, Sec 28 par 3 of the Constitution & Art XIV, Sec 4, par 3 of the
Constitution, contending that it was a non-stock non-profit institution
and should not be taxed for the receipt of rent income. Such an
income should be used to carry out its religious, charitable and
educational purposes.

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SC: Rent income from lease of property subject to tax, regardless of
purpose for the income.
 Art VI, Sec 28 par 3 of the Constitution only applies to real
property.
 Art XIV, Sec 4, par 3 only applied to non-stock non-profit
educational institution, to which YMCA does not belong.

Non-stock non-profit educational institution


Exemption of non-stock non-profit education institution is merely a reiteration of Art IV
of the Constitution: Actually, Directly & Exclusively used for such purposes  The use of
the amount is the test of exemption.
 Interest income from bank Deposits – to avail of exemption from 20% FIT,
the non-stock, non-profit educational institution Cf: DOF 149-95
 Cf: DOF 149-95: requires concurrence of the following conditions for
exemption:
o Proof in the form of certification, issued by the bank of deposit in that
particular bank
o Certification re: actual utilization of such amount for educational
purposes
o Resolution of the BOT that such amount will be used for expansion of
educational project

Interest on Deposit of bank deposits:


Subject to 20% FIT if depositor: (Sec 30 is categorical: regardless of use / disposition)
 Government educational institution
 private educational institution
 charitable institution
 religious organization
Exempt
 if depositor is Non-stock, non-profit educational institutions: subject to
conditions in the DOF 149-95 (CCP)

Rules on Exemption on:


 Income Tax (Sec 30 NIRC)
 Property Tax (Art VI Sec 28 par 3 Consti; Lung Center of the Phils v. Roces)
 Donor’s Tax (Sec 101 A3)
 Estate Tax (Sec 87D)

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Is…exempted Income Tax Property Tax Donor’s Tax Estate Tax
from… (Sec 30 NIRC)
Religious YES ADE: Actually, YES. Provided NO
directly, complies with
exclusively* conditions
used for
religious
purposes
Educational Institution
Private NO. ADE: Actually, NO NO
Subject to 10% directly,
preferential exclusively*
corporate rate if used for
income from its educational
unrelated purposes
activities is not
more than 50%
of its income.
Government YES (Sec 30i) May be exempt NO
from donor’s
tax
Non-stock, non- Yes (Sec 30h, YES. Provided NO
profit Art XIV Sec 4 complies with
par 3 Consti) conditions
Charitable YES (Sec 30e, ADE: Actually, YES. Provided YES, provided
subject to last directly, complies with the 30%
par) exclusively* conditions requirement is
used for complied with
charitable
purposes

*Exclusively is no longer construed as primarily. Now, the court construes the


meaning of exclusively as solely. Doctrine of incidental purpose no longer exists.
(Lung Center Phils v. Roces)
- partial exemption is allowed (Lung Center of the Philippines v. Quezon City)

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9 Donations Exempt from Donor’s Tax (QARTIER-CPS) – with conditions for
exemption
 Qualified Donees
 Accredited Non-government organizations (RA 8424)
 Religious organization
 Trust foundations
 Educational institutions – non-stock non-profit
 Research institution
 Cultural organization
 Philanthropic organization
 Social welfare organization

 Conditions for exemption:


o Non-stock non-profit
o Not more than 30% of the donation shall be used for admin purposes
o Trustees receive no compensation
o Donations for the achievement of purposes as stated in Articles of
Incorporation

Donations Mortis Causa (Sec 87D CSC) – subject to condition: Not more than 30% of
the donation shall be used for admin purposes
 Charitable Institution
 Social welfare institution
 Cultural

Corporations include partnership no matter how created or organized – registration


with the SEC is not required
 JV / Association need not comply with the formal requirements of the law
regarding the creation of a partnership. (Collector v. Gatchalian)
 A taxable partnership is formed for as long as parties have the intention to
divide profits among themselves & there is a contribution to a common fund.
 Co-ownership not taxable; merely for the enjoyment of the co-owners (not for
profits) – seemingly conflicting doctrines:
o An unregistered taxable partnership was formed between the heirs.
(Unya v. Commissioner 45 SCRA 74, 1972) – apartments were
purchased by heirs and they received rent income therefore.

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o There was no unregistered taxable partnership formed / organized.
(Obillos, 139 SCRA 136, 1985) – sold property to divide proceeds only,
not for profit
o There was no unregistered taxable partnership formed / organized.
(Pascual & Dragon, 166 SCRA, 1988) – 5 parcels of land were
purchased & later on sold by heirs. SC applied test in Art 1769; heirs
shared in gross receipts of sale. Mere sharing in the gross receipts
does not in itself establish partnership.

Significant Rules:
 MCIT
 IAET
 Branch Profits Remittance Tax
 Tax sparing credit rule (Sec 28B5b)

MCIT of 2% of GI – applicable to DC (Sec 27E), RFC (Sec 28A2)


 Rationale / underlying basis: Forestall the prevailing practice of
corporations of over-claiming deductions in order to reduce their income tax
payments (not stated in RR 9-98)
 Equitable Provisions of the MCIT:
o Applies only to a corporation on the commencement of its 4 th yr of
corporate operations.
 Sec 27E par 1 – not automatically imposed on a newly-formed
corporation; proven fact that corporations often operate at a
loss for the 1st 3yrs
o Excess of MCIT can be claimed as a tax credit for 3 consecutive taxable
years (Carry-Forward Rule)
o Suspended for corporations that suffer losses due to:
 Prolonged labor dispute – strike that has lasted for more than
6months
 Force majeure
 Serious / Legitimate business reverses
 Illustration:
o Actual NIT Payable: P300,000 v. MCIT of 2% of GI: P450K  Claim
P450K (since more than actual)
o P150K (P450-P300) can be claimed (carried forward)
 Amendment (RR 12-2007)

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o Now included in the quarterly IT return (new! Before annual reporting)
 Scope of Application:
o Does not apply to NRFCs
o DCs
 X  but can still be taxed under the 10% Preferential Corporate
Rate
 Private educational institution (RR 9-98)
 Non-profit hospitals
o RFCs
 X:
 International carriers exempt from MCIT  subject to
2.5% FIT
 Regional HQ of MNCs, OBUs  still subject to 10% FIT
 Registered under the PEZA (RA 7916) and BCDA (RA
7227)  still subject to the preferred corporate tax of
5%

IAET of 10% (Sec 29) – improper accumulation of corporate earnings is taxed


 Cases when there is improper accumulation of corporate earnings:
o When the Corporation, despite presence of unrestricted retained
earnings in excess of 100% of their paid up capital, did not declare
dividends to SH
o Reserved earnings are invested in unrelated business / activity
o Investment in bonds and other long-term securities
 However, accumulation is proper / justified when: PNP
o Project: Corporate earnings are used for expansion corporate project
o Necessary for probable contigencies (p.69 Dimaampao I.T.) –
enumeration is not exclusive:
 Allowance for increase in accumulation of earnings up to 100%
of paid-up capital as of B/S date inclusive of accumulations
taken from other years
 Definite corporate expansion projects
 Earnings reserved for acquisition of equipment, buildings,
machinery
 Earnings reserved for compliance with loan covenant
 Earnings required by law / regulation in respect of which
distribution is prohibited

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 All undistributed earnings reserved for distribution in the
Philippines by the subsidiaries of a foreign corporation
o Prohibited: Dividend declaration is prohibited by a provision in a loan
agreement
 Rationale (RR 2-2001): Regulation – IAET of 10% is in the form of penalty to
corporations who should declare dividends when warranted by circumstances
– presence of unrestricted R/E. It is a deterrent to possible tax avoidance on
the part of SHs. (Had dividends been distributed, the government could have
imposed a FIT of 10% on stockholders)
 Exclusions from coverage:
o Bank, other non-bank financial intermediaries
o Public corporations
o Insurance companies
 Scope of application:
o Closed corporations – not more than 20 stockholders

Branch Profits Remittance Tax – FIT of 15% (Sec 28A5)


 Coverage: RFC engaged in trade / business in the Philippines
 Acts that constitute doing trade / business & make a foreign corporation an
RFC RA 7042 Sec 3D (POASA)
o Participation in management, supervision, control of a business in the
Philippines
o Opening of a branch in the Philippines
o Appointment of an agent
o Soliciting contracts
o Any act which will imply the continuity of commercial transactions
 Tax Base: Branch Profits
o Effectively connected with conduct of trade / business in the
Philippines: the amount applied / earmarked for remittance (no longer
the amount actually remitted)
 Tax Rate: 15% FIT
 Case: Marubeni Doctrine (Marubeni v. Commissioner 177 SCRA 500)
o SC: The remittances is not taxable for not being effectively connected
with conduct of trade / business in the Philippines. The investment of
Marubeni-Japan in a domestic corporation is a business that is different
& distinct from the business carried out by Marubeni. Direct

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investment by the mother company in the company has no direct
connection with conduct of trade/business of Marubeni-Philippines.

Tax sparing credit rule (Sec 28B5b) – 15% of dividends from DCs
 Contemplated situation: NRFC received cash / property dividend from a
domestic corporation
 Income covered: Dividend income
 Tax Rate: 15% FIT
 Rationale for reduction of corporate rate from 30% to 15%: To attract /
encourage foreign investments by reduction of the income tax rate (P&G v.
Commissioner)  non-revenue purposes of the Philippines
o Subject to the condition that the country in which such foreign country
is domiciled shall allow credit against the tax due from NRFC, taxes
deemed paid in the Philippines (Deemed Paid Tax Credit)
 P&G-US (NRFC) established P&G-Phils (DC). Because of such
investment made in the Philippines, the rate was reduced so
that the dividend declared by P&G Philippines and distributed to
P&G-US could be taxed at only 15%.
 Since P&G established a business in the Philippines, it is
deemed to have paid tax under the Philippines (Sec 902 US IRC
allows American corporations to claim credit as against taxes
deemed paid in other countries).
o Other cases: Is proof of amount actually granted required?
 SC: There must be proof of actual amount granted as tax
credit so we could impose the reduced credit of 15%. (P&G v.
Commissioner – 2nd division)
 Motion for recon: The Tax Code does not allow actual
grant (Sec 28B5b). It merely says, shall adopt. No such
word as actual. Nor does any RR provide for this. 
PREVAILING VIEW
 Proof allowed: enough to prove that there is such a
provision under the Revenue Code of the foreign
government allowing such tax credit
 P&G Phils was the w/holding agent insofar as the dividends was
concerned. Does it have legal personality to file a written claim
for refund?  NO legal personality
 M/R:  YES, w/ legal personality. Withholding agent is
not only an agent of the government, but also an agent

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of the taxpayer wrt to filing of return & payment of the
tax. Withholding agent is technically considered as
taxpayer, therefore has the personality to file a
written claim of refund.
 SC: There is no need of proof of actual amount granted as tax
credit so we could impose the reduced credit of 15%. (Wonder
v. Commissioner – 3rd division)
 Does the Philippine branch, as w/holding agent of
dividends, have legal personality to file a written claim
for refund?  YES.
o Withholding agent (Sec 22) v. Taxpayer
Withholding agent Taxpayer
Required to deduct & Subject to tax imposed
w/hold the tax under S. 57 under this title
Can file written claim for
refund (S. 204c)

Sec 28A3: Definition of Gross Philippine Billings – modified: origin of passengers, cargo
& baggages determines situs of income (no longer the place of sale), partially amending
rule on situs on sale of personal property (Sec 42A6 provides that situs is place of sale)
 Therefore an offline international airline may no longer be taxed, even if it
sells tickets here, if there is no proof that passengers originated in the
Philippines (RR 15-2002)
o Come to think of it, an offline international airline has no landing rights
in the Philippines in the first place

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Allowable Deductions 5/23/2017 8:50:00 PM

Distinguish Allowable Deductions from Personal Exemptions


Allowable Deductions Personal Exemption
Nature Nature of business Personal expenses –
expenses (except: substitute for the
deductible contribution) disallowance of family,
living & personal expenses
(Sec 36A1)
Amount Actual business expenses P50,000 (uniform basic P/E
paid / incurred, as proven / as of Jan, 200816) – applies
substantiated by receipts to married individual, head
of family, unmarried
individual w/ no dependents
 arbitrary amount (may
not be enough to cover 1yr
family/living/personal
expenses)
Claimant Individual & corporate TP’s Individual TP’s
X:
1. NRA-NETB (Sec 25B:
imposes GIT of 25%)
2. NRA-ETB w/ no
reciprocity (NRA-ETB may
claim based on recip rules
but not more than P50K)
Kind / Classification 1. Itemized deductions 1. Basic P/E: P50K
2. Optional standard 2. Additional P/E:
deduction (OSD)  P25K/dependent child (not
Amendments by 9504 more than 4 children) =
max: P100K17 (prev
P8K/child = max: P32K)

Amendments introduced by RA 950418 re OSD:


 claimable by corporate TPs
 40%, previously 10% in the NIRC

16 As amended by RA 9504
17 As amended by RA 9504

18 Effective: July 6, 2008


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 tax base:
o for Indiv TPs is now gross sales / receipts (previously gross income)
o for corporate TPs is gross income

Re: Wisdom behind RA 9504: It has been held valid in a long line of cases, the court
cannot question the motive, object, expediency, necessity behind the passage of a tax
law.

Allowable Deductions (Sec 34) from Exclusions from GI (Sec 32B):


Allowable Deduction Exclusions from GI
Nature Items of expenses, which Items of Income, which are
are allowed by law as excluded by law,
deductions from Gross constitution or the Tax Code
Income in that they are exempt
Purpose Exclusions are important for Exclusions are important for
purposes of determining purposes of determining
Taxable Income Gross Income

FAQs on Allowable Deductions

Allowable Deductions under the Tax Code: (LTRB-DBP-CID)


 Losses (deductible losses)
 Taxes (deductible taxes)*
 Research & Devt Expenditures (as introduced by
 Business expenses – ordinary & necessary
 Depreciation (allowance for depreciation)
 Bad debts expense**
 Pension Trust contribution
 Contribution (deductible contribution)
 Interest expense***
 Depletion expense

Determinative Test for Ordinary & Necessary Expenses (Business Expenses):


(DOM)
 Development of the business of the taxpayer
 Operation of the taxpayer’s trade / business (in connection with…)
 Management of the taxpayer’s trade / business (in connection with…)

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GR: Capital expenditures are not allowable deductions; they should be
capitalized and amortized.
X: (Sec 34A2)
 Capital expenditure incurred by private educational institution – during the
year when the same was incurred (with option to capitalize & claim allowance
for depreciation)
 Capital asset19 purchased from proceeds of Interest on loan
 Intangible drilling & development costs
 Research & development expenditures, subject to certain conditions (NEW!)

Tax Benefit Rule – applies to tax refund, recovery of bad debts written off
 Provision on deductible tax (Sec 34C)
o Taxes when refunded shall be included in the GI in the year of
recovery / receipt to the extent of income tax benefit of said deduction
 Must be a deductible tax: Must have been claimed as a
deduction in the preceding taxable year.
 Non-deductible taxes: (SIDE)
 Special assessment tax
 Income tax
 Donor’s tax
 Estate tax
 Must have been actually claimed as a deduction
 Illustration:
NIBT
Less: Tax  refund granted the following year
NIAT
x Tax Rate
Income Tax Payable

[Tax
X Tax Rate applied
Tax Benefit]

 Provisions on bad debts expense (Sec 34E) - included in the gross income
in the year of receipt or recovery to the extent of income tax benefit of said
reduction

19 life of more than 1yr (of course)

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 Requisites for deductibility of Bad debts expense (PRC v. Commissioner):
(CUBANO)
o Charged off - Amount must be charged off / against the books /
accounts of the taxpayer during the taxable year
o Uncollectible – not only in the current taxable year but also in the
future
o Business / Trade / Exercise of profession – must arise from…
o Ascertained to be worthless during the taxable year
o Not involving related taxpayers (remember: expenses involving
related taxpayers are not deductible)
o Obligation must be subsisting, valid & enforceable
 If bad debts were written off during a year when the corporation incurred net
loss, subsequent recovery of the bad debt does not result in taxable income,
because it will merely be a return on capital. (RR 5-99)

When a Bad Debt may be said to be worthless in accordance with sound business
Judgment: BIDS-SAID (RR 5-99)
 Bankruptcy of the taxpayer / insolvency
 Insufficiency of collaterals
 Death of the debtor
 Statute of limitations – application of the…
 Success of judicial action
 Amount – if only P1K & debtor is residing faraway, the cost of collection will
be more than the amount
 Injury that may be sustained by the debtor
 Destruction of properties, documents & the like

Change of Taxpayer’s Status (Sec 35C): 8 (2 fr 1st par, 2 fr 2nd par, 4 fr last par)
 Marriage of the taxpayer during the taxable year  ineffectual due to the
uniform personal exemption
 Additional dependent
 Death of taxpayer  P/E can be claimed by his estate
 Death of spouse  ineffectual due to the uniform personal exemption
 Death of dependent  as if the dependent died at the close of the taxable
year, by legal fiction

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 Dependent becoming more than 21yrs of age during the taxable year  as if
the dependent became more than 21yrs old at the close of the taxable year,
by legal fiction
 Marriage of dependent during the taxable year (NEW!)  as if the dependent
married at the close of the taxable year, by legal fiction (before: automatic
disqualification in the old tax code)
 Gainful employment of dependent during the taxable year (NEW!)  as if the
dependent became gainfully employed at the close of the taxable year, by
legal fiction (before: automatic disqualification in the old tax code)

Who can claim the P25K additional personal exemptions?


GR: Husband
X:
 If the husband is jobless, and the wife is the breadwinner BBB (Bantay Bata
Brigade)
 If the husband signs a waiver (made to sign by the wife):
o IMUS (I am under the saya), RAM, RAMBO, UHAW (union of husband’s
afraid of their wives), GHQ (Go Home Quickly),

o

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General Principles 5/23/2017 8:50:00 PM

Sec 42: Income Tax Situs / Location / Place (last asked: 1957)
 Services - where such services are performed / rendered
 Sale of real property – location of real property
 Sale of personal property – place of sale (GR; X: Gross Philippine Billings)
 Interest income – residence of the debtor (National Development Corporation
v Commissioner)

GENERAL PRINCIPLES

Scope – Local Taxation (2007) / National Taxation


The power of taxation may be described as…(CUPS)
 Comprehensive – The power to tax reaches to every trade / occupation, to
every object of industry, to every space of possession, and in case of failure
to discharge the same, may be followed by confiscation / forfeiture of
property (e.g. tax is imposable on exercise of profession, possession of
property, use / enjoyment of a right)
o Consequences in case of failure to pay tax - Distrain of personal
property, Levy
 Unlimited – subject to inherent & constitutional limitations
 Plenary
 Supreme

Nature
Inherent –
 Simple: The power to tax co-exists with the State. It exists independently of
the Constitution. Such Constitutional limitations merely regulate imposed
limitations on the exercise of the power to tax. (p.14 footnote 17)
 Authoritative: The power to tax is inherent in the sovereign state because it is
a necessary attribute of sovereignty. Without this power, no state can exist
nor enjoy. The power to tax proceeds from the theory that the existence of
the government is a necessity.
It is an essential and necessary attribute belonging as a matter of right to
every independent state or government. No state can exist w/o the means to
pay its expenses, hence the power to compel the payment of taxes
(Emergence of the power to tax)
As a principal attribute of sovereignty, the exercise of the power to tax
derives its source from the very existence w/ the State, whose social contract

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with the citizens obliges it to promote the common good. It emanates from
the theory of necessity; without taxes government cannot fulfill its mandate
of promoting the general welfare and well-being of the people. (Yuchengco,
BPI v. Commissioner)

Legislative
Why is the power to tax legislative in character: (p.15, footnote 18)
 Simple: It is legislative because the power to tax is vested exclusively in the
law-making body of the State. It is Congress that has the power to enact tax
laws.
 Impressive: It is based on the theory that taxes are a grant of the people,
and this grant shall be made by the immediate representatives of the people.
And where the people have laid this power, then it shall remain to be
exercised.

Explain the Symbiotic Relationship Theory between the State & its inhabitants as
espoused in Commissioner v. Algue
 Despite the natural reluctance to surrender part of one’s income to the taxing
authorities, every person who is able to must contribute his share in the
burden of running the government. The government for its part is expected
to re-spend in the form of tangible & intangible benefits intended to improve
the lives of the people, and enhance their material & moral values.

Ability to Pay
 Taxes must be based on taxpayer’s ability to pay.  Basis of equitable
taxation
 Constitutional Basis: Art VI Sec 28 (1)
o Uniform & equitable
o The government on its part emphasizes the reciprocal duty of the
government

Purposes:
Primary: Raise Revenue
Secondary: PIER
 Protect local industries against unfair foreign competition (TCCP)
o Countervailing and dumping duties

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 Inequalities (reduce…) – to promote social justice, it must adopt a system
which must impose just, fair & reasonable taxes: progressive system of
taxation
 Encourage the growth of local industries & manufacturers – Power to tax
includes the power to grant exemptions, tax amnesties, tax condonations
 Regulatory purposes – as an implement of the police power of the State

Does the power to tax include the power to destroy?


The power to tax does not include the power to destroy as long as the Court sits.

Reconcile these seemingly conflicting pronouncements / opinions (see p.20


Dimaampao)
Justice Marshall is correct that the power to tax includes the power to destroy if used
validly as an implementing

Justice Holmes is also correct. If it is used solely for the purpose of…

The power to tax may be used as an implement of the power of eminent domain.
 Taking / expropriation of private property
o E.g. RA 7432 as amended by RA 9257: Covered establishments are
mandated to grant 20% to Senior citizens. It is now a deductible tax,
no longer a tax credit.
 For public use / purpose – Has no concrete definition; Test cited: the ultimate
result, general welfare of the people. Special care and attention to Senior
Citizens may create social problems. Thus, it will in effect redound to the
general benefit of the people.
o If the beneficiary is any of the following, it within the contemplation of
public purpose (Art XIII Sec 11 as cited in Carlos Rach Co. v.
Commissioner):
 Elderly
 Underprivileged
 Women
 Children
 Disabled
 Payment of just compensation – Could be claimed as a deductible tax.

Tax Credit v. Deductible Tax

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Tax Credit Deductible Tax
Reduces TP’s tax liab Reduces TP’s taxable
income

City Trust v. CA 234 SCRA 348 – improved version of the lifeblood doctrine in
Commissioner v. Molina, etc
 Taxes are the lifeblood of the nation, through which government agencies
continue to operate, and which the State continues its functions…

Is deficiency assessment a bar to a claim for refund?


Deficiency Assessment of a Claim for Refund – To avoid multiplicity of suits & prevent
absurdity, the claim of the taxpayer that there is tax deficiency must first be settled.
 Reason: An error / mistake is not binding on the government.
o OMEN of government officials, BIR, agents of the government shall not
be binding upon it.
 Omissions, mistake, error, negligence

City Trust - 499 SCRA 77: different answer – no, it will not bar such claim for refund.
Claim for refund and protest are governed by different rules. If the government made
an assessment, and subsequently the taxpayer files a written claim for refund,

Fundamental Principles of a Sound Tax System (Abakada Guro v. Ermita) – FAT


Fiscal Adequacy -
Administrative Feasibility – Art VI Sec 28 par 1
Theoretical Justice / Equality -

To be considered sound, legal / constitutional basis does not necessarily follow.

Inherent Limitations on the Exercise of the Power of Taxation (PINET)


 Public purpose (Senior Citizens Act)
 International Comity
 Non-delegation of the power to tax
o Art VI Sec 28 Par 2: Tariff power of the president
o Art X Sec 5: Power of LGUs

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 Exercised thru the local legislative council
 Subject to guidelines & limitations (Memorize: Fundamental
principles of LG / RP Taxation: Sec 130 – principles of local
gov’t taxation & Sec 198 – fundamental principles of LG
taxation, LGC)
 Imposes / provides 15 limitations (Sec 133)
 Local government units cannot impose national, donor’s,
estate taxes
 No tax may be imposed on instrumentality of the NG, its
agencies, LGUs
 Based on sound public policy that the State may
not tax itself (no constitutional prohibition; mere
statutory provision in RA 7160, which Congress
can repeal)
 Mactan Cebu Int’l Airport Authority v. Marcos (261 SCRA
667, 1996): MCIAA is subject to RPT
 Mla Int’l Airport Auth case (495 SCRA): MIAA is exempt
from RPT on its airport lands & buildings
 Distinctions: MCIAA is a GOCC. All exemptions
granted to GOCCs are withdrawn upon effectivity
of RA 7167 – considered as an instrumentality.
 MIAA is not an instumentality of the national
government is not qualified under Sec 2 Par XIII
of the Revised Admin Code.
o Meaning of instrumentality v GOCC
 MIAA v. Pasay City
 Justice Tinga & Justice Nachura:
 Adopted the majority view. MIAA is not
considered as a GOCC (Sec 2 Title X – Definition
of instrumentality)
 Now: Exempt from R/PT.
 Instrumentalities of National Government
 Bangko Sentral ng Pilipinas
 UP
 PPA
 MCIAA – instrumentality of the government.
Therefore, exempt
 P

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 Exemption from tax of Government
 Territoriality

Tax Evasion (Estate of Benigno Toda Jr. v. Commissioner) – 3 Factors that concurs for
tax evasion to arise:
 Unlawful
 State of mind – must be coupled with bad faith, evil, deliberate
 End to be achieved – reduce taxpayer’s liability / evade payment of tax

Double Taxation – may either be direct or indirect


 Direct double taxation is prohibited.
o Same
 Taxpayer
 Taxing authority
 Taxable period
 Nature of tax
 Indirect double taxation is allowed.
o If taxing authorities are different
o International Juridical Double Taxation
 Different taxing authority
 Same
 Taxpayer
 Taxable period
 Subject: e.g. Royalties
 Methods to mitigate the harshness of double taxation / avoid its
occurrence:
 Tax credit method, as embodied in a tax treaty – Sec
34C item 3
 Exemption method – reciprocity
 Vanishing deduction - Method under the law on estate
tax designed to mitigate the harshness of double
taxation  Requisites:
 Death of present decedent must have occurred
within 5 yr period from previous decedent
 Identity of the property with that inherited from
prior decedent

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 Previous taxation
 Inclusion of the property in the prior estate
 No previous VD

GR: Exemptions are strictly construed against the taxpayer


X: Liberally construed in favor of the TP
 Special persons under special circumstances
 Agency of the government (Maceda v. Macaraig)
 Law provides for liberal interpretation
 Traditional exemptees: non-stock, non-profit organizations (e.g. Charitable,
Religious, Philanthropic organizations)

GR: Taxes are not subject to set-off (Mambulao Doctrine 1961, Francia v. Sia doctrine
1997)
 Taxes are not subject to set-off / compensation. A pending claim for tax
credit / tax refund can not be set off against the tax deficiency of the
taxpayer. It may only be allowed if the claim is demandable, due and
liquidated. (Phoenix Mining v. Commissioner)
X: There was already a law appropriating an amount in payment of the claim of the TP.
[TP and government are not considered Drs-Crs of each other.] (Domingo v. Garlitos,
1962)

City Trust Case

Taxpayer’s Suit (Abaya v. Ebdane Jr)


Requires disbursement / illegal expenditure of public fund derived from taxes
 came from contributions (Marcos case 65 SCRA 624)
 no need to present proof of direct injury, for as long as evidence of illegal
disbursement / expenditure of public fund, TP suit will lie (Maceda case)
 illegal contracts which may involve disbursement of public fund (Abaya v.
Ebdane)

Provisions of the Constitution Relative to the Power of Taxation: REVENUE-


LESS-DAN-PTN

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 Religious privity must be respected – free exercise of religious profession &
worship (Art III Sec 5)
 Equal protection clause (Art III Sec 1)
 Veto power of the president re: appropriation, revenue & tariff bills (Art VI
Sec __, Par 2)
 Exemption from property taxation of REC: religious educational charitable
institutions, provided actually, directly & exclusively used for REC purposes
(Art VI, Sec 28 par 3)
 Non-impairment clause (Art III Sec 10)
 Uniformity of taxation (Art VI Sec 28 par 1)
 Exemption shall be approved by majority of all members of Congress
(absolute majority - according to Art VI Sec 28 par 4)

 Local government units are constitutionally conferred / constitutionally
delegated with the power of taxation (Art X Sec 5)
 Exemption from income tax, property tax, custom’s duties of non-stock, non-
profit educational institutions (Art XIV, Sec 4 Par 3 of the Constitution)
 Special Fund collected, levied under special law shall only be used for such
purpose (prevents juggling of funds – Art VI Sec 29 par 3)
 Supreme Court has the jurisdiction to review, reverse, affirm on appeal
decisions of lower courts involving legality, validity of tax, imposts,
assessments or penalties (Art VIII Sec 5 (2b))

 Due Process must be observed in the imposition of tax (Art III Sec 1)
 Appropriation, revenue and tariff bills shall originate exclusively in the house
of representatives. (Art VI Sec 24)
 No public money / property shall be used directly / indirectly for religious
purpose. (Art VI Sec 29 par 2) – in line with separation of church and state

 Press (freedom of…) – Art III Sec 4
 Tariff power of the president (Art VI Sec 28 Par 2)
 Non-imprisonment: No person shall be imprisoned for non-payment of poll
tax / community tax certificate under Sec 156 RA 7167 (Art III Sec 20)

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