FREQUENTLY ASKED BAR EXAM QUESTIONS “FAQs” guidelines and limitations on the exercise by the local governments of the
Taxation Law power to tax but what was granted by the fundamental law cannot be
General Principles
Q: Distinguish direct taxes from indirect taxes, and give example for each
one. (Bar 1994, 2000, 2001, 2006)
A DIRECT TAX is one in which the taxpayer who pays the tax is
directly liable therefor, that is, the burden of paying the tax falls directly on
the person paying the tax.
An INDIRECT TAX is one paid by a person who is notdirectly
liable therefor, and who may therefore shift or pass on the tax to another
person or entity, which ultimately assumes the tax burden. (Maceda v.
Macaraig, 197 SCRA 771)
Income tax, estate and donor's tax are considered as direct taxes.
Value-added tax, excise tax,other percentage taxes, and documentary stamp
tax are indirect taxes.
Note: Alternative Suggested Answer
DIRECT TAXES are taxes wherein both the incidence (or liability
for the payment of the tax) as well as the impact or burden of the tax falls on
the same person. An example of this tax is income tax where the person
subject to tax cannot shift the burden of the tax to another person.
INDIRECT TAXES, on the other hand, are taxes wherein the
incidence of or the liability for the payment of the tax falls on one person but
the burden thereof can be shifted or passed on to another person. Example of
this tax is the value-added tax.
Q: May Congress, under the 1987 Constitution, abolish the power to tax of
local governments? (Bar 2001, 2003)
No. Congress cannot abolish what is expressly granted by the fundamental
law. The only authority conferred to Congress is to provide the guidelines
and limitations on the local government's exercise of the power to tax (Sec.5,
Art. X, 1987 Constitution).
Section 5, Art. X, 1987 Constitution
Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
local governments.
Note: Alternative Suggested Answer
No. The law centralizing the imposition and collection of all taxes in the
national government would contravene the Constitution which mandates
that: . . . "Each local government unit shall have the power to create their
own sources of revenue and to levy taxes, fees, and charges subject to such
guidelines and limitations as Congress may provide consistent with the basic
policy of local autonomy." It is clear that Congress can only give the
withdrawn by Congress.
Q: Describe the power of taxation. May a legislative body enact laws to raise
revenues in the absence of a constitutional provision granting said body the
power to tax? (Bar 2003, 2005)
Yes. The legislative body may enact laws even in the absence of a
constitutional provision because the power to tax is inherent in the
government and not merely a constitutional grant. The power of taxation is
an essential and inherent attribute of sovereignty belonging as a matter of
right to every independent government without being expressly granted by
the people. (Pepsi-Cola Bottling Company of the Philippines, Inc. v.
Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976)
Q: From 1991 to 1995, X, who is a businessman, has not been paying his
income taxes. X is now being assessed for the unpaid income taxes in the
total amount ofP150,000.00. X claims his income tax liability has already
been compensated by the amount of P300.000.00 which the government
owes him for the expropriation of his property. Decide. (Bar 1996, 2005)
The income tax liability of X cannot be compensated with the amount owed
by the Government as compensation for his property expropriated. Taxes are
of distinct kind, essence and nature than ordinary obligations. Taxes and
debts cannot be the subject of compensation because the Government and X
are not mutually creditors and debtors of each other and a claim for taxes is
not a debt, demand, contract, or judgment as is allowable to be set off.
(Francia vs. IAC. G.R 76749, June28. 1988)
Q: X, a lessor of a property, pays real estate tax on the premises, a real estate
dealer's tax based on rental receipts and income tax on the rentals. X claims
that this is double taxation? Decide. (Bar 1996, 2004)
There is no double taxation. DOUBLETAXATION means taxing for the same
tax period the same thing or activity twice, when it should be taxed but once,
by the same taxing authority for the same purpose and with the same kind or
character of tax. The REALESTATE TAX is a tax on property; the REAL
ESTATEDEALER'S TAX is a tax on the privilege to engage in business; while
the INCOME TAX is a tax on the privilege to earn an income. These taxes are
imposed by different taxing authorities and are essentially of different kind
and character (Villanueva vs. City of Iloilo, 26 SCRA578)
Q:. Does a BIR ruling have a retroactive effect, considering the principle that
tax exemptions should be interpreted strictly against the taxpayer?
(Bar 2004, 2007)
 No. A BIR ruling cannot be given retroactive effect if its retroactive
application is prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court
of Appeals et. Al. 267 SCRA 557 [1997])
Income Taxation
Q: In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax
credits arising from its over-withholding of income payments. It opted to carry over
the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind
and applied for a refund of the excess tax credits. Will the claim for refund prosper?
(Bar 2013, 2012)
Section 76, NIRC
Once the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor.
Carry-over Option is irrevocable
No. The claim for refund will not prosper. While the law gives the taxpayer an option
whether to carry-over or claim as refund the excess tax credits shown on its final
adjustment return, once the option to carry-over has been made, such option shall be
considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed. (Section 76, NIRC; CIR v. PL
Management International Phils., Inc., April 4, 2011, 647 SCRA 72 (2011) G.R. No.
160949).
Q: Are the revenues from tickets reserved by the Philippine office of an off-line
international carrier without any flight operations in the Philippines subject to tax?
(Bar 2007, 2005, 1994) (Note: gray area)
Section 28 (A) (3), NIRC
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port
or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place
at any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings.
Yes.
Income received in the Philippines from the sale of tickets by an “off-line” airline is
taxable as income from whatever source. (Commissioner v. BOAC, GR 65773-74,
April 30, 1987)
The source of income is the property, activity or service that produced the income.
The sale of tickets in the Philippines is the activity that produces the income. The
absence of landing rights in the Philippines cannot alter the fact that revenues were
derived from ticket sales within the Philippines. (Commissioner of Internal Revenue
v. Japan Air Lines, GR 60714, October 4, 1991 reiterating British Overseas Airways
Corp., Air India and American Arilines, Inc.)
Note: Alternative Suggested Answer
No. The origination of the flight is determinative of the sources of income of the
international carrier. If the flight originated from the Philippines to foreign
destination, the income is an income from within; if it originated in a foreing country
to any destination, the income is from without. In this situation, no flight will
originate from the Philippines. Hence, the income is not taxable in the Philippines
under section 28(A)(3), NIRC.
Q: Who are required to file individual income tax return? Who are not required to
file individual income tax return? (Bar 2001, 2000)
Section 51, NIRC
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources
within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines.
(2) The following individuals shall not be required to file an income tax
return;
(a) An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Section 35: Provided, That a
citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippine shall file an income tax return,
regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in
Section 32 (A)(1), derived from sources within the Philippines, the income
tax on which has been correctly withheld under the provisions of Section 79
of this Code: Provided, That an individual deriving compensation
concurrently from two or more employers at any time during the taxable
year shall file an income tax return: Provided, further, That an individual
whose compensation income derived from sources within the Philippines
exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected to final withholding
tax pursuant to Section 57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the provisions
of this Code and other laws, general or special.
Q: What are the tax implications of the payment to a law firm in terms of income
taxes? (Bar 2013, Bar 1995)
Section 26, NIRC
Tax Liability of Members of General Professional Partnerships. - A
general professional partnership as such shall not be subject to the income
tax imposed under this Chapter. Persons engaging in business as partners in
a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the
net income of the partnership shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership.
For income tax purposes, the compensation for services is part of the gross
income of the law partnership. From its total gross income derived within and
without, it has to compute its net income in the same manner as a corporation. The
net income of the partnership whether distributed or not will be declared by the
partners as part of their gross income who are to pay the income tax thereon in their
individual capacity. [Section 26, NIRC]
General Professional Partnerships (GPPs) are non-taxable entities. What is
taxable are the partners comprising the same and they are obligated to report as
income their share in the income of the GPP during the taxable year whether
distributed or not. [Ton vs. Del Rosario, GR No. 109289, October 1994]
Q: What are the tax implications on income derived from sources within the
Philippines by a non-resident alien who stayed in the Philippines for less than 180
days? (Bar 2010)
What are the tax implications on income derived from sources within the
Philippines by a non-resident alien who stayed in the Philippines for more than 180
days? (Bar 2000)
Section 25 (A) in relation to Section 35 (D), NIRC
Section 25 (A) (1) - A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one
hundred eighty (180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines'.
Section 35 (D)Personal Exemption Allowable to Nonresident Alien
Individual - A nonresident alien individual engaged in trade, business or in
the exercise of a profession in the Philippines shall be entitled to a personal
exemption in the amount equal to the exemptions allowed in the income tax
law in the country of which he is a subject - or citizen, to citizens of the
Philippines not residing in such country, not to exceed the amount fixed in
this Section as exemption for citizens or resident of the Philippines:
Provided, That said nonresident alien should file a true and accurate return
of the total income received by him from all sources in the Philippines, as
required by this Title.
Non-resident aliens not engaged in trade or business are not allowed
personal exemptions. Also, their income from within the Philippines is subject to 25%
on such gross income.
Non-resident aliens engaged in trade or business are allowed to avail of the
itemized deductions including personal and additional exemptions but subject to rule
on reciprocity on the personal exemptions.
Q: Taxable or non-taxable? (Bar 2005, Bar 1995)
a. Illegal income (e.g., income from Jueteng)
b. Gain arising from Expropriation of property
c. Taxes paid and subsequently refunded
d. Recovery of bad debts previously charged off
e. Gain on the sale of a car used for personal purposes
a. Taxable. Gross income includes “all income derived from whatever source”
[Section 32(A), NIRC], which was interpreted as all income no expressly
excluded or exempted from the class of taxable income, irrespective of the
voluntary or involuntary action of the taxpayer in producing the income.
Thus, the income may proceed from a legal or illegal source such as from
jueteng. Unlawful gains, gambling winnings, etc. Are subject to income tax.
(CIR vs. Manning, GR No. L-28398, August 6, 1975)
b. Taxable. Sale exchange or other disposition of property to the government of
real property is taxable. It includes taking by the government through
condemnation proceedings. [Gonzales vs CTA, GR No. L-14532, May 26,
1965]
c. Taxable ONLY IF the taxes were paid and claimed as deduction and which
are subsequently refunded or credited. It shall be included as part of gross
income in the year of receipt to the extent of the income tax benefit of said
deduction. [Section 34(C)(1) NIRC] Not taxable if the taxes refunded were
not originally claimed as deduction.
d. Taxable under TAX BENEFIT RULE. Recovery of bad debts previously
allowed as deduction in the preceding years shall be included as part of the
gross income in year of recovery to the extent of income tax benefit of said
deduction. [Section 34 (E) (1), NIRC]
e. Taxable. Since the car is used for personal purposes, it is
considered as capital asset hence the gain is considered income.
[Section 32 (A) (3) and Section 39 (A) (1), NIRC]
Q: What are activities considered as royalties? What are the tax implications on
royalties paid by a domestic corporation to a non-resident foreign corporation? What
is the tax treatment on income of a domestic corporation considered as royalty?
(Bar 2010, 2002)
Section 42 (A) in relation to Section 28 (B)(1) and Section 24
(B)(1), NIRC
Section 42 (A) (4) Rentals and royalties. - Rentals and royalties from
property located in the Philippines or from any interest in such property,
including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial
knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to,
and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in paragraph
(b) or any such knowledge or information as is mentioned in
paragraph (c);
(e) The supply of services by a nonresident person or his employee
in connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection
with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television;
(iii) Tapes for use in connection with radio broadcasting.
The royalties paid to the non-resident foreign corporation is subject to 30%
final withholding tax, unless a lower tax rate is prescribed under an existing tax treaty.
[Section 28 (B) (1), NIRC]
The income of a domestic corporation subject considered as royalty is subject
to the 20% final withholding tax. [Section 24 (B) (1), NIRC]
Deductions, Exemptions, Exclusions & Inclusions
Q: Mr. Javier is a non-resident senior citizen. He receives monthly pension from the
GSIS which he deposits with the PNB. Is he exempt from income tax and therefore
not required to file an income tax return? (Bar 2007, 2000)
Section 32 (B) (6) (c), NIRC
Exclusions from Gross Income.
(c) The provisions of any existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government
agencies an other institutions, private or public.
Mr. Javier is exempt from income tax on his monthly GSIS pension [Section 32 (B)
(6) (c), NIRC] but not on the interest income that might accrue on the pensions
deposited with PNB which are subject to final withholding tax. Consequently, since
Mr. Javier’s sole taxable income would have been subject to a final withholding tax, he
is not required anymore to file an income tax return [Section 51 (A) (2) (c)].
Q: All-events test (Bar 2010, Bar 2009)
What is the all-events test?
If AAA Corporation rendered services to BBB Corporation in 2007,
but AAA billed BBB only in 2008 and collected the payment in the same year
2008, is BBB allowed to claim the expense as a deduction?
The all-events test is a test applied in the realization of income and
expense by accrual-basis taxpayer. The test requires (1) the fixing of a right
to the income or liability to pay; and (2) the availability of reasonably
accurate determination of such income or liability, to warrant the inclusion
of the income or expense in the gross income or deductions during the
taxable year. (CIR vs. Isabela Cultural Corporation, GR No. 172231,
February 12, 2007)
No. The expense is deductible in the year it complies with the all-
events test. The test is considered met if the liability is fixed, and the amount
of such liability to pay is already fixed in 2007 when the services were
rendered, and the amount of such liability is determinable with reasonable
accuracy in the same year. Hence, the deduction should have been claimed
in 2007 and not in 2008.
Q: In order to facilitate the processing of its application for a license from a
government office, Corporation A found it necessary to pay the amount of
Php100,000 as a bribe to the approving official. Is the Php100,000 deductible from
the gross income of Corporation A? On the other hand, is the Php100,000 taxable
income of the approving official? (Bar 1998, 2001)
Section 34 (A) (1) (c) Bribes, Kickbacks and other Similar
Payments
No deduction from gross income shall be allowed under Subsection (A)
hereof for any payment made,
 directly or indirectly, to an official or employee of the national government,
or to an official or employee of any local government unit, or to an official or
employee of a government-owned or controlled corporation, or to an official
oremployee or representative of a foreign government, or to a
privatecorporation, general professional partnership, or a similar entity, if
the payment constitutes a bribe or kickback.
Section 32 (A) Gross Income; General Definition
Except when otherwise provided in this Title, gross income means all income
derived from whatever source xxx
Since the Php100,000 constitutes a bribe, it is not allowed as a deduction from the
gross income of Corporation A. However, to the recipient government official, the
same constitutes a taxable income. All income from legal or illegal sources are taxable
absent any clear provision of law exempting the same. This is the reason why gross
income had been defined to include income from whatever source derived.
Q: Company A decides to close its operations due to continuing losses and to
terminate the services of its employees. Under the Labor Code, employees who are
separated from service for such cause are entitled to a minimum of one-half month
pay for every year of service. Company A paid the equivalent of one month pay for
every year of service and the cash equivalent of unused vacation and sick leaves as
separation benefits. Are such benefits taxable and subject to withholding tax under
the Tax Code? (Bar 1994, 1995, 1999, 2005)
Section 32 (B) (6) (b) Exclusions from Gross Income - Retirement
Benefits, Pensions, Gratuities, etc
Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee
All of the benefits are not taxable, hence, they are not subject to withholding tax under
the Tax Code. Benefits received as a consequence of separation for any cause beyond
the control of the employees such as closure of business are excluded from gross
income.
Q: Mr. Jacobo worked for a manufacturing firm. Due to business reverses, the firm
offered voluntary redundancy program in order to reduce overhead expenses. Under
the program, an employee who offered to resign would be given separation pay
equivalent to his three month’s basic salary for every year of service. Mr. Jacobo
accepted the offer and received Php400,000 as separation pay under the program.
After all the employees who accepted the offer were paid, the firm found its overhead
still excessive. Hence, various unprofitable departments were closed pursuant to a
retrenchment program. As a result, Mr. Kintanar was separated from the service and
received Php400,000 as a separation pay. (Bar 1994, 1995, 1999, 2005)
1. Did Mr. Jacobo derive income when he received his separation pay?
2. Did Me. Kintanar derive income when he received his separation pay?
Section 32 (B) (6) (b) Exclusions from Gross Income - Retirement
Benefits, Pensions, Gratuities, etc
Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee
1. Yes, Mr. Jacobo derived a taxable income when he received his separation pay
because his separation from employment was voluntary on his part in view of his offer
to resign. What is excluded from gross income is any amount received by an official or
employee from the service of the employer for any cause beyond the control of the
said official or employee.
2. No, Mr. Kintanar did not derive any income when he received his separation pay
because his separation from employment is due to causes beyond his control. The
separation was involuntary as it was a consequence of the closure of various
unprofitable departments pursuant to the retrenchment program.
Q: XYZ Colleges is a non-stock, non-profit educational institution run by the
Archdiocese of BP City. It collected and received the following:
a. Tuition fees
b. Dormitory fees
c. Rentals from canteen concessionaires
d. Interest from money-market placements of the tuition fees
e. Donation of a lot and building by school alumni
Which of these above cited income and donation would not be exempt from taxation?
(Bar 1994, 2004)
Section 4 (3) Art XIV 1987 Constitution
All revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. xxx
Section 101 (A) (3) Exemption of Certain Gifts
Gifts in favour of an educational xxx institution or organization: Provided,
however, That not more than thirty percent (30%) of said gifts shall be used
by such done for administration purposes. xxx
All of the income derived by XYZ Colleges will be exempt from taxation provided they
are used actually, directly, and exclusively for educational purposes. The donation is
likewise exempt from donor’s tax if it is actually, directly, and exclusively used for
educational purposes, provided not more than 30% of the donation is used by the
done for administration purposes.
Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac. The southern
side and middle part are occupied by the Church and a convent, the eastern side by a
school run by the Church itself, the southeastern side by some commercial
establishments, while the rest of the property, in particular the northwestern side, is
idle or unoccupied. May the Church claim tax exemption on the entire land?
(Bar 1996, 2002, 2005)
Section 28 (3) Art VI 1987 Constitution
Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.
No. The Church cannot claim tax exemption on the entire land. Only the southern,
middle, and eastern sides occupied by the Church, convent, school, respectively, are
exempt because these areas are being used actually, directly, and exclusively for
religious and educational purposes.
The southeastern side occupied by some commercial establishment is not tax exempt.
It is not exclusively used for the exempted purpose but it is subject to taxation. The
property must be exclusively (solely) used for religious or educational purposes.
(Lung Center of the Phils. V. Quezon City; GR No. 144104; June 29, 2004) The
northwestern side, which is idle or unoccupied, is also not exempt from taxation since
it is not actually, directly, and exclusively used for religious or educational purposes.
Q: Noel Santos is a very bright computer science graduate. He was hired by Hewlett
Packard. To entice him to accept the offer of employment, he was offered the
arrangement that part of his compensation would be an insurance policy with a face
value of P20 Million. The parents of Noel are made the beneficiaries of the insurance
policy.
1. Will the proceeds of the insurance form part of the income of the parents of Noel
and be subject to income tax?
2. Can the company deduct from its gross income the amount of the premium?
(Bar 2004, 2007)
Section 32 (B) (1) Exclusions from Gross Income - Life Insurance
The proceeds of life insurance policies paid to the heirs or beneficiaries upon
the death of the insured, whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross
income.
Section 36 (A) (4) Items not Deductible - Premiums of Life
Insurance
Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
1. No. The proceeds of life insurance policies paid to the heirs of beneficiaries upon
the death of the insured are not included as part of the gross income of the recipient.
There is no income realized because nothing flows to Noel’s parents other than a mere
return of capital, the capital being the life of the insured.
2. Yes. The premiums paid are ordinary and necessary business expenses of the
company. They are allowed as a deduction from gross income so long as the employer
is not a direct or indirect beneficiary under the policy of insurance. Since the parents
of the employee were made the beneficiaries, the prohibition for their deduction does
not exist.
Q: JR was a passenger of an airline that crashed. He survived the accident but
sustained serious physical injuries which required hospitalization for 3 months.
Following negotiations with the airline and its insurer, an agreement was reached
under the terms of which JR was paid the following amounts: Php500,000 for
hospitalization; Php250,000 as moral damages; and P300,000 for loss of income
during the period of his treatment and recuperation. Which, if any, of the amounts he
received are subject to income tax? (Bar 1995, 2003, 2005, 2007)
Section 32 (B) (4) Exclusions from Gross Income - Compensation
for Injuries or Sickness
Amountsreceived, through Accidentor Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
All the amounts received from the airline company are excluded from gross income.
Since the amounts received from the airline company were received as damages by
agreement on account of personal injuries, all shall be excluded from JR’s gross
income. The amounts having been received on account of the injuries suffered by JR,
is compensatory in nature, hence, is not considered as an income but a mere return of
capital. Income is any wealth which flows to the taxpayer other than a mere return of
capital.
ALTERNATIVE ANSWER
The income realized from the judgment is only the amount received for loss of
income. This constitutes taxable income because were it not for the injury, he could
have received it from his employer as compensation income. All the other amounts
received are either for injuries or damages received on account of such injuries which
are exclusions from gross income.
 Capital Gains Tax

Q: A, a Filipino citizen residing in Makati and a pure compensation income earner,

sold the following properties which he owns to B:
1. Land located in Batangas
2. Shares of stock in a domestic corporation not traded in the local stock
exchange
Is A liable for Philippine Income tax? If so, what is the tax base and tax rate?
(Bar 2010, Bar 2008)

Section 24 (C) and (D) (1), NIRC

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at
the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange.
Not over P100,000…………………………….. 5%
On any amount in excess of P100,000………… 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax
of six percent (6%) based on the gross selling price or current fair market
value as determined in accordance with Section 6(E) of this Code, whichever
is higher, is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real property located
in the Philippines, classified as capital assets, including pacto de retro sales
and other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this Subsection, at
the option of the taxpayer.

Yes. The income from sale of land is subject to capital gains tax of 6% of the
higher value between the selling price and fair market value of the real property
(land).
The income from sale of shares of stock is subject to 5% on first P100,000
net capital gain, and 10% for any amount in excess of P100,000 net capital gain.