EXPLANATORY NOTES

NIRC SECTION 1 – 30 (2018)

PART 1

- NIRC being a special law prevails over a general law like Civil Code.
- Revenue law, is a law passed for the purpose of authorizing the levy and
collection of taxes.
- Revenue derived from taxes are exempt from execution.
- Revenue refers to all funds or income derived by the government whether
from tax or other source.
- Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 – when an administrative agency
renders an opinion by means of circular or memo, it merely interprets a pre-
existing law, and no publication is necessary for its validity. Construction by
an executive branch of government of a particular law although not binding
upon the courts must be given weight. These agencies are the one called to
implement the law.
- Rulings or interpretation while entitled to great weight, are not judicially
binding.
- BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of
the administrative level issued by the BIR and the DOJ. These two will take a
character of substantive rules and are generally binding and effective, if not
otherwise contrary to law or constitution.
- It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
- Ruling of first impression means rulings, opinions & interpretations without
established precedents. Only the CIR can issue this ruling. Those with
precedents are called Ruling with established precedents.
Requisites for valid regulations. – (a) They must not be contrary to law; (b)
They must be published in the Official Gazette; (c) They must be useful, practical and
necessary for law enforcement; (d) They must be reasonable in their provisions; and (e)
They must be in conformity with the legal provisions.
Rational Basis Test - It is sufficient that the legislative classification is rationally
related to achieving some legitimate state interest. (British American Tobacco vs.
Camacho, G.R. No. 163583, April 15, 2009)
“Assessment,” meaning. – With special reference to internal revenue taxes, an
assessment is merely a notice to the effect that the amount stated therein is due as tax
and a demand for the payment thereof. It is not an action or proceeding for the
collection of taxes. It is a step preliminary, but essential to warrant of distraint, if still
feasible, and also to establish a cause for judicial action as the phrase is used in the
Revenue Code.
Even an assessment based on estimates is prima facie valid and lawful where it
does not appear to have been arrived at arbitrarily or capriciously. (Marcos vs. CA, 273
SCRA 47, 1987)
Assessment is not an action or proceeding. It is a preliminary step.
Assessment as a general rule is a condition sine quanon for the collection of
taxes but not for filing criminal actions.
An assessment fixes and determines the tax liability of a taxpayer. As soon as it
is served, an obligation arises on the part of the taxpayer concerned to pay the amount
assessed and demanded. Hence, assessments should not be based on mere
presumption no matter how reasonable or logical said presumption may be.

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 In order to stand the test of judicial scrutiny, the assessment must be based on
actual facts. The presumption of correctness of assessment being a mere presumption
cannot be made to rest on another presumption x x x. (Collector vs. Benipayo, 4 SCRA
182)

A tax assessment is prima facie valid and correct and the taxpayer has the
burden of proof to impugn its validity. (Behn Meyer & Co. vs. Collector of Internal Revenue,
27 Phil. 647) The validity of a tax assessment is a disputable presumption. (Perez vs.
CTA, et al., G.R. No. L-10507, prom. May 30, 1948; Collector vs. Bohol Land Transportation,
G.R. Nos. L-13099 and L13462, prom. April 29, 1960)

All presumptions are in favor of the correctness of tax assessments. The good
faith of tax assessors and the validity of their actions are presumed. The burden of proof
is upon the taxpayer to show clearly that the assessment is erroneous, in order to
relieve himself from it.
Where a taxpayer question the correctness of an assessment against him and is
apparently not acting in bad faith or merely attempting to delay payment, but is deprived
of the best means of proving his contention because his books of accounts were lost by
the BIR agent who examined them, said taxpayer must be given an opportunity to prove
by secondary evidence that the assessment is incorrect. (Santos vs. Nable, et al., 2 SCRA
21)

As the law provides that any person who is aggrieved by an assessment issued
by the Commissioner of Internal Revenue is given only 30 days to appeal therefrom to
the Tax Court, the only effect should be that after that period, the assessment can no
longer be questioned by the taxpayer; otherwise, the assessment which has become
final, executory and demandable under Section 11 of Republic Act No. 1125 would be
an absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec. 28, 1961)
The taxpayer’s failure to appeal to the Court of Tax Appeals in due time made
the assessment in question final, executory and demandable. (Republic vs. Manila Port
Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for collection
of the tax was instituted, said taxpayer was already barred from disputing the
correctness of the assessment or invoking any defense that would reopen the question
of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the period of
thirty days for appeal to the Court of Tax Appeals would make little sense. (Republic vs.
Lopez, 2 SCRA 566)

Acquittal in a criminal case does not exonerate taxpayer’s civil liability to pay the
tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
“Best evidence obtainable,” explained. – It refers to the findings gathered by
internal revenue examiners and agents from the records of the register of deeds,
corporations, employers, clients or patients, tenants, lessees, vendees and the like with
whom the taxpayer had previous transactions or from whom he acquired any income.
It will be noted that under Section 5 of the said Code, the Commissioner of
Internal Revenue may obtain information on potential taxpayers from government
offices or agencies.
Networth method of investigation. – As stated above, the Commissioner of
Internal Revenue may make tax assessments on the best evidence obtainable. He can
avail of methods in order to arrive at a correct and reasonable assessment of taxes.
One method is the networth method of investigation.
The power or authority of the Commissioner to choose the method of determining
taxable income is quite comprehensive, and the only limitation to the exercise of such
power of authority is that the method chosen or adopted must “clearly reflect the
income.“ Consequently, Tax Code (Sec. 43) authorizes the Commissioner of Internal
Revenue to employ the networth method, where a taxpayer keeps no books or records

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or where such books or records do not clearly reflect his income. (Commissioner vs.
Enrique Avelino, G.R. No. L-14847, prom. Sept. 19, 1961)

It is not required in networth cases that the Government prove with absolute
certainty the sources from which petitioner derived his unreported income. It is sufficient
if evidence is adduced of the likely source or sources of such income. In this case, there
is ample evidence of the probable sources from which petitioner could have derived his
undeclared income such as flourishing business in optical goods, office equipment, and
haberdashery; horse racing, and real estate transactions. (Reyes vs. Collector, G.R. Nos.
L-11534 & L-11558, prom. Nov. 25, 1968)

CIR vs. Hantex, G.R. No. L-136075, March 31, 2005

- Mere photocopies not admissible. Exert effort to get the original
- Hearsay evidence is admissible. BIR not bound by the technical rules of
evidence. It depends on trustworthiness for evidence to be admissible.

A. SECRECY OF BANK DEPOSITS

Q. What guarantees on confidentiality do depositors enjoy under the law?
A. For peso deposits, Republic Act No. 1405 (Bank Deposits Secrecy Law) declares all
deposits of whatever nature with banks in the Philippines, including investments in government
bonds, as of an absolutely confidential nature and prohibits the examination or inquiry into such
deposits or investments by any person, government official, bureau or office, as well as the
disclosure by any official or employee of a bank of any information concerning said deposits.
There are only four (4) instances under the law where bank deposits or investment in
government bonds may be disclosed or looked into, namely: (1) upon written permission of the
depositor; or (2) in cases of impeachment; or (3) upon order of a competent court in cases of
bribery or dereliction of duty; or (4) in cases where the money deposited or invested is the
subject matter of the litigation.
It may be noted that RA 1405 covers not only bank deposits but also investments in government
bonds.
For foreign currency deposits, Republic Act No. 6426 (The Foreign Currency Deposit Act)
similarly declares that these deposits are of an absolutely confidential nature and cannot be
examined, inquired or looked into by any person, government official, bureau or office whether
judicial or administrative or legislative or any other entity whether public or private. There is only
one instance for disclosure under said law and, that is, upon the written permission of the
depositor. RA 6426 also exempts foreign currency deposits from attachment, garnishment, or
any other order or process of any court, legislative body, government agency or any
administrative body whatsoever.
For investments in trust accounts or in deposit substitutes, if these are in the form of
investments in government bonds or deposits, the protection under RA 1405 and RA 6426
extends thereto accordingly. If these are in other forms of investments, the disclosure of
information related thereto is covered by Section 55 of the General Banking Law of 2000
(Republic Act No. 8791) which prohibits, unless there is an order of a court of competent
jurisdiction, the disclosure by any director, official, employee or agent of any bank any
information relative to the funds or properties in the custody of the bank belonging to private
individuals, corporations or any other entity.
NOTE:
Under par. (F) of the NIRC, it states:
(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related
Information Held by Financial Institutions. – Notwithstanding any contrary provision of Republic
Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of
the Philippines, and other general or special laws, the Commissioner is hereby authorized to
inquire into the bank deposits and other related information held by financial institutions of:
(1) A decedent to determine his gross estate; and

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 (2) Any taxpayer who has filed an application for compromise of his tax liability under
Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that hi financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Act of
the Philippines, or under other general or special laws, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of tax
information from a foreign tax authority pursuant to an international
convention or agreement on tax matters to which the Philippines is a signatory
or a party of: Provided, That the information obtained from the banks and other
financial institutions may be used by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement purposes.1
In case of a request from a foreign tax authority for tax information held by banks and
financial institutions, the exchange of information shall be done in a secure manner to
ensure confidentiality thereof under such rules and regulations as may be promulgated
by the Secretary of finance, upon recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained from banks and financial
institutions pursuant to a convention or agreement upon request of the foreign tax
authority when such requesting foreign tax authority has provided the following
information to demonstrate the foreseeable relevance of the information to the request:
(a) The identity of a person under examination or investigation;
(b) A statement of the information being sought including its nature and the form
in which the said foreign tax authority prefers to receive the information from
the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines
or is in the possession or control of a person within the jurisdiction of the
Philippines;
(e) To the extent known, the name and address of any person believed to be in
possession of the requested information;
(f) A statement that the request is in conformity with the law and administrative
practices of the said foreign tax authority, such that if the requested
information was within the jurisdiction of the said foreign tax authority then it
would be able to obtain the information under its laws or in the normal course
of administrative practice and that it is in conformity with a convention or
international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would
give rise to disproportionate difficulties.
The Commissioner shall forward the information as promptly as possible to the
requesting foreign tax authority. To ensure a prompt response, the Commissioner shall
confirm receipt of a request in writing to the requesting tax authority and shall notify the
latter of deficiencies in the request, if any, within sixty (60) days from receipt of the
request.
If the Commissioner is unable to obtain and provide the information within ninety (90)
days from receipt of the request, due to obstacles encountered in furnishing the
information or when the bank or financial institution refuses to furnish the information,
he shall immediately inform the requesting tax authority of the same, explaining the
nature of the obstacles encountered or the reasons for refusal.

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As amended by RA 10021, entitled “An Act to Allow the Exchange of Information by the BIR on Tax Matters
Pursuant to Internationally-Agreed Tax Standards, otherwise known as “Exchange of Information on Tax Matters
Act of 2009”, Amending Secs. 6(F), 71, and 270 of the NIRC of 1997, as Amended, and for Other Purposes” march
5, 2010

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The term “foreign tax authority,” as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.

Q. How do banks respond to an order of a competent court?

A. For peso deposits, banks comply with orders for disclosure in court cases subject to these
requirements: (a) there must be a court order; (b) the order must be issued by a competent
court specifically directing the bank concerned to disclose the required information; and (c) the
bank should check and satisfy itself that the deposits or investment in government bonds being
inquired into are either the subject of a case of bribery or dereliction of duty of public officials, or
of a case where the deposit or investment itself is the subject matter of the litigation. If these
requirements are not met, there would be basis for the bank to request the court to excuse
compliance with the court order.
In impeachment cases, it is necessary that there be an order issued by the impeachment court
or by its authorized officer. For foreign currency deposits, the law does not provide an instance
for disclosure upon a court order. As mentioned above, there is only a single instance for
disclosure under RA 6426 and, that is, upon written permission of the depositor. Thus, for
foreign currency deposit accounts subject of a court order, the bank can invoke RA 6426 to
excuse compliance.

Q. What is the liability of the banks and/or its officers and employees for violating the
laws against disclosure?
A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the
General Banking Law of 2000 are subject to stiff criminal penalties.
Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine of
not more than P20,000, or both, in the discretion of the court. Under RA 6426, the penalty is
imprisonment of not less than one year not more than five years or a fine of not less than
P5,000 nor more than P25,000, or both, in the discretion of the court. The violation of Sec. 55 of
the General Banking Law of 2000, the penalty is imprisonment of not less than two years nor
more than 10 years or a fine of not less than P50,000 nor more than P200,000, or both, in the
discretion of the court; and in addition, if the offender is a director or officer of a bank, he is
subject to suspension or removal by the Monetary Board.

B. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS

Q. Are banks allowed to open accounts using an alias or a number?
A. There is no specific banking law up to the present prohibiting banks from opening deposit
accounts using an alias or a number. Prior to July 7, 2000, there is also no banking regulation
providing for such prohibition. On July 7, 2000 and in seeking the adoption of anti-money
laundering measures, the Bangko Sentral ng Pilipinas (BSP) issued a regulation, Circular No.
251, providing that, unless otherwise prescribed under existing laws, anonymous accounts or
accounts under fictitious names are prohibited.
The exception referred to under Circular No. 251 was RA 6426 (The Foreign Currency Deposit
Act) which explicitly allows the keeping of numbered accounts for the recording and servicing of
deposits.
For peso accounts, when banks allow the opening of deposit accounts under pseudonyms, it is
assumed that: (1) they have exercised due diligence to ascertain the identity of their clients; and
(2) they are aware of the legal provisions and requirements on the use of pseudonyms.
The above notwithstanding, it may be pointed out that in the Manual of Regulations issued by
BSP, or even before the issuance of Circular 251, there were already regulations requiring the
banks to: (a) adopt systems to establish the identity of their depositors; and (b) require to set a
minimum of three (3) specimen signatures from each of their depositors subject to regular
updating. Even for numbered accounts as authorized under RA 6426, BSP has required banks,
under Circular 258, to take necessary measures to establish and record the true identity of their
clients, which identification may be based on official or other reliable documents and records.

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Q. Are there other laws governing the use of pseudonyms or aliases?
A. Art. 178 of the Revised Penal Code penalizes the: (a) publicly using of a fictitious name for
the purpose of concealing a crime, evading the execution of a judgment, or causing damage;
and (b) concealment by any person of his true name and other personal circumstances.
On the other hand, there is also Commonwealth Act No. 142, as amended by Republic Act No.
6085 (Regulating the Use of Aliases) which provides that, except only as a pseudonym for
literary purposes and athletic events, it is unlawful for any person to use an alias, unless the
same is duly recorded in the proper local civil registry. Related thereto, Articles 379 and 380 of
the Civil Code provide that no person shall use different names and surnames except the
employment of pen and stage names provided it is done in good faith and there is no injury to
third persons.
What can be noted is that the above provisions allow the use of aliases under certain
circumstances. Conversely stated, the use of aliases is not absolutely disallowed. Moreover, the
sanctions for any violation of the above provisions on aliases are mainly directed to the one
using the unauthorized alias.

Q. How does Circular No. 251 apply to existing numbered accounts?

A. For peso accounts, the banks should have their respective programs of compliance with the
Circular. For foreign currency deposit accounts, they are allowed to continue maintaining
numbered accounts opened in accordance with RA 6426 subject to the requirement that the
banks shall take necessary measures to establish and record the true identity of their clients.

Q. What penalties/sanctions are applicable for violating the laws/regulations?

A. Article 178 of the Revised Penal Code is directed to the person concealing his identity
publicly or using a fictitious name and the penalty would range from one day up to six months
imprisonment and/or a fine up to P500,000. For violation of Commonwealth Act 142, which is
likewise directed to the person using an unauthorized alias, the penalty is imprisonment from
one year to five years and a fine of P5,000 to P10,000. For the violation of Circular 251, it is
subject to the administrative sanction on the bank and/or responsible directors/officers of fine up
to P30,000 per transaction.

C. CONTINUED CONFIDENTIALITY/SECRECY OF DEPOSIT TRANSACTIONS

Q. Is confidentiality/secrecy of deposit accounts compromised with the issuance of
Circular 251?
A. No. Circular 251 merely disallowed the opening of fictitious and anonymous accounts and
has not in any way modified nor lessened the safeguards and protection to depositors under RA
1405. This means that, notwithstanding Circular 251, deposit accounts cannot be examined or
looked into except under the limited circumstances provided for in RA 1405.

Q. Why are the BSP and the BAP advocating the amendment to bank secrecy laws?
A. The proposal of BSP and BAP is for access to deposit accounts only under exceptional
circumstances, such as deposits only above the P50-million level and in relation to the
commission of serious offenses like racketeering and illicit drug trade. Except for these
instances, depositors and those with legitimate transactions remain protected under RA 1405.
The objective of the proposal is to institute this measure as an anti-money laundering campaign
so as to delete the Philippines as a non-cooperative country in the list of the Financial Action
Task Force against money laundering

INCOME TAX

A. Income Tax Systems

 There are three kinds of income tax systems:
o Global (unitary) tax system
 Here, all items of gross income, deductions, personal and additional exemptions
are reported in one income tax return and a single tax is imposed on all income
received or earned, regardless of the activities which produced the income.

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  It is akin to putting all income into one basket and taxing the entire basket.

o Schedular tax system

 Here, different types of activities are subjected to different types of tax rates.
The tax rates depend on the classification of the taxable income ant the
activities which produced the income.

o Semi-global, semi-schedular system

 Certain passive income and capital gains are subject to final taxes while other
income are added to arrive at the gross income (where deductions are used to
arrive at the taxable income)
 We follow the semi-global/semi-schedular system in the Philippines.
 Schedular can also mean that tax rates will differ based on the tax base.
 For instance, global is usually applied to corporations, as corporations are
taxes at a single rate, regardless of the tax base; while the schedular system
is applied to individuals as they are subjected to different tax rates based on
their tax bracket.

D. Situs of Taxation
Under the tax code, only resident citizens and domestic corporations are taxed
from income whose geographical sources is worldwide. It is important to determine
whether such income is realized in the Philippines or abroad.

 Section 42 is NOT relevant to domestic corporations and resident citizens

because they are taxed worldwide. This section comes into play when it comes
to determination of geographical sources of income of taxpayers who are only
taxed on income sourced within the Philippines.
 The following are treated as gross income from sources within the Philippines
(Read Secs. 152-165, Revenue Regulations No. [“R.R.”] 2-1940)

1. Interests – including interests on bonds, notes and other interest bearing

obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines

2. Dividends –
a. From a domestic corporation; and
b. A foreign corporation, unless less than 50% of the gross income of the
foreign corporation was derived from the Philippines for the three-year
period (the amount will be based on the same ratio to dividends as the
gross income for such period derived from sources within Philippines to
its gross income from all sources.)
i. For example, We make kaijus, Inc., a Japanese corporation, derives
more than 50% of its gross income in the Philippines from the sale of
kaiju action figures for the past three years. If it declares dividends to
a non-resident Filipino, the dividend income will be considered
sourced within the Philippines.
3. Services – compensation for labor or personal services performed in the
Philippines.
4. Rentals and Royalties – from property located in the Philippines or from any
interest in such property for:
a. The use of any copyright, patent, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other similar stuff
b. The use of any industrial, commercial or scientific equipment
c. The supply of scientific, technical, industrial or commercial knowledge or
info

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 d. The supply of services by a non-resident person in connection with those
of property or rights, or the installation or operation of any brand,
machinery, or other apparatus purchased form such non-resident person
e. Technical advise, assistance or services rendered in connection with
technical management of any scientific, industrial or commercial
undertaking
f. The use of motion picture films, films for TV, tapes for radio broadcast
5. Sale of real property – the gains, profits and income from sale of real property
located in the Philippines.
6. Sale of personal property – gains, profits and income from sale of personal
property, determined by subsection (E).

 The place of the signing of a contract is NEVER an issue or a factor for determining
the source of income.
 Do not forget the “turnkey contract” case of CIR v. Marubeni (G.R. No. 137377,
December 18, 2001), when it comes to situs problems.
 Expenses of a multinational corporation directly allocated or identified with the
operations of the Philippine branch. So, the company can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branch’s
gross income to the total gross income, worldwide, of the multinational corporation.
(CIR v. CTA and Smith Kline & French Overseas Co., G.R. No. L-54108, January
17, 1984)
 The source of income is the property, activity, or service that produced the income.
o It is the place of activity creating the income which is controlling, and not the
place of business or residence of a corporation.
 Hence, reinsurance premiums ceded to foreign reinsurers are considered
income from Philippine sources. (Howden & Co., Ltd. V. CIR, G.R. No. L-
19392, April 14, 1965)
 Also, the sale of airline tickets through a general sales agent in the
Philippines is considered income from Philippine sources, even if the tickets
pertain to an airline company which does not maintain any flights to and from
the Philippines. (CIR v. British Overseas Airways Corporation, G.R. No. L-
65773, April 30, 1987, wherein the Court considered the sale of the tickets
as the source of income, and not the activity of actually transporting
passengers)
 When the sale is consummated within the Philippines (as in the title to the
property was transferred in the country), the situs of the sale is in the
Philippines and is therefore taxable here. (A. Soriano Y Cia v. CIR, G.R. No.
L-5896, August 31, 1955)

Income Test of Source of Income

Interest income Residence of DEBTOR
Dividend Income: Income within

1) From domestic corporation Income within, if 50% or more of the gross

income of the foreign company (for the
2) From foreign corporation past 3 years) was derived from sources
within the Philippines

Income without, if less than 50% of the

gross income of the foreign company (for
the past 3 years) was derived from
sources within the Philippines
Service Income Place of performance
Rent income Location of Property
Royalty income Place of use of intangible

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Gain on sale of real property Location of property
Gain on sale of personal property Place of sale
Gain on sale of domestic shares of stock Income within

Gross income from sources outside (without) the Philippines.

1. Interests other than those derived from sources within
2. Dividends other than those derived from sources within
3. Compensation for labor or personal services performed outside the Philippines
4. Rentals or royalties from property located outside the Philippines or any interest
in such property
5. Gains, profits, income from sale of real property located outside the Philippines

Income from sources partly within and partly without the Philippines.
 For the gross income items allocated to sources partly within and partly without
the Philippines,
o There shall be deducted the expenses, losses and other deductions properly
apportioned, and
o A ratable part of other expenses, losses and deductions which cannot
properly be allocated to some item of gross income.
 If there is any remainder, it shall be included in full as taxable income from
sources within the Philippines

Situs of sale of personal property

 Gains, profits and income derived from purchase of personal property within and
sold without, or from purchase without and sale within, are treated as derived
entirely form sources with the country in which it is SOLD.

Situs of sale of stocks in a domestic corporation

 Gains from sale of shares of stock in a domestic corporation are treated as
DERIVED ENTIRELY from sources within the Philippines regardless of where
the said shares are sold.

E. Income Tax on Individuals

Now that we know how to determine where income is geographically sourced, it
is time to focus on the different kinds of taxpayers. Let us begin with individual
taxpayers.

Individual taxpayers are classified into:

1. Citizens, who are divided into:
 Resident citizens – those citizens whose residence is within the Philippines; and
 Non-resident citizens – those citizens whose residence is not within the
Philippines.
2. Aliens, who are divided into:
 Resident aliens – those individuals whose residence is within the Philippines and
are not citizens thereof; and
 Non-resident aliens – those individuals whose residence is not within the
Philippines but temporarily in the country and are not citizens thereof. They are:
 Those engaged in trade or business within the Philippines; and
 Those who are not so engaged. (see NIRC, Sections 23-25)

It is important to know the definition of each kind of individual taxpayer because the
tax liability of each differs (as we shall see later).

Resident aliens
 Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen

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 Mere physical or body presence is enough, not intention to make the country one’s
abode. (Garrison v. CA, G.R. No. L-44501, July 19, 1990)
 An alien actually present in the Philippines who is not a mere transient or sojourner
is a resident of the Philippines for purposes of income tax. Whether he is a transient
or not is determined by his intentions with regard to the length and nature of his
stay.
o A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient.
o But if his purpose is of such a nature that an extended stay may be necessary for
its accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to
return to his domicile abroad when the purpose for which he came has been
consummated or abandoned. (R.R. 2-1940)

 The BIR has ruled that there is intention on the part of an alien to stay in the
Philippines indefinitely when the alien:
o Had a Special Resident Retiree’s Visa;
o Acquired real property and is actually present most of the time in the Philippines;
and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)

Non-resident citizens
 Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein;
2. Citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable
year;
4. Citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.

 Who are non-resident citizens? (R.R. 1-1979)

1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant
for which a foreign visa has been secured.
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis.
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renewed form time to tome under such circumstance as to
require him to be physically present abroad most of the time (not less than 183
days)

 Non-resident citizens who are exempt from tax with respect to income derived from
sources outside the Philippines shall no longer be required to file information
returns from sources outside the Philippines beginning 2001. (R.R. 5-2001)

 The phrase “most of the time” shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year.

10
 o However, citizens who work outside of the Philippines for at least 183 days in a
taxable year due to a contract of employment with a Philippines employer (such
as employees seconded to a foreign country) is not considered a non-resident
citizen because they are not considered employed abroad. They do not fall
within Section 22(E)(3) because their employment remains with the Philippines
employer. (BIR Ruling No. 116-12)

 The wage or income of an OFW/OCW which is earned from outside the Philippines
is exempt from income tax.
o An OCW is a Filipino citizen who:
 Holds a job outside the Philippines;
 Is physically present in that foreign country where the job is;
 Is registered with the POEA;
 Has valid overseas employment certificate;
 Their salaries and wages are paid by an employer abroad and is not borne by
any entity or person in the Philippines. (R.R. 1-2011)

 Resident Alien
o An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status from
resident alien to non-resident alien. An alien who has acquired a residence is
taxable as a resident for the remainder of his stay in the Philippines. (Section 6,
R.R. 2-1940)

Non-resident aliens engaged in business in the Philippines

 Who are non-resident aliens?
1. An individual whose residence is not within the Philippines, and
2. Not a citizen of the Philippines

 One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient or non-resident. (R.R. 2-1940)

 Non-resident aliens are either:

o Engaged in trade or business, such as:
 One who actually derives income in the Philippines, or
 Stays in the Philippines for more than 180 days during any calendar year
(deemed to be a non-resident alien engaged in the Philippines, Section 25[A])
o Not engaged in trade or business.

Kinds of income and income tax of individuals

Before we get into the smallest details of the tax liabilities of each kind of individual,
let’s set down some basic rules which will be helpful to remember:

 Only resident citizens (and domestic corporations as we shall see later) are taxed
on income derived from abroad. They are worldwide taxable!
 For income received from sources which are not subject to final withholding tax (like
passive income to be discussed below), a resident citizen, a non-resident citizen, a
resident alien, and a non-resident alien individual engaged in trade or business in
the Philippines are all subject to the graduated income tax rates in Section 24.
o But what about non-resident aliens not engaged in trade or business?
 For non-resident aliens not so engaged, the tax rate is:
 25% of the entire or gross income received from sources within the
Philippines or

11
  15% of the gross income received as compensation, salaries, and other
emoluments by reason of his employment by: (special alien individuals)
o Regional or area headquarters and regional operating headquarters of
multinational corporations;
o Offshore banking units establishment by a foreign corporation in the
Philippines; or
o By foreign petroleum service contractor or sub-contractors operating in
the Philippines. (Section 25[A-E])

STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually of its
own stocks without change in per value.
- The stock distributed is a stock dividend. It is not subject to a dividend tax or
passive income. However, if the stockholder owns a common stock and the
stock dividend is preferred stock or vice – versa, then the stock dividend is
subject to tax because there is already a change of interest.
Dividends out of quarterly profits. – This refers to your letter requesting opinion
as to whether your company can declare cash and/or stock dividends out of quarterly
profits and/or surplus.
It is represented that your company has been issuing cash and stock dividends
for the last five (5) years; that during the early part of this year, you have issued 50%
dividend out of accumulated retained earnings; and that since your company has been
making profits as early as the first quarter of this year, you intend to declare cash and/or
stock dividend out of quarterly profit.
Ruling: An ordinary dividend is the most common type of corporate distribution,
and is defined as (1) a distribution of property by a corporation to its stockholder (2)
made in the ordinary course of its business (3) out of its earnings and profits. (par. 2251,
2d Am. Jur. 33) Thus, a dividend is a corporate profit set aside, declared and ordered by
the directors to be paid to the stockholders on demand or at a fixed time. (Fisher vs.
Trinidad, 43 Phil. 973)
It is distinguished from “profits” for the profits in thousands of a corporation do not
become dividends until they have been set apart, or at least declared, as dividends and
transferred to the separate property of the individual stockholders. Such being the case,
your company can declare cash and/or stock dividends out of its quarterly profit. (BIR
Ruling No. 87-172)
Under the TRAIN LAW, these are the tax treatment of individuals:

1. Among the different individual taxpayers, it is only the resident citizen who is taxable
on his income within and without the Philippines.

2. The graduated rates of individual taxation that ranges from 20% to 35% effective
January 1, 2018 until December 31, 2022, are the tax rates for the resident citizen, non-
resident citizen, and resident alien.

The first ₱250,000 of their income is not subject to income tax. Further, these graduated
rates will apply to all income coming from “blind sources”. It is also the “basket rates” of
other income which have no specific tax rates applicable.

3. The minimum wage earner is always exempted from taxes on his compensation income,
as well as on holiday pay, overtime pay, night-shift differential pay, and hazard pay.

4. The purely self-employed individuals/professionals if the gross sales/gross receipts do

not exceed the threshold amount of ₱3 Million for VAT, are given the following options:

12
 Option 1: To be taxed at 8% on gross sales/gross receipts and other non-operating
income in excess of ₱250,000, in lieu of the graduated income tax rates.
If this option is availed, they are also exempted from the percentage tax
under Section 116 of the Tax Code.

Option 2: To be taxed using the graduated rates, of which the first ₱250,000 is
exempted. But, they will be liable to pay the percentage tax.

NOTE: If the gross sales/gross receipts exceeds ₱3 Million, the taxpayer cannot avail
the 8% option tax. Instead, he will be taxed based on the graduated rates and be
liable to pay the VAT.

5. Individual mixed income earners. (compensation income, self-employment, and

practice of profession)

(1) All income from compensation taxable under graduated rates.

(2) All income from business or practice of profession where the gross sales/gross
receipts and other non-operating income do not exceed ₱3 Million, can avail
Option 1 or 2. (See No. 4)
(3) If the gross sales/gross receipts and other non-operating income exceeds ₱3
Million VAT threshold, he cannot avail the 8% option tax. But, instead be taxed
by the graduated rates and will be liable to pay the VAT.

6. Special alien individual (refers to aliens who worked with multi-national companies,
offshore banking units, and petroleum contract operators.

Their gross income from employment is subject to 15% final tax.

POSITION AND FUNCTION TEST

This test will apply on the taxability of a Filipino working with the same company of
that of an alien. The Filipino holding the same position and function with that of the
alien, will have the same preferential tax treatment of 15%.

Income of these special alien individuals outside of their employment, would be taxed
the same as that of the resident alien.

7. Tax treatment on deposit substitutes.

Interest income FROM deposit substitutes are taxed at 20% final tax.

When is a deposit considered deposit substitutes?

Read Section 22 (y), which gives you the meaning of deposits substitutes.

Under this provision, if the individuals or corporate lenders at any one time did not
reach 20, the deposits will not be considered as deposit substitutes. Thus, the interest
income would not be subjected to final tax.

This is the concept of the 19 Lender Rule, under Revenue Regulation No. 14-2012, and
Revenue Memorandum Circular No. 77-2012.

Read: PEACE BOND CASE.

BDO vs. Republic of the Phils., G.R. No. 198756, January 13, 2015

8. Capital gains tax on sale by real property by individuals.

6% capital gains tax on selling price or Fair Market Value whichever is higher, on sale of
real properties which are CAPITAL ASSETS.

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 Real properties referred to the immovable properties defined and enumerated in
Article 415 of the Civil Code of the Philippines.

Capital assets refers to properties which are not ordinary assets as defined under the
NIRC (Section 39, NIRC)

Ordinary assets are the following:

1. Stock and trade or inventory
2. Properties held by the taxpayer primarily for sale to customers in ordinary course of
trade or business
3. Property used in the trade or business which is subject to the allowance or
depreciation
4. Real property used in trade or business of the taxpayer

WHAT IS BEING TAXED IS THE PRESUMED GAIN

If the buyer of the real property is government, the seller will have the option to be
subjected to tax either the 6% capital gains tax or the graduated rates.

If the proceeds of the sale will be used by the seller to buy or construct a new house, the
proceeds will be exempted from the capital gains tax. The exemption will be once every
ten years.
If the proceeds will not be entirely used, the unused part will be subjected to capital
gains tax.

Under the present revenue regulation, the seller will be required to pay the capital
gains tax even he intends to use the proceeds to buy or construct a new house. But, he
can ask for a tax refund if indeed he used the proceeds to buy or construct a new house.

- If the taxpayer will sell real property to the government, he will have the option to
be taxed under Section 24 of the graduated rates. It is an option because he can
either be taxed under the 6% capital gain tax or under Section 24 which are the
graduated rates.

Income tax formula for individuals

It is important to note the basic formula to determine the taxable income of an
individual. Think of it as a road map where the different provisions of the code will plug
into. The basic formula to determine the taxable income of an individual is as follows:

Gross Income ₱xxxx

Less: Deductions (either itemized
of optional standard deduction) ₱xxxx
Taxable Income ₱xxxx
Tax Rate %_____
Tax Due ₱xxxx

Deductions
 Individuals, except those who earn purely compensation income can claim itemized
deductions (which we will discuss in more detail).
“Engaged in trade or business”, explained. – The phrase “engaged in trade or
business within the Philippines” includes the performance of the functions of a public
office or the performance of personal services within the Philippines. (Sec. 8, Rev. Regs.
No. 2)

14
 “To engage in business” is uniformly construed as signifying to follow the
employment or occupation which occupies the time, attention, and labor for the purpose
of a livelihood or profit.
A nonresident alien who shall come to the Philippines and stay there in an
aggregate period of more than one hundred eighty days during any calendar year shall
be deemed a nonresident alien doing business in the Philippines. (Sec. 25A)
The length of stay is the criterion. Hence, a non-resident alien shall not be
considered engaged in trade or business in the Philippines if he stays in the Philippines
for less than 180 days notwithstanding the fact that during such stay he actually
performs personal services, or engages in a commercial activity therein. And the whole
period of more than 180 days must cover a calendar year.
The entire gross income of non-resident aliens not engaged in trade or business
received from all sources within the Philippines is subject to income tax. He must not be
engaged in trade or business in the Philippines.
The sources of the income are interests, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income, and capital gains.
Tax Liability of Members of General Professional Partnerships (GPP). (Sec. 26)
The GPP as a juridical entity is exempted from income taxes. It would be the
individual members who will be liable on their net income share from the GPP.
A partner in a general professional partnership shall report in his income tax
return, whether distributed or not, his share of the profits of the partnership. If he reports
his net share in the profits, he shall be deemed to have elected the itemized deduction
and may no longer claim the optional standard deduction. In case he declares his
distributive share in the gross income undiminished by his share in the deduction, he
may avail the 40% optional standard deduction in lieu of the itemized deduction.
Professional partnership. – Your professional partnership of Certified Public
Accountants is exempt from income tax pursuant to Section 26 of the Tax Code, as
amended. Accordingly, payments to said partnership for professional services rendered
are exempt from the withholding tax provisions of Revenue Regulations No. 13-78 as
amended by Revenue Regulations No. 6-79, both implementing Section 50 (now 43) of
the Tax Code, as amended by Presidential Decree No. 1351. (BIR Ruling No. 84-142)

Professional partnership are not required to file income tax return. – Requesting
confirmation of your opinion to the effect that professional partnerships are not required
to file quarterly returns of their income; and that individual partners of a professional
partnership should not be required to file quarterly returns if they received their shares
in the net income of the partnership at the end of the calendar year or the fiscal year of
the partnership.

In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3,
Revenue Regulations No. 7-93 prescribing the procedures for the filing of quarterly
returns and payment of the quarterly income tax by individuals receiving self-
employment income, a return of summary declaration or gross income and deductions
(BIR Form No. 1701 Q) for each of the first three quarters of the calendar year, and a final
or adjustment return (BIR Form No. 1701) shall be filed by all individuals, including
estates and trusts. The tax returns shall be filed on or before indicated dates:

First quarterly return - May 15 of the current year;

Second quarterly return - August 15 of the current year;
Third quarterly return - November 15 of the current year;
Final return - April 15 of the following year.

15
 The corresponding income tax, as computed, shall be paid at the same time that
the returns are filed based on declarations of actual income and deductions for the
particular quarter. The filing of the returns and payment of taxes shall be in lieu of the
filing of a declaration of estimated income for the current taxable year and the payment
of the estimated tax as provided for in Section 67(a) and (b) (now 60) of the NIRC
primarily for the reason that the procedure prescribed in Section 67 (now 60) of the NIRC
of estimating the amount of income and tax to be paid by the individual.

Such being the case, your opinion that professional partnerships are not required
to file quarterly returns of their income is hereby confirmed. However, individual partners
of a professional partnership are required to file a return of summary declaration of
gross income and deduction for each of the first three quarters of the calendar year and
a final or adjustment return. The corresponding tax, as computed, shall be paid at the
same time that the returns are filed based on declarations of actual income and
deductions for the particular quarter. (BIR Ruling No. 94-60)

Taxation of Co-ownership
1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436

Domestic Corporations and Foreign Corporations

The term “domestic,” when applied to a corporation means created or organized
in the Philippines or under its laws (Se. 22[C], NIRC), while the term “foreign,” when
applied to a corporation, means a corporation which is not domestic (Sec. 22[D], NIRC).
The branches of a domestic corporation, whether located in the Philippines or abroad,
are merely extensions of the local head office. Accordingly, their incomes in the
Philippines and abroad of the head office and foreign branches are to be reported by
the Philippine head office in its corporate income tax return, and the branch profits
remitted by its foreign branches to the Philippine head office shall no longer be subject
to the branch profit remittance tax because (a) the income of the foreign branch had
already been subjected to Philippine income tax, and (b) the branch profit remittance tax
applies only to Philippine branches of foreign corporations operating in the Philippines
operating in the customs territory and exempts from the tax profits remitted by the
Philippine branch operating in special economic zones to their head offices abroad.

A “resident foreign corporation” is a foreign corporation engaged in trade or

business within the Philippines (Sec. 22[H], NIRC), and a “nonresident foreign
corporation” is a foreign corporation not engaged in trade or business within the
Philippines (Sec. 22[I], NIRC).

Test in determining Status of Corporations

Following the above provisions, it can be said that the Philippines adopted the
“law of incorporation test” under which a corporation is considered (a) as a domestic
corporation,, if it is organized or created in accordance with or under the laws of the
Philippines, or (b) as a foreign corporation, if it is organized or created in accordance
with or under the laws of a foreign country. Corollarily, a domestic corporation may be
formed or organized by foreigners under the Philippine Corporation Code, provided that
it is organized under the laws of the Philippines. On the other hand, a corporation
established by Filipino citizens under the laws of a foreign country will be treated as a
foreign corporation, and the branch that such foreign corporation sets up in the
Philippines is a resident foreign corporation. In other words, the nationality of the
owners of the corporation has no bearing in ascertaining the status or residence of
corporations, for income tax purposes.
The term “doing business” implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the

16
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose of business organization. In order that a foreign
corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character (BOAC v.
Commissioner, 149 SCRA 395).

Partnerships
Except for a general professional partnership and an unincorporated joint venture
or consortium in construction or energy-related projects, which in reality are also
partnerships, Section 22(B) of the 1997 Tax Code considers any other type of
partnership (described here as “business partnership”) as a corporation subject to
income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business partnership
and an ordinary corporation on a similar footing, by imposing the 10% dividend tax on
the cash and/or property dividends actually or constructively received by an individual
stockholder of a corporation, or in the distributable net income after tax of a partnership
of which he is a partner, except a general professional partnership, received by a
partner. The term “after-tax net profit” means the net profit of the partnership
computed in accordance with generally accepted principles of accounting, less the
corporate income tax imposed in Section 27 of the Tax Code (Sec. 2 Rev. Regs. No. 2-84,
January 16, 1984). Sec 73(D) of the 1997 Tax Code, however, provides that “the taxable
income declared by a partnership for a taxable year which is subject to tax under
Section 27(A) of this Code, after deducting the corporate income tax imposed therein,
shall be deemed to have been actually or constructively received by the partners in the
same taxable year and shall be taxed to them in their individual capacity, whether
actually distributed or not.”
Joint Ventures
Joint venture. – A joint venture was created when two corporations while
registered and operating separately were placed under one sole management which
operated the business affairs of said companies as though they constituted a single
entity thereby obtaining substantial economy and profits in the operation. (Collector vs.
Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82
dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990)

Thus, Empire Venture which has been constituted as a single entity whereby
Empire and Uniphil agreed to pool their resources for the development of a parcel of
land and the construction of condominium units thereon as well as the eventual sale of
said units is a joint venture which is subject to the 35% Section 27 of the Tax code, as
amended. However, the respective 70% and 30% shares of Uniphil and Empire from
the profits of the joint venture are not subject to income tax Section 27 of the Tax Code,
as amended. (BIR Ruling No. 91-254)

Note: The term “corporation” mentioned in joint venture refers to a corporation as

defined by the corporation law.

Unregistered partnerships. – They, in order to be subject to corporate income

tax, must be engaged in joint venture for profit. To constitute said unregistered
partnership, the character of habituality peculiar to business transactions for the
purpose of gain must be present. (BIR Ruling No. 89-124)
Elements of joint venture. – To constitute a “joint venture,” certain factors are
essential. Thus, each party to the venture must make a contribution, not necessarily of
capital, but by way of services, skill, knowledge, material or money; profits must be
shared among the parties; there must be a joint proprietary interest and right of mutual
control over the subject matter of the enterprise; and usually, there is single business
transaction (BIR Ruling No. 317-92).

17
 Exempt joint venture or consortium is an unincorporated joint venture or
consortium engaged in construction activity or energy-related project. – The term
“joint venture or consortium,” referred to in Section 22(B) of the 1997 Tax Code that
is not considered as a separate taxable entity, means an unincorporated entity formed
by two (2) or more persons (individuals, partnerships or corporations) for the purpose of
undertaking construction project (P.D. 929, May 4, 1976), or engaging in petroleum and
other energy operations with operating contract with the government. The term “joint
venture” was clarified by the Secretary of Finance when he issued Revenue
Regulations No. 10-2012 on June 1, 2012. In said Regulation, the joint venture that is
not taxable as a corporation must comply with the following requisites: (a) the joint
venture or consortium is formed for the purpose of undertaking construction activity; (b)
It involves jointing or pooling of resources by licensed local contractors; i.t., licensed as
a general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry; (c) the local contractors are engaged in construction
business; and (d) the joint venture itself is licensed as such by PCAB. If all the above
requisites are not met, the joint venture becomes liable to the corporate income tax.
Each member of the joint venture not taxable as a corporation shall report and pay
taxes on their respective shares to the joint venture profit. Since it is not considered as a
separate taxable entity, the net income or loss of the joint venture or consortium is taken
up and reported by the co-venturers or consortium members in accordance with their
participation in the project as set forth in their agreement. The participation in the project
as set forth in their agreement. The two (2) elements – unincorporated entity (or entity
not registered with the Securities and Exchange Commission) and for the purpose of
undertaking construction or energy-related project – must be present in order that the
joint venture or consortium may not be considered as a separate taxable entity.

Tax-exempt joint venture shall not include those who are mere suppliers of
goods, services or capital to a construction project.
Joint Venture (JV) involving foreign contractors may be treated as non-taxable
corporation only if:
1. Member foreign contractor is covered by a special license as contractor by
PCAB; and
2. Construction project is certified by the appropriate Tendering Agency
(government office) that the project is a foreign-financed/internationally-
funded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine government and the
foreign/international financing institution, pursuant to the rules and regulations
of R.A. 4566 (Contractor’s License Law)
Each member of the joint venture not taxable as corporation shall report and pay
taxes on their respective shares on the joint venture profit, received by a joining
corporation.
All licensed local contractors must enroll to BIR’s eFPS at the RDO where local
contractors are registered as taxpayers.
Foreign joint venture or consortium that does not sell goods nor perform
services in the Philippines. – A joint venture or consortium formed among non-
resident foreign corporations in connection with a local project in the Philippines is not
subject to Philippine income tax, where said foreign joint venture or consortium does not
sell goods nor perform any service in the Philippines. This rule is anchored on the fact
that a foreign corporation is taxable only on income from sources within the Philippines
(BIR Ruling No. 23-95). Accordingly, no withholding tax is required to be deducted and
withheld by the Philippine payor from income payments from foreign sources made to
the foreign joint venture or consortium.
Exempt joint venture or consortium may become taxable partnership. – An
exempt joint venture or consortium undertaking a construction of office tower project

18
may subsequently become subject to income tax as a separate joint venture or
consortium, where after the construction period, the joint venture partners engaged in
the business of leasing the building floors or portions thereof separately owned by them
(BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the joint venture granted
under the law is valid only up to the completion of the construction project and does not
extend to the subsequent sale or lease of the developed condominium floors or units to
customers.

BIR Rulings prior to Revenue Regulations No. 10-2012:

Corporations does not include joint venture undertaking construction
activity; allocation of floors, units, or lots is a mere return of capital. – The joint
ventures described above are not subject to corporate income tax under Section 27 of
the 1997 Tax Code, since the term “corporation” does not include a joint venture or
consortium formed for the purpose of undertaking construction projects pursuant to
Section 22(B) of the 1997 Tax Code. Accordingly, the memorandum of agreement, joint
venture agreement, or exclusive development and marketing agreement between or
among the contracting parties, as the case may be, will not give rise to a taxable joint
venture, and the allocation of specific floors or units or subdivision lots in the project is
not a taxable event and is not subject to income tax and expanded withholding tax,
because the allocation is a mere return of the capital that each party has contributed to
the project.
Transfer of land to joint venture is similar to capital contribution;
distribution of developed lots/units is merely an act of partitioning commonly
owned property. – Joint venture agreements for the construction and development of
real property may or may not be treated as a separate taxable unit, depending on
whether or not a separate taxable unit, depending on whether or not a separate taxable
entity is established by the joint venture partners. If the parties did not form nor register
a separate entity and merely agreed to pool their resources to a common fund, no
separate taxable unit is created. In this case, each joint venture partner has to account
for his respective share in the net revenue earned from the joint venture project
separate income tax returns partners. Hence, the partners may file separate income tax
returns for its net revenue for the project less its respective proportionate share in the
joint venture expenses. The contribution of land to the joint venture is not a taxable
event that will give rise to capital gains tax on sale or transfer of land. Such transfer is
similar to a capital contribution that does not give rise to income tax. The distribution of
developed lots/units is merely an act of partitioning the commonly owned property. It is
nothing more than an act of terminating the co-ownership by making each partner
specific owner of the identifiable lot or unit. At this stage, no taxable sum has yet been
realized by the joint venture partners. That act of allocation or assigning portions of the
developed lots to each member of the joint venture cannot be treated as a taxable
event. The same is true despite the fact that the shares allocated to or received by the
partners may not necessarily correspond to the lot area originally contributed by them to
the joint venture. Hence, the titling of the land back to the joint venture partners is not
subject to income tax, expanded withholding tax, and value added tax (BIR Ruling DA-
165-03-18-99).

Sale of developed floor, unit or lot is subject to income tax. – Should the
corporate landowner or developer sell any of the floors or portions of the floors allocated
to them to third parties, the gain that may be realized by them from such sale will be
subject to the regular corporate income tax and to the expanded withholding tax under
Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as amended (BIR Ruling No.
274-92, September 30, 1992). This rule applies even if the sale takes place before or
during the construction period.

19
 Taxable Joint Ventures
There are two (2) instances when a joint venture becomes a taxable entity. First,
a domestic corporation jointly owned by individuals and by two or more existing
domestic corporations and/or foreign corporations that is incorporated under the laws of
the Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or licensed by the
Securities and Exchange Commission [e.g., Marubeni Corporation – Philippine Branch]
is a taxable corporation, even if it is engaged in the business of construction or energy-
related activity. Second, if the unincorporated joint venture or consortium (or
unregistered partnership) is engaged in any other line of business than construction or
energy-related activity with operating contract with the government, the same will also
be treated as a taxable corporation. The income and expenses of the taxable joint
venture must be reported by it during the taxable year.
I. Rates of income tax of corporations

1. Domestic corporation
 30% of taxable income from all sources within and without the Philippines.
 However, if the domestic corporation has a tax effort ratio of 20% of the GNP, or a
ratio of 40% of income tax collection to total tax revenues or a VAT tax effort of 4%
of GNP, and a 0.90% ratio of Consolidated Public Sector Financial Position (CPSFP)
to GNP, they have the option to be taxed at 15% of their gross income instead of the
regular income tax of 40%.
 The election of gross income tax option will be irrevocable for three (3) consecutive
taxable years.

2. Proprietary educational institutions and non-profit hospitals has a preferential

treatment to be taxed at 10%. However, under the pre-dominance test, if their total
income from unrelated trade, business, or other activity exceeds 50% of the total gross
income derived by the proprietary educational institutions and non-profit hospitals,
they will be taxed under the regular income tax of 30%.

Read the meaning of:

1) Unrelated trade, business or other activity
2) Proprietary educational institution

Example:
XYZ is a stock and profit educational institution. The following are their income;
Education business ₱1,000,000
Non-education business (unrelated to education) ₱2,000,000
Total income ₱3,000,000 x 50% (₱1,500,000)
Thus, the unrelated income of ₱2 Million exceeds the 50% which is ₱1,500,000, then the
preferential 10% tax treatment will not apply. So that the tax rate will be the regular
corporate tax rate of 30%. This is the meaning of the pre-dominance test.

Read: CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
CIR vs. St. Luke, G.R. No. 203514, February 13, 2017

3. Government owned or controlled operations are exempted, to wit:

(1) GSIS
(2) SSS
(3) PHIC
(4) Local Water Districts

Exception: If the GOCC charters or any other special laws exempt them from income tax.

NOTE: PCSO is now subject to tax.

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 4. Final tax on certain passive incomes. Read Section 27 (D)
 Capital gains tax from sale of shares of stock not traded in stock exchange 15%
based on capital gains.
 Tax on income derived under the expanded foreign currency deposit system. Read
Section 27 (D) (3).

Read: PAL vs. CIR, G.R. No. 206079-80, January 27, 2018/Tax on savings
interests/refund.

 Intercorporate dividends are exempted if received by a domestic corporation from

another domestic corporation.
 Capital gains realized from sales, exchange or disposition of lands and/or buildings,
final tax of 6% of the selling price or FMV whichever is higher.

Take note that it only refers to lands and buildings and not on real properties

 Minimum corporate income tax on domestic corporations.

Read: CIR vs. PAL, G.R. No. 180066, July 2009
Manila Bank vs. CIR, G.R. No. 168118, August 28, 2006

 The minimum corporate income tax is 2% of the gross income.

Notes: A new concept introduced by the 1997 amendments to the NIRC in the Minimum
Corporate Income Tax (MCIT). In the case of Chamber of Real Estate and Builders
Association, Inc. vs. Hon. Executive Secretary (G.R. No. 160756, March 9, 2010), the
Supreme Court held that the MCIT is imposed on gross income and not on capital.
Gross income is arrived at by deducting the capital spent by a corporation in the sale of
its goods including cost and other expenses from gross sales.

MCIT came about as a result of the perceived inadequacy of the present self-
assessment system in capturing the true income of firms that should be subject to tax.
The MCIT is expected to provide a reasonable measure of the actual corporate income
tax that a corporation ought to be paying on the basis of its available resources.

A minimum corporate tax of 2% is imposed on the gross income as defined in Section

27(E)(4) of corporations beginning on the fourth taxable year after their respective
commencement of operations. This applies only if the normal corporate income tax is
less than the amount of the minimum corporate income tax.

The excess of the minimum corporate income over the normal corporate income tax
can be carried forward to the three succeeding years and credited against the normal
income tax for the said succeeding years.

The imposition of the minimum corporate income tax on certain corporations may be
deferred by the Secretary of Finance upon showing by a corporation that it has
suffered losses because of a prolonged labor dispute, force majeure or business
reverses.

Take note of the instances where there is relief from the minimum corporate tax.

II. Rates of income tax on foreign corporations

A. Resident foreign corporations

 30% of gross income or optional tax of 15%. (the same conditions with that of
the domestic corporations 15% of gross income)
B. Minimum corporate income tax on resident foreign corporations. (the same
with that of the domestic corporations)
C. International carrier
 2 ½% of Gross Philippine Billings.

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  Study the meaning of Gross Philippine Billings
 Read these cases:
 CIR vs. BOAC, 149 SCRA 395
 CIR vs. American Airlines, 180 SCRA 274
 CIR vs. Air India, 157 SCRA 648
 CIR vs. JAL, 202 SCRA 450
D. Offshore banking units
 Exempted on their income from foreign currency transactions
 On foreign currency loans, interest income is subject to 10% final tax
 Any other income of non-residents, whether individuals or corporations from
transaction with the offshore banking units shall be exempt from income tax
(R.A. No. 9294, April 28, 2004)
E. Tax on branch profits remittances
 15% of the total profits earmarked for the remittance without any deduction for
the tax component

Notes: The proviso giving a special tax rate (7½% instead of the usual 15%) on
remittances of branches to head offices authorized to engage in petroleum
operations in the Philippines has been deleted. It must be emphasized that
dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax. Same rule shall apply to dividends
received by resident foreign corporations from a domestic corporation, i.e.,
not subject to tax. However, dividends received by non-resident foreign
corporations from a domestic corporation shall be imposed a 15% final
withholding tax, provided the national law of the non-resident foreign
corporation allows taxpayer clause. Otherwise it will be subject to the
normal domestic rate as provided in Section 28(B)(5)(b) of the Tax Reform
Act of 1997.

Read: Bank of America vs. CA, 234 SCRA 302

F. Rate of tax on non-resident foreign corporation
 Read further Section 28
G. Imposition of improperly accumulated earnings tax
 10% of the improperly accumulated taxable income
 Read: Section 29, NIRC

Improperly Accumulated Earnings Tax. Immediacy Test (Cyanamid vs. CA,

G.R. No. 108067, January 20, 2000)

Section 30 - Exemption from Tax on Corporations. The corporations covered by this

section are exempted from income tax because it is generally organized not for profit
but exclusively for the benefit of their respective members. So that no income inuring to
the benefit of the individual members but for the benefit of the organization as a whole.

However, a corporation is not simply exempted from tax because it is not organized
and operated for profit, it is still subjected to income tax no matter how these
corporation are created. Hence, if they will have income of whatever kind and character
from any of their properties real or personal or from any of their activities conducted for
profit regardless of the disposition made of such income, they will be liable for income
tax.

For instance a non-profit corporation will sell their property and derive income
therein, that income would be subjected to income tax.

The rule that “regardless of their disposition made of such income” do not apply to
non-profit educational institution, because under the constitution all revenues and

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assets of these institutions it actually, directly and exclusively used for educational
purposes will make these institution exempted from all taxes. Thus, if Xavier University,
for example, who is a non-stock, non-profit educational institution will use their rental
income from the gym for education purposes, the same is not subject to income tax.
However, if the gym rental is used for charitable purposes it would already be subjected
to income tax because what the constitution provides is only to educational purposes.

READ : 1) CIR vs. Court of Appeals, 298 SCRA 83

2) Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998
3) CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
4) CIR vs. St. Luke, G.R. No. 203514, February 13, 2017
5) CIR vs. De la Salle University, G.R. No. 196596, November 9, 2016

pc3
August 2018

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