TAXATION 1 NOTES (Atty Rizalina Lumbera) – PRELIMS PERIOD

(SECS 22-30)
 Even if you are alive or you are dead, you are still subjected to SECTION 22 OF THE NIRC (definition of terms)
certain taxes
 TAXES WHEN YOU ARE ALIVE: Income Tax, VAT, Percentage Tax, (A) Person – means any individual, a trust, estate or a corporation
Excise Tax, Documentary Stamp Tax (B) Corporation – includes partnerships, no matter how created or
 TAXES WHEN YOU ARE DEAD: Estate Tax, DST organizes, joint stock companies, joint accounts, associations,
insurance companies, but does NOT include General
National Taxes professional partnerships and a joint venture or consortium
- INCOME TAX: Direct tax on the right to receive income formed for the purpose of undertaking construction projects
- ESTATE TAX: Transfer mortis causa projects or engaging in coal, geothermal, and other energy
- DONOR’S TAX: Donations made inter vivos operations pursuant to an agreement under a service contract
- VAT with the government
- Percentage Tax o General Profesional Partnerships – partnerships formed
- Excise Tax by persons for the sole purpose of exercising their
common profession, no part of income of which is derived
National and Local taxes are not in conflict with one another, they do not in engaging in any trade or business
tax the same things and impose tax on different areas. (C) DOMESTIC – when applied to a corporation, means created or
organized in the Philippines under its laws
Q: WHAT IS INCOME? (D) FOREIGN – when applied to a corporation means corporation,
which is not domestic
A: It is anything that flows in to the wealth of the taxpayer or increases (E) NON RESIDENT CITIZEN
the net worth of the taxpayer, other than the return capital, regardless if o A citizen of the Philippines who establishes to the
the income is derived from legal or illegal sources or that the income is in satisfaction of the commissioner the fact of his physical
kind or cash presence abroad with a definite intention of residing
theiren
Q: WHEN IS INCOME TAXABLE? o A citizen of the Philippines who leaves the Philipines
A: When (1) it is actually or constructively received (2) it must be during the taxable year to reside abroad, either as an
realized (3) it must not be exempted by law immigrant or for employment on a permanent basis
o A citizen of the Philippines who works and derives
Q: What is income tax? income from abroad and whose employment thereat,
A: It is tax on the right to receive income, depends on the source of requires him to be physically present abroad most of the
income. time during the taxable year
o A citizen who has been previously considered as non-
resident citizen and who arrives in the Philippines at any
TYPES OF EARNERS time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident
 Compensation income earner: usually selling service, and under an citizen for the taxable year in which he arrives in the
EE-ER relationship - “sweldo” Philippines with respect to his income derived from
 Self-Employed individual – selling service, no EE-ER relationship, sources abroad until the date of arrival in the Philippines
usually from trade or business o The taxpayer shall submit proof to the commissioner to
 Mixed Income Earner – there is a profession, there is an EE-ER, show his intention of leaving the Philippines to reside
there could be trade or business permanently abroad or to return and to reside in the
Philippines as the case may be
KINDS OF TAXPAYERS (F) RESIDENT ALIEN – an individual whose residence is within the
Philippines and who is not a citizen thereof
1. Individual Taxpayers (G) NONRESIDENT ALIEN – individual whose residence is not
a. Resident Citizen (RC) within the Philippines and who is not a citizen thereof
b. Non-Resident Citizen (NRC) (H) RESIDENT FOREIGN CORPORATION – applies to a foreign
c. Resident Alien (RA) corporation engaged in trade or business within the
d. Non-Resident Alien Engaged in Trade or Business Philippines
(NRAETB) (I) NON-RESIDENT FOREIGN CORPORATION – applies to a foreign
e. Non-Resident Alien NOT engaged in Trade or corporation NOT engaged in trade or business within the
Business (NRANETB) Philippines
Note: Estate of a deceased person not yet settled or not yet distributed (J) FIDUCIARY – guardian, trustee, executor, administrator,
among the heirs, is considered an individual income taxpayer receiver, conservator or any person acting in any fiduciary
capacity for any person
Trustor-Trustee relationship, with no distribution yet is deemed as an (K) WITHHOLDING AGENT – any person required to deduct and
individual taxpayer withhold tax
(L) SHARES OF STOCK – includes shares of stock in a
2. Corporate Taxpayers CORPORATION Warrants and/or options to purchase shares of
a. Domestic Corporation stock, as well as units of participation in a partnership (except
b. Resident foreign corporation general professional partnership), joint stock corporations,
c. Non-resident foreign corporation joint ventures, taxable as corporations, associations, and
recreation or amusement clubs, such as golf, polo or similar
Partnerships – they are treated as corporate taxpayers clubs and mutual fund certificate
Two kinds of partnerships under the tax code: (M) SHAREHOLDER – holders of a share/s of stock, warrant/s and
or options to purchase shares of stock in a corporation, as well
i. General Professional Partnership: exercise of profession of the as a holder of a unit of participation in a PAT xpn, GEN PROF
partners and no part of its income is derived from trade or PAT in a joint stock company, as association, joint stock
business; not subject to tax corporations, joint ventures, taxable as corporations,
ii. General Co-partnership – subject to tax, same rates as DC associations, and recreation or amusement clubs, such as golf,
o Joint venture agreements are also subject to tax polo or similar clubs and mutual fund certificate, or insurance
company
(N) TAXPAYER – any person subject to tax imposed in this title
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 (O) INCLUDING/INCLUDES – shall not be deemed to exclude other
things otherwise within the meaning of the term defined
(P) TAXABLE YEAR – the calendar year, or the fiscal year ending
during the calendar year, upon the basis of which the net
income is computed under this title
 Taxable year – includes, in the case of a return made for a fractional
part of a year under the provisions of this title or under rules and
regulations prescribed by the secretary of finance, upon
recommendation of the commissioner, the period for which the
return is made
(Q) FISCAL YEAR – means an accounting period of 12 months
ending on the last day of any month, other than December
(R) PAID OR INCCURED/PAID OR ACCRUED – shall be construed
according to the method of accounting upon the basis of which
the net income is computed under this title
(S) TRADE OR BUSINESS – includes performance of functions of
the public office
(T) SECURITIES – shares of stock in a corporation and rights to
subscribe for or to receive such shares
o Includes bonds, debentures. Notes, certificates or other
evidence of indebtness issued by any corporation
including those issued by a government or political
subdivision thereof, with interest coupons or registers in
form
(U) DEALER IN SECURITIES – merchant of stocks or securities,
whether an individual partnership or corporation, with an
established place of business regularly engaged in the
purchase of securities and the resale thereof to customers that
is one who, as a merchant buys securities and re-sells them to
customers with a view to the gains and profits that may be
derived therefrom
(V) BANK – any bank defined under the General Banking Act
a. Kinds of banks: commercial, thrift, rural or
specialized government bank, development bank
(W) NON- BANK FINANCIAL INTERMEDIARY – performing quasi
banking services
(X) The term "quasi-banking activities" means borrowing funds
from twenty (20) or more personal or corporate lenders at any
one time, through the issuance, endorsement, or acceptance of
debt instruments of any kind other than deposits for the
borrower's own account, or through the issuance of certificates
of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or purchasing
receivables and other similar obligations: Provided, however,
That commercial, industrial and other non-financial
companies, which borrow funds through any of these means
for the limited purpose of financing their own needs or the
needs of their agents or dealers, shall not be considered as
performing quasi-banking functions.
(Y) The term "deposit substitutes" shall mean an alternative from
of obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate
lenders at any one time) other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for
the borrowers own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to bankers'
acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided,
however, That debt instruments issued for interbank call loans
with maturity of not more than five (5) days to cover
deficiency in reserves against deposit liabilities, including
those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments.
(Z) The term "ordinary income" includes any gain from the sale
or exchange of property which is not a capital asset or property
described in Section 39(A)(1). Any gain from the sale or
exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary income' shall be
treated as gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1). The term
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'ordinary loss' includes any loss from the sale or exchange of
property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall be treated
as loss from the sale or exchange of property which is not a
capital asset. – so yung loss or gain ng ordinary assets
(AA) The term "rank and file employees" shall mean all employees
who are holding neither managerial nor supervisory position
as defined under existing provisions of the Labor Code of the
Philippines, as amended.
(BB) The term "mutual fund company" shall mean an open-end and
close-end investment company as defined under the
Investment Company Act.
(CC) The term "trade, business or profession" shall not include
performance of services by the taxpayer as an employee; no
EE-ER relationship
(DD) The term "regional or area headquarters" shall mean a
branch established in the Philippines by multinational
companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
(EE) The term "regional operating headquarters" shall mean a
branch established in the Philippines by multinational
companies which are engaged in any of the following services:
general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing
control and sales promotion; training and personnel
management; logistic services; research and development
services and product development; technical support and
maintenance; data processing and communications; and
business development.
(FF) The term "long-term deposit or investment
certificates" shall refer to certificate of time deposit or investment
in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments with a maturity period of not less than five (5) years,
the form of which shall be prescribed by the Bangko Sentral ng
Pilipinas (BSP) and issued by banks only (not by nonbank financial
intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other
denominations as may be prescribed by the BS.
(FF) STATUTORY MINIMUM WAGE EARNER – shall refer to the rate
fixed by the regional tripartite wage and productivity board, as
defined by the BLES and DOLE
(GG) Minimum wage earner – shall refer to a worker in the private
sector paid the statutory minimum wage; or to an employee in
the public sector with compensation income of not more that
the statutory minimum wage in the non-agricultural sector
where he/she is assigned
 So parang kapag sa PRIVATE – saktong minimum wage lang, kapag
sa PUBLIC naman pwede mas mababa pa sa minimum wage
END OF SECTION 22
INDIVIDUAL TAXPAYERS
1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-resident Alien NOT engaged in t/b
5. Non-resident alien engaged in t/b
(1) RESIDENT CITIZEN
 A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines (SEC 23 A)
 An income tax is hereby imposed: On the taxable income [ SEC 31:
TAXABLE INCOME: means the pertinent items of gross income
 specified in this code, less the deductions, if any, authorized for such
types of income by this code or other special laws), other than under
sections B, C, D of section 24 derived for each taxable year from all
sources within and without the Philippines, by every individual
citizen residing therein (SECTION 24 A 1)
 Who are residing Filipino citizens – those who are physically staying
or present in the Philippines or has an intention to reside her
permanently, or those who are absent but has an intention to return
 Who are Filipino Citizens?
Section 1. The following are citizens of the Philippines:
[1] Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
[2] Those whose fathers or mothers are citizens of the
Philippines;
[3] Those born before January 17, 1973, of Filipino mothers,
who elect Philippine citizenship upon reaching the age of
majority; and
[4] Those who are naturalized in accordance with law.
(ARTICLE IV, SECTION 1 OF THE PHILIPPINE CONSTITUTION)
(2) NON-RESIDENT CITIZEN
Section 22 E of the NIRC: NON RESIDENT CITIZEN
o A citizen of the Philippines who establishes to the
satisfaction of the commissioner the fact of his physical
presence abroad with a definite intention of residing
therein
 Intention must be manifest to reside in another
country
o A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis
 Those who have VISAs
o A citizen of the Philippines who works and derives
income from abroad and whose employment thereat,
requires him to be physically present abroad most of the
time during the taxable year
 OFWs are covered in this case
o A citizen who has been previously considered as non-
resident 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 non-resident
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 arrival in the Philippines
 Does not return yet to Phil – NRC
 Upon return here in Phil – RC
o The taxpayer shall submit proof to the commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return and to reside in the
Philippines as the case may be
o Seamen
 Not residing in the phil but he is also not
residing somewhere else, he is not earning
income from the Philippines
o Those na nagbabakasyon sa ibang bansa are NOT non-
resident citizens of the Philippines
Section 24 (A) (1) (B): An income tax is imposed on the taxable income
[TAXABLE INCOME: means the pertinent items of gross income specified
in this code, less the deductions, if any, authorized for such types of
income by this code or other special laws, ] other than income subject to
tax under subsections B,C,D of this section derived for each taxable year
from all sources within the Philippines by an individual citizen of the
Philippines who is residing outside the Philippines including overseas
contract workers including
SEC 23 (C): An individual citizen of the Philippines who is
working and deriving income from abroad as an overseas contract
worker is taxable only for income from sources within the Philippines.
Provided, That a seaman, who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the
complement vessel engaged exclusively in international trade shall be
treated as an overseas contract worker
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SEC 23 (B): A NRC is taxable only on income derived from
sources within the Philippines
(3) RESIDENT ALIEN
SECTION 22 (F) RESIDENT ALIEN – an individual whose residence is
within the Philippines and who is not a citizen thereof
SECTION 24 (A)(1)(C): On the taxable income defined in section 31 of
this code, other than income subject to tax under Subsections B,C,D
derived for each taxable year from all sources within the Philippines by
an individual alien who is a resident of the Philippines
 Period of time residing in the Philippines is not material, if
pagdating palang ditto sa pilipinas, the intention is clear and
manifest to reside, there is no required number of days
 Sec 23 (D): An alien individual, whether a resident or not of the
Philippines is taxable only on income derived from sources within
the Philippines
(4) NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
Section 22 G: NONRESIDENT ALIEN – individual whose residence is
not within the Philippines and who is not a citizen thereof
Section 25 (A)(1): A non-resident alien individual engaged in trade
or business or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen (RC) and
resident alien individual from all sources within the Philippines
o A non-resident alien individual who shall come to the
Philippines and stay therein for an aggregate period of
more than 180 days during any calendar year shall be
deemed a NRAETB
 A citizen of another country, not residing in the Philippines but
engaging in economic or commercial activities in the Philippines
 T/B: refers to economic or commercial transactions in the
Philippines
(5) NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR
BUSINESS
 Citizen of another country, not residing in the Philippines and who is
not entering in economic or commercial transactions in the
Philippines
 Section 25 B: There shall be levied, collected and paid for each
taxable year upon the entire income received from all sources
WITHIN the Philippines by every non-resident alien individual, not
engaged in trade or business within the Philippines
 Sec 22 G: Non-resident alien: means an individual whose residence
is not within the Philippines, and who is not a citizen thereof
 Sec 23 D: An alien individual, whether a resident or not of the
Philippines is taxable only on income derived from sources within
the Philippines
SUMMARY OF TAXABLE LIABILITIES OF INDIVIDUAL TAXPAYERS
TAXPAYER TAXABLE FROM TAXABLE FROM
SOURCES WITHIN SOURCES WITHOUT
RC YES YES
NRC YES NO
RA YES NO
NRAETB YES NO
NRANETB YES NO
CORPORATE TAXPAYERS
1. Domestic Corporation
2. Resident – Foreign Corporation
3. Non-Resident Foreign Corporation
(1) DOMESTIC CORPORATION
 Sec 22 (c): means created or organized in the Philippines or under
its laws
 Sec 23 (E): A domestic corporation is taxable on all income derived
from sources within and without the Philippines
(C) Sec 27 (A): Taxable for income, within and without the
Philippines by every corporartion defined under section 22 B
[Corporation – includes partnerships, no matter how created
or organizes, joint stock companies, joint accounts,
associations, insurance companies, but does NOT include
General professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects projects or engaging in coal, geothermal,
and other energy operations pursuant to an agreement under a
service contract with the government
o General Proffesional Partnerships – partnerships formed
by persons for the sole purpose of exercising their
common profession, no part of income of which is derived
in engaging in any trade or business
Organized under laws of the Philippines.
Q: WHAT IS A FOREIGN CORPORATION?
A: Entity incorporated in accordance with any law other than the
Philippines or a foreign law
(2) RESIDENT FOREIGN CORPORATION
 Section 22 H: RESIDENT FOREIGN CORPORATION – applies to a
foreign corporation engaged in trade or business within the
Philippines
 Sec 23 F: A foreign corporation, whether engaged or not in trade or
business in the Philippines is taxable only on income derived from
sources within the Philippines
 Section 28 (A) (1): A RFC is taxable only from income derived
within the Philippines
 It has a branch here in the Philippines, even if principal place of
business is abroad, and such branch here in the phil is the RFC
 There is an agent assigned here
 There is hiring of EEs
 Principle of habituality
(3) NON-RESIDENT FOREIGN CORPORATION
 Incorporated under foreign laws but is not engaged in trade or
business within the Philippines (22 I)
 Sec 23 F: A foreign corporation, whether engaged or not in trade or
business in the Philippines is taxable only on income derived from
sources within the Philippines
 SECTION 28 (B) (1): Taxable only from all sources WITHIN the
Philippines at the rate of 30%
SUMMARY OF TAX LIABILITIES OF CORPORATE TAX PAYERS
TAXPAYER TAXABLE FOR TAXABLE FOR
SOURCES WITHIN SOURCES WITHOUT
DC YES YES
RFC YES NO
NRFC YES NO
NOTE: Under section 25 (C) (D) & (E) There are “special aliens”
1. Alien individual employed by regional or area HQs and ROHQS
of multinational companies
2. Alien individual employed by offshore banking units
3. Alien individual employed by petroleum service contractor and
subcontractor
o They are working in the PHIL, but they are classified as
NRANETB
o Their income is taxable as NIT, same rates as provided in
Section 24 (a)
Q: HOW DO YOU DETERMINE IS INCOME IS SOURCED WITHIN OT
WITHOUT THE PHILIPPINES?
A: You look at Section 42 of NIRC
SEC. 42. Income from Sources Within the Philippines.-
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(A) Gross Income From Sources Within the Philippines. - The following
items of gross income shall be treated as gross income from sources
within the Philippines:
(1) Interests. - Interests derived from sources within the
Philippines, and interests on bonds, notes or other interest-
bearing obligation of residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than
fifty percent (50%) of the gross income of such
foreign corporation for the three-year period ending
with the close of its taxable year preceding the
declaration of such dividends or for such part of
such period as the corporation has been in
existence) was derived from sources within the
Philippines as determined under the provisions of
this Section; but only in an amount which bears the
same ration to such dividends as the gross income of
the corporation for such period derived from
sources within the Philippines bears to its gross
income from all sources.
(3) Services - Compensation for labor or personal services
performed in the Philippines;
(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; and
(iii) Tapes for use in connection with
radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the
sale of real property located in the Philippines; and
(6) Sale of Personal Property - Gains; profits and income
from the sale of personal property, as determined in
Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
 (1) General Rule. - From the items of gross income specified in
Subsection (A) of this Section, there shall be deducted the
expenses, losses and other deductions properly allocated
thereto and a ratable part of expenses, interests, losses and
other deductions effectively connected with the business or
trade conducted exclusively within the Philippines which
cannot definitely be allocated to some items or class of gross
income: Provided, That such items of deductions shall be
allowed only if fully substantiated by all the information
necessary for its calculation. The remainder, if any, shall be
treated in full as taxable income from sources within the
Philippines.
(2) Exception. - No deductions for interest paid or incurred
abroad shall be allowed from the item of gross income
specified in subsection (A) unless indebtedness was actually
incurred to provide funds for use in connection with the
conduct or operation of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. - The
following items of gross income shall be treated as income from sources
without the Philippines:
(1) Interests other than those derived from sources within the
Philippines as provided in
paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within
the Philippines as provided in
paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed
without the Philippines;
(4) Rentals or royalties from property located without the
Philippines or from any interest in
such property including rentals or royalties for the use of or
for the privilege of using
without the Philippines, patents, copyrights, secret
processes and formulas, goodwill,
trademarks, trade brands, franchises and other like
properties; and
(5) Gains, profits and income from the sale of real property
located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the
items of gross income specified in Subsection (C) of this Section there
shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expense, loss
or other deduction which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be treated in full as
taxable income from sources without the Philippines.
(D) Income From Sources Partly Within and Partly Without the
Philippines.- Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and
(C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. Where items of gross
income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of
computing the taxable income therefrom) the expenses, losses
and other deductions properly apportioned or allocated
thereto and a ratable part of other expenses, losses or other
deductions which cannot definitely be allocated to some items
or classes of gross income. The remainder, if any, shall be
included in full as taxable income from sources within the
Philippines. In the case of gross income derived from sources
partly within and partly without the Philippines, the taxable
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income may first be computed by deducting the expenses,
losses or other deductions apportioned or allocated thereto
and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of
gross income; and the portion of such taxable income
attributable to sources within the Philippines may be
determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance.
Gains, profits and income from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines,
or produced (in whole or in part) by the taxpayer without and sold within
the Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines, or from the purchase of
personal property without and its sale within the Philippines shall be
treated as derived entirely form sources within the country in which
sold: Provided, however, That gain from the sale of shares of stock in a
domestic corporation shall be treated as derived entirely form
sources within the Philippines regardless of where the said shares
are sold. The transfer by a nonresident alien or a foreign corporation to
anyone of any share of stock issued by a domestic corporation shall not
be effected or made in its book unless: (1) the transferor has filed with
the Commissioner a bond conditioned upon the future payment by him of
any income tax that may be due on the gains derived from such transfer,
or (2) the Commissioner has certified that the taxes, if any, imposed in
this Title and due on the gain realized from such sale or transfer have
been paid. It shall be the duty of the transferor and the corporation the
shares of which are sold or transferred, to advise the transferee of this
requirement.
END OF SECTION 42
Q: WHAT DO WE LOOK AT TO DETERMINE IF SOMETHING IS
TAXABLE WITHIN OR WITHOUT?
INTERESTS Debtor’s POV
DIVIDEND INCOME
 From DC Income within
 From FC Income within, if 50% or more of
the gross income of the foreign
company for the past three years
was derived from sources within
the Philippines
Income without, if less than 50% of
the gross income of the FC for the
past three years was derived from
sources within the Philippines
SERVICE INCOME Place of performance
Rent Income Location of property
Royalty Income Place of use
Gain on sale of personal Place of sale
property
Gain on sale on Domestic shares Income within
of stock
Q: WHAT DO YOU MEAN, IT IS TAXABLE PARTLY WITHIN &
WITHOUT?
A: In this case, ito ata yung hindi pa siya finished product. It needs to be
produced or manufactured in a different place, and is sold in another vice
versa. Taxable lang siya in proportion
TAX ON INDIVIDUALS
Q: WHAT ARE THE TYPES OF EARNERS?
A:
 Compensation income earners: Those who have an EE-ER
relationship
o RATE OF TAX: NIT (Net income tax)
 The rate of NIT is followed as provided in
Section 24 (A) (2) (a)
 Self- Employed Individuals
o If their gross sales or gross receipts and other non-
operating income does not exceed (3M)
 The 3M is the VAT threshold as provided in
section 109 BB
o RATE OF TAX: They have an option to avail (if does not
exceed 3M) either NIT (Schedular) or 8% tax on the gross
sales or gross receipts and other non-operating income in
excess of 250,000 pesos in accordance with SEC 24 (A)
(2) (a)
o If more than 3M, The rate of tax is NIT
 Mixed Income Earner
o All income from compensation: NIT
o All income from business or practice or t/p
 If does not exceed 3M: NIT/8% on the gross
sales or receipts and other non-operating
income based on the NIT rates (scheduler
table)
 If exceed the 3M threshold: NIT
NOTE: You can only choose and avail of the type of tax you pay once a
year, if you do not choose, default NIT na talaga siya
SECTION 24
(A) Rates on income tax on individual citizens and individual
resident aliens of the Philippines
(1) Income tax of RC: All income from WITHIN and without the
Philippines, taxable as income under A. If will fall under purely
compensation or “others”, tsaka kapag wala sa B,C & D. So sa B,
kapag yung source is foreign, dito nay an sa A. Kapag Sa C
naman, kapag listed in SE, dito na din yan sa A. Kapag sale of
ORDINARY assets, or assets na OUTSIDE the Philippines, A na
din yan mahuhulog
(2) Income tax of NRC: All income WITHIN the Philippines lang ang
taxable, if it is without. It’s no longer taxable.
(3) Income tax of RA: All income WITHIN the Philippines lang ang
taxable in this case. Kapag wala din sa B,C,D dito nay an sa A
mahuhulog
SECTION 24 (B) – Rate of Tax on certain Passive Income
Ang tawag sa type of tax na ito is FINAL WITHHOLDING TAX
(1) Interests, Royalties, Prizes and Other winnings
 Interests : 20% - PESO currency
 Interest: 15% = FOREIGN CURRENCY
o Xpn: Non-resident individual
 Royalties – 20 %
o XPN: books, literary works, other musical compositions:
10 % RATE FWT
 Prizes: if less than 10,000 pesos = NIT rates
o If more than 10,000: RATE: 20-%
 Winnings from PCSO/Lotto
o If less than 10k; exempt
o If more than 10k: 20% fwt
 Interest income from long term deposit or investment in the form of
savings etc: EXEMPTED if at least five years and no pretermination
o We are Only talking about banks in the Philippines, kapag
RC/DC since taxable siya worldwide, ang tax kapag sa
ibang bansa yung preterminate etc NIT na.
MTAC 2019
o Kapag naman ibang taxpayer na, exempt na yan kapag sa
ibang bansa nag preterminate etc, din a yan taxable dito
sa pilipinas kahit di pa niya tinapos yung deposit
o If there is pretermination
 Nasa bank ng less than three years – RATE OF
TAX: 20%
 Nasa bank ng less than 4 years – 12 %
 Nasa bank ng less than 5: 5%
o The rationale in this case, is if you lend to the government
hindi ka na nila itatax kaya lilibre ka sa tax kapag di ka
nag preterminate ng 5 taon
(2) Cash or property dividends
 RATE:10% = imposed upon the cash and/or property dividends
actually or constructively received by an individual from a DC or
from a joint stock company, insurance or mutual fund companies,
operating HQs of multinational companies, or on the share of an
individual in the distributable net income after tax of PAT.
SECTION 24 C: CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT
TRADED IN STOCK EXCHANGE
 Rate: 15% fwt from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation except shares sold or
disposed on in SE.
o Not over 100,000 = 5%
o On any amount in excess of 100,000 = 10%
 APPLICATION: If listed in the stock exchange, you bought it for
500,000 and the book value is 1 million. You sold it at 100,000
because there is a crash in the stock market
o ANONG RATE? SECTION 127 APPLIES: Kasi listed siya sa
stock market, tsaka wala namna kasing donative intent
o Rate under section 127 (A) 6/10 of 1% of the gross
selling price
 What if it is not listed in the SE? Binenta mo ng maayos na price?
RATES IN SECTION 24 APPLIES
 What if NOT listed in SE? Hindi mo binenta ng maayos. May donative
intent. Bayad ka ng donor’s tax under section 100
o SECTION 100: When personal property is transferred for
less than full consideration in money/money’s worth kung
magkano nalugi mo yun ang mag impose ng donor’s tax
 Rate: 6%
 What if listed in SE and binenta mo ng maayos na price? 6/10 of 1%
pa din
 39 (B): In the case of a taxpayer, other than a corporartion, only the
following percentages of the gain or loss recognized upon the sale or
exchange of capital asset shall be taken into account in computing:
net capital gain, net capital loss and net income
o 100% if capital asset has been held for not more than 12
months
o 50% if capital has been held for more than 12 months
Q: WHAT ARE THE TYPES OF ASSETS
A: Ordinary and Capital
 Ordinary – assets used by the taxpayer in business
 Capital – not used in t/b
SECTION 39 (A) (1): The term “capital assets” means property held by
the taxpayer, whether or not connected with his trade or business but
does not include
(1) Stock in trade of taxpayer or other property of a kind which
would properly be included in the inventory if on hand at the
close of the taxable year
(2) Property held by the taxpayer primarily for the sale to
customers in the ordinary course of his trade or business
(3) Property used in the trade or business of a character which is
subjected to allowance for depreciation
(4) Real property used in t/b by taxpayer
SECTION 24 (D): capital gains from sale of real property
 Section 6 e: it is the commissioner who prescribes the rates
 Under here, either a final tax of 6% gross selling price or current
market value, whichever is higher
 It is imposed on capital gains presumed to have been realized from
the sale, exchange or other disposition of real property
o It must be located in the Philippined
o Classified as capital assets [SECTION 39 (A)(1) DEFINES
CAPITAL ASSENTS]
 What are included?
o Pacto de retro
o Other forms of conditional sales
o Estates and trusts
 Tax liability on gains from sales or other dispositions of real
property to the government, or any of its political subdivisions or
GOCCS
o This talks about forced sales
o You have a chouce, CGIT na 6% or NIT under section 24
o Mas beneficial daw kapag NIT kasi kapag wala ka kinita,
wala ding itatax sayo
 Exception regarding the taxability of proceeds from the sale of RP
o The capital gains from the sale of residence
 Proceeds = if fully utilized in acquiring or
constructing new principal residence within 18
calendar months from the sale is exempted
from capital gains tax under this section
 Conditions
o Historical costs is carried
out
o Commissioner is notified
within 30 days from the
date of sale to avail of the
tax exemption
o Such tax exemption can
only be availed of once
within 10 years
 When is the exception partially applicable?
o If the proceeds of the sale are not fully utilized, yung
sobra shall be subject to CGT.
 RATE? Gross selling prince or fmv at the time
of sale, whichever is higher multiplied by a
fraction of the unutilized amount bearts the
rate of 6%
 Note: the exception applies only to the house and not the land
 Application: house is sold at 1.8m. the house was bought at 800,000
the 1m is left. 1m is taxable
 Application: co-owners wanted to sell a house and lot, who can
claim exemption?
o The one who owns it as his/her actual principal place of
residence, but since it is co-ownership only up to the
extent of my share, will I be exempt from cgt
 Application: Jordan lives in alabang, and works in qc, b works in
alabang and lives in qc. They exchamged their property. Both should
pay cgt
 Application: loan secured by a mortgagee
o It was foreclosed: no cgt
o Foreclosed sale at auction: no cgt
o Once the redemption period expires (1) year redemption
period, it is only when the cgt attaches because it is only
when there is a transfer of ownership
o Who pays the cgt? Highest bidder, if redeemed by
additional owner, no cgt. Because cgt is paid only when
there is a transfer of ownership
APPLICATIONS
(1) If RC
A. Taxable worldwide siya, from all income derived within and
without the Philippines, so taxable siya sa sweldo niya, sa
parlor niya kahit nasaang bansa pa siya, lecture, cocaine (oo
taxable din siya sa cocaine because the law does not
distinguish naman kung legal or illegal), “others” yung tawag
kapag hindi compensation income from ee-er ganon pa din
yung rates as discussed, yung 3M threshold applicable pa din
MTAC 2019
B. Passive income – taxable din worldwide, kapag galling sa pinas
ang source FWT ang tawag sa tax, pag galling sa ibang bansa, sa
NIT/8% na yung tawag
C. Fwt kapg loob ng pinas, nit kapag galling na sa labas pero again
rc siya so taxable siya worldwide
D. Real property – kapag capital asset at nasa pinas, fwt kapag sa
ibang bansa, taxable pa din siya pero others na or nit
(2) If NRC
A. All income derived from the sources outside the Philippines are
not taxable in this case, but all income from Philippines are
taxable. This letter a talks about compensation income, income
from t/b or any other income as “others” na wala sa b,c, d rates
are yung 3m threshold ekek rules
B. Interests – 20% if peso
o Interests- 15% if dollars
o time deposit not preterminated in phil, exempted
o time deposited not pt in us – no tax
o raffle in the Philippines 9,999.99 pesos: nit
o if more than 10,000 pesos fwt 20%
o lotto in the phil: exempted if less than 10k, if more than
10k fwt of 20%
o lotto in states, raffle – not taxable
o royalties – distributed in the Philippines, tax: fwt: 20%, if
literary works, musical compositions: 10%
o if royalties distributed in the states- no tax
 dividends – fc issued to nrc. Is it taxable? Yes, nit. If more than 50%
o if the xpn applies
 17% within
 83% without
o If issued by dc to nrc, yes it is taxable fwt 10%
C. SMC issued 300,000 pesos to nrc. The rate is fwt 15%
o but shares of stock from the us are not taxable
D. Location of property is the key here
a. Bahay bili pinas: fwt 6% cgt
b. Bahay nili states no tax
(3) RA
- Domiciled in another country, all income within the phil,
taxable
- Cgt; no exemption because ra cannot own rp in philippines =
this is only the general rule
o Xpn: Filipino heritage, born in states and maerican
xirizen: inheritance of property in the Philippines
and decided to stay in the philipppines
 This is the actual principal residence, cgt
may be applied for
 Seller pays siya kumita eh
- No Filipino heritage, Caucasian, ta decided to buy a condo, can
apply for cgt exception
SECTION 25 Non- resident alien individuals
(a) NRAETB
(1) GR: NRAETB has the same tax liabilities with rc and ra from
income derived from sources within Philippines
(2) Cash and or property dividends from dc, joint stock
company, insurance mutual fund, regional headquarters of
multinational. Et: 20% rate
 Interests, royalties prizes: fwt 20%
 Prizes if amounting to 10,000 or less is nit
 Prizes if amounting to more than 10k is fwt 20%
 Cinematographic films: 20%
 Royalties in books, literary works, musical compositions: 10%
 Interest income form long term deposit: same rates lang. no
pretermination dapat before 5 years to be exempted, but again only
sa banks inside phil mag apply yung rules, if outside phil, nakuha
kahit san pa diyan, di na yan taxable
 Capital gains – same rates under sec 24 c & d
o C= 15%
  Kapag lugi
 Listed = no donative intent 6/10 of
1%
o Yes donative intent =
donor’s tax = 6%
 Not listed = donor’s tax
 Kapag sold ng maayos. Listed = 6/10 of 1%
 Kapag sold ng maayos, not listed 15%
o D = CGT 6% Binenta mo man yan ng lugi or kita, 6% pa
din ang rate. Same rules
SECTION 25 (B) NRAENETB
 For classifications under A and B of section 24. Tax rate is 25% gross
income tax or final tax
 For c and d of section 24, same rates lang. 15% for c and 6% on D
Section 25 c,d & e = SPECIAL ALIENS
 NIT rates na for A and B. no longer given preferential treatment
 FWT 15% basis: Sec 27 (D) (2)
 Sec 27 D (2): “A final tax at the rate of 15% shall be imposed on net
capital gains realized during the taxable year from the sale,
exchange or other dispositions of shares of stock in a domestic
corporation except shares sold or disposed through the stock
exchange”
Q: What is the rate if it is on the sale of RP?
 Sec 27 (D)(5): A final tax of 6% is hereby imposed on the gain
presumed to have been realized on the sale, exchange or disposition
of lands and/or buildings which are NOT actually used in the
business of the corporation and treated as CAPITAL ASSETS based
on the gross selling price or fair market value as determined with
Sec 6 (E)
o Sec 6 E: Authority of the commissioner to prescribe real
property values
Q: What is the rate of tax if income is received from a foreign corporation?
A: NIT 30% SEC 27 (A).
o Same concept lang sila sa individuals, kapag wala sa B,C,D
nasa A.
o Kapag received from a foreign corporation or an
individual, taxable siya under NIT @ 30% and the legal
basis is section 27 A.

SECTION 26 Tax Liability of Members of General Professional Q: What is MCIT?

Partnerships
 A general professional partnership as such shall NOT be subject to
income tax under this chapter
 So a GPP is NOT subject to income tax
 Are they exempted from liabilities? NO.
 Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and
individual capacities
 How do you compute the distributive share of partners?
o Net income of PAT shall be computed in the same manner
as a corporation
o So other partnerships are taxable
o Only general professional Partnerships are EXEMPT from
tax
o Each partner shall report as gross income his distributive
share, actually or constructively received in the net
income of the partnership.
A: Sec 27 (E) (1)” A minimum corporate income tax of two percent of the
gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this title, beginning on the fourth
taxable year immediately following the year in which such corporation
commenced in business operations, when the minimum income tax is
greater than the tax computed under subsection A for the taxable year”
Q: What is IAET?
A Improperly accumulated tax
MINIMUM CORPORATE INCOME TAX
The corporation is TAPSILUGAN XYZ
First what is GROSS INCOME?
 Under Section 27 (E)(4): Gross income shall mean gross sales less
sales returns, discounts and allowances and costs of goods sold

So, illustrate natin yung income ni Tapsilugan

2019 2020 2021 2022

ATTY. LUMBERA’S DISCUSSION ON CORPORATIONS
20 million (Ito ang 9.5 is the gross 10 M is the gross In this example,
ilagay natin both
WITHIN WITHOUT kinita mo) income income
yung mangyayari
DOMESTIC TAXABLE TAXABLE 12 million (ito ang 6.8M which is yung 9.6 is yung sweldo ng kung lugi and kita
CORPORATION puhunan mo) mga sweldo ng mga empleyado,
12 M is the gross
RESIDENT FOREIGN TAXABLE NOT TAXABLE empleyado mo, costs costs
income – 11.7 costs,
CORPORATION 20M-12M = 8M sweldo ng employee
[Revenue – Capital 9.5-6.8 = 2.7M 10M-9.6M = 400,000
NON-RESIDENT TAXABLE NOT TAXABLE
= gross income] = 300,000 [Taxable
FOREIGN 2.7M x 30%NIT = 400,000 x 30%NIT
net income]
810,000 [this is under
CORPORATION So 8M is now your Subsection A of
gross income 2.7-810,000 = 1.89M section 27] = 300,000 x 30%NIT=
120,000 90,000
 When the principal place of business is OUTSIDE the Philippines, at From the gross 810,000 goes to the
merong branch dito sa Pilipinas = RFC YAN (Resident Foreign income, you deduct government, and you 400,000 – 120,000 =
Corporation) the costs, yung mga keep the 1.89M. 280,000 So if you apply MCIT,
sweldo ng kasi nasa fourth year
 When the principal place of business is outside the Philippines, and The 120,000 goes to na from existence ng
empleyado etc
there is no branch here in the Philippines pero kumikita pa din = the government and corporation. So dito
NON-RESIDENT FOREIGN CORPORATION Yung mga costs mo, the 280,000 you get sa fourth year, the
to keep government has a
 What is the rate kapag long-term deposit? THE RATE IS 20% FWT assuming umabot choice.
 Ang rate naman sa royalties is 10% pero wala silang literary or ng 6M
musical rates kasi hindi naman sila pwede maging composers They can tax on the
8M – 6M = 2M taxable net income of
300,000 30%
WHAT ARE INTERCORPORATE DIVIDENDS? Yung 2M ito na yung thereof, or they can
itatax mo for NIT tax the corporation
 Sec 27 (D) (4) : Dividends received by a domestic corporation from 30% on the GROSS
another domestic corporation are NOT subject to tax INCOME
2,000,000 x 30% =
600,000 What if they choose
Q: If a corporation sells a capital asset not listed, what is the rate? to tax on the gross
The 600,000 goes to

MTAC 2019
the government income?
So 2M- 600,000 = Ganito itsura niyan:
1.4M
12M X 2% [MCIT] =
Yung 1.4 M sayo nay 240,000
un
So pipiliin ng
government MCIT
siyempre na 240,000
ito yung mas malaki
eh. Yun din
nakalagay sa
provision.
What if in 2022, iba naging kwento ng income?
 12M is your gross income – 13.8M is your costs, sweldo = -1.8M
yung sagot, lugi ka naman sa case na ito.
 Paano taxability ng government? Ganon pa din
o - 1.8M x 30% = 0 NIT, walang matatax yan sa NIT kasi
wala naman yang kinita eh.
o So paano kikita gobyerno dito?
o Mag tax pa din sila ng MCIT on the gross sa 12M
o So 12 M x 2% = 240,000 yan ang kukunin nilang tax so
kahit wala ng kita yung company, pwede pa din sila mag
MCIT. Kita or lugi, MCIT pa rin
 Kailan ba nangyayari tong MCIT Na ito? It begins from the 4 th year
from commencement of existence hanggang nagooperate na siya,
may karapatan na gobyerno mamili kung MCIT or NIIT, pero pinipili
lang ang MCIT kapag mas mataas ang MCIT kaysa sa NIT
IMRPOPERLY ACCUMULATED INCOME TAX
 The improperly accumulated earnings tax imposed in the preceding
section shall apply to every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholders
or the share holders of any other corporation by permitting
earnings and profits to accumulate instead of being divided or
distributed [Basis: Sec 29 B (1)]
 Who are exempted from IAET? [Basis: Section 30 B (2)]
o Publicly held-corporations [gobyerno to, including
GOCCs]
o Banks and other non-bank financial intermediaries and
o Insurance companies [if all risks are insured against,
benefits din kailangan may pondo ito]
 They are required to retain earning because of
the nature of the business that they have
 Ito application niyan si XYZ (Domestic corporation) with
stockholders
o Revenues [ito yung mga kinita mo] – Costs of sales[ito
yung puhunan mo] = gross income
o Gross income – deductions [ito na yung mga sweldo ng
empleyado, discounts, returns] = Net income
o From the net income, pwede ito hatiin sa retained
earnings and surplus
 Surplus: amount of money or assets invested in
the company by shareholders
 Retained earnings: profits made by the
corporation that has NOT yet been paid to its
shareholders
o Kapag si XYZ corporation nagdamot, ayaw niya ibigay sa
stockholders niya yung yung retained earnings [kasi
share dapat yun ng stockholders], ITATAX NGAYON NG
GOBYERNO yung ayaw mo ibigay sa stockholders
 Halimbawa 10M yung retained earnings, hindi
pinamigay magiging IAET na yan. So 10% on
the 10M ang rate
o Ano mangyayari naman kapag pinamigay niya sa
stockholders? Kapag pinamigay na niya sa stockholders
niya, ang tawag na doon DIVIDENDS, so yung rate ng
domestic corporation sa dividends is = FINAL
WITHHOLDING TAX 10% under section 24 (B)
MTAC 2019
Paano naman ang rules ng resident foreign corporation?
 The principal branch is in the USA, but there is a branch here in the
Philippines, only the branch here in the Philippines is TAXABLE
o Wala silang classification regarding real property kasi
they cannot own real property anyway
 Paano yung lipat and taxability ng dividends?
o Kapag DC – DC: Exempt
o Kapag DC – RFC: Exempt din
 They are also subject to MCIT, but it is only the Philippine branch
which is subjected to the MCIT
 Paano naman gagawin yung IAET nila?
o From the net income of the RFC if the retained earnings
are NOT given away to the stockholders, it is NOT subject
to the IAET
 But if they give the retained earnings to their
stockholders, the SH receive them as
DIVIDENDS
o So ano mangyayari? Ang ginagawa kasi ng RFC, ireremit
nila sa principal branch nila yung kinita ng RFC sa
principal branch sa ibang bansa
o What are BPR? Under section 28 A(5): Branch profit
remittances is any profit remitted by a branch to its head
office shall be subject to tax of 15% which shall be based
on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof
(EXCEPT: Those activities which are registered with
Philippine economic zone authority)
 Tax shall be paid under section 57& 58 of this
code
 Ano ba yung laman ng section 57? &
58?
 Pero yung interests, dividends, rents, royalties
including remuneration of technical services,
salaries, wages, premiums, annuities,
emoluments or other fixed or determinable
annual, periodic & casual gains, profits, income
and capital gains received by a FOREIGN
corporation from all sources taxable WITHIN
the Philippines shall NOT be treated as branch
profit remittances UNLESS the same are
effectively connected with the conduct of its
trade or business in the Philippines
 So ganito ang application:
o Kapag di niremit, magbebenefit ang gobyerno
o Pag nag remit palabas sa ibang bansa sa principal place of
business from the RFC itatax ka ng 15% doon sa pag
remit ditto sa pilipinas pero sa USA kailangan ka din itax
ng hindi bababa sa 15%
 Ano mangyayari kapag below 15% ang tinax ng
USA?
 Ang remedy ng gobyerno, since
ayaw nila madaya itatax na nila ng
BPR ng 30% HINDI NA 15% LANG
o Hanggang sa nasa pilipinas ang kinikita ng RFC at ayaw
niya iremit yun, 30% ng 30% every year ang tax sa BPR
NON-RESIDENT FOREIGN CORPORATION
 Ang NRFC walang branch sa pilipinas, nasa ibang bansa ang
principal place of business pero kumikita pa din ditto sa pilipinas
 For A & B, Income and Passive income the rate is GIT 30%
 Kapag under C naman FWT, Kapag under D wala, kasi bawal din sila
mag own ng real property dito sa pilipinas
 Ano naman ang rate sa intercorporate dividends?
o DOMESTIC – NON-RESIDENT FOREIGN CORPORATION:
FWT 15%
 Meron ba silang IAET & BPRT? WALA. Wala na nga silang branch
ditto sa pilipinas eh.
Section 30 exemptions from tax on corporations
 The following organizations shall NOT be taxed under this title in
respect to income received by them “as such”
o Anong ibig sabihin ng “as such na yan” if the income was
derived from income coming from the main purpose for
 which the corporation under this enumeration is created,
HINDI SIYA SUBJECT TO TAX
 This is the enumeration
o (A) Labor, agricultural or horticultural organization not
organized principally for profit
o (B) Mutual savings bank NOT having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes
and without profit
o (C) A beneficiary society, order or association operating
for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system,
or a mutual aid organization by ees providing for the
payment of life, sickness, accident or other benefits
exclusively to the members of such society, order, or
association, or non-stock corporation or their
dependends;
o (D) Cemetery, company owned and operated exclusively
for the benefit of its members
o (E) Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer
or any specific corporation
o (F) business league, chamber of commerce or board of
trade, not organized for profit and no part of the net
income which inures to the benefit of any private
stockholder or individual
o (G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare
o (H) A non-stock, non-profit educational institution
o (I) A government educational institution
o (J) Farmers’ or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of
purely local character, the income of which consists solely
of assessments, dues and fees collected from members for
the sole purpose of meeting its expenses
o (K) Farmers, fruit growers or like association and
operated as sales agent for the purpose of marketing the
products of its members and turning back to them
proceeds of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by them
o Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties
REAL or PERSONAL or from any of their activities
conducted for profit, regardless of the disposition made of
such income shall be subject to tax imposed under this code
DISCUSSION OF ATTY LUMBERA:
 Yung mga nasa enumeration na domestic corporations nay an
 They were all made for non-stock, non-profit purposes iba iba ang
primary purpose nakalagay naman sa enumeration yung primary
purpose eh
 INCORPORATION
o Stock – lahat ng kita dividends, meaning may
stockholders and merong board of directors
o Non-stock – no dividends because all income is with the
corporation, hindi napupunta sa particular na tao [sa
stock kasi napupunta sa particular na tao] wala din itong
stockholders, BOARD OF TRUSTEES lang ang meron
 The nature of the corporation is for the benefit of members or the
benefit of others
 So, saan sa lahat ng kinikita nila? Saan sila libre?
o Doon yan sa mahuhulog sa “as such” – income for which
each primary purpose was created, ito ang libre sa buwis
under column A sa income tax nila
 Yung last paragraph ng section 30 yung “Notwithstanding….”
o Ibig sabihin non, lahat ng kinita nila mula sa property nila
whether real or personal, regardless of disposition
[meaning regardless saan ginamit] they are NOT exempt
from taxation
MTAC 2019
APPLICATION OF SECTION 30
 Charitable institutions, churches, convents, mosques – All their LBI=
Land, buildings and improvements, ADE [Actually, Directly and
exclusively used] for CRE [Charitable, religious, educational
purposes] are exempt from REAL PROPERTY TAXES
o SECTION 28 (3) 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.
 Under section 30 (E) naman of the NIRC, Lahat ng kinita ng
charitable institutions walang tax in pursuant to the purpose na
kinita nila
 Under the last paragraph of section 30, doon naman sila PWEDE
maging taxable
BUILDING
Jollibee
BUILDING
Mcdo
HOME FOR THE AGED
KFC
May Parking lot
milktea
pa ditto
 How do you know muna that is is NON-STOCK/NON-PROFIT
EDUCATIONAL INSTITUTION? Tignan mo yung articles of
incorporation, kapag may stock holders for profit
o FOR PROFIT & FOR STOCK = May board of directors
o NON-STOCK & NON-PROFIT = WALANG BOARD OF
DIRECTORS WALANG DIVIDENDS
 From the drawing, which is exempted from REAL PROPERTY TAX?
o Under section 28 (3) ng constitution, all Lands, Buildings
and improvements, actually directly and exclusively used
for charitable, religious and educational purposes are
exempt from RPT
o So lahat ng nasa drawing exempted, except si MCDO, KFC
Jollibee kasi di naman sila ADE, CRE, HENCE TAXABLE
SILA UNDER RPT
 Isa bang basis ng exemption ng NSNP is under Section 234 of the Lgc
 SEC. 234. Exemptions from Real Property Tax. - The following are
exempted from payment of the real property tax:chanrobles virtual
law library
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, nonprofit or religious cemeteries
and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or -
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided
for under R. A. No. 6938; and
(e) Machinery and equipment used for pollution control and
environmental protection. Except as provided herein, any exemption
from payment of real property tax previously granted to, or presently
enjoyed by, all persons, whether natural or juridical, including all
government-owned or -controlled corporations are hereby withdrawn
upon the effectivity of this Code.
Paano naman ang rules paggdating na asa income?
 Home for the aged made Christmas cards, binenta nila ito. Kumita
sila ng 3 million.
o Is it income? YES.
o Is it without or within? It is income WITHIN
 o Is it subject to income Tax?
 NO. It is not.
 Why? Kasi doon siya mahuhulog sa “as such”
because the income was realized for the
principal purpose for which the organization
or corporation was made, HENCE. Exempted
 Yuung home for the aged, tumanggap ng rentals amounting to
500,000
o Is it income within? YES
o Is it taxable? YES
 What is the basis? Last paragraph of section 30
 “Notwithstanding….
o The point is, lahat ng
kinita nila from their real
property or personal
property, or any activity
for profit so long as di na
in pursuant to the
primary purpose created
is subject to income tax
o WHAT IS THE TAX DUE? NIT, 30% Yung rate na ng
domestic corporations
 What about bank deposit: 3.5 M, kumita ng 2,000 sa interest. This is
income. Is it income within? Yes.
o Is it taxable? YES. It is taxable
o What is the rate? FWT. 20% It is classified at passive
income, ang rate ng DC for passive income is 20%
o Why is it taxable? Again, HINDI NAMAN ITO INCOME FOR
THE PRIMARY PURPOSE FOR WHICH THEY WERE
CREATED, so doon sila sa last paragraph ng section 30
mahuhulog – Hence, they are taxable
 Yung 500,000 na kinita sa renta tsaka yung 2,000 pesos na kinita sa
passive income kahit na gamiting para pinturahan yung home for
the aged are NOT exempt from tax
o Sabi kasi sa section 30, REGARDLESS of disposition…. So
kahit saan pa niya gamitin, basta kinita niya NOT for the
principal purpose for which it was created hindi yan
exempted from tax
o Yung renta ba may connection bay un sa principal
purpose ng home for the aged? Hindi diba? Kahit yung
interests, walang kinalaman sa principal purpose
NEXT SITUATION
 X gave 1m for the home for the aged as a gift
o From the point of view of the home for the aged, this is
INCOME
 Is it taxable? WELL, It is actually a GIFT, so it
does not fall under “as such” it falls under the
realm of donations
 So dito, it is income from the point of view of
the receiver but there is NO INCOME TAX
 Tignan muna natin yung relevant provisions
o Under Section 32 (B)(3)
 Gifts, bequests and devises: The value of
property acquired by gift, bequest, devise or
descent: provided however, that income from
such property, as well as gift, bequest, devise,
descent of income from any property, in cases
of transfers of divided interest shall be
included in gross income
o Under section 99 DONORS TAX
 (A) The tax for each calendar year shall be six
percent computed on the basis of the total gifts
in excess of 250,000 pesos exempt gift made
during the calendar year
o Under section 101 EXEMPTION ON CERTAIN GIFTS
 (A) Gifts made to or for the use of the National
Government of any entity created by any of its
agencies which is not conducted for profit or to
any political subdivision of the government
 (B) Gifts in favor of educational and/or
charitable religious, cultural or social welfare
corporation, institution, accredited non-
government organization, trust or
philantrophic organization or research
MTAC 2019
istiutuion or organization, provided, however
that not more than 30% of said gifts shall be
used by such done for administration
purposes.
 Ano ba yung administration
purposes na pinaguusapan diyan?
o Yan yung ginamit mo ng
pasweldo, bayad ilaw,
bayad tao, kuryente lahat
o So kapag di mo ginamit
for administration
purposes yan
 So pag sakto sa 30% exempted pa
din
o Under section 87 (Donor’s Tax)
 (D) All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the net income of which
inures to the benefit of any individual,
provided that not more than 30% of said
bequests, devises legacies or transfers shall be
used by such institutions for administration
purposes
 So ayan na lahat ng relevant provisions, ganito mo siya iaapply.
o Yung 1M na binigay ni EX, Gift yun eh. So hindi taxable
yung tumanggap ang itatax is yung NAGBIGAY. Si X.
o So X is Generally not subject to tax. However, kapag
ginamit yung more than 30% doon sa pagbayad ng
administration fees TAXABLE NA.
 If it was a donation inter vivos [donation
habang buhay pa si X] the taxability will be
based on Donor’s tax under section: 99&101
 Kapag di naman ginamit yung more than 30%
for admin fees, EXEMPT
o So what is 30% of 1M, it is 300,000. So kapag lumampas
ka sa 300,000 pesos sa administration purposes
TAXABLE NA for 6% computed based on the total gifts in
excess of 250,000 [this is applicable in donation inter
vivos]
o Paano naman kapag MORTIS CAUSA donation? Yung
provisions ng ESTATE TAX NAMAN ANG IAAPPLY.
 Hence, doon sa 1m, if not more than 30% was
used for admin purpose. NOT TAXABLE
 If more than 30% of the 1m was used for
admin purposes, TAXABLE na siya
 So in the foregoing, ano ang remedy ni DONOR para hindi nalang
siya magbayad ng tax? Kasi siya na nga nagbigay, siya pa din itatax?
o REVOKE THE DONATION
Religious organization
PARSONAGE
MCDO
KFC
JOLLIBEE Parking lot Office
MILKTEA
 So diyan sa drawing, ang religious organization is exempted REAL
PROPERTY TAX, so long as the LBI are ADE used FOR CRE purposes
o BASIS: Section 28 (3) of 1987 constitution
o So yung mcdo, kfc, Jollibee and milktea, di yan exempted
from RPT
 What if kumita ang simbahan [lahat pala ng religion, organized as a
domestic corporation]
o Yung pamisa ni simbahan, kumita ng 3M
 Taxable? YES.
  Subject to tax, NO. Basis: section 30 because
income “as such”- again, meaning it was made
for the primary purpose for which it was
created
o Yung rentals na kinita ng simbahan sa mga pinarentahan
niya?
 Is it subject to tax? YES.
 Doon naman mahuhulog sa last
paragraph ng section 30, na lahat ng
kita from property, real or personal
or any activity for profit na was NOT
from the primary purpose for which
it was created is subjected to
INCOME TAX regardless of
disposition
o RATE? 30% NIT, DC rate
kais nga DC ang
classification ng religious
organization
o What about on interests? IS IT TAXABLE?
 Yes
 What is the rate? FWT OF 20% = yun ang rate
ng domestic corporation sa interests eh
 Si father nagpabless ng kotse, aabutan mo si father sa sobrang
daming kotse na binless niya umabot ng 150,000 pesos
o Is this income? YES
o Is it taxable? YES
 He realized income in the exercise of his
profession, this is a consideration hence, if it
does not exceed 3M annually, may choice si
father kung 8% or NIT
 If more than 3M, default NIT na
 If X gave a gift amounting to 1m to the religious institution
o It is generally exempted
 If Donation inter vivos: Exempted under
section 101 (2) = DONOR’S TAX
 If donation mortis causa: exempted under
section 87 (D) = ESTATE TAX
o When is it not exempted?
 It is not exempted if more than 30% was used
for administration purposes
 Hence, if ginamit yung more than 30% of the
gift for administration purposes, TAXABLE
 If Intervivos, taxable under donor’s
tax
 If mortis causa, taxable under estate
tax
NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS
 Under ART 14, Sect 24 (3)
(3) 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. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall
be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions subject to the
limitations provided by law including restrictions on dividends and
provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax
o all revenues and assets, including land, building and
improvements, ADE used for educational purposed are
EXEMPTED from taxes
 WHAT DOES IT COVER?
 Internal revenue Taxes
MTAC 2019
 RPT
 TCD
 Revenues and assets are exempted: THIS IS
CONSTITUTIONALLY GUARANTEED pero sa
religious, charitable institutions, it is only NIRC
guaranteed
 So halimbawa, UST is a NSNPEIT: may parking lot, may garden, may
carpark na andoon business establishments like mcdo, etc etc
o So, first under RPT ano lang ang exempted? LAHAT
naman exempted ang HINDI lang is yung laman ng
carpark, hindi naman kasi siya ADE for educational
purposes, kaya kailangan pa din niya magbayad ng tax
o If RPT & Not ADE taxable, pero if yung INCOME is ginamit
na sa ADE for educational purposes, The income is THUS
EXEMPTED
 Ito kasi yung ginaguarantee ng constitution
 So medyo may conflict between section 30
tsaka yung constitution, so regarding this
siyempre constitution is the supreme law of
the land, so the constitution governs
 Kaya ganyan na siya nireconcile: Kapag RPT
tapos ADE, taxable pero kapag ginamit yung
income na yun for ADE educational purposes,
YUN EXEMPTED na ang income!!!!!!!
 So halimbawa si UST kumita ng tuition fee na 30M, tapos kumita ng
rental income na 5M
o Yung 30M na tuition fee, exempt din under sec 30 (H) pati
under the constitution kasi income ito as such, again
meaning for the PRIMARY PURPOSE yung kinita niya for
which it was created
o Yung 5M na rental income, Hindi exempt under section 30
Last paragraph pero exempt under the constitution
 So under section 30, Last paragraph NIT 30%
 However, in constitution it is NOT the source, it
is the USE. So yung 5M na rental income kapag
ginamit siya for purposes na ADE used for
educational purposes, WALA NA TAX. Pero
kapag hindi, eh di ayun taxable pa din
 This is best illustrated in DLSU VS CIR
COMMISSIONER OF INTERNAL REVENUE, vs. DE LA SALLE
UNIVERSITY, INC.
G.R. No. 196596, November 09, 2016
The Commissioner submits the following arguments:
DLSU's rental income is taxable regardless of how such income is derived,
used or disposed of. DLSU's operations of canteens and bookstores within
its campus even though exclusively serving the university community do
not negate income tax liability.
Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax
Code
“the income of whatever kind and character of [a non-stock
and non-profit educational institution] from any of [its] properties, real
or personal, or from any of (its] activities conducted for profit regardless
of the disposition made of such income, shall be subject to tax imposed by
this Code.”
The Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the
rentals earned from property. Thus, DLSU's income from the leases of
its real properties is not exempt from taxation even if the income would
be used for educational purposes.41
 DLSU stresses that Article XIV, Section 4 (3) of the Constitution WHAT ARE THE RULES IF IT IS A PROPRIETARY EDUCATIONAL
is clear that all assets and revenues of non-stock, non-profit educational INSTITUTION AND HOSPITALS
institutions used actually, directly and exclusively for educational
purposes are exempt from taxes and duties.  The rules on RPT is the same, the exception falls under SEC 234 of
LGC, as long as the LBI are ADE educational purposes, TAX EXEMPT
on RPT; No constitutional guaranty in this case
ISSUE: Whether DLSU's income and revenues proved to  Under Section 27 (B) Proprietary Educational institutions and
have been used actually, directly and exclusively for educational purposes hospitals which are NON-PROFIT shall pay a tax of 10% on their
are exempt from duties and taxes. taxable income
o EXCEPT those covered under subsection D
 Section 27 (D) Rate of tax from certain passive
income
RULING: YES.  Interest deposits, monetary benefit
from deposit substitutes and from
The requisites for availing the tax exemption under trust funds and similar
Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the arrangements and royalties shall be
classification non-stock, non-profit educational institution; and (2) taxed at 20% FWT is hereby
the income it seeks to be exempted from taxation is used actually, imposed upon the amount on
directly and exclusively for educational purposes. interest on currency bank, deposit
and yield or any other monetary
A plain reading of the Constitution would show that Article XIV,
benefit from deposit substitutes and
Section 4 (3) does not require that the revenues and income must have
from trust funds, similar
also been sourced from educational activities or activities related to the
arrangements received by
purposes of an educational institution. The phrase all revenues is
DOMESTIC corporations and
unqualified by any reference to the source of revenues. Thus, so long as
royalties derived within the
the revenues and income are used actually, directly and exclusively for
Philippines
educational purposes, then said revenues and income shall be exempt
o So kapag galling sa
from taxes and duties.
foreign corporation, NIT
tax 30% rate on DC
Thus, when a non-stock, non-profit educational institution
 That interest income derived from a
proves that it uses its revenues actually, directly, and exclusively for
domestic corporation from a
educational purposes, it shall be exempted from income tax, VAT, and
depository bank under the expanded
LBT. On the other hand, when it also shows that it uses its assets in the
foreign currency deposit system
form of real property for educational purposes, it shall be exempted from
shall be subject to a final income tax
RPT.
at the rate of 15%
o So kapag rate of interest,
We further declare that the last paragraph of Section 30 of the
20%FWT kapag galling
Tax Code is without force and effect for being contrary to the Constitution
domestic amd kapag peso
insofar as it subjects to tax the income and revenues of non-stock, non-
o Kapag foreign currency
profit educational institutions used actually, directly and exclusively for
15%
educational purpose. We make this declaration in the exercise of and
o Provided, that if the gross income from unrelated trade,
consistent with our duty to uphold the primacy of the Constitution. We
business or other activity EXCEEDS 50% of the total gross
stress that our holding here pertains only to non-stock, non-profit
income derived by such educational institutions or
educational institutions and does not cover the other exempt
hospitals from all SOURCES the tax prescribed under
organizations under Section 30 of the Tax Code.
SUBSECTION (A) [meaning 30% NIT na ang tax] shall be
For all these reasons, we hold that the income and revenues imposed on the ENTIRE TAXABLE INCOME
of DLSU proven to have been used actually, directly and exclusively  This means that the GR is 10% lang ang itatax,
for educational purposes are exempt from duties and taxes. pero ang rate ng passive income subsection D
ang susundin so yung mga royalties, interests
mo FWT 20% kapag galling sa DC, kapag
galling sa foreign corporation naman NIT 30%
 So in this case, the income na kinita ng DLSU from the parking fees  Tapos, diba may total income ka yearly?
were exempted from tax because they were used ADE for KAPAG yung kinita mo sa total income mo,
educational purposes yung lagpas 50% ng income na yun galling sa
unrelated trade, business or activity, NIT 30%
na ang rate ng tax mo
o “Unrelated trade, business or other activity” means any
UST IS A PROPRIETARY EDUCATIONAL INSTITUTION trade, business or other activity, the conduct of which is
not substantially related to the exercise of performance
 Hence, it may likewise be exempted by such educational institution or hospital of its pimary
 You are not generally exempted, only if there is a law exempting you purpose or function.
from paying tax o “proprietary educational institution” – is any private
 NSNPEI are exempted under Section 30 (H) school maintained and administered by private
individuals or groups with an issued permit to operate

MTAC 2019
 from the DEPED, DECS, CHED or TESDA as the case may
be, in accordance with existing laws and regulations
 Ust being a PEI, yung income niya is not covered by SEC 30, It is
covered under Section 27 (B)
 UST as a proprietary educational institution, kumita siya ng 30 M for
tuition fee and 5M for rental
o Classify natin. Yung 30m for tuition fee, RELATED. Yung
5M UNRELATED
o Magkano total income? 35M ang total income ni UST
 Ano ang 50% ng 35M? = 17.5M
 If income from unrelated trade or business
does not exceed 50% ang taxable income is
10% under section 27 (B)
 Pero if it exceeds the 50%, taxable siya as NIT
30% Under subsection A of section 27
UST IS A STATE UNIVERSITY
 There is no constitutional provision relating to the taxability of the
government
 This area is OWNED by the government, if you say that it is a state
university
 Kumita siya ng 30M from tuition fee
o Is it income? YES
o Is it tax exempt? Yes, it falls under AS SUCH [Section 30 I]
 Kumita siya ng 5M rentals
o Is it income? YES
o Is it tax exempt? Yes, falls under last paragraph of Section
30.
 Under RPT naman, ano ang rules bilang UST is a state university.
Lahat din exempted, basta ADE for educational purposes, so kung
may carpark din siya na may mcdo yung carpark nay un SUBJECT TO
real property tax [BASIS: Sec 234 of LGC]
 All real properties of the government of the Philippines are EXEMPT
except when the BENEFICIAL use pertains to a non-exempt entity.
The carpark is not exempt, because the beneficial use pertains to a
non-exempt entity.
 The NSNPEI has the best situation in this case, this is because the
government gives it the best tax exemptions because it thanks such
NSNPEI because the government cannot provide the education that
the people need
 The government is being taxed, pero it is in the exercise of its
proprietary function
o Jus imperii – Governmental function; not subject to suit
o Jus gestionis - Non- governmental function; subject to
suit
WHAT ABOUT CHARITABLE HOSPITALS vs PROPRITARY HOSPITALS
 Proprietary Hospital: same rules under Section 27 (B) Hence, yung
income is Generally taxable at 10%
o Yung passive income is taxable under Subsection D
 20% on interests, royalties etc from DC
 If from FC [NIT, 30%]
 If interests tapos foreign currency 15%
provided na DC din nagbigay
o Pero, kapag yung “unrelated trade, business,
income/profit niya” from the total taxable income is
sobra sa 50% ang tax na babayaran na niya is 30% NIT
under (A)
o Kapag RPT, basta ADE used for CRE purposes exempted
in RPT
 Kapag charitable hospital, kapag income “as such” EXEMPTED siya,
under section (30) (E)(G) if not income as such, it falls under section
30 Last paragraph, taxable siya kung ganon
MTAC 2019
CASE: Comm. Of Internal Revenue vs. St. Luke’s Medical Center, Inc.
(G.R. No. 195909-195960; Sept. 26, 2012)
Facts: St. Luke’s (respondent) is a hospital organized as a non-stock and
non-profit organization. Sometime in 2002, BIR assessed St. Luke’s
deficiency taxes amounting to P76M for 1998 which was subsequently
reduced to P63M during trial in the CTA. St. Luke’s protested and filed an
administrative protest with BIR but was not acted by the latter within the
180 period thus reaching to the CTA.
According to BIR, Section 27B of the NIRC imposing a 10%
preferential tax rate applies to St. Luke’s. Its reason is that it amends the
exemption on non-profit hospitals and which prevails over the exemption
on income tax granted under Section 30 (E and G) for non-stock,
nonprofit charitable institution and civic organizations promoting social
welfare. It further claimed that St. Luke’s was actually operating for profit
because only 13% came from charitable purposes and that it had a total
revenue of P1.73B from patient services in 1998.
Meanwhile, St. Luke’s contended that its operating income only
totaled P334 M (less the operating expenses) and out of that P218M
(65%) made up its free services and further claimed that its income does
not inure to the benefit of anyone. Furthermore, it argued that it falls
under the exception provided under Sec. 30 (E) and (G) of NIRC and
making of profit per se does not destroy its tax exemption.
CTA En Banc ruled in favor of St. Luke’s exemption under Sec.
30 and reiterated its earlier fiding in another case identifying St. Luke’s as
a charitable institution. CTA adopted the test in Hospital de San Juan de
Dios, Inc. v. Pasay City, which states that "a charitable institution does not
lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required
to do so, where funds derived in this manner are devoted to the
charitable purposes of the institution . . . ." (The generation of income
from paying patients does not per se destroy the charitable nature of St.
Luke's.)
Issue: WON St. Luke’s is liable for deficiency income tax under Sec. 27 (B)
of the NIRC which imposes a 10% preferential rate.
Held: Petition partly granted. YES, St. Luke’s is liable under Sec. 27 (B) of
the NIRC.
Under Sec. 30 (E) of the NIRC provides that a charitable institution
must be: (1) non-stock corporation or association; (2)ORGANIZED
EXCLUSIVELY for charitable purposes; (3) OPERATED EXCLUSIVELY for
charitable purposes; (4) No part of its net income or asset shall inure to
the benefit of any member , officer or any person. Under the last
paragraph of Sec. 30 of the NIRC if a tax exempt charitable institution
conducts "any" activity for profit, such activity is NOT TAX EXEMPT even
as its not-for-profit activities remain tax exempt. It simply means that
even if a charitable institution organized and operated exclusively for
charitable purposes is nevertheless allowed to engage in “activities
conducted for profit” without losing its tax exempt status for its no-for-
profit activities. However, as a consequence "income of whatever kind
and character" of a charitable institution "from any of its activities
conducted for profit, regardless of the disposition made of such
income, shall be subject to tax." (Sec. 30, last par.). Therefore,
services rendered to paying patients are activities conducted for profit
and thus taxable under Sec. 27 (B) of the NIRC.

St. Luke's fails to meet the requirements under Section 30 (E) and
(G) of the NIRC to be completely tax exempt from all its income.
However, it remains a proprietary non-profit hospital under Section
27 (B) of the NIRC as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to
the preferential tax rate of 10% on its net income from its for-profit
activities.

Notes:

1. TEST OF CHARITY - as a gift, to be applied consistently with

existing laws, for the benefit of
an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or [by]
otherwise lessening the burden of government." (In other
words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government.)
2. Solely is synonymous with EXCLUSIVELY. (Lung center of the
Phil.)
3. Proprietary- means private.
4. Non-profit- no net income accrues to the benefit of any person
and with all its income devoted to the institutions purpose and
all its activities CONDUCTED NOT FOR PROFIT.

MTAC 2019