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whatever source, including (but not limited to the following Employee – an individual performing services under an

Taxation 1 items: employer-employee relationship. The term covers all


employees, including offices and employees, whether
Finals Reviewer and Transcription (1) Compensation for services in whatever form paid, elected or appointed, of the Government of the
including, but not limited to fees, salaries, wages, Philippines, or any political subdivision thereof of any
commissions, and similar items; agency or instrumentality.
“Study Harder. It’s better to fail here ● As long as you are an employee in an EER, you
● The definition is found under RR No. 08-2018 are considered an employee for tax purposes.
than fail in the bar.” – Atty. R. Abrantes
“Compensation Income" – in general, means all What are the requisites under the employer-employee
remuneration for services performed by an employee for relationship? [SPTC]
The following are income subject to tax: (UST
his employer under an employer-employee relationship. 1. selection and engagement of the employee;
Reviewer)
(power to select)
1. Compensation income
The name by which the remuneration for services is 2. payment of wages (power to pay salaries);
2. Fringe benefits
designated is immaterial. Thus, salaries, wages, 3. power of dismissal (power to terminate); and
3. Professional income
emoluments and honoraria, allowances, commissions 4. employers’ own power to control employees
4. Income from business
(e.g. transportation, representation, entertainment and the conduct (power to control)
5. Income from dealings in property
like); fees including director’s fees, if the director is, at the
6. Passive investment income
same time, an employee of the employer/corporation; Employer - any person for whom an individual performs
7. Annuities, proceeds from life insurance or other types
taxable bonuses and fringe benefits, except those which or performed any service, of whatever nature. under an
of insurance
are subject to the fringe benefits tax under Sec. 33 of the employer-employee relationship. It is not necessary that
8. Prizes and awards
Code and the allowable “de minimis” benefits; taxable the services be continuing at the time the wages are paid
9. Pensions, retirement benefit or separation pay
pensions and retirement pay; and other income of a in order that the status of employer may exist. Thus, for
10. Income from any source whatever
similar nature constitute compensation income. purposes of withholding, a person for whom an individual
has performed past services and from whom he is still
● It actually adopts the definition of an employer- receiving compensation is an "employer”.
COMPENSATION INCOME
employee relationship under the Labor Code. ● So meaning, it doesn’t mean that I have to
- Includes all remuneration for services rendered
● So, all that is paid to the employee under EER is perform currently a service tapos bibigyan mo
by an employee for his employer unless
considered compensation. The only exception ako ng salary for me to be considered as an
specifically excluded under the NIRC (UST
that it cannot be considered compensation is that employee. Pwede naman I perform past service
Reviewer)
if it qualifies as a “de minimis” benefits and as a pero binabayaran mo pa rin ako ngayon, I can
**remuneration → money paid for work or a service.** fringe benefit tax. Otherwise, it is considered as still be considered as an employee. So kahit na
a compensation income subject to the nagresign ka na a year ago but you are still
We have Section 32. We’re still under gross income compensation income tax being paid currently of your compensation
SEC. 32. Gross Income. - referring to the past services, then you are still
Compensation Income Earners – individuals whose considered an employee for purposes of tax.
(A) General Definition. - Except when otherwise provided source of income is purely derived from an employer- ● Please take note. It is not necessary na yung
in this Title, gross income means all income derived from employee relationship. pagperform mo ng services is sabay sa
● Keyword: purely derived pagreceive mo ng compensation. It could be na
you have performed previous past services tapos

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 1
ngayon ka lang binabayaran. For this purpose, ● This pertains to the rule on “Convenience of the below. If you are earning P250,000 and below
whatever you receive, that is considered Employer Rule”. annually, you have no tax liability.
compensation under EER. ● If the allowance is given for the convenience of
the employer, that is not considered as Minimum Wage Earner (MWE) – refers to a worker in the
Employer and Employee Relationship - exists when a compensation on the part of the employee. private sector who is paid with a statutory minimum wage
person for whom services were performed (employer) has ● Let’s say, common to sa mga “planta”. Yung mga (SMW) rates, or to an employee in the public sector with
the right to control and direct an individual who performs employee nila may housing within the compensation income of not more than the statutory
the services (employee), not only as to the result of the compound, libre ang accommodation, food… minimum wage rates in the non-agricultural sector where
work to be accomplished but also as to the details, tapos the question is, ito ba yung binibigay ko sa the worker/employee is assigned. Such statutory minimum
methods and means by which it is accomplished. An kanila, is it part of the compensation for them? wage rates are exempted from income tax. Likewise, the
employee is subject to the control of the employer not only Now, if it is for the convenience of the employer, exemption covers the holiday pay, overtime pay, night
as to what shall be done, but how it shall be done. It is not that would not be considered as compensation shift differential pay, and hazard pay earned by an MWE.
necessary that the employer actually exercises the right to kasi that was given to you for the benefit of your
direct or control the manner in which the services are employer and not for your own benefit. That is That minimum wage earners as defined in Section 22(HH)
performed. It is sufficient that there exists a right to control the “Convenience of the Employer Rule”. of this Code shall be exempt from the payment of income
the manner of doing the work. ● This refer to a benefit provided by the Er for the tax on their taxable income: Provided, further, That the
Ee but which would be more beneficial to the Er holiday pay, overtime pay, night shift differential pay and
● It actually adopts the EER under the Labor Code. than to the Ee. As such, they are not considered hazard pay received by such minimum wage earners shall
● So, it doesn’t mean na if hindi niya inexercise as taxable. ( TaxAcctg Center website) likewise be exempt from income tax.
ang right/power to control is hindi na siya ○ EXAMPLE: Mr. De la Cruz is a ● You have an exemption on this for purposes of
employer. It is sufficient that he has that right of. technician manager of a refrigeration compensation. How would you know na MWE
plan in Laguna where a single power ka? Punta ka sa RTWPB, doon sila
loss of 5mins would bring about millions magpapublish ng rates. Kung andun ka pa,
Henderson v. Collector, 1 SCRA 649 (1961)
of losses. To prevent such losses, Mr. meaning you are still a MWE. Therefore, you are
Mr. Roboto, a high ranking executive in Roboto
De la Cruz was provided a housing still exempt from income tax.
Industries, Inc. was given an apartment where he would
benefit in Laguna because it would take ● Please take note that holiday pay, overtime pay,
host parties for the clients of his company. He would
him 2 hrs to travel from his Bulacan night shift differential pay and hazard pay
also travel abroad with his wife, Mrs. Roboto, to go on
residence to Laguna plant. received by such minimum wage earners shall
meetings. Are these rental allowances and travel
likewise be exempt from income tax. Kapag
allowances part of the gross income?
Case: CIR vs Castaneda nagbigay ng allowance, tapos pag in-add mo sila
● Terminal leave pay received by a government lahat and above na siya sa minimum wage rate,
Ruling: No. CONVENIENCE OF THE EMPLOYER
official or employee is not subject to withholding hindi na siya considered as MWE. Pero let’s say
RULE. No part of these redounded to Mr. Roboto’s
(income) tax. may minimum wage siya, tapos may holiday pay,
personal benefit, nor were there such amounts retained
● Why not subject to withholding tax? Because he overtime pay, night shift differential pay and
by him. These bills were paid directly by the employer
is separated from the services through no fault hazard pay, even if it is way above the minimum
corporation. These expenses are COMPANY
of his own, so beyond the control. wage rate, he is still considered as a MWE.
EXPENSES, not income by employees which are
● Please take note of the new schedular rates. For
subject to tax.
the years 2018-2022, just look for it meron ito sa Minimum Wage Earner Cont’d
internet :D Ang pinakamababa is P250,000 and

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 2
● Pag may isa diyan na hindi one of those Pero what if naay sobra na P1 due to allowance, are you Kapag nag FB binigay sa managerial, it is not part of the
enumerated, at pag in-add ko siya… Let’s try an still considered a minimum wage earner? Considerd parin compensation income, PERO taxable parin under the
example. ba? Ang MWE is P1,100. Minimum wage earner ka parin, Fringe Benefit Tax. Sa different na tax.
● You have your minimum wage. Magkano ang basta even though may kasamang allowance, still below.
minimum wage sa Davao? So you have your tax schedule, sa table. If you are a rank
● You have your basic wage, overtime, holiday Q: Sir Dave - What if the allowance sir and the deminimi and file employee, may fringe benefit ka, kasali siya doon
pay, night shift differential, hazard allowance sir is above that? Is it still subject to tax? sa compensation. Pag binigay sa managerial employee,
● Let’s say Basic - P375 - Sakto. A: No. Again, like I’ve said earlier, compensation income hindi siya kasali doon, sa iba siya.
○ Nag OT ka. P40 excludes deminimi and fringe benefits. Hindi siya
○ Holiday. Let’s say P600 considered. Only those compensation income. Okay? What are the kind of Fringe Benefit tax? SEC 33 (B),
○ Night DIfferential. P27 NIRC
○ Hazard Pay na P4 Having said the Fringe Benefits. Segway. What is a (1) Housing - Pabahay kay manager.
● Magkano na yan lahat? Now, way above your Fringe Benefit? (2) Expense Account - yung mga, bili ka ng anong
minimum wage earner, diba? But still, since gusto mong bilhin, tapos i-charge lang sa
considered parin to, ito, ito, still you are still Fringe Benefit (FB) - kumpanya
exempted from tax. It means any goods, service, or other benefit for which is (3) Vehicle of any kind
● Let us say you are given allowance na P193. granted in cash or in kind other than basic compensation. (4) Household personnel such as maid, drivers and
Since merong isang hindi kasali, and if in-add So its OTHER than basic compensation. Meron kang others, lalo na sa mga executive. May mga
natin, you are going to be paid above the individual employee except rank and file employee, as company talaga na naga hire ng mga experts,
minimum wage, then you are not going to be defined herein, such as but not limited to: (You have, ten) mga experts, tapos binibigyan sila ng condo,
considered a minimum wage earner. Please take This is under the implementing tax provisions RR 8-2018, may mga katulong na at body guard. That can be
note of that. Sec. 2. You have ten classes of Fringe Benefits. considered a Fringe Benefit.
(5) Interest on loan not less than market rate to the
Q: Sir Dave - What was under the TRAIN Law was the Tandaan ninyo sa FB, it is not considered a fringe benefit extent of the difference between the market rate
holiday pay, but in the IRR, all of those (referring to the subject to FB tax if it is given to a rank and file employee. and actual rate granted - so let’s say pinautang
other pays) were indicated. So which shall prevail? Dapat Managerial. So how do you classify an employee ka the market rate daw is…
A: Ito lahat. Provided that these received by the MWE are as a rank and file? Paano mo masasabi naman na hindi (a) What’s the rate now? You have your
likewise exempt. This is TRAIN Law I have. Are we siya rank and file? [The class murmurs with no definite credit trans, di ba?
reading the same? answer]
The market rate now is 6%
Pero wait lang hah? Sa TRAIN copy na hawak ko, apat How would you know na Rank and File siya or Managerial Example:
siya. Baka ibang version. I got this from CD Asia Online. siya? Pinautang ka with 4% interest rate.
You double check with the BIR nalang on their website. - Rank and File - there’s no element of decision While the prevailing market rate is 6%.
making. No discretion. Then the difference of 2% will be considered as
Basta, the principle is holiday pay, OT, night shift fringe benefit.
differential, hazard pay. Same principle, kapag mag So kapag may FB na binigay sa rank and file, it is - Provided that you are under a
exceed na siya, then that can be considered as still a considered as part of the compensation subject to managerial position, not rank-in-file.
MWE. compensation income tax.
SEC 33 (B), NIRC

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 3
(6) Membership fees/ dues and expenses born by the On or after Jan 1, 2018 - rate is 35% a. Given to a managerial employee and those
employer for the employee’s social, and athletic clubs or under supervisory positions
other similar organizations; Example: b. It is not required by the nature of or necessary to
Example: You were given a vehicle with a monetary value of the trade, business, industry or profession of the
Membership in golf clubs P65,000. To compute for the FBT, you must: employer or when the FB is for the convenience
Membership in Chamber of Commerce 1) Gross up the value of the fringe benefit by or advantage of the employer (EXEMPTION)
dividing the value by 68% or 65% depending on
(7) Expenses for foreign travel; the date you received it. This means you need to PRINCIPLE OF FRINGE BENEFITS
If pinapatravel ka, then manager ka, expenses for the trip get the 100% This is an additional compensation for the manager. If the
are considered as fringe benefit. 2) Then, after getting the gross monetary value, FB is given for the convenience of the employer, it is no
multiply it by either 32% or 35% longer an additional compensation for the employee.
(8) Holiday and vacation expenses; Hence, it is not considered as fringe benefit subject to tax.
Example:
(9) Educational assistance to the employee or his NON-TAXABLE FRINGE BENEFITS
Before TRAIN TRAIN Law
dependents; and SEC 33 (C), NIRC
Value FB P65,000 P65,000 (C) Fringe Benefits Not Taxable. - The following fringe
(10) Life or health insurance and other non-life insurance benefits are not taxable under this Section:
premiums or similar amounts in excess of what the law Divide 68% 65%
allows. (1) Fringe benefits which are authorized and exempted
- Take note, in excess to what the law allows that Grossed up 95,588 100,000 from tax under special laws;
Monetary Value
is considered a fringe benefit
(2) Contributions of the employer for the benefit of the
Multiply 32% 35% employee to retirement, insurance and hospitalization
Question: If its a fringe benefit, how will it be taxed?
benefit plans;
FB Tax Due 30, 588 35,000
SEC. 33 (A), NIRC as amended by the TRAIN Law (3) Benefits given to the rank and file employees,
whether granted under a collective bargaining
FBT (Fringe Benefit Tax) is a final tax.
(A) Imposition of Tax.— Effective January 1, 2018 and agreement or not; and
onwards, a final tax of thirty-five percent (35%) is
This means that is the total amount that you need to pay (4) De minimis benefits as defined in the rules and
hereby imposed on the grossed-up monetary value of
fringe benefit furnished or granted to the employee for that particular fringe benefit. regulations to be promulgated by the Secretary of
(except rank and file employees as defined herein) by Finance, upon recommendation of the Commissioner.
the employer, whether an individual or a corporation But for purposes of law, you need not compute for it. But
(unless the fringe benefit is required by the nature of, or you just need to be familiar with how it is computed. Additional: (From UST Reviewer)
necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the 5. Fringe benefits granted to employee as required by
You need to know when FBT is applied or when FB is the nature of, or necessary to the trade, business or
convenience or advantage of the employer). xxx
subject to FBT. If an employer gives benefits, it can be profession of the employer
considered as fringe benefits but will it be considered as a
How to compute for the FB tax? fringe benefit subject to tax, that is a different story. 6. Fringe benefits granted for the convenience of the
It will depend on the date you received the fringe benefit. employer (Employer’s Convenience Rule) (NIRC, Sec.
Before Jan 1, 2018 - rate is 32% 32; R.R. 3-98, Sec. 2.33 [C])
WHEN WILL A FB SUBJECT TO A FBT?

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 4
● Laundry allowance not exceeding P300 per
If there’s fringe benefit given to rank-and-file is it taxable? month; CASE: CIR vs. Castaneda
Yes. But not taxed as a fringe benefit but it is taxed as ● Employees achievement awards (e.g. for length
part of compensation income or as an income tax. of service or safety achievement, which must be
in the form of tangible personal property other INCOME EXEMPT UNDER TAX TREATY
Note that not all fringe benefits are subject to FBT. The than cash gift or certificate with an annual
definition of fringe benefits is an additional compensation. monetary value not exceeding P10,000 received Income of any kind, to the extent required by any
Thus, you need to look at the fringe benefits if it will by an employee under an established plan which treaty obligation binding upon the Government of the
qualify as fringe benefits subject to FBT. does not discriminate in favor of highly paid Philippines is exempt from tax (NIRC, Sec. 32 B [5]).
employees;
DE MINIMIS BENEFITS ● Gifts given during Christmas and major NOTE: Public policy recognizes the principles of
For the purpose of determining whether the fringe benefits anniversary celebrations not exceeding P5.000 reciprocity and comity among nations.
shall be considered as payments of de minimis benefits, per employee per annum;
the employee shall submit a written representation. ● Daily meal allowance for overtime work and Reasons for granting tax exemption through a treaty
night/graveyard shift not exceeding 25% of basic 1. Reciprocity
The term “de minimis” benefits which shall be exempt minimum wage on a per region basis. 2. To lessen the rigors of international juridical
from the FBT in general be limited to facilities or double taxation
privileges. They are even exempt from income tax and In HRs, they do a restructuring oc compensation to lessen
withholding tax even if received by rank-and-file the tax impact on employees. What they do is that they Examples of tax treaties entered into by the Philippines
employees and supervisory or managerial employees. consider all the de minimis benefits, they avail everything 1. RP-Japan Tax Treaty
to the maximum. This is to decrease your basic 2. RP-US Tax Treaty
UPDATED LIST OF DE MINIMIS BENEFITS compensation subject to tax. This is called Salary 3. RP-France Tax Treaty
RR 5-2011 as amended by RR 8-2012 and RR 1-2015 Structuring. 4. RP-Switzerland Tax Treaty
● Monetized unused vacation leave credits of 5. RP-Netherlands Tax Treaty
private employees not exceeding 10 days during
the year; Fringe Benefits Exclusions: Compensation for Injuries
● Monetized value of vacation and sick leave or Sickness CASE: Reagan vs. CIR
credits paid to government employees;
● Medical cash allowance to dependents of Kinds of compensation for injuries or sickness that Most Favored Nation Clause
employees, not exceeding P750 per employee may be excluded from gross income
per semester or P125 per month; 1. Amounts received through accident or health This grants to the contracting party treatment not
● Rice subsidy of P1,500 or one sack of 50kg rice insurance or Workmen’s Compensation Act as less favorable than which has been or may be granted to
per month amounting to not more than P1,500. compensation for personal injuries or sickness the most favored among other countries. It allows the
● Uniform and clothing allowance not exceeding 2. Amounts of any damages received whether by taxpayer in one state to avail of more liberal provisions
P4,000 per annum; suit or agreement on account of such injuries or granted in another tax treaty to which the country of
● Actual medicine assistance (e.g. medical sickness (NIRC, Sec. 32 B [4]). residence of such taxpayer is also a party; provided that
allowance to cover medical and healthcare the subject matter of taxation is the same as that in the
needs, annual medical/executive check-up, NOTE: They are mere compensation for injuries or tax treaty under which the taxpayer is liable (CIR v. SC
maternity assistance, and routine consultations sickness suffered and not income. It is intended to make Johnson and Son Inc., G.R. No. 127105, June 25, 1999).
not exceeding P10,000 per annum; the injured party whole as before the injury.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 5
part of the corpus or income of the fund be used for, or be
Total de minimis benefits 70,000
EXCLUSIONS FROM GROSS INCOME diverted to, any purpose other than for the exclusive
TOTAL NON-TAXABLE P410,000 benefit of the said officials and employees.
Sec. 32 (B) (7) AMOUNT
(b) Any amount received by an official or
(e) 13th Month Pay and Other Benefits.— Gross
benefits received by officials and employees of public employee or by his heirs from the employer as a
and private entities: Provided, however, That the total consequence of separation of such official or employee
exclusion under this subparagraph shall not exceed from the service of the employer because of death
Let’s say ang total ng binili mo ay nasa 70. So 410 ang
Ninety thousand pesos (₱90,000) which shall cover: sickness or other physical disability or for any cause
maximum na ibibigay sayo bago ka magiging taxable.
beyond the control of the said official or employee.
(i) Benefits received by officials and employees of the That is if you know how to structure your compensation.
national and local government pursuant to Republic Act That is structuring your salary compensation.
(c) The provisions of any existing law to the
No. 6686;
contrary notwithstanding, social security benefits,
We already discussed Pensions, Retirement Benefits,
“(ii) Benefits received by employees pursuant to retirement gratuities, pensions and other similar benefits
Separation Pay. (Midterms)
Presidential Decree No. 851, as amended by received by resident or nonresident citizens of the
Memorandum Order No. 28, dated August 13, 1986; Philippines or aliens who come to reside permanently in
REVIEW:
the Philippines from foreign government agencies and
“(iii) Benefits received by officials and employees not other institutions, private or public.
covered by Presidential Decree No. 851, as amended Retirement Benefits, Pensions, Gratuities,
by Memorandum Order No. 28, dated August 13,1986; etc.-
and (d) Payments of benefits due or to become due
to any person residing in the Philippines under the laws of
(a) Retirement benefits received under Republic
“(iv) Other benefits such as productivity incentives and the United States administered by the United States
Christmas bonus.” Act No. 7641 and those received by officials and
Veterans Administration.
employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit
Under the TRAIN LAW, the total exclusion for 13th (e) Benefits received from or enjoyed under the
plan maintained by the employer: Provided, That the
month pay and other benefits is already P90,000 Social Security System in accordance with the provisions
retiring official or employee has been in the service of the
before it was P82,000. of Republic Act No. 8282.
same employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his retirement:
Note that this does not only involve the 13th month pay (f) Benefits receivedconve from the GSIS under
Provided, further, That the benefits granted under this
but it also involves other benefits. Republic Act No. 8291, including retirement gratuity
subparagraph shall be availed of by an official or
received by government officials and employees.
employee only once. For purposes of this Subsection, the
Therefore, under the TRAIN LAW the minimum amount of term 'reasonable private benefit plan' means a pension,
compensation exempt from taxation is equal to: gratuity, stock bonus or profit-sharing plan maintained by
CASE: CIR v. CA, 203 SCRA 72
an employer for the benefit of some or all of his officials or
Minimum Amount P250,000 employees, wherein contributions are made by such
employer for the officials or employees, or both, for the
CASE: CIR v. GCI Retirement, 207 SCRA 487
13th month and other 90,000 purpose of distributing to such officials and employees the
benefits earnings and principal of the fund thus accumulated, and
Take note of withholding of wages. Section 78 of NIRC
wherein it is provided in said plan that at no time shall any
defines wages.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 6
Payment or Income Tax Withheld). Dito nakalagay kung
Tax Return, which is the BIR Form 1700 for individuals
magkano yung na withhold na taxes during your receiving purely compensation income or BIR Form 1701 for
SEC. 78. Definitions.
employment. individuals with mixed income.
(A) Wages. - The term 'wages' means all remuneration (other
than fees paid to a public official) for services performed by an What is BIR Form 2316?
employee for his employer, including the cash value of all Mag file ka ng income tax on the yearend, tapos you
remuneration paid in any medium other than cash. compute your total income amounting to one hundred
The BIR Form 2316 is also called the Certificate of
thousand (P100,000.00). Tapos may na withhold si
Compensation Payment or Income Tax Withheld.
Employer #1 na 50, then may na withhold din si employer
Paano ba tina-tax ang compensation? You have your The BIR defines compensation as either salaries, wages or #2 na 50. Nagbigay ng Form 2316 si 1st employer. Let’s
withholding tax. You have this substituted filing. How do other forms of remuneration given by an employer to an say you computed your tax due.
you file your return? employee.
100,000
What Is It for and Who Needs to File It? x .30
If you are earning purely compensation, empleyado ka
lang talaga, you only have 1 employer, pansin nyo na 30,000
This form is a certificate that must be accomplished and (50)
hindi ka na mag fa-file because that is the responsibility of issued yearly by the Payor or Employer to each employee (50)
your employer. That is what we call substituted filing? It whose income is subjected to final tax declaration. The
is called substituted because instead na ikaw na taxpayer employer must indicate the total amount that was paid to → whatever is the difference, yun na lang yung babayaran
ang mag file, the employer is substituting you in your the employee and the corresponding taxes withheld during mo.
place. Kaya substituted filing. Yung employer na ang mag the calendar year.
file. But this is only applicable if you have 1 employer and
Should you have no other income from other employers, there The Form 2316 will be your proof that you already paid
you are earning purely compensation income.
will be no need for you to file an income tax return. The BIR the tax through your employer kasi nag withhold na sya.
If in a taxable year you have two employers. Let’s say Form 2316 is enough proof that your income has already been Kaya kailangan mo ng Form 2316 para i attach mo doon
January to December. Calendar. Kung isa lang ang subjected to income tax. This is called substituted filing, sa Return because this is your proof na nag withhold na si
employer mo, purely compensation ka lang, wala kang wherein the employer files the income tax returns for the
1st employer ng 50 and si 2nd employer ng 50. Whatever is
raket or sideline, pwede na hindi ka na mag file on your employee.
the difference, yun na lang yung babayaran mo.
own because that is the responsibility of your employer.
This form is normally requested as part of pre-employment
requirements in order for your new employer to make sure that Take note that you always have to get you Form 2316 at
Let’s say January to June, 1st
employer, nag resign ka
the correct deductions have been made by your previous the end of the period because that will serve as your
then nag apply ka ulit. 2nd employer, from June to
employer. income tax return. That is if you are a purely compensated
December. Pagdating ng yearend, are you still covered by
taxpayer. Pag hindi purely compensated income, you do
the substituted filing? NO MORE. This is because you When Is the BIR Form 2316 Issued? not qualify for substituted filing.
already have two employers in a taxable year.
The employer must issue the form to each employee on or
So ano ang gawin? Pag hindi ka na covered ng before the 31st of January of the succeeding year in which 1. What is “Substituted Filing”?
substituted filing, ikaw na ang mag fa-file. Ano ang payment was made. However, in case of termination of Substituted Filing is when the employer’s annual return (BIR
employment, it must be issued on the same day when the Form 1604CF) may be considered as the “substitute” Income
gagawin mo?
last payment of wages was made. Tax Return (ITR) of employee inasmuch as the information
provided in his income tax return (BIR Form 1700) would
Si employer #1, after your resignation dapat magbibigay The BIR Form 2316 must be attached to the Annual Income exactly be the same information contained in the employer’s
sya ng BIR Form 2316 (Certificate of Compensation

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 7
annual return (BIR Form No. 1604-CF). calendar year, the income tax of which has not been withheld If the employee is qualified for substituted filing, the employee
correctly (i.e. tax due is not equal to the tax withheld) resulting concerned should sign the substituted filing signature box of
2. How is “Substituted Filing” different from “Non-Filing”? to a collectible or refundable return BIR Form 2316 and have the same signed by the employer. A
Under “substituted filing”, an individual taxpayer although c. Employees whose monthly gross compensation income copy of BIR Form 2316 signed both by the employer and
required under the law to file his income tax return, will no does not exceed Five Thousand Pesos (P5,000) or the employee shall be retained and kept by the employer and the
longer have to personally file his own income tax return but statutory minimum wage, whichever is higher, and opted for employee.
instead the employer’s annual information return filed will be non-withholding of tax on said income If an employee is not qualified for substituted filing, he is
considered as the “substitute” income tax return of the d. Individuals deriving other non-business, non-profession- required by law to file his income tax return (BIR Form 1700 or
employee inasmuch as the information in the employer’s related income in addition to compensation not otherwise BIR Form 1701). BIR Form 2316 should be attached as proof
return is exactly the same information contained in the subject to final tax of his compensation income and withholding taxes as well as
employee’s return. e. Individuals deriving purely compensation income from a other necessary and applicable attachments, like financial
single employer, although the income of which has been statements, certificate of creditable withholding taxes.
“Non-filing” is applicable to certain types of individual correctly subjected to withholding tax, but whose spouse is not
taxpayers who are not required under the law to file an income entitled to substituted filing For those qualified for substituted filing, is it necessary to
tax return. An example is an employee whose pure f. Non-resident aliens engaged in trade or business in the have BIR Form 2316 notarized?
compensation income does not exceed P60,000, and has only Philippines deriving purely compensation income or No, it is not necessary to have BIR Form 2316 notarized for
one employer for the taxable year and whose tax withheld is compensation income and other business or profession those qualified for substituted filing.
equivalent to his tax due. related income.
Can an employee file an ITR (BIR Form No. 1700) even if
3. Who are qualified and under what conditions will Who shall prepare and issue BIR Form 2316? he is qualified for substituted filing?
substituted filing of BIR Form No. 1700 apply? In general, every employer or other person who is required to No, for taxable year 2002 and beyond, substituted filing is
Substituted filing applies only to individuals who meet all the deduct and withhold the tax on compensation including fringe mandatory for qualified employees.
following conditions: benefits given to rank and file employees, shall furnish every
a. The employee receives purely compensation income employee from whose compensation taxes have 4 been
(regardless of amount) during the taxable year withheld the Certificate of Compensation Payment/Tax Question from Sir Dave:
b. The employee receives the income only from one employer Withheld (BIR Form 2316 Oct 2002 ENCS version). - If ever the employer withholds and remitted
in the Philippines during the taxable year more than what is required from the employee, will
c. The amount of tax due from the employee at the end of the When should the employer issue BIR Form 2316? the former be liable to the latter?
year equals the amount of tax withheld by the employer Employers should issue BIR Form 2316 to the employee on or YES.
d. The employee’s spouse also complies with all three (3) before January 31 of the succeeding calendar year, or if
conditions stated above. employment is terminated before the close of such calendar
- What happens if you have 2 employers in a
e. The employer files the annual information return (BIR Form year, on the day on which the last payment of compensation is
No. 1604- CF) f. The employer issues BIR Form 2316 (Oct made. calendar year then the 1st employer withheld a
2002 ENCS) version to each employee sufficient amount and the 2nd employer withheld an
What will an employee do with BIR Form 2316 issued by amount more than what is necessary, what if you
4. Who are not qualified for substituted filing of BIR Form the employer? have excess?
1700? If the BIR Form 2316 was issued by a previous employer as a ● Ang habulin mo nyan is the employer then ang
The following individuals are not qualified for substituted filing: result of termination of employment and the employee has employer ang maghabol sa BIR. Ang problema
a. Individuals deriving compensation income from two or more been subsequently employed within the same calendar year,
nyan is makukuha pa ba nya, kasi na remit na
employees, concurrently or successively at anytime during the the employee should submit a copy of BIR Form 2316 issued
nya yun eh. Pero ang ginagawa pag ganito, i
taxable year by the previous employer to his present employer, for
b. Employees deriving compensation income, regardless of consolidation with his current compensation received from the consider na lang sya sa next. Hindi credit.
amount, whether from a single or several employers during the present employer. ● If in a year, you have 2 employers you will no
longer qualify for substituted filing. Pero if next

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 8
year, wala ka nang other employer then you will conscience of men, these are not the
now be covered by the substituted filing. same. We do not interchange them. 2. Subject to final withholding tax (FWT)
When you say usurious, it violates the a. Interest Income on deposits made in
PASSIVE INCOME Usury Law. But wala ng Usury Law. It bank institution is a passive income,
is not usurious, but it is unconscionable which is usually subject to FWT
Passive income – an income is considered passive if the and excessive which the courts can 3. Exempt from Income Subject to Normal Tax
taxpayer merely receives . . it is an income without you intervene. (applies to corporations)
having to do anything. ● When you say usurious, it does not a. Usually an interest income subject to
In compensation income you have to render service. In mean that it is excessive, it’s just that it FWT, but it could also be subject to
passive income you just have to wait. violates the Usury Law. That is how you normal tax. Meaning, the normal rates
should think. (e.i rates on corporations, etc. ), If the
Passive income is income derived from any activity in interest income is derived from
which the taxpayer does not materially participate. Classification of Interest Income ordinary course of business
1. Exempt from income tax b. EXAMPLE:
Passive Income – income in which the taxpayer a. Those earned by members of a duly i. Kung banko ka, you earn an
merely waits for the amount to come in, which includes, registered cooperative (RR-20-2001; interest, nagpapautang ka, so
but not limited to e, royalty income, BSP Prescribe form of Investment ang kita mo is the interest
dividend income, winnings, prizes. maturity more than 5 years) income na babayaran ng
i. If you have an investment in a nangutang. So if this is your
Example: form of a BSP prescribed form ordinary course of business,
1.) Interest income: it is an earning derived from and the maturity is: this is not subject to FWT, but
depositing or lending money, goods and credits. Unless this is subject to normal tax.
Years Tax rate
exempted by law, interest income received by the ii. But if you will only deposit in
taxpayer, whether usurious or not, is subject to income more than 5 exempt from the bank, that is not your
tax. years that 12 %. income tax. ordinary course of business, so
that is not subject to normal
What do you mean by usurious? How can you consider 4 years to less 5% tax, but subject to FWT.
an interest as usurious? Let’s say 50% interest, is it than 5 years EMPHASIS: If the interest income is earned on
usurious? the normal course of business, this is part of your
3 years to less 12% normal income subject to, if you’re an individual,
Anong rate ang nakalagay sa Usury Law? Diba depende than 4 years graduated rates, or if you’re a corporation, 30%
yun kung anong klase law?
less than 3 years 20% RELATED TAX RATES:
How would you know na usurious siya? Is Usurious the
same with unconscionable excessive?
b. Those under the expanded Foreign Individual Corporation
Currency Deposits by nonresident
● You visit your jurisprudence, kasi when
citizen, aliens RC/RA/NR NRA not DC RF NRF
you say usurious, it violates the Usury
c. Tenants who paid to the landowner the A engaged engaged C C
Law. When you say excessive and
price of the land ____ CARP (garble) in T/B in T/B
unconscionable, shocking to the

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 9
Royalties
FWT on 20% 25% 20% 20 30%
interest % EXAMPLE Definition- A royalty income is a payment or portion of
income proceeds paid with the owner of the right or patent to use
it or in portion of the proceeds from the work of another
YEAR 1 YEAR 2
author or composer.
November Nov-Dec Jan-October
CASE: NDC v. CIR, GR L-53961, June 30, 1987 In general, a royalty income is 20% final tax except if
Advance rental Paid Nov- Jan royalty is on books, literary works and musical
of 3 months compositions in which case, the tax is 10% final tax.
RENTAL and LEASES
Question: Is the January taxable under Year 1? Or do I Royalty- this is the use of your Intellectual Property.
RENTAL INCOME have to wait until year 2 for it to be taxable?
- Also considered as passive income GR: 20% final tax = Royalty
- The amount paid for the use of property under an Answer: If the prepaid rent is received without any EX: 10% final tax = Royalty on Books, Literary Works &
agreement which is determined under this restriction as to its use, the entire 3 months should be Musical Compositions
regulation to be leased shall be considered as declared on the year it is received, meaning gross income
rental of the lessor. Such lessor may deduct in Year 1 Dividends
outright the expenses incurred during the taxable Rules on Dividends:
year. SECURITY DEPOSITS WITH RESTRICTIONS
- is a fixed sum, either in cash or in property Q: How can you say that your prepaid rent is with or 1) If received by a Domestic or Resident Corporation from
equivalent, to be paid at a definite period for the without restrictions? a Domestic Corp, such dividend is TAX EXEMPT.
use or enjoyment of a thing or right. All rentals ● that is called Inter-corporate dividends which is
derived from lease of real estate or personal A: If there are stipulations to that effect. Example: If Dividends of DC --> another DC|RC
property, of copyrights, trademarks, patents and the lessor fails to fulfill his/her promise, pwedeng ● Kailangan nanggaling sa Domestic Corporation
natural resources under lease (UST reviewer) maforfeit…… for it to be considered Tax Exempt.
2) Stock dividends, Dividends received from a
RR- 19-86- Regulation on Taxation of Leases Cooperative and Pre? Liquidated Dividends are tax
Security deposits exempt.
Rules for the lease/rent: Eto deposit lang. If the advance payment is a security
deposit, meaning it is only for the purposes of insuring na 3) Pag Cash Dividend & Property Dividend subject to final
Situation: one month deposit, one month advance after mong matapos yung term, wala kang nadamage. tax if received by the Individual or Non-Resident Corp
(prepaid rental) form a Domestic Corporation.
Question: On the part of the lessor, Is the one month If it is with restriction- it restricts the lessor as to its use,
advance and one month deposit, is it part of his/her gross then the amount should be excluded by the termination of 4) If dividend is received by a Resident Citizen… Non-
income? the contract. resident Citizen… tax is 10%.
Answer: If the advance payment is a prepaid rental
received without restriction as to its use, the entire So if the security deposit is refundable, maibabalik sayo, 5) If dividend is received by a Non-Resident Alien Not
amount is taxable on the year it is received whether the that is not a gross income of the lessor. Engaged in business in the Phil, final tax is at 20%.
lessor uses cash or accrual.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 10
6) If dividend is received by a Non-Resident Alien Not fixed period of time, whichever is longer, in annuity contract or any interest therein, only the
engaged in business in the Phil, final tax is 25%. consideration of capital paid by him. actual value of such consideration and the
- The portion representing return of premium is not amount of the premiums and other sums
7)If dividend is received by a Non-Resident Foreign Corp taxable while that portion that represents interest subsequently paid by the transferee are exempt
from Domestic Corp, final tax is 15%. is taxable. from taxation.
DC-DC EXEMPT
CORP-NRC NOTE: The portion of annuity net of premiums is taxable ❖ Interest payments thereon if such amounts are
being interest or earnings of the premium and not return held by the insurer under an agreement to pay
of capital. interest shall be taxable. If paid to a transferee
for a valuable consideration, the proceeds are
Q: X purchased a life annuity for ₱100,000 which will pay not exempt.
him ₱10,000 a year. The life expectancy of X is 12 years.
**Please memorize the TAX RATES.
How much is excluded from the gross income of X? NOTE: The life insurance proceeds must be paid
by reason of the death of the insured. Payments
CASE: CIR v. CA, GR 108576, Jan. 20, 1999
A: The ₱100,000 is excluded from the gross income of X for reasons other than death are subject to tax
since it represents a return of premiums which is not up to the excess of the premiums paid.
Exclusions:
income but a return of capital.
• Income Exempt Under Tax Treaty
2. El Oriente Fabrica v. Posadas, 56 Phil 147
(see previous discussion)
Tax the proceeds of life insurance policies paid
Exclusions: to
• Passive Income of Foreign Government
corporate beneficiaries = not taxable income
1. Proceeds from Life Insurance
Income Derived by Foreign Government. - Income derived
3. Return of Premium Paid
from investments in the Philippines in loans, stocks,
GR: Amounts received under a life insurance,
bonds or other domestic securities, or from interest on
endowment, or annuity contact, whether in a Conditions for the exclusion of the return of premium
deposits in banks in the Philippines by (i) foreign
single sum or in installments, paid to the paid from gross income
governments, (ii) financing institutions owned, controlled,
beneficiaries upon the death of the insured are 1. Amount received by insured;
or enjoying refinancing from foreign governments, and (iii)
excluded from the gross income of the 2. As a return of premium paid by him;
international or regional financial institutions established
beneficiary. 3. Under a life insurance, endowment or annuity
by foreign governments
contract;
XPNs: 4. Either :
Annuities & Insurance
❖ If such amounts, when added to amounts a. During the term;
**Already discussed na daw
already received before the taxable year under b. At the maturity of the term mentioned in
such contract, exceed the aggregate premiums the contract; or
FROM UST REVIEWER:
or considerations paid, the excess shall be c. Upon surrender of the contract.
included in the gross income.
Annuity
NOTE: The amount returned is not income but mere
- It refers to the periodic installment payments of
NOTE: However, in the case of a transfer for a return of capital.
income or pension by insurance companies
valuable consideration by assignment or
during the life of a person or for a guaranteed
otherwise, of a life insurance, endowment or Return of Premium v. Life Insurance Proceeds

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 11
The difference lies in cases where the insured in lets say 5K ang sales value, tapos na-acquire ko lang sya
a life insurance contract survives. In order that life ng 100.
insurance proceeds may be totally exempt from income
taxation, the insured must die. If he survives, there is only So ano yung tax ko?
a partial exemption, i.e., only the portion of the proceeds
representing return of premiums previously paid is Now, pag shares of stocks, first you have to determine
excluded, being a mere return of capital. whether or not ordinary course of business or not.

If ordinary course of business, meaning I am dealing with


Prizes & Winnings securities so subject yun ng tax kase yun yung ordinary
Case: CIR v. COA, GR 101976, Jan. 29, 1993 course ng business mo.
Q: What is the difference between the Prize and Winning?
A: Prize- reward from a contest or competition; with Pero pag hindi, tapos may shareholdings ka, you have to
effort; reflecting one’s superiority ask again if it is traded in the local stock exchange. If yes,
Winning- reward for an event that depends upon then you look at Sec 127 (where the tax is at 6/10 of 1%).
by chance or luck; lotto 6/10 of 1% is actually a business tax.
Prizes:
GR: Prizes are subject to final tax of 20%
EX: IF Prize is Php10,000 or less exempt.

Winnings:
Also subject to 20% final tax unless amounting to 10k or
less. 10k or less from PCSO/Lotto are exempt. So kung
nakadaog ka ug P10,001, subject to tax naka na 20%.

Gains derived from dealings in Property


Sale of shares of Stocks
Sec 127 of NIRC as amended by the Train Law:
“There shall be levied, assessed and collected
on every sale, barter, exchange or other disposition of
shares of stock listed and traded through the local stock
exchange other than the sale by a dealer in securities, a
tax at the rate of six-tenths of one percent (6⁄10 of 1%) of
the gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise
disposed which shall be paid by the seller or transferor.”

So pag sale ng shares of stock, let’s say may investment


ako kay Davao Doc. Nung binenta ko na yung shares ko,

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 12
October 10, 2018 excess thereof is imposed on sale, exchange or
Mabborang 1:45:01 - 1:55:08 disposition of shares in the domestic corporation or Q: Is it TRADED?
to the local stock exchange. A:Kung traded, 6/10 of 1%.
Under the TRAIN LAW: Rate: 15% of the NET GAIN
Local Stock Exchange (TRADED) = tax is 6/10 of Q: If its not traded? Does it have a net gain? Kasi
1% Example: pwede naman wala syang net gain.
Q: Binenta mo ng 5000 yung na acquire mo for A: If may net gain, 15% of that is your tax.
If not traded : Apply the Rule on Net Capital Gains 5000? Do you have a tax?
Prior to TRAIN Law it is ½ of 1 percent which is the A: Wala, kasi wala kang gain. Bago ka magkatax Very familiar dealings of property:
base is the net gain, if you have any gain dapat may gain ka. And that gain is subject to 15% SALE OF REAL PROPERTY
tax.
Revenue Regulations No. 9-2018: Implementing the Q: Is the selling of the real property in the course of
increase in stock transfer tax provided in Section 39 Tax Particular: Capital gains from sale of shares of the ordinary business of the taxpayer? If this
of Republic Act No. 10963 or the TRAIN Law stock not traded in the local stock exchange of ordinary business of the taxpayer?
domestic corporations A: If it is ordinary it is subject to the law on tax and
The Percentage Tax on the sale, barter or exchange not subject not capital gains tax.
of shares of stock listed and traded through the local NIRC: Sec. 27 (D) (2) Capital gains tax of 5% on the
stock exchange has been increased from one-half of first PHP100,000 and 10% in excess thereof is Q: How do you know that it is an ordinary asset?
one percent (1/2 of 1%) to six-tenths of one percent imposed on sale, exchange or disposition of shares A: Under the Tax Code, an ordinary asset is an
(6/10 of 1%). not traded in the local stock exchange. asset which qualify in any of the following:

There shall be levied, assessed and collected on TRAIN LAW: Capital gains tax on sale, exchange or a) Stock in trade of the taxpayer or other property of
every sale, barter, exchange, or other disposition of disposition of shares not traded in the local stock a kind which would properly be included in the
shares of stock listed and traded through the local exchange is increased to a flat rate of 15%. inventory of the taxpayer if on hand at the close of
stock exchange other than the sale by a dealer in
securities, a tax at the rate of six-tenths of 1 percent Before TRAIN Law: So gina ensure na ang net the taxable year 

[0.6 percent] of the gross selling price or gross value gains di mag-abot ng 100, 000, para di mag 10%.
in money of the shares of stock sold, bartered, Ginagawa ng tao, gina-buak-buak para di mulapas So in the orientation of real estate business, so part
exchanged or otherwise disposed which shall be ug 100,000.00 para 5% lang. sya of your inventory, so whatever kita of that, is
paid by the seller or transferor. NOW: Automatic 15% na sa NET GAIN, pag di sya part of your normal tax.
TRADED.
Under the Train Law:
b) Property held by the taxpayer primarily for sale to
So kung may benta ka sale of share of stock. customers in the Ordinary course of trade or
Capital gains from sale of shares of stock not traded Q: Is it an ordinary income in the ordinary course of
in the local stock exchange, a final tax of the rate of business? business 

15% shall be imposed on a net capital gain, in A: If hindi, so its CAPITAL.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 13
c) Property Used in the trade or business of a Again, the 6% will only apply if it is a capital asset, if A: Because you have to satisfy the following
character which is subject to the allowance for it is not used in business. conditions for it to be exempt from capital gains tax
depreciation provided in the NIRC 
 of 6%:
Anomaly of Capital Gains, it is a presumed gain.
Diba in the shares of stocks we only consider the 1.The entire proceeds from which is fully utilized in
Take note: Let’s say ako may factory, syempre yung net gain? Tama naman kasii hindi naman ito lahat,
factory ko nakatayo sa lupa. But the inventory of the acquiring or 
 constructing a new principal
income, yung net lang ang income.
factory sells cellphone. So capital asset ang lupa. residence within 18 calendar months from the date
Now in real estate, it is considered as presumed of sale or disposition;
Q: Is it primarily for sale to customers in the capital gains. SO ang 6% ang basis niyan is not only
Ordinary course of trade or business? the net gains but the selling price, the zonal value or This applies kung binenta mo yung dating bahay mo
the assessed value, whichever is higher. So it is not kasi lumipat ka, nag upgrade ka. Binenta mo bahay
A: No, kasi nga cellphone. BUT, it is used in considered your cost. mo sa NHA kasi nagpagawa ka ng bahay mo sa
business of a character which is subject to the Monteritz.
allowance for depreciation. Ginagamit ko sya sa Example: Bumili ako ng lupa at 5M, binenta ko sya
at 6M. Diba dpat ang kita ko 1M lang?
business kasi doon nkatayo ang property ko. That is Take note: It is only the proceeds of the sale of your
Diba dapat ang 6% doon lang sa 1M? Hindi. Ang
still considered as an ordinary asset not a capital principal residence shall be fully utilized.
6% ay doon sa selling price, assessed value or
asset. zonal value kasi ito ang tawag na presumed gains,
Example:
capital gains mo sya.
But if its used in your business, it considered as
ordinary asset. Therefore not subject to CAPITAL Binenta mo sa NHA: 500,000
Condition exempt paying in Capital gains tax,
GAINS TAX. this pertains to the sale of a family home or dwelling
Pinagawa mo sa Monteritz: 8M
house, including the land on which it is situated,
d) Real property used in trade or business of the
where the individual and members of his family Nag-abono ka pa, pero ang 500,000 is exempt from
taxpayer
reside. capital gains tax
Again pag ordinary asset, go for the normal tax.
So pag binenta nyo yung principal dwelling or family
2. Can be availed of once every 10 years; 

home that could be conditionally exempted from
Pag hindi ordinary asset, it is capital asset, the
income tax is the capital gains tax. So capital gains paying capital gains tax.
3.Notify the CIR within 30 days from the date of sale
tax is soon to be realized in a sale of a real property, or disposition through a prescribed return of his
not categorized as ordinary asset and the tax is at Q: Bakit conditionally?
6% or the highest among the selling price or zonal intention to avail the tax exemption; 

value, whichever is higher.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 14
4. If there is no full utilization, the portion of the For purposes of computing the distributive share of
gains 
 presumed to have been realized shall be the partners, the net income of the partnership shall (c) Collateral Pay, namely
be computed in the same manner as a corporation (1) Specialist Pay;
subject to 
 capital gains tax; (NIRC, Sec. 26). (2) Combat Pay;
(3) Flying Pay;
Example: GPP is not liable, only the partners. GPP is only (4) Air Mechanic’s Pay;
(5) Sea Duty Pay;
required to file a return for its income, except
Proceed: 500,000 (6) Hazardous Duty Pay;
income exempt under Sec. 32 (B) of the NIRC,
(7) Instructor’s Duty Pay.
setting forth the items of gross income and of (8) Parachutist’s Pay; and
Construction of new principal residence: 300,000
deductions allowed, and the names, Taxpayer (9) Hardship Pay; and
Identification Numbers (TIN), addresses and shares
The remaining 200,000 is subject to 6% Capital
of each of the partners (NIRC, Sec. 55). (d) Collateral Allowances, namely
gains tax
(1) Special Clothing Allowance;
Partners shall nonetheless be liable for income tax (2) Cold Winter’s Clothing Allowance and Cold
5.Sale or disposition of the old actual principal
in their separate and individual capacities. Weather Clothing Maintenance Allowance;

 residence; 
 (3) Winter Clothing Allowance;
EXCLUSIONS UNDER SPECIAL LAWS (4) Initial Enlistment and Reenlistment Allowance;
Statutory income tax exemptions (5) La
6. By a citizen or resident alien; 


RA 9040, An Act Exempting From Tax Certain


7. The historical cost or adjusted basis of his old Allowances And Benefits Granted To The Members
principal residence shall be carried over to the cost Of The Armed Forces Of The Philippines

 basis of his new principal residence; 
 SEC. 3. Exclusions from Gross Income. — The
following pay and allowances of AFP personnel
shall not be included in gross income and shall be
8.The 6% capital gains tax due shall be deposited
exempt from taxation under Title II of Republic Act

 with an authorized agent bank subject to release No. 8424, otherwise known as the “Tax Reform Act
upon certification by the RDO that the proceeds of of 1997”.
(a) Longevity pay,
the sale have been utilized (R.R. No. 14-00). 

(b) Mandatory allowances. namely
BUSINESS INCOME DERIVED FROM PRACTICE (1) Cost of Living Allowance;
OF PROFESSION (2) Personnel Economic Relief Allowance; and
(3) Hazardous Allowance;

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 15
ordinary or necessary is evidentiary. You have to ● For travel expenses, you must prove that it is in
X. DEDUCTIONS AND EXEMPTIONS prove for it to be deducted. the pursuit of trade, business or profession, and
● If there is income, ang general rule is taxable not merely personal one.
siya. You have to pinpoint the statutory (a) In General. - There shall be allowed as deduction from
provisions that make it exempted to tax. gross income all the ordinary and necessary expenses (iii) A reasonable allowance for rentals and/or other
● Kapag deductions naman, the presumption is paid or incurred during the taxable year in carrying on or payments which are required as a condition for the
hindi siya allowed. You have to pinpoint the which are directly attributable to, the development, continued use or possession, for purposes of the
statutory provisions wherein the law or the Tax management, operation and/or conduct of the trade, trade, business or profession, of property to which
Code allows the deductions to be deducted from business or exercise of a profession, including: the taxpayer has not taken or is not taking title or in
your gross income. So, that is the nature of which he has no equity other than that of a lessee,
deductions because it is in nature of tax (i) A reasonable allowance for salaries, wages, and user or possessor;
exemption which must be construed in _____ other forms of compensation for personal services ● If you lease your premises used in business, the
(1:56-2:01 di maklaro). actually rendered, including the grossed-up monetary rental expense is an allowable deduction.
value of fringe benefit furnished or granted by the
We have Section 34 which was amended by TRAIN LAW employer to the employee: Provided, That the final tax (iv) A reasonable allowance for entertainment,
which provides for Deductions from Gross Income imposed under Section 33 hereof has been paid; amusement and recreation expenses during the
● So you are talking here of an employer na may taxable year, that are directly connected to the
Sec. 34. Deductions from Gross Income.— Except for employees. The compensation paid to the development, management and operation of the trade,
taxpayers earning compensation income arising from employees are considered deductible… , business or profession of the taxpayer, or that are
personal services rendered under an employer-employee including the grossed-up monetary value of directly related to or in furtherance of the conduct of
relationship where no deductions shall be allowed under fringe benefit furnished or granted by the his or its trade, business or exercise of a profession
this Section, in computing taxable income subject to employer to the employee. not to exceed such ceilings as the Secretary of
income tax under Sections 24(A); 25(A); 26; 27(A), (B), ● We have discussed about fringe benefits, it must Finance may, by rules and regulations prescribe,
and (C); and 28(A)(1), there shall be allowed the following have to be ____ 4:39 but this fringe benefit is upon recommendation of the Commissioner, taking
deductions from gross income: applicable to both. BUT the fringe benefits tax into account the needs as well as the special
● Please take note that if you are exclusively an is only applicable to the supervisor and circumstances, nature and character of the industry,
employee or any compensation income earner, managerial positions. Kasi pag fringe benefits trade, business, or profession of the taxpayer:
there are no more deductions allowed. Before binigay sa rank-and-file, it is part of their Provided, That any expense incurred for
there are personal deductions, but because of compensation income. So part of their entertainment, amusement or recreation that is
TRAIN LAW, there are no more deductions. compensation income, which is also deductible contrary to law, morals public policy or public order
● Section 34 provides for the Deductions from on the part of the employer. Now on fringe shall in no case be allowed as a deduction.
Gross Income. benefits which is subject to fringe benefits tax, ● If your business is the selling of goods, your limit
“(A) Expenses.— the entire gross-up monetary is also a deduction or your ceiling is, otherwise stated, if you are
“(1) Ordinary and Necessary Trade, Business or on the part of the employer. But this is subject to engaged in service let’s say professional ka,
Professional Expenses.— fringe benefits tax. “Please take note of that” – what is your ceiling? Kasi ang nakalagay sa
● This number 1 is actually a catch-all. So, kung Sir ☹ provision diba, subject not to exceed such
wala sa 3, 4, and so on. Do, you have to prove ceilings as the Secretary of Finance. According
that it is Ordinary and Necessary Trade, (ii) A reasonable allowance for travel expenses, here to the Revenue Regulation: the ceiling is ½% of
Business or Professional Expenses – ito yung and abroad, while away from home in the pursuit of your net sales kapag you are selling goods; 1%
masyado may issue because proving that it is trade, business or profession;

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 16
of your gross receipts if you are selling your operation and/or conduct of the trade, business 2) Expenses Allowable to Private Educational
services. or profession of the taxpayer. Institutions. - In addition to the expenses allowable as
● D-M-O-C (Development, Management, deductions under this Chapter, a private educational
Question: Why is your ceiling higher if you are selling your Operation and/or Conduct, of the trade, business institution, referred to under Section 27 (B) of this
services? (entertainment, amusement and recreation or profession) Code, may at its option elect either: (a) to deduct
expenses [E-A-R]) expenditures otherwise considered as capital outlays
Please take note letter C.(below) of depreciable assets incurred during the taxable year
Answer: Kasi pag service ka, mas marami kang for the expansion of school facilities or (b) to deduct
entertainment, amusement and recreation expenses (c) Bribes, Kickbacks and Other Similar Payments. - allowance for depreciation thereof under Subsection
because may client ka, may papakainin ka, so the ceiling No deduction from gross income shall be allowed (F) hereof.
is higher. Kung goods naman binebenta mo, tangible under Subsection (A) hereof for any payment made, ● You have here a distinction on what is
goods, then hindi naman ganun kalaki dapat yung directly or indirectly, to an official or employee of the Capitalizable and what is deducted as expense.
entertainment ng (limitation?) expense. That’s why the national government, or to an official or employee of
limitation only for E-A-R is ½% of your net sales AND 1% any local government unit, or to an official or What is Capitalizable Expenditure? It is an expense for
of your gross receipts if you are selling your services. employee of a GOCC, or to an official or employee or which the benefit is estimated to be more than the taxable
representative of a foreign government, or to a private year. Let’s say bumili ka ng chair, hindi mo naman siguro
Take Note! This is what we call as ORDINARY or corporation, general professional partnership, or a ini-expect na magla-last lang siya for a year or more than
REASONABLE ALLOWANCES xxx nag rap na si sir xxx similar entity, if the payment constitutes a bribe or a year, that is why ika-capitalize mo siya, meaning irerefer
Is it an exclusive list? No. For as long as you can prove to kickback. mo siya as asset. Yung mga expenses mo na feeling mo
the BIR that it is ordinary or necessary in your trade, ● Please take note in our gross income before may wala naming future value, it doesn’t increase your
business or profession, then it can be allowable. nakalagay, any income received whatsoever is productivity, it doesn’t increase the life of your business, it
taxable. All income even if it is illegally received, doesn’t give you a benefit on the taxable year, that is
(b) Substantiation Requirements. - No deduction from it is taxable. BUT if it is illegally paid, it is not expense as incurred. You have the concept of
gross income shall be allowed under Subsection (A) deductible. So what’s your provision on that? We Capitalizable Expense and the expense which is Expense
hereof unless the taxpayer shall substantiate with have letter C which provides “Bribes, Kickbacks debt incurred. So we have that Capitalizable Expenditure
sufficient evidence, such as official receipts or other and Other Similar Payments are not allowed as and Expenses.
adequate records: a deduction”.
(i) the amount of the expense being deducted, ● The provision for your illegally received to be Case: Zamora vs Collector
and taxed is under Sec. 32 of the Tax Code.
(ii) the direct connection or relation of the
G.R. No. L-15290, May 31, 1963
expense being deducted to the development, Under Section 32 of the Tax Code, gross income means
MARIANO ZAMORA vs. CIR and CTA
management, operation and/or conduct of the income derived from whatever source, including
trade, business or profession of the taxpayer. compensation for services; the conduct of trade or
FACTS: Mariano Zamora, owner of the Bay View Hotel
business or the exercise of a profession; dealings in
and Farmacia Zamora, filed his income tax returns. The
● You have to prove in your evidence that the property; interests; rents; royalties; dividends; annuities;
CIR found that he failed to file his return of the capital
amount claimed as deductions is similar to that prizes and winnings; pensions; and a partner’s distributive
gains derived from the sale of certain real properties
presented in the evidence AND that direct share in the net income of a general professional
and claimed deductions which were not allowable. The
connection or relation of the expense being partnership.
collector required him to pay deficiency income tax. On
deducted to the development, management,

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 17
in the trade and business of the taxpayer and
appeal by Zamora, the CTA reduced the amount of ordinary and necessary expenses; part thereof
that it is reasonable, then it can be allowable as
deficiency income tax. constituted her personal expenses. There having been
deduction.
no means by which to ascertain which expense was
Zamora appealed, alleging that the CTA erred in incurred by her in connection with the business of
Case: Esso Standard vs CIR
dissallowing P10,478.50, as promotion expenses Mariano Zamora and which was incurred for her
incurred by his wife for the promotion of the Bay View personal benefit, the Collector and the CTA in their
Hotel and Farmacia Zamora (which is ½ of P20,957.00, decisions, considered 50% of the said amount of ESSO STANDARD EASTERN, INC., (formerly,
supposed business expenses). P20,957.00 as business expenses and the other 50%, Standard-Vacuum Oil Company), petitioner,
as her personal expenses. We hold that said vs. THE COMMISSIONER OF INTERNAL REVENUE,
Zamora alleged that the CTA erred in disallowing allocation is very fair to Mariano Zamora, there respondent.
P10,478.50 as promotion expenses incurred by his wife having been no receipt whatsoever, submitted to G.R. Nos. L-28508-9 July 7, 1989
for the promotion of the Bay View Hotel and Farmacia explain the alleged business expenses, or proof of the
Zamora. He contends that the whole amount of connection which said expenses had to the business or Deductions; Expenses, elements of.— We come, then, to the
P20,957.00 as promotion expenses, should be allowed the reasonableness of the said amount of P20,957.00. statutory test of deductibility where it is axiomatic that to be
and not merely one-half of it, on the ground that, while deductible as a business expense, three conditions are
imposed, namely:
not all the itemized expenses are supported by In the case of Visayan Cebu Terminal Co., Inc. v. CIR.,
(1) the expense must be ordinary and necessary,
receipts, the absence of some supporting receipts has it was declared that representation expenses fall
(2) it must be paid or incurred within the taxable year, and
been sufficiently and satisfactorily established. under the category of business expenses which are (3) it must be paid or incurred in carrying on a trade or
allowable deductions from gross income, if they business.
ISSUE: Whether or not CTA erred in allowing only one meet the conditions prescribed by law particularly In addition, not only must the taxpayer meet the business test,
half of the promotion expenses? section 30 (a) [1], of the Tax Code: he must substantially prove by evidence or records the
- that to be deductible, said business deductions claimed under the law, otherwise, the same will be
HELD: NO. Section 30, of the Tax Code, provides that expenses must be ordinary and necessary disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its
in computing net income, there shall be allowed as expenses paid or incurred in carrying on
deduction.
deductions all the ordinary and necessary expenses any trade or business;
paid or incurred during the taxable year, in carrying on - that those expenses must also meet the Rule that claims for deductions are a matter of
any trade or business. Since promotion expenses further test of reasonableness in amount. legislative grace; Burden of justifying a deduction lies on the
constitute one of the deductions in conducting a - They should also be covered by supporting taxpayer.—Since the margin fees in question were incurred for
business, same must satisfy these requirements. Claim papers; in the absence thereof the amount the remittance of funds to petitioner’s Head Office in New
for the deduction of promotion expenses or properly deductible as representation York, which is a separate and distinct income taxpayer from
entertainment expenses must also be substantiated or expenses should be determined from all the branch in the Philippines, for its disposal abroad, it can
never be said therefore that the margin fees were appropriate
supported by record showing in detail the amount and available data
and helpful in the development of petitioner’s business in the
nature of the expenses incurred. Philippines exclusively or were incurred for purposes proper to
● For expense to be allowable as deduction, it the conduct of the affairs of petitioner’s branch in the
Considering, as heretofore stated, that the application Philippines exclusively or for the purpose of realizing a profit or
must be necessary or ordinary expense in the
of Mrs. Zamora for dollar allocation shows that she of minimizing a loss in the Philippines exclusively. If at all, the
business. In this case, the business were hotel
went abroad on a combined medical and business trip, margin fees were incurred for purposes proper to the conduct
and pharmacy. Of course, kung meron kang of the corporate affairs of Standard Vacuum Oil Company in
not all of her expenses came under the category of
hotel, you need to promote (promotion New York, but certainly not in the Philippines.
expenses). As long as it is necessary or ordinary

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 18
should have been imposed not on the total deficiency of traveling expenses while away from home in the pursuit
FACTS: In CTA Case No. 1251, petitioner ESSO P367,944.00 but only on the amount of P146,961.00, of a trade or business; and rentals or other payments
deducted from its gross income for 1959, as part of its the difference between the total deficiency and its tax required to be made as a condition to the continued use
ordinary and necessary business expenses, the credit of P221,033.00. or possession, for the purpose of the trade or business,
amount it had spent for drilling and exploration of its of property to which the taxpayer has not taken or is not
petroleum concessions. This claim was disallowed by CIR: Denied the claim and charged the 18% interest in taking title or in which he has no equity.
the respondent Commissioner of Internal Revenue on the whole amount of deficiency. Also the denied the
the ground that the expenses should be capitalized and claims of ESSO for refund of the overpayment of its (2) Expenses allowable to non-resident alien individuals
might be written off as a loss only when a "dry hole" income taxes, holding that the margin fees paid to the and foreign corporations. — In the case of a non-
should result. ESSO then filed an amended return Central Bank could not be considered taxes or allowed resident alien individual or a foreign corporation, the
where it asked for the refund of P323,279.00 by reason as deductible business expenses. expenses deductible are the necessary expenses paid
of its abandonment as dry holes of several of its oil or incurred in carrying on any business or trade
wells. Also claimed as ordinary and necessary CTA: Denied the claims for the years 1959 and 1960 conducted within the Philippines exclusively.
expenses in the same return was the amount of but sustained its claim for P39,787.94 as excess
P340,822.04, representing margin fees it had paid to interest. The principle is recognized that when a taxpayer claims
the Central Bank on its profit remittances to its New a deduction, he must point to some specific provision of
York head office. ISSUE: Whether or not the margin fees in question be the statute in which that deduction is authorized and
considered necessary and ordinary business expenses must be able to prove that he is entitled to the
On August 5, 1964, the CIR granted a tax credit of and therefore still deductible from its gross income. deduction which the law allows. As previously adverted
P221,033.00 only, disallowing the claimed deduction for to, the law allowing expenses as deduction from gross
the margin fees paid. HELD: NO, it is not considered necessary and ordinary income for purposes of the income tax is Section 30(a)
business expenses and therefore will not be considered (1) of the National Internal Revenue which allows a
In CTA Case No. 1558, the CR assessed ESSO a as deductions. deduction of 'all the ordinary and necessary expenses
deficiency income tax for the year 1960, in the amount paid or incurred during the taxable year in carrying on
of P367,994.00, plus 18% interest thereon of A margin fee is not a tax but an exaction designed to any trade or business.' An item of expenditure, in order
P66,238.92 for the period from April 18,1961 to April curb the excessive demands upon our international to be deductible under this section of the statute, must
18, 1964, for a total of P434,232.92. The deficiency reserve. The Supreme Court conclude then that the fall squarely within its language.
arose from the disallowance of the margin fees of margin fee was imposed by the State in the exercise of
Pl,226,647.72 paid by ESSO to the Central Bank on its its police power and not the power of taxation. In the present case, since the margin fees in question
profit remittances to its New York head office. SEC. 30. Deductions from gross income in computing were incurred for the remittance of funds to petitioner's
net income there shall be allowed as deductions Head Office in New York, which is a separate and
ESSO settled this deficiency assessment on August 10, (a) Expenses: distinct income taxpayer from the branch in the
1964, by applying the tax credit of P221,033.00 Philippines, for its disposal abroad, it can never be said
representing its overpayment on its income tax for 1959 (1) In general. — All the ordinary and necessary therefore that the margin fees were appropriate and
and paying under protest the additional amount of expenses paid or incurred during the taxable year in helpful in the development of petitioner's business in
P213,201.92. On August 13, 1964, it claimed the refund carrying on any trade or business, including a the Philippines exclusively or were incurred for
of P39,787.94 as overpayment on the interest on its reasonable allowance for salaries or other purposes proper to the conduct of the affairs of
deficiency income tax. It argued that the 18% interest compensation for personal services actually rendered; petitioner's branch in the Philippines exclusively or for

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 19
A: Mga tao. Kelangan mo ng tao, ng pambayad sa kanila. the type of business in which the taxpayer is engaged.
the purpose of realizing a profit or of minimizing a loss
The intention of the taxpayer often may be the controlling
in the Philippines exclusively. If at all, the margin fees
Now, it is ordinary if it is an normal payment in your fact in making the determination. Assuming that the
were incurred for purposes proper to the conduct of the
business. It doesn’t mean na kailangang habitual, or expenditure is ordinary and necessary in the operation of
corporate affairs of Standard Vacuum Oil Company in
doesnt mean na kailangan everyday binabayad, or the taxpayer's business, the answer to the question as to
New York, but certainly not in the Philippines.
everyday may expense, so long as it is NORMAL. Normal, whether the expenditure is an allowable deduction as a
let’s say grocery store. What are normal expenses in business expense must be determined from the nature of
It is clear that ESSO, having assumed an expense
grocery store? the expenditure itself, which in turn depends on the extent
properly attributable to its head office, cannot now claim
and permanency of the work accomplished by the
this as an ordinary and necessary expense paid or
Normal in relation to the business and other expenditure.
incurred in carrying on its own trade or
circumstances? Ano ba ang normal sa grocery?
business.WHEREFORE, the decision of the Court of
So please take note, there is no hard and fast
Tax Appeals denying the petitioner's claims for refund
Q: Pag ordinary ba, kailangan necessary? If an expense rule. It depends upon the nature of the business, and it
of P102,246.00 for 1959 and P434,234.92 for 1960, is
is ordinary, does it have to be necessary? Otherwise, if could depend on the intention of the taxpayers. In actual
AFFIRMED, with costs against the petitioner.
the expense is necessary, does it have to be an ordinary practice, this is being stretched. Kapag may dini-disallow
expense? na expense, ito ang ginagawa - you stretch the definition -
Case: Esso Standard v. CIR - Cont’d A: No. May ordinary na hindi necessary, may necessary sabihin mong ordinary and necessary naman ito ah,
On Deck: Chester Pelaez na hindi ordinary. pakialam nila? For as long as the connection isnt that far
too remote. So you can actually argue it that it is an
Q: San galing yung marginal fees? Paano sila nagkaroon Going back to the example, Sa Grocery? [The class ordinary and necessary expense, but in this particular
ng marginal fees? murmurs] case, the margin fees are not ordinary and necessary,
A: Nag remit sila sa head office, may marginal fees. Ang A: Decorations for christmas season. because the margin fees only come after the income is
question, deductible ba ito. Is it deductible? already obtained - pag mag remit na sila sa kanilang head
Hmm, decoration? Mag decorate ka. Pwede na rin. office, saka pa nag kaka margin fees. So in other words,
Q: Which requisite is lacking? Necessary but not ordinary? [The class murmurs, no pwede ba silang maka generate ng income without these
A: It is not an ordinary expense. definite answer from the reciter or the class] margin fees? Pwede, diba? Kasi hindi naman siya
necessary. That is why it is not allowable deductions.
Q: What do we mean when we say ordinary? So now, is the concept of an ordinary expense a cookie-
A: Is it ordinary if it is appropriate and helpful to the cutter na fit and fixed siya? Can you define it now? Is it a Case: CM Hoskins v. CIR
taxpayers? And it is necessary, kapag? cookie-cutter na pag-ganito, ganyan, necessary? Boxed, On Deck: Kae Baucan
hulma nga concept. Na kapag kani, sure jud ko na
So how do you know if it is ordinary and necessary? The ordinary ni, pag kini, necessary, dili ordinary. Kumbaga, Issue: Whether the payment made by the petitioner tax
court, here, said that there is no hard and fast rule. cookie-cutter. Is it a fixed rule? payer to its controlling stock holder of its 50% supervision
A: No sir, it depends upon the circumstances. fees is deductible as ordinary and necessary expense
It is considered necessary if it is appropriate and helpful to
develop the business. So, it depends upon the nature and the intention Q: Was it deductible as ordinary and necessary expense?
of the taxpayer. So in this particular case, the court said: Ano ba ang ginagawa ni CM Hoskins?
Q: Let’s say you have a grocery. So ano ba ang mga A: Here, he normally and conceives and plans the
necessary expense mo diyan which is appropriate and The right to a deduction depends in each case projects. He also laid down rules for supervision.
helpful to develop your business? on the particular facts and the relation of the payment to

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 20
So nag susupervise siya. Is it not an ordinary and X X
necessary expense? Q: How about the representation? In-allow ba ng court?
A: Yes sir, as payment for his services. A: Not all. Because? In year 1, year 2, so pwede mo siyang i-expense provided
you pass all the test.
So ano ngayon ang problema? So in this particular case, you failed to substantiate. We
A: Here, the SC ruled that the payment was not already know that for an expense to be deductible, it must But if your expense or payment which has an economic
deductible as , and should be distribution of the profits of be ordinary and necessary, it must pass the test of benefit which extends beyond the taxable year, you do not
the taxpayer, sir. The payment by petitioner to Hoskins reasonableness. Third, dapat substantiated siya with consider the payment as an expense in Year 1, but you
received as managing agent of the subdivision projects documentary evidence such as official receipts and capitalize it as an asset and you expense it through your
was INORDINATELY LARGE and cannot be ordinarily adequate records bearing the amount of the direct depreciation or depletion, depending on the useful life of
given the treatment of ordinary and necessary expenses connection of the expense to the business. the asset.
as allowed in
In this particular case, take note of the farming expense. How do you determine if you have to capitalize?
In other words, for ordinary and necessary expense to be Sabi ng respondent, farming expense kasi gini-graze niya The Court said in that particular case is that when the
deductible, it must be? ang farm. Tinapas - pa clear, para maging productive na benefit is within the taxable year only. Example, in Year 1,
siya. Year 2. You can expense everything provided you pass all
Q: It failed to pass the test of what? the test. But if the expense or the payment has an
A: It failed to pass the test of reasonableness. Sabi ng court: economic benefit which extends beyond the taxable year,
you cannot consider the entire amount as expense in year
So in other words, it is not enough that the An item of expenditure, in order to be deductible 1, but you capitalize it as an asset and you expense it
expense is necessary or ordinary - it must also be under ordinary and necessary business expenses, must through your depreciation or depletion depending on the
REASONABLE. In this particular case, sobrang laki. More fall squarely within the language of the statutory provision. useful life of the asset.
than 50%. Sabi ng court, no, for an expense to be It is intended primarily, although not always necessarily, to
deductible, you must pass the test of whether it is cover expenditures of a recurring nature where the benefit
necessary or ordinary, and must pass the test of derived from the payment is realized and exhausted within
reasonableness. the taxable year. Accordingly, if the result of the Example:
expenditure is the acquisition of an asset which has an I constructed a house in Year 1 and expensed a total of
Hindi pwedeng sobrang laki ng cini-claim mong deduction economically useful life beyond the taxable year, no P8M. I cannot expense the whole amount in Year 1
that it is no longer reasonable, given the nature of the deduction of such payment may be obtained under the because the house will last for 20 years. You cannot
business. Thank you. provisions of the statute. In such cases, to the extent that expense the amount outright because there is an
a deduction is allowable, it must be obtained under the economic benefit more than Year 1.
Case: Santiago v. CIR provisions of the statute which permit deductions for
On Deck: Inok amortization, depreciation, depletion or loss. What will you do? You capitalize. Consider the house as
an asset with a life of 20 years.
Q: So ano itong farming expense? What is the nature of You have expense, may capital expenditure. How do you
this? determine if you have to capitalize? Now sabi ng court, in How will you deduct your expense in gross income? You
A: Capital expenditure. Meaning? that particular case, if the benefit is within the taxable year deduct it through depreciation.
lang,
The cost of the farm are capital investment that is not an USE THE STRAIGHT LINE METHOD
allowable deduction. Year 1 Year 2 8M / 20 years = P400,000

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 21
or liability. withhold during the taxable year (2018) because payment
So, every year, you deduct a depreciation expense of will be made at the time of payment (2019).
P400,000. And by the end of Year 20, you have already So you recognize the expense when there is reasonable
recovered the total amount of 8M expenses used to certainty na babayaran mo yan and all the rights, all the The Supreme Court said, when it already passed the all
construct the house. events which lead to that liability or income you have events test, it should be expensed and the corresponding
already acquired or benefited from. withholding tax should be withheld, so the court
In accounting, the matching principle, pertains to the disallowed their bonus expense.
benefits received must match the expense. PRINCIPLE OF ALL EVENTS TEST
- If I will benefit from the house for 20 years, (Note: This is frequently asked in the Bar :) ) So how will you know how much you will withhold when
kailangan yung benefit may kabanggang equal For a taxpayer using the accrual method, the you do not know how much you will pay? So this has
amount of expense during that time. determinative question is, when do the facts present become the issue.
themselves in such a manner that the taxpayer must
For example you were given food. The benefit you receive recognize income or expense? The accrual of income and Extra Topic:
from that particular asset will only last for the taxable year. expense is permitted when the all-events test has been Are condominium association dues vatable? No. It is a
It will not have any more economic benefit up to the next met. This test requires: reimbursable expense so it should not be vatable. It is
taxable year. It has no economic benefit for more than a (1) fixing of a right to income or liability to pay; and part of the operations of the condominium. (This was
year. (2) the availability of the reasonable accurate asked in the Bar)
determination of such income or liability.
HOW CAN AN EXPENSE BE DEDUCTIBLE?
BIR Ruling 12-2004
a. It must be ordinary and necessary; In the particular example (Rents), you have already used
The accrual of income or expenses is permitted when
b. It must be reasonable; the place, the facility; So all the events which fixes your
the all events test has been met.
c. It must be substantiated with evidence; and liability to pay have already occured.
d. It must be within the taxable year. Note: With regards to BONUSES.
The all events test requires the fixing of the right ot
If the expense is required to be withheld as tax and you
income or the liability to pay and availability of the
Example: The usual taxable year is Jan 1 - Dec 31. did not withhold it as tax, it cannot be deductible.
accurate determination of such income or liability.
You have rent expense for the year 2018 amounting to
P100,000. But you paid for it on February 2019. Example: In Compensation, if the employer did not
withhold the amount to you, he cannot declare that in his
Question: When is the rent expense deductible? In the salaries and wages expense what he paid to you.
CIR vs. Isabela Cultural Corporation*
year of expense or in the year of payment? When should Why? Because it must properly match otherwise it is
GR No. 172231 February 2, 2007
the expense be recognized? disallowed.
In this case, since the corporation has retainer or
Answer: 2018 because it is the year where economic For Bonuses, at the end of the year (ex. 2018) they have
professional fees, they pay the said amounts in
benefits have been received or used. already accrued so they will know, but in the case of
January, February of the next year (2019) but the
Reason: Because at that year, it has already passed the withholding, you need to withhold if there is payment.
expense pertains to the previous year (2018). They
“All events Test” Sometimes these bonuses are paid in January. Because
contended that they have no means of knowing how
these bonuses are not yet fixed because what if by
much will be paid because the billing statement come
What is this? January there there are leave credits or absences that
after the year-end, hence, they claim that they do not
It requires the fixing of the right to income or liability to pay needs to be computed. So there is a company that did not
and availability of accurate determination of such income

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 22
know how much is the expense for the legal fees until the burden of proof of establishing the accrual of an records pertaining to his gross sales or gross receipts,
the billing statement is received. item of income or deduction. the said corporation shall keep such records pertaining
to his gross income as defined in Section 32 of this
IN THIS CASE, THE LEGAL EXPENSES WERE Code during the taxable year, as may be required by
The CIR contended that since the services rendered to
the rules and regulations promulgated by the Secretary
the corporation pertain to this particular year (2018), so DISALLOWED BECAUSE IT DOESN’T PERTAIN TO of Finance, upon recommendation of the
in the financial statement of the corporation, there is no THE RIGHT TAXABLE PERIOD. Commissioner.
expense for Legal Fees because the billing was
received after the year end. “Notwithstanding the provisions of the preceding
KINDS OF DEDUCTIONS Subsections, x x x.”
Ruling: The SC held that the corporation could have
1. Itemized (Sec. 34, NIRC)
known the yearly amount it pays for legal fees. Hence,
2. Optional Standard Deduction (Sec. 34 (L), NIRC)
it has at its disposal information that would have led What is an OPTIONAL STANDARD DEDUCTION?
them to compute how much would be the fees for the In lieu of having an itemized deduction, you can opt to
year. OPTIONAL STANDARD DEDUCTION have the OSD. It’s a standard deduction of 40% of the
SEC. 34 (L), NIRC Gross Receipts or Gross Sales.
The SC reiterated the “ALL EVENTS TEST.”
“(L) Optional Standard Deduction (OSD).— In lieu of
the deductions allowed under the preceding Remember, in order to claim for a deduction, you have to
The all-events test requires the right to income or Subsections, an individual subject to tax under Section prove that such expense should be ordinary, necessary
liability be fixed, and the amount of such income or 24, other than a nonresident alien, may elect a and reasonable and it must be substantiated by evidence.
liability be determined with reasonable accuracy. standard deduction in an amount not exceeding forty
However, the test does not demand that the amount of percent (40%) of his gross sales or gross receipts, as If you do not have any of those requirements, you can opt
income or liability be known absolutely, only that a the case may be. In the case of a corporation subject to for Optional Standard Deduction. There is a standard
taxpayer has at his disposal the information necessary tax under Sections 27(A) and 28(A)(l), it may elect a
standard deduction in an amount not exceeding forty deduction based on your Gross Sales and Gross Receipts
to compute the amount with reasonable accuracy. The and you need not substantiate them because it is a
percent (40%) of its gross income as defined in Section
all-events test is satisfied where computation remains 32 of this Code. Unless the taxpayer signifies in his standard deduction.
uncertain, if its basis is unchangeable; the test is return his intention to elect the optional standard
satisfied where a computation may be unknown, but is deduction, he shall be considered as having availed But take note, if you are a General Professional
not as much as unknowable, within the taxable year. himself of the deductions allowed in the preceding Partnership (GPP), you can only claim once.
The amount of liability does not have to be determined Subsections. Such election when made in the return
exactly; it must be determined with "reasonable shall be irrevocable for the taxable year for which the
return is made: Provided, That an individual who is Why? When you are a GPP, you are computing for the
accuracy." Accordingly, the term "reasonable Net Profit to be distributed to the Partners. The OSD can
entitled to and claimed for the optional standard
accuracy" implies something less than an exact or deduction shall not be required to submit with his tax only be claimed once, either the GPP or the individual
completely accurate amount. return such financial statements otherwise required partners.
under this Code: Provided, further, That a general
The propriety of an accrual must be judged by the facts professional partnership and the partners comprising Example:
that a taxpayer knew, or could reasonably be expected such partnership may avail of the optional standard
deduction only once, either by the general professional GPP
to have known, at the closing of its books for the
partnership or the partners comprising the partnership:
taxable year. Accrual method of accounting presents Provided, finally, That except when the Commissioner Gross Sales/Receipts 100
largely a question of fact; such that the taxpayer bears otherwise permits, the said individual shall keep such

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 23
Is separation pay taxable? NO. It is not taxable because it
Less: OSD 40% CDL HOTELS (PHILS.) CORPORATION, -versus
is on the ground which is beyond the control of employee.
COMMISSIONER OF INTERNAL REVENUE (CTA
Profit for Distribution 60 Before, we talked about separation pay from the point of
CASE NO. 7167) June 27, 2012
view of the separated employees. Now, we are asking
Partner A Partner B from the point of view of the employer. We said that the
The burden of proof that the expenses incurred are
separation pay is not taxable on the part of the employee.
ordinary and necessary is on the taxpayer and does not
Profit 30 30 The question now is whether it is deductible expense on
rest upon the Government. To avail of the claimed
the part of the employer.
Less: OSD 40% 40% deduction, it is incumbent upon the taxpayer to adduce
substantial evidence to establish a reasonably proximate
The Court said that the implementation of the Revised
Taxable Income 18 18 relation petition between the expenses to the ordinary
Organizational Structure which removed unnecessary
conduct of the business of the taxpayer. A logical link or
positions in the workforce necessarily resulted in the
This is not allowed. You can only claim once - either the nexus between the expense and the taxpayer's business
company’s proposed payment in the settlement sum of
GPP or the individual partners. must be established by the taxpayer.
the redundancy separation pay. To reiterate, the
implementation of the Revised Organizational Structure is
Why is the NON-RESIDENT ALIEN not allowed to claim essential to . . . the operating cost and thereby improve
an OSD? BIR Ruling DA 298-05 July 1, 2005 the profitability of the company. Thus, the proposed
payments of the settlement sum of the redundancy
How will I know if I should elect OSD or itemized The BIR ruled: separation pay constitute an ORDINARY and
deduction? NECESSARY expense, provided that the proposed
Thus, in consideration of the fact that the use of storage settlement sum of the redundancy separation pay are fully
It depends upon the nature of your business. Kung wala and facilities is directly connected and necessary in substantiated by supporting documents. These payments
ka namang substantiation ng mga expense mo, OSD carrying out all its business, the payment of storage fee are deductible against the company’s gross income.
(Optional Standard Deductions) ka na lang, hindi ka pa i by SPDI for the use of their office is an ordinary
audit. Pero kung substantiated naman yung expense mo expense the same way that a normal . . . . . Therefore, the separation pay are considered ordinary
and you foresee that your expense will be more than 40%, This pertains to seller of storage, cold goods, tino-toll and necessary expense which is deductible. Deductible
we will go with itemized deduction. nila yung pag store doon sa storage facility. Sabi ng sya on the part of the employer and it is not taxable on the
Court, the payment for the fees doon sa storage is an part of the employee. Kasi wala naming choice ang
You also have special deductions. These are deductions ordinary and necessary expense. employee, it is outside of their control.
allowed by special laws like the Senior Citizen Act. Kung
mag employ ka ng senior citizen, you have and additional Separation benefits are deductible from the gross income
This pertains to the payments of a company to the
15%. because they are ordinary and necessary expenses.
settlement of redundancy separation pay. What happened
here is nagkaroon ng redundancy. Nagkaroon ng
Let’s go to allowable deductions. We already discussed However, take note that if the separation pay is paid out of
restructuring labor. Maraming na lay-off kasi redundant
ordinary and necessary business expense. the retirement plan, it CANNOT be deducted as business
yung position. The question now is whether the payment
expense because they are already deducted from the
of the separation pay is an ordinary and necessary
gross income when the company made its contribution to
expense.
the plan.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 24
When you go to pension cost, bakit hindi na sya However, in actual practice pwede naman ibang evidence
responsibility upon the purchaser to keep and preserve
deductible? Kasi let’s say yung company gumawa ng kasi nakalagay explicitly sa provision na “or adequate
the original copy of the invoice or receipt for a period of
pension plan, so nag babayad sya yearly. You go to records”.
three years from the close of the taxable year in which
pension cost, meron syang deductions for pension cost.
the invoice or receipt was issued. The rationale behind
Let’s say on year 4, may sineparate na employee. If the
the latter requirement is the duty of the taxpayer to G.R. No. 175651, September 14, 2016
fund to the separation pay came from the pension plan,
keep adequate records of each and every transaction PILMICO-MAURI FOODS CORP. v. COMMISSIONER
this will no longer be deductible as separation pay kas
entered into in the conduct of its business. So that OF INTERNAL REVENUE
inga may deduction ka na on your pension plan.
when their books of accounts are subjected to a tax
Compensated na sya on your pension plan. So it is no
audit examination, all entries therein could be shown as This case reiterated the substantiation requirement.
longer deductible.
adequately supported and proven as legitimate And in proving claimed deductions from gross income,
business transactions. Hence, petitioner’s claim that the the Supreme Court held that invoices and official
As to substantiation requirements, no deduction from
NIRC of 1977 did not require substantiation receipts are the best evidence to substantiate
gross income shall be allowed unless the taxpayer shall
requirements is erroneous." deductible business expenses.
substantiate with sufficient evidence the amount of
expense being deducted, and the direct connection or
What if nawala ang official receipts? What if wala kang
relation of the expense being deducted to the Take note of this, kaya nga may Ask for receipt notice.
mahanap? Can you present other evidence? PWEDE.
development, management, operation and/or conduct Kaya pag bibili kayo mag demand kayo ng receipt
For as long as there is adequate records.
of the trade, business or profession of the taxpayer. because that will be your adequate record to support your
In this particular case, the Court cited wherein nasunog
deduction kasi expense nay un kung mag bili kayo.
yung company. Ang ginawa, they checked the
inventory tapos meron namang files, so pwede yun for
For purposes of income tax, kasi may nakalagay sa
G.R. No. 173373 July 29, 2013 as long as there is no other evidence available.
provision na “official receipts or adequate records”. Sa
H. TAMBUNTING PAWNSHOP, INC. vs.
BIR, dalawa lang ang ka tanggap tanggap na records, it
COMMISSIONER OF INTERNAL REVENUE
should be Official Receipt or Sales Invoice. When you talk Interest expense
about sales invoice you are referring to goods. Goods is
The evidence presented in this case were only cash
the subject of sales invoice. Pag service, Official Receipts.
vouchers. ALLOWABLE DEDUCTIONS
However, the provision is explicit, nakalagay na “or
SEC. 34. Deductions from Gross Income.
adequate records”. The word or is a conjunction –
The proper substantiation requirement for an expense
alternative. So you can present official receipt or adequate
to be allowed is the official receipt or invoice. While the (B) Interest. -
records.
rental payments were subjected to the applicable
expanded withholding taxes, such returns are not the (1) In General. - The amount of interest paid or
Let’s say lease expense, wala kang Official Receipt na
documents required by law to substantiate the rental incurred within a taxable year on indebtedness in
natanggap pero may lease contract. That could be
expense. Petitioner should have submitted official connection with the taxpayer's profession, trade or
sufficient kasi that is an adequate record supporting that
receipts to support its claim. business shall be allowed as deduction from gross
there is really a contract. For as long as it is not self-
income: Provided, however, That the taxpayer's
serving, that may be held.
A person who is subject to an internal revenue tax shall otherwise allowable deduction for interest expense
issue receipts, sales or commercial invoices, prepared shall be reduced by an amount equal to the following
In this particular case (Tambunting Pawnshop v CIR), the
at least in duplicate. The provision likewise imposed a percentages of the interest income subjected to final
Court is saying to the effect that the only records which is
allowable is either Official Receipt or Sales Invoice.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 25
business. For as long as it is connected in some way,
tax: Forty-one percent (41%) beginning January 1, Issued December 29, 2000 implements the provisions
directly or indirectly, with your trade, business, or exercise
1998; Thirty-nine percent (39%) beginning January 1, of Section 34(B) of the Tax Code of 1997 relative to the
of profession.
1999; and Thirty-eight percent (38%) beginning requirements for the deductibility of interest expense
January 1, 2000; That effective January 1, 2009, the from the gross income of a corporation or an individual
The interest must have been stipulated in writing. This is
percentage shall be thirty-three percent (33%). engaged in trade, business or in the practice of
based on your credit transaction. Diba kapag walang
profession.
stipulation, the interest is void.
(2) Exceptions. - No deduction shall be allowed in
respect of interest under the succeeding In general, subject to certain limitations, the following
The interest payment arrangement must not be between
subparagraphs: are the requisites for the deductibility of interest
related taxpayers. So who are related parties or related
expense from gross income:
taxpayers? Between members of family.
(a) If within the taxable year an individual taxpayer a) there must be an indebtedness;
reporting income on the cash basis incurs an b) there should be an interest expense paid or incurred
The family of an individual should include only his
indebtedness on which an interest is paid in advance upon such indebtedness;
brothers and sisters, spouse, ancestors, and lineal
through discount or otherwise: Provided, That such c) the indebtedness must be that of the taxpayer;
descendants; or between an individual and a corporation
interest shall be allowed as a deduction in the year the d) the indebtedness must be connected with the
more than 50% in value of the outstanding stock is
indebtedness is paid: Provided, further, That if the taxpayer's trade, business or exercise of profession;
owned, directly or indirectly, by such individual; or 2
indebtedness is payable in periodic amortizations, the e) the interest expense must have been paid or
corporations which are owned in common by the same
amount of interest which corresponds to the amount of incurred during the taxable year;
individual; between grantor and fiduciary of any trust
the principal amortized or paid during the year shall be f) the interest must have been stipulated in writing;
(fiduciary is the trustee); between the fiduciaries of a trust
allowed as deduction in such taxable year; g) the interest must be legally due;
if they are under the same grantor; between the fiduciary
h) the interest payment arrangement must not be
and the beneficiary.
(b) If both the taxpayer and the person to whom the between related taxpayers;
payment has been made or is to be made are persons i) the interest must not be incurred to finance petroleum
If they belong in the abovementioned enumeration, the
specified under Section 36 (B); or operations; and
interest expense corresponding to the debt between the
j) in case of interest incurred to acquire property used in
parties are not deductible.
(c) If the indebtedness is incurred to finance petroleum trade, business or exercise of profession, the same was
exploration. not treated as a capital expenditure
What is the rule in deductibility of interest?
(3) Optional Treatment of Interest Expense. - At the
There must be an indebtedness – kailangan may utang. In general, the amount of interest paid or incurred within a
option of the taxpayer, interest incurred to acquire
Hindi pwede na mag claim ka ng interest expense pero taxable year on indebtedness in connection with the
property used in trade business or exercise of a
wala kang utang. Sa books mo kung nag claim ka ng taxpayer's profession, trade or business shall be allowed
profession may be allowed as a deduction or treated as
interest expense kailangan may corresponding loans as deduction from gross income.
a capital expenditure.
payable or any payable amounting to an indebtedness.
There are 2 kinds of interest.
So kailangan ba na engaged into lending for the interest 1.) Interest expense deductible in full
expense to be deductible? Yun ba ang ibig sabihin ng 2.) Interest expense subject to limitations
Revenue Regulation No. 13-2000
requirement na “the indebtedness must be connected with
the taxpayer's trade, business or exercise of profession”? Ano ang subject to limitations? We have what we call TAX
NO, for as long as the indebtedness is used in your ARBITRAGE.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 26
-It is a strategy which takes advantage of the A: No. As long as in a year, meron kang interest income
difference in tax rates or tax systems as the which is subject to final tax. So pwedeng ang principal mo
Limitation on the amount of deductible interest
basis for profit (UST Reviewer) na 4000 came from inutang mo last year. The principal
expense.
- Interest expense with limitation may not come from the source of your interest expense
PURPOSE:
The taxpayer’s otherwise allowable deduction for
- To neutralize the tax effect of interest expense Q: How did we come up with the rates?
interest expense shall be reduced by an amount equal
reduction and the lower final income tax rate on
to 33% of the interest income subject to final tax (Sec.
interest income A: Jan 1, 1998 20/34= .59 (1-.59) = 41%
34B [1], NIRC).
- Under the Tax Code, as amended, interest Jan 1, 1999 20/33= 0.61 (1-.61)= 39%
expense deduction shall be reduced by 38% of Jan 1, 2000 20/32= 0.63 (1-.63)= 38%
NOTE: This is to safeguard from tax arbitrage schemes.
the interest income subjected to FWT. Jan 1, 2009 20/30= .67 (1-.67)= 33%
This limitation on the deductibility of interest expense
was legislated to specifically address the tax arbitrage
EXAMPLE:
arising from the difference between the 20% final tax on
Here, in effect ang tax benefit that i am paying is only .66
interest income and the normal corporate income tax
Loan: 100,000 per piso, lugi si Govt., that’s why minusan ka, of
rate under which interest expense can be claimed as a
Int. Exp 6000 x 30% (FWT; corp)= 1,8000 corresponding .33 para ang total na mabayad nimo sa
deduction.
government would total to 1.
Gipaloan: 100,000
The rate of interest limitation is actually the difference
Int. Income 6000 x 20% (FWT; indv)= 1,200
between the normal corporate tax and the 20% final tax
PROFIT: 600
as a percentage of the NCIT rate, rounded off.
Provisions of __________ thereof ____ interest incurred
Thus, under the 30% NCIT, (30%-20%) /30% =
This is tax arbitrage, you play with the money in order to paid by the taxpayer business related taxes shall be
33.33%.
profit. So nakita eto ng legislature. So they provided for deducted from the gross income and shall not be subject
interest expense with limitations. So ano yung limitations? to limitations mentioned. (paspas kaayo si sir dri guys.
Tax Arbitrage is a strategy which takes advantage of
Maski i-slow ang speed, dili jd masabtan)
the difference in tax rates or tax systems as the basis
Jan 1, 1998 41%
for profit.
Jan 1, 1999 39% Take note: A tax is not an indebtedness because you owe
Jan 1, 2000 38% it to the government in your personal capacity. So ang
General rule, kung may interest expense ka and you Jan 1, 2009 33% sabi, hindi daw siya dapat i-offset. Kasi they have this
comply with the requisites, the interest expense is case of Mambulao, wherein may utang ang government
deductible. So kung ang interest expense mo for the year Thus, if you obtained the interest income within the sa kanya, tapos meron siyang deficiency tax, so sabi nya,
is 10,000; so ang iyong deductible is 10,000. So kung 10, period above, irereduce mo. offset nalang. The Court held that a debt and a tax is not
000 ang binayad mo as interest, then 10,000 din yung i of the same nature. You owe the tax on the sovereign
declare mo as deduction. Example: In 2009: 4000 x 33%= 1,320 capacity of the state and in your personal capacity. So in
Yung interest expense na deductible ko is only 4,680 this particular case, your interest in your unpaid taxes is
TAX ARBITRAGE instead of 6000 deductible.
- is the practice of profiting from differences that
arise from the ways transactions are treated for Q: Kailangan ba na yung inutang ko, yun din yung subject CIR vs. Palanca
tax purposes. ng interest income? [The term "debt" is properly used in a comprehensive
sense as embracing not merely money due by contract,

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 27
but whatever one is bound to render to another, either for (c) If the indebtedness is incurred to finance petroleum
corporation, the deductions for taxes provided in
contract or the requirements of the law. Where statutes exploration.
paragraph (1) of this Subsection (C) shall be allowed
impose a personal liability for a tax, the tax becomes at
only if and to the extent that they are connected with
least in a broad sense, a debt.] Read:
income from sources within the Philippines.
CIR vs. Palanca
Because your basis for your interest is your unpaid taxes. CIR vs. Prieto
Therefore, it is still deductible. Paper industries vs. CA

TAXES Q: So what are deductible taxes?


(B) Interest. - A: Business taxes, business permits, local permits

(1) In General. - The amount of interest paid or incurred TAX BENEFIT RULE
within a taxable year on indebtedness in connection with
(1) In General. - Taxes paid or incurred within the YEAR 1 YEAR 2
the taxpayer's profession, trade or business shall be
taxable year in connection with the taxpayer's
allowed as deduction from gross income: Provided,
profession, trade or business, shall be allowed as Income 100 110 (taxable)
however, That the taxpayer's otherwise allowable
deduction, except: (MEMORIZE) Local tax (50)
deduction for interest expense shall be reduced by forty-
two percent (42%) of the interest income subjected to final 50
a. The income tax provided for under this Title;
tax: Provided, That effective January 1, 2009, the
b. Income taxes imposed by authority of any You have gross income of 100, tapos nagbayad ka ng
percentage shall be thirty-three percent (33%). [29]
foreign country; but this deduction shall be local tax na 50, so 50 nalang. Tapos Year 2, nagkamali
allowed in the case of a taxpayer who does pala ng assess, so 40 lang pala dapat, nirefund ka ng 10,
(2) Exceptions. - No deduction shall be allowed in respect
not signify in his return his desire to have to that 10 would now be taxable. So that is the tax benefit
of interest under the succeeding subparagraph`s:
any extent the benefits of paragraph (3) of this rule. Kung maclaim mo siya as refund, you can consider it
subsection (relating to credits for taxes of as income to the extent that you considered it as
(a) If within the taxable year an individual taxpayer
foreign countries); deduction.
reporting income on the cash basis incurs an
c. Estate and donor's taxes; and
indebtedness on which an interest is paid in advance
d. Taxes assessed against local benefits of a Q: What if your income is 40? Tapos you paid taxes, 50,
through discount or otherwise (Eto yung nangutang ka ng
kind tending to increase the value of the so negative 10, tapos ngayon, you’ve got the refund of the
1000, ideduct na nila in advance ang interest): Provided,
property assessed. (Special Assessments) entire 50. So how much should you consider as taxable
That such interest shall be allowed as a deduction in the
year the indebtedness is paid: Provided, further, That if income in the next year? Is it the entire 50?
Provided, That taxes allowed under this Subsection,
the indebtedness is payable in periodic amortizations, the
when refunded or credited, shall be included as part of A: Following the tax benefit rule, since you only benefited
amount of interest which corresponds to the amount of the
gross income in the year of receipt to the extent of the 40, so what is considered as your taxable income is also
principal amortized or paid during the year shall be
income tax benefit of said deduction. (Tax Benefit Rule) only 40. Kasi kahit naman 50 to, negative 10 naman, so i
allowed as deduction in such taxable year;
only benefit the amount 40.
(2) Limitations on Deductions. - In the case of a If: 40
(b) If both the taxpayer and the person to whom the
nonresident alien individual engaged in trade or (50) *only benefitted 40
payment has been made or is to be made are persons
business in the Philippines and a resident foreign (10)
specified under Section 36 (B); or

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 28
Tax Benefit Rule: - if you’re claiming it as a (7) Proof of Credits. - The credits provided in Subsection
Tax benefit kept for the taxes paid. Allowable Deductions 100 *deduction, dito mo iclaim (C)(3) hereof shall be allowed only if the taxpayer
= Taxable Income 100 establishes to the satisfaction of the Commissioner the
So in the event na marerefund sya, you only declare the X Tax Rate (30%) x .3 if you’re claiming for tax following:
amount for which allows the benefit. 30 credit, ditto mo iclaim (a) The total amount of income derived from
sources without the Philippines;
Sec 34(C)(3) But claim for tax credit are subject to limitations. (b) The amount of income derived from each
You have credit against tax for taxes of foreign taxes. country, the tax paid or incurred to which is claimed as a
(3) Credit Against Tax for Taxes of Foreign Limitations provided in Paragraph (4), Sec 34 (C) credit under said paragraph, such amount to be
Countries. - If the taxpayer signifies in his return his desire determined under rules and regulations prescribed by the
to have the benefits of this paragraph, the tax imposed by (4) Limitations on Credit. - The amount of the credit Secretary of Finance; and
this Title shall be credited with: taken under this Section shall be subject to each of the (c) All other information necessary for the
(a) Citizen and Domestic Corporation. - In the following limitations: verification and computation of such credits.
case of a citizen of the Philippines and of a domestic (a) The amount of the credit in respect to the tax
corporation, the amount of income taxes paid or incurred paid or incurred to any country shall not exceed the same **This is precisely what happened to Manny Pacquiao.
during the taxable year to any foreign country; and proportion of the tax against which such credit is taken, May binenta sya sa US / kita sa boxing tapos di niya
(b) Partnerships and Estates. - In the case of any which the taxpayer's taxable income from sources within diniclare ang income nya. What he should have done is to
such individual who is a member of a general professional such country under this Title bears to his entire taxable declare that income and whatever tax na binayaran nya
partnership or a beneficiary of an estate or trust, his income for the same taxable year; and sa US, claim it as a credit or a deduction.
proportionate share of such taxes of the general (b) The total amount of the credit shall not
professional partnership or the estate or trust paid or exceed the same proportion of the tax against which such So that is your Foreign Credit Limitation. This also has the
incurred during the taxable year to a foreign country, if his credit is taken, which the taxpayer's taxable income from Tax Benefit Rule. Same Concept.
distributive share of the income of such partnership or sources without the Philippines taxable bears to his entire
trust is reported for taxation under this Title. taxable income for the same taxable year. CASE: CIR vs Lednicky, GR L-18169, July 31, 1964
ISSUE: Whether a citizen of the United States
An alien individual and a foreign corporation shall not be Explanation on Para 4 is your limitations are: residing in the Philippines, who derives wholly from
allowed the credits against the tax for the taxes of foreign WHICHEVER IS LOWER between 1 & 2, will be your limit sources within the Philippines, may deduct his gross
countries allowed under this paragraph. income from the income taxes he has paid to the United
1.) 1st limit is actual tax paid sa foreign or the States government for the said taxable year
Applicable to Citizen and Domestic Corp kasi nga yung proportion of the Philippine Tax
taxable mo is within or without. So if you have kita in US & 2.) 2nd limit is your total taxable income in the HELD: No. An alien resident who derives income
Phils so may binayaran ka na taxes sa US. You can claim foreign country over your worldwide taxable income times wholly from sources within the Philippines may not deduct
as a tax credit for the taxes you paid in the US or you X Phil Tax na 30%. The proportion of your foreign taxable from gross income the income taxes he paid to his home
claim it as a deduction. It’s your choice. income in relation to your entire taxable income then country for the taxable year. The right to deduct foreign
multiply from which the tax credit shall be taken. income taxes paid given only where alternative right to tax
What’s the difference between claiming as a tax credit (Formula will be = Foreign / World X Phil Tax) credit exists.
and/or a deduction?
How do you prove your credits? Sec 34 (C) (7) Section 30 of the NIRC, Gross Income “Par. C (3):
**Example, you have your: Credits against tax per taxes of foreign countries.
Gross Income 200

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 29
If the taxpayer signifies in his return his desire to have the Capital Losses Sec 34 (D)(4): NOLCO provides that you can Carry-Over the Loss within
benefits of this paragraph, the tax imposed by this shall be a) Capital losses are losses from sales or the next consecutive 3 yrs.
credited with: Paragraph (B), Alien resident of the Exchanges of capital assets shall be allowed only to the
Philippines; and, Paragraph C (4), Limitation on credit.” extent provided in Section 39. But this is only allowed pag consecutive.
b) Securities Becoming Worthless. - If securities as
defined in Section 22 (T) become worthless during the What if lugi din ang Year 2? So since within 3 years pa
LOSSES taxable year and are capital assets, the loss resulting man sya, pwede pa sya icarry-over following the
*NO INSURANCE = CLAIM FOR DEDUCTION (LOSS) therefrom shall, for purposes of this Title, be considered “FIRST IN, FIRST OUT” basis.
*WITH INSURANCE = NO CLAIM FOR DEDUCTION as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets. It is allowable deduction from the gross income of the
What are losses? same taxpayer who has sustained and accumulated the
Losses actually sustain during the taxable year (not Losses From Wash Sales of Stock or Securities. net-operating loss, regardless of the change in its
compensation for by an insurance or other forms of Sec 34 (D)(5): ownership. This rule also applies in case of merger.
indemnity) should be allowed as deduction. Losses from 'wash sales' of stock or securities as
provided in Section 38. Please take note that it should be within gross income for
What if may insurance? the next consecutive taxable year.
You deduct the compensation made by the insurance. Wagering Losses.
This must be incurred in trade or professional business or Sec 34 (D)(6): Q: Who are entitled to deduct NOLCO from Gross
of property connected in the business or profession. Losses from wagering transactions shall be allowed only Income?
to the extent of the gains from such transactions. A: Any individual, including estates and trusts, engaged in
Now if the loss arises from fire/storm/shipwreck or other business or trade or in the exercise of profession and
forms of casualty or from robbery, theft or embezzlement, NOLCO-Net Operating Losses Carry-Over domestic & resident foreign corp subject to the normal
that loss can be claimed as deduction PROVIDED wala Sec 34 (D)(3): income tax.
kang insurance. But if you have an insurance, you cannot
claim the loss as deduction kase nacompensate na sya by Important concept of the NOLCO: Q: Bakit ang Non-Resident FC are not allowed to have
the insurance. RR 14-2001 provides the allowance for deductions of NOLCO?
NOLCO shall be limited only to the net operating losses A: Because they taxed not on taxable income but on
Therefore, accumulated January 1, 1998. Gross Income. So wala talaga silang deduction in the first
NO INSURANCE = CLAIM FOR DEDUCTION (LOSS); place. That’s why useless na irequire mo sila sa NOLCO.
WITH INSURANCE = NO CLAIM FOR DEDUCTION

Example: NOLCO is also not applicable to:


Proof of Loss Sec 34 (D)(2): Year 1 Gross Income = 100 a) OBUs for a foreign banking corporation and FCDU of a
If nasunog, pwede wala ng proof and iclaim na wala na Allowable deduction = 200 domestic banking corporations
ang files kasi nga nasunog. Loss = 100 (NOLCO) b) Enterprise registered with the BOI enjoying the Income
Year 2 Gross Income = 200 Tax Holiday Incentive
If theft, proof of loss is to file/blotter basta any kind of Allowable Deduction = 100 c) PEZA-registered enterprise
proof that can satisfy your claim of loss. d) SBMA-registered enterprise

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 30
e) Foreign corporations engaged in international shipping 5. Actually Charged off in the books of accounts of the
or air carriage business in the Philippines taxpayer as of the end of the taxable year; What are the methods?
f) Any person, natural or juridical, enjoying exemption 6. Actually Ascertained to be worthless and uncollectible (*wala na gidiscuss kay very accounting na daw )
from income tax (R.R. 14-2001) as of the end of the taxable year; (a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding
Q: How will you ascertain a debt is worthless and twice the rate which would have been used had the
Bad Debts Sec 34 (E) uncollectible? annual allowance been computed under the method
Q: What are Bad Debts? A: RR 25-2002 provides that The Commissioner of described in Subsection (F) (1);
A: Bad debts are receivables becoming worthless. May Internal Revenue will consider all pertinent evidence, (c) The sum-of-the-years-digit method; and
utang A kay B. Receivable ni B yung utang, asset nya including the value of the collateral, if any, securing the (d) Any other method which may be prescribed by the
yun. Kaso si A hindi na makabayad. So B is given by the debt and the financial condition of the debtor in Secretary of Finance upon recommendation of the
Tax Code to deduct the Debt as Worthless. But must determining whether a debt is worthless, or the assigning Commissioner.
comply with the requisites for a valid deduction of Bad of the case for collection to an independent collection
debts from Gross Income. lawyer who is not under the employ of the taxpayer and **NOTE: As long as the BIR doesn’t object on the method
who shall report on the legal obstacle and the virtual of your depreciation, ok lang yun)
Sec 34 (E) Debts due to the taxpayer actually ascertained impossibility of collecting the same from the debtor and
to be worthless and charged off within the taxable year who shall issue a statement under oath showing the CASE: Basilan Estate vs CIR defined Depreciation
except those 1) not connected with profession, trade or propriety of the deductions thereon made for alleged bad “Depreciation is the gradual diminution in the useful
business and 2) those sustained in a transaction entered debts. Thus, where the surrounding circumstances value of tangible property resulting from wear and tear
into between parties mentioned under Section 36 (B) of indicate that a debt is worthless and uncollectible and that and normal obsolescence. The term is also applied to
this Code: Provided, That recovery of bad debts legal action to enforce payment would in all probability not amortization of the value of intangible assets, the use of
previously allowed as deduction in the preceding years result in the satisfaction of execution on a judgment, a which in the trade or business is definitely limited in
shall be included as part of the gross income in the year showing of those facts will be sufficient evidence of the duration. Depreciation commences with the acquisition of
of recovery to the extent of the income tax benefit of said worthlessness of the debt for the purpose of deduction. the property and its owner is not bound to see his property
deduction. gradually waste, without making provision out of earnings
for its replacement.” Basilan Estate vs CIR

Depletion Sec 34 (G)


Depreciation Sec 34 (F) Q: What is the difference between Depletion and
Requisites for a valid deductions of Bad debts from A depreciation deduction a reasonable allowance for the Depreciation?
Gross Income: exhaustion, wear and tear (including reasonable A: Depletion pertains to natural resources, oils, gas wells
1. There is an existing debt due to the taxpayer which is allowance for obsolescence) of property used in the trade and mines.
valid and legally demandable or business.
2. The same shall be connected with the taxpayer’s Election to Deduct Exploration and Development
Trade/Business/Profession **example a Table you purchase now, will not have the Expenditures.
3. Must not be sustained in a transaction entered into same economic use in the next 5 years.
between Related parties. **Take note of the election to deduct exploration and
4. Debts are Uncollectible despite diligent effort exerted Because of the wear and tear, you are given allowances development expenditures.
by the taxpayer to be deducted in your gross income.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 31
The taxpayer may on his option, deduct exploration and as exploration and development expenditures paid So pwede niya I deduct in full, pwede nya din
development expenditures accumulated as cost or or incurred during the taxable year. naming i-amortize
adjusted basis for cost depletion as of date of prospecting,
as well as exploration and development expenditures paid He has the option to deduct it as ____ or capitalized ü deferred expenses
or incurred during the taxable year: Provided, That the
amount deductible for exploration and development
mo doon sa contribution tapos idedepreciate or I
expenditures shall not exceed twenty-five percent (25%) dedeplete] Paid or incurred by the taxpayer in 
 connection
of the net income from mining operations computed
without the benefit of any tax incentives under existing Please take note of the definition of exploration and with his trade, business or profession; Not treated
laws. development. as ordinary expenses; and Chargeable to capital

Difference between depletion and depreciation? account but not 
 chargeable to property of a
Exploration means the searching or prospecting for
mineral resources by geological, geochemical or character which is subject to depreciation or
Depreciation is to spread or allocate the cost of a
geophysical surveys, remote sensing, test pitting, depletion (Sec 34 (I), NIRC). 

tangible fixed asset over its estimated economic useful
trenching, drilling, shaft sinking, tunneling or any
life. In other words, it may be seen as a reduction in the
cost of a fixed asset due to normal usage, wear and tear, other means for the purpose of determining the
Period for amortizing the deferred research and
new technology, and other related reasons. existence, extent, quantity and quality thereof and
the feasibility of mining them for profit. (RA 7942) development expenditures

In computing taxable income,


Depletion refers to natural resources; refers to the
deduction form gross income arising from the RESEARCH and DEVELOPMENT EXPENSES
- such deferred expenses shall be allowed as
exhaustion of natural resources like mines and oil
In businesses where R and D is very heavy, like 
 deduction, 

and gas wells as a result of production or severance
pharmaceuticals (experimentation, testing,
from such mines or wells. Take note: You have your
conventions, medreps)
cost depletion method. Oil & gas wells or mines are - ratably distributed over a period of not less than
allowed a reasonable allowance for depletion or 
 sixty (60) months (beginning with the month in
ü Taxpayer may treat research or development
amortization computed using the cost-depletion
expenditures,
 which are paid or incurred by him which the taxpayer first realizes benefits from such
method.
during the taxable year in connection with his trade, expenditures). 

Take note of the direction to deduct exploration and business or profession as: ordinary and necessary
development expenditures, the taxpayer may at his expenses, which are not chargeable to capital CHARITABLE AND OTHER CONTRIBUTIONS
option deduct exploration and development account, and shall be allowed as deduction during
expenditures accumulated as cost or adjusted basis the taxable year when paid or incurred, 1. Contributions or gifts actually paid or made within
for cost depletion as of date of prospecting, as well
the taxable year

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 32
ü to, or for the use of the Government of the Q: What are donations deductible in full? foreign institutions or international organizations or

 Philippines or any of its agencies or any political in pursuance of special laws;
A: Donations or contributions deductible in full, we Donations to Certain Foreign Institutions or
subdivision thereof exclusively for public purposes, have donations to the government. Take note: International Organizations because of a certain
or to accredited domestic corporations, or 
 Donations to the government are only deductible in treaty. So if you donate to a international
full, if the donations are exclusively to finance or to organization, there is a treaty between the
Philippines and and that organization saying that is
Maybe deductible in full or subject to limitations. provide or undertaking priority activities of the NEDA
deductible in full. Then it is deductible in full.
(National Economic Development Authority).
Requisites:
Read: RR 13-98
ü Donations to Accredited Nongovernment
So if ang dinodate mo sa government is not in the
Organizations or NGO’s, this is also
ü associations organized and operated exclusively relation of the priority activities of the NEDA, that is deductible in full provided that the NGO is
for religious, charitable, scientific, youth and sports not deductible in full, it is subject limitation. organized and operated exclusively for
development, cultural or educational purposes or for scientific, research, educational, character-
the rehabilitation of veterans, or to social welfare SEC 34(H) (2)(a) Donations to the Government. – building and youth and sports
institutions, or to nongovernment organizations, 
 Donations to the Government of the Philippines or to development, health, social welfare,
any of its agencies or political subdivisions, cultural or charitable purposes, or a
including fully-owned government corporations, combination thereof, no part of the net
2. in accordance with rules and regulations exclusively to finance, to provide for, or to be used income of which inures to the benefit of
promulgated by the Secretary of Finance, upon in undertaking priority activities in education, health, any private individual.
recommendation of the Commissioner, 
 youth and sports development, human settlements,
science and culture, and in economic development ü Donation must be utilized not later than the 15th
according to a National Priority Plan determined by day of the 3rd month following the close of taxable
3. no part of the net income of which inures to the
the National Economic and Development Authority
benefit of any private stockholder or individual 
 (NEDA). year; 


4. in an amount not in excess of: That is the only time that donations are deductible in ü Administrative expense must not exceed 30% of
full. Otherwise, it is subject to limitations.
the total expenses; 

ü ten percent (10%) in the case of an individual,
Another examples deductible in full:

 and 
 ü Upon dissolution, assets shall be transferred to
(b) Donations to Certain Foreign Institutions or
International Organizations. – donations to foreign another non-profit domestic corporation or to the
ü five percent (5%) in the case of a corporation, of institutions or international organizations which are State.

 the taxpayer's taxable income derived from trade, fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered
business or profession (Sec 34 (H), NIRC). 
 into by the Government of the Philippines and the

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 33
Take note: It must comply to the four
 requisites for 1. Articles of corporations Q: What are the limited deductible donations?
A: Donations or contributions or gifts actually
donations to the accredited NGOs to be deductible donated in the taxable year to accredited NGOs
in full. 2. Corporation by-laws should be allowed to limited deductibility with the
amount that do not exceed 10% for an individual
Q: So what is the accrediting body for this? donor and 5% for corporate donor, of the taxpayer's
3. Certificate of Registration
taxable income derived from trade, business or
A: Philippine Council for NGO Certification (PCNC). profession as computed without the benefit of this
It certifies NGOs/NPOs “that meet the established 4. Affidavit of Modus Operandi deduction. It is only in its full deductibility if you have
criteria for financial management and the four requisites earlier mentioned.
accountability.”
5. Character of the organization, the purpose
Accredited ka na,level Administrative expense must
not exceed 30% of the total expenses, upon
Q: What does the PCNC do? Anong ginagawa nito 6. The list of projects dissolution, assets shall be transferred to another
pag pumunta to sa mga office ng accredited NGO? non-profit domestic corporation or to the State and
no part of the net income of which inures to the
A:Nag-o-ocular inspection ito.PCNC schedules a 7. The source of income benefit of any private individual.
visit to the accredited NGOs because itong mga
NGOs/foundation are very common for money- 8. And other facts relating to the operations of the The limit is 10% - individual donor and 10% of a
laundering.Kasi ang lalaki ng mga funding tapos corporate donor base on taxable income before the
NGO. contribution. So whichever is lower that is your limit.
napupunta sa mga NGO, maraming project tapos
Read: RR 13-98
wala pala. Dummy lang pala sya. So because of
that PCNC pumupunta, icheck nila. You have to
CONTRIBUTION TO A PENSION TRUST
submit papers showing completed projects and NIRC SEC 34 (J) Pension Trusts. - An employer
future projects for the next few years, tapos i-che- Q: Is the PCNC accreditation a one-time certification establishing or maintaining a pension trust to provide for
check nila. Once you are accredited, you will be only? Does it expire? the payment of reasonable pensions to his employees
A: Yes, the certification expires after a certain shall be allowed as a deduction (in addition to the
issued a PCNC Certification. Now the PCNC
period. An NGO (nongovernment organization’ contributions to such trust during the taxable year to cover
Certificate, ipapakita sa donor and now the donor
means a non profit domestic corporation) can obtain the pension liability accruing during the year, allowed as a
can claim the deductions in full. deduction under Subsection (A)(1) of this Section) a
a certification that lasts from one (1), three (3), or
five (5) years — depending on its years of existence reasonable amount transferred or paid into such trust
TAKE NOTE: Si DONOR ang mag-claim ng and ratings from the evaluation. When an during the taxable year in excess of such contributions,
deduction in full. Hindi si NGO. but only if such amount (1)has not theretofore been
organization’s certification expires, it needs to apply
allowed as a deduction, and (2) is apportioned in equal
for renewal. parts over a period of ten (10) consecutive years
These are some of the documents to be submitted:

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 34
beginning with the year in which the transfer or payment is That is wash sales. Kaya tinawag na wash kasi
made. PROCEEDS of WASH SALES parang nilabhan ko lang sya.

Ito yung kung magpepension, kung employer ka Wash sale - A sale of stock or securities where SPECIAL DEDUCTIONS
magko-contribute or magbabayad ka ng pension substantially identical securities are acquired or
plan, you have to consider the PAST SERVICE NOLCO
purchased within 61-day period, beginning 30 days
COST. (3) Net Operating Loss Carry-Over. - The net
before the sale and ending 30 days after the sale.
operating loss of the business or enterprise for any
Let’s say magbabayad ka ng pension ng taxable year immediately preceding the current
G.R.: Losses from wash sale are not deductible
employees, may mga empleyado ka jan na 40 years taxable year, which had not been previously offset
since these are considered as artificial loss.
in service, or 15 years in service, you have to as deduction from gross income shall be carried
compensate the services they rendered before. over as a deduction from gross income for the next
So I am paying for the CURRENT SERVICE COST XPN: When taxpayer is a dealer in securities, and
three (3) consecutive taxable years immediately
and PAST SERVICE COST. the transaction from which the loss resulted was
following the year of such loss: Provided, however,
made in the ordinary course of business of such
That any net loss incurred in a taxable year during
The past service cost, yung ang i-amortize for 10 dealer, the loss is deductible in full.
which the taxpayer was exempt from income tax
years.
shall not be allowed as a deduction under this
So ganito yun, meron kang 30 days and another 30
Subsection: Provided, further, That a net operating
Example: 10 years na sya sa akin, hindi ko lang days so 60 days, nagbenta ako security tapos
loss carry-over shall be allowed only if there has
naman binabayaran yung pension for this year but masyadong mababa ang binili sa akin kaya may
been no substantial change in the ownership of the
for the previous year. Kasi kung mag ko-compute ka loss. Tapos bigla, bumili ako ng same security that
business or enterprise in that -
ng retirement plan, consider the entire duration of time, I cannot deduct the losses. Kasi nga wash
his service, so yan ang tinatawag na PAST sales. Parang ginamit ko lang sya para makadeclare
(i) Not less than seventy-five percent (75%) in
SERVICE COST. ako ng loss, which is bumili rin naman ako ng same
nominal value of outstanding issued shares., if the
Deductible payment to pension trusts security within the 60 days.
business is in the name of a corporation, is held by
Then no deduction for the loss shall be allowed
Employer’s current liability – amount contributed under Section 34 unless the claim is made by a or on behalf of the same persons; or
 (ii) Not less
during the taxable year shall be treated as an dealer in stock or securities and with respect to a than seventy-five percent (75%) of the paid up
transaction made in the ordinary course of the capital of the corporation, if the business is in the
ordinary and necessary expense 

business of such dealer. name of a corporation, is held by or on behalf of the
Let’s say meron akong investment kay SN Prime, same persons.
Employer’s liability for past services – 1/10 of the binenta ko ngayon ang value nya 100, binenta ko at
reasonable amount paid to cover pension liability 50. So nalugi ako ng 50. Tapos maya maya bumili For purposes of this subsection, the term "not
applicable to the preceding 10 years 
 din ako ng same identical shares, same lang. The operating loss" shall mean the excess of allowable
50 loss that I get, I cannot deduct it kung bumili ako deduction over gross income of the business in a
within the 60 day period ng same identical shares.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 35
taxable year.
 Provided, That for mines other than addition 25, 000 so that should cover for the
overseas contract workers referred to in Subsection (C)
personal expense of the anak. But because of the of Section 23 hereof; and
oil and gas wells, a net operating loss without the
TRAIN LAW they eliminated it, wala ng exemptions,
benefit of incentives provided for under Executive
wala ng allocations for you. Remember , the “(c) On the taxable income defined in Section 31 of this
Order No. 226, as amended, otherwise known as
threshold for taxable income has already increased. Code, other than income subject to tax under
the Omnibus Investments Code of 1987, incurred in Subsections (B), (C), and (D) of this Section, derived for
Before from 10,00 , you are already taxable. Now,
any of the first ten (10) years of operation may be you need to earn 250,000 for you to be taxable. So each taxable year from all sources within the
carried over as a deduction from taxable income for with that 250,000 threshold is enough to cover your Philippines by an individual alien who is a resident of
the next five (5) years immediately following the the Philippines.
personal expenses. So kaya wala na sya. You are
year of such loss. The entire amount of the loss not longer allowed to claim personal and additional “(2) Rates of Tax on Taxable Income of
shall be carried over to the first of the five (5) exemption because it is expressly repealed by the Individuals.— The tax shall be computed in
taxable years following the loss, and any portion of TRAIN Law. accordance with and at the rates established in the
such loss which exceeds, the taxable income of Train law is effective January 01, 2018. So if may following schedule:
such first year shall be deducted in like manner form mga tanong pertaining to the taxable income in
the taxable income of the next remaining four (4) 2017 or prior, you still have to consider the personal “(a) Tax Schedule Effective January 1, 2018 until
years. and additional exemption. December 31, 2022:

Now deduction from individuals, diba nakalagay dun Xl. TAX ON INDIVIDUALS: BASES AND RATES
sa pambungad ng allowable deductions , “except for For Resident Citizens and Resident Aliens
an individual or any compensation income , these Sec. 24. Income Tax Rates.— (TRAIN LAW)
are the deductions.” Kung individual ka before, we
have what we called personal exemption , which is “(A) Rates of Income Tax on Individual Citizen and
an additional exemption. Dati ang personal Individual, Resident Alien of the Philippines.—
exemption kasi is depende sa status mo if married, “(1) An income tax is hereby imposed:
single, head of the family. Dati iba iba yung rates. “(a) On the taxable income defined in Section 31 of this
Example: Code, other than income subject to tax under
50,000 personal exemption, nung nagka anak ka,
Subsections (B), (C), and (D) of this Section, derived for “Tax Schedule Effective January 1, 2023 and onwards:
each taxable year from all sources within and without
may additional 25, 000 exemption, per anak not to the Philippines by every individual citizen of the
exceed four, so may motivation. Philippines residing therein;
Rationale of Personal Exemption: Itong 50,000 ito
yung na estimate nila to cover your personal “(b) On the taxable income defined in Section 31 of this
expenses. Kasi kung compensation earner ka lang, Code, other than income subject to tax under
di allowed ang other exemptions and allowed lang is Subsections (B), (C), and (D) of this Section, derived for
your personal exemptions to cover for your personal each taxable year from all sources within the
expenses tulad ng kain, bahay, the 50,000 dw is Philippines by an individual citizen of the Philippines
who is residing outside of the Philippines including
enough for a year, Imagine. So pag may anak ka,

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 36
● So, if you are married, you can file separately or ● Gross SALES– kapag binebenta mo GOODS
You have your TRAIN LAW. This is called the major you can file jointly. If there’s an income and you ● Gross RECEIPTS – kapag binebenta mo
revisions on our Tax Code. Effective January 1, 2018 until cannot determine, kanino siya i-aatribute? You SERVICES
December 31, 2022. Your minimum income to be taxable can divide it equally if there’s no reason ___
is P250,000. And your maximum rate is already 35%. kung ____ or attribute that income (sorry guysh nag Diba meron tayong tax table? See Section 24. Graduate
rap jud si sir) tax rates siya kasi nag-gagraduate, nagtataas. Now if you
Kasi before what is the minimum? P10,000. One of the are purely self-employed, meaning ang kita mo, ikaw ang
proponents kasi said that it’s for social justice to have it Cont… may-ari ng business. If you are ganito and your gross
amended kasi daw there’s no more difference. What’s the sales/gross receipts does not extend P3million, you have
“Provided, That minimum wage earners as defined in
highest bracket before? P500,000. So, if you are earning the option to avail the schedular rate or of the optional 8%
Section 22(HH) of this Code shall be exempt from the
millions, there is no apparent difference because you are in excess of P250,000.
payment of income tax on their taxable income:
taxed on the same rate. So that’s why they say that it calls Bakit in excess? Kasi diba ito yung exception minimum
Provided, further, That the holiday pay, pay received by
for revision. That is why may TRAIN. threshold. So kung below niyan, it involved a xxx.
such minimum wage earners shall likewise be exempt
from income tax.
Please take note that we don’t have personal revision of If ang kita mo every year is below P250,000, you are tax
exceptions (2:00 not sure with the italicized) kasi the rationale of exempt. But if your kita is more than P250,000 and you
personal and additional exceptions is ______ the fact that A material difference of the current tax law is when it are purely self-employed or professional and you have a
there is already a higher minimum tax threshold which is comes to those: gross receipts/gross sales not exceeding P3million, you
P250,000. Sabi nila kasali na diyan ang personal and have this option, wala ito dati. Wala tayong option dati,
additional exceptions so we have no personal and Schedular lang tayo dati. This is the very “meat” of the
“(b) Rate of Tax on Income of “Purely Self-employed
additional exceptions. revision, that you have the option to avail the 8% in
Individuals and/ or Professionals Whose Gross Sales or
Please take note that effective January 1, 2023 mag-iiba excess of P250,000. Hindi 8% of gross sales/gross
Gross Receipts and Other Non-operating Income Does
ang ang Tax table. Please secure a copy of the tax table. receipts kundi 8% of gross sales/gross receipts in excess.
Not Exceed the VAT Threshold as Provided in Section
Sa January 1, 2023, P250K pa rin ang minimum but mag- You still have the benefit of the P250,000 deduction, so in
109(BB).— Self-employed individuals and/or
iiba yung bracketing. excess of that, you have the 8%. That is your option, it is
professionals shall have the option to avail of an
optional. (Sir: Kuha?) :D
8% tax on gross sales or gross receipts and other
non-operating income in excess of ₱250,000 in lieu
How about MARRIED individuals? If we go to Business Tax, you have your VAT di ba. The
of the graduated income tax rates under Subsection
Section 24 cont... counterpart of VAT is your PERCENTAGE tax. Kapag ang
(A)(2)(a) of this Section and the percentage tax
collections mo nag exceed ng P3million in a year, xxx8:34-
“For married individuals, the husband and wife, subject under Section 116 of this Code.
8:39xxx. Pag hindi ako nag exceed ng P3million, I am
to the provision of Section 51(D) hereof, shall compute
subject to the percentage tax. That is based on the gross
separately their individual income tax based on their
Currently, the VAT threshold is P3million. If you are sales and the gross receipts. Kapag hindi ka nag-exceed
respective total taxable income: Provided, That if any
*sulat sa white board* ng P3million, Percentage tax ka dapat PLUS schedular
income cannot be definitely attributed to or identified as
(normally ha, dati). BUT now, you have the option to be
income exclusively earned or realized by either of the
Before, the VAT threshold is P1.5million, then it was taxed 8%. The 8% is in lieu of the schedular and
spouses, the same shall be divided equally between
amended to P1,919,500. Ano tong VAT threshold? If you percentage tax. So, itong 8% na benefit hindi lang in
the spouses for the purpose of determining their
have exceeded P3million, you have this new option not to lieu of schedular but also in lieu of percentage tax.
respective taxable income.
use the schedular rate of bracketing. You do not need to pay percentage tax.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 37
What if sir I will opt for the schedular? - Kapag sosobra siya ng 3 million, wala kang
prescribed under Subsection (A)(2)(a) of this Section.
● If you will opt for the schedular, this plus the choice na mag graduated.
“(2) All Income from Business or Practice of Profession
percentage tax (idk what sir meant by this kay iya - Again ha pag mixed-income ka you have your

gi-illustrate sa board). You are still liable for the compensation, you have your business or
“(a) If Total Gross Sales and/or Gross Receipts and
percentage tax. Bakit nila ginagawang liable ito? profession.
Other Non-operating Income Do Not Exceed the VAT
This is in line with our basic principle of our - Kung sa compensation wala ka nang choice to
Threshold as Provided in Section 109(BB) of this
sound taxation policy F-A-T (Fiscal Adequacy, apply schedular/graduated
Code.— The rates prescribed under Subsection
Administrative Feasibility and Theoretical - Now pag business or professional you have to
(A)(2)(a) of this Section on taxable income, or eight
Justice). Administrative Feasibility, para maging ask mage-exceeds 3 million or below 3 million
percent (8%) income tax based on gross sales or gross
madali ang trabaho ng taxpayer. No need to file - Pag below 3 million you have 2 options,
receipts and other non-operating income in lieu of the
quarterly percentage tax kasi ito na… so that is schedular/graduated + percentage tax
graduated income tax rates under Subsection (A)(2)(a)
an option. That is the “meat” of the revision. So OR you opt for the 8%
of this Section and the percentage tax under Section
you have the option. - Now kapag may kitang 3 million wala kang
116 of this Code.
choice to use the schedular/graduated plus VAT
Please take note that the option to be taxed at 8% is kasi you have already exceeded 3 million.
“(b) If Total Gross Sales and/or Gross Receipts and
only applicable if your gross sales/gross receipts
Other Non-operating Income Exceeds the VAT
does not exceed P3million. Again, the 8% is in lieu, Q: How do you know what is more beneficial between the
Threshold as Provided in Section 109(BB) of this
meaning instead of the graduate rates or the two?
Code.— The rates prescribed under Subsection
schedular rates and the percentage tax. So hindi ka A: How would you know based on what you have
(A)(2)(a) of this Section.
na kailangan magbayad ng percentage tax which is a learned? Ano ang difference?
business tax. Percentage tax is the counterpart of What are the factors to be considered to
your VAT. Again let’s recap: compute for your schedular income, or gross sales or
● Pag purely self-employed or professional – if gross receipts? I’ll ask you the same question - what are
Kung employee ka, can you avail of the 8%? your gross sales or gross receipts does not the factors to consider?
● NO. Kasi the 8% is only available to “Purely Self- exceed P3million, you have this option:
employed Individuals and/ or Professionals”. graduated or schedular + percentage tax or 8% Ano ang difference niyan? Remember, the 8%, ano ang
Hindi siya applicable if you are an employee. based on gross receipts/gross sales in excess of basis nito? Gross sales/gross receipts. Schedular, ang
P250,000. basis mo is? Your taxable income.
What if you are an employee and at the same time meron
kang sideline na sari-sari store sa bahay, anong tawag What if mixed? Meaning you have a compensation Ano ang difference sa dalawa? Your allowable
sayo? income because you are an employee and at the same deductions.
● Ang tawag sayo ay Mixed Income Earner. time I have a business. Paano ang tax ko?
● Your compensation income is still subject to Please take note that the options, when you file your first
graduated schedular. Itong purely business mo, quarterly return, you have your option irrevocable for that
“(c) Rate of Tax for Mixed Income Earners.—
ito yun. So sa purely business mo you have the taxable year.
Taxpayers earning both compensation income and
option na maging graduated ka or schedular OR
income from business or practice of profession shall be
8% kapag hindi siya aabot ng P3million. Q: Paano mo malalaman kung ano ang mas
subject to the following taxes:
● Kung sosobra siya ng P3million, wala kang beneficial?
“(1) All Income from Compensation – The rates
choice kung hindi graduated.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 38
A: You project based the past experience of your deposit substitutes, investment management siya, you have your capital gains. Doon ka mag tatax sa
business, kung mas marami ka namang allowable accounts and other investments evidenced by gain.
deduction, baka better ang schedular. certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) -n general, Let’s say:
But if you do not have any allowable deduction, these are tax exempt, but if you pre In general, Binenta niya ng P80M. Let’s say P100K. So the net gain -
remember, what is the necessary for your allowable these are tax exempt, but if you pre terminate it, how much ang tax?
deduction? Substantiated. So what if you do not have you have your corresponding taxes:
receipts maybe it would be best na ito nalang? - From four to five years - 5% Under the current TRAIN Law - the tax is 15% of the net
- Three to four years - 12 % gain. Not to the gross selling price, but to the net gain -
One point consider also is the nature of your business if - Less than three years - ordinary 20% meaning if nag benta ka, lugi ka, wala kang tax, kasi wala
you are a professional, marami ka bang deductions? You tax kang net gain. Ito yan siya, 15%.
do not have that much deductions compared to engaged - Royalties, except on books, as well as other
in selling of goods. You have to consider that, kasi pag literary works and musical compositions - 10% Before the TRAIN Law, ang tax niyan is by brackets. If net
selling of goods ka, marami kang deductions. Pag selling - Prizes and other winnings - except PCSO gain P100K or below, 5%. If ang net gain is above P100k,
of service ka, wala kang masyadong deductions niyan amount to P10,000 or less, 20% 10%. Eto siya dati - ginawa ngayon inisa - 15%. There’s
because your cost of the service is YOU. Hindi mo ma no more distinction. Kasi ano ang ginagawa ng mga tao
qua-quantify yun, you cannot substantiate that - so you do Cash and/or Property Dividends - Magkano? That’s noon? Tinatagpi-tagpi nila ang transaction para 5% lang
not have deductions. 10%. ang makuha. Ginagawa nila, mag sell tayo ngayon, sell
nanaman tayo next week para 5%. But now it’s 15% on
How would you know if that would be beneficial or not? Capital Gains from Sale of Shares of Stock not Traded the net capital gain.
You project based on your history or past expenses. in the Stock Exchange - Not traded hah, kasi pag
traded, that’s no longer final tax but that’s business tax. That’s your sale of shares of stock. Now how about the
So that is the new [system], I assume that will be asked in That’s a transaction tax. Before it was ½ of 1, now its more famous capital gain of sale of real property? You
the bar. Maybe next year. Or next next year. 6/10th of 1. That’s for TRADED in stock exchange. have 6% - no changes. But please take note, unlike that
above, the 6% is based on presumed gain. You have your
There are many administrative forms na nagka-gulo dyan Pag hindi siya traded - let’s say nag benta ka dahil may sales price, the market value, or the assessed value,
sa 8% dahil masyadong in-overhaul. But they coped up gusto kang papasukin na investor or stockholder, or let’s whichever is higher. Exception: Kapag ginamit mo yung
and issued RRs and administrative effect of that 8%. But say si Davao Doc, binili ni Metro Pacific recently ang land to utilize for the construction of your principal
that is no longer our concern. kanilang shares? They brought some of the shares of residence. We’ve already discussed that.
some of the existing stock holders because they want to
Let's go to tax rate on certain passive income [Sec. 24, get the higher voting control - ang binili ata nila is around So how about NON-RESIDENT ALIEN ENGAGED IN
(B)] P5,000 per share? So sobrang laki. Nabili mo lang yun TRADE OR BUSINESS? You already know how to
- Interest from currency bank deposit - that’s 20% dati - mga P200 lang yun. In fact, there was one stock determine if an alien is engaged in trade or business or
- Interest income received by the individual tax holder who sold almost P80 million. That’s how you can not.
payer from a depository bank under the get your money back. Especially pag malalaking
expanded foreign currency deposit system - institution - imagine, P80M. If NRA Engaged in Trade or Business - it is taxed in the
that’s 15% same manner as an individual citizen, same lang, same
- Interest income from long-term deposit with trust Now, paano mo ma ta-tax yun? You have to determine if tax.
fund deposit or investment in the form of the shares are traded. Kasi pag traded siya, you have the
savings, common or individual trust funds, this stock transaction tax of 6/10th of 1. Pero kung hindi

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 39
NRA NOT Engaged in Trade or Business - so pag NOT
33%
engaged, all of the income is taxed… Paano? The The TRAIN Law did not amend yet the rates on
provision states: Corporation because its supposed to be amended on 32%
Package 2, the next package of TRAIN. They are
“There shall be levied, collected and paid for planning on lowering it down to 25% in line with our
each taxable year upon the entire income received from neighboring countries, China and Vietnam. OPTIONAL TAX (15%)
all sources within the Philippines by every nonresident Sec 27(A), NIRC
alien individual not engaged in trade or business within The TRAIN Law is anti-investment. The purpose of xxx
the Philippines as interest, cash and/or property TRAIN law is collect money for the Build, Build Build Provided, further, That the President, upon the
dividends, rents, salaries, wages, premiums, annuities, program but to make it appealable to the masses, they recommendation of the Secretary of Finance, may
compensation, remuneration, emoluments, or other fixed decreased the tax of the common masses and shifted the effective January 1, 2000, allow corporations the
option to be taxed at fifteen percent (15%) of gross
or determinable annual or periodic or casual gains, profits, tax to the capitalist or the companies. (Sir’s opinion), But if
income as defined herein, after the following conditions
and income, and capital gains, a tax equal to twenty-five you are a capitalist, you do not want to shoulder the have been satisfied:
percent (25%) of such income. impact, you would push it down to the ultimate consumer.
So the question is, is it good that we have higher net pay (1) A tax effort ratio of twenty percent (20%) of Gross
So therefore, pag NRA Not engaged, ang but the prices of goods are also higher? That’s the effect National Product (GNP);
gagawin niyo, all of the income is taxed at 25%. So i-po- of the TRAIN Law. (2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
pool mo iyon, 25%. May deductions ba? Is a NRA Not
(3) A VAT tax effort of four percent (4%) of GNP; and
Engaged, subject to deductions? It is based on gross Remember that there are Income Tax Holidays (ITH), (4) A 0.9 percent (0.9%) ratio of the Consolidated
income. So all gross income, i-tatax niyo with 25%. PEZA on BOI? There was a proposal that they would Public Sector Financial Position (CPSFP) to GNP.
Except, capital gains based on selling of share, is going to provide “SUNSET PROVISIONS.” This means they
be taxed in the above manner. So, taxed sila on gross would put limits on the income tax holiday on the The option to be taxed based on gross income shall be
income except capital gains from sale of shares or real incentives. What would happen to the investors when you available only to firms whose ratio of cost of sales to
property. Same before, 15% and 6% respectively. would provide sunset provisions on the incentives? All of gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
them will transfer. It would have been fortunate if the
SPECIAL ALIENS ASEAN Market is not that competitive but the reality is the The election of the gross income tax option by the
Those employed by RHQ, ROHQ, OBU, and some ASEA market is very competitive. This should also be corporation shall be irrevocable for three (3)
contractors… please take note that the preferential considered. consecutive taxable years during which the corporation
treatment provided shall not be applicable to RHQ, is qualified under the scheme.
ROHQ, OBU, and petroleum contractors after January 1, DOMESTIC CORPORATIONS
2018.
Year Rate OPTIONAL TAX TO PROPRIETARY EDUCATIONAL
Members of the GPP, again members of the GPP? INSTITUTIONS AND HOSPITALS
Paano?
SEC. 27 (B), NIRC
Jan 1, 2009 - Present 30%
The GPP is not taxed, but they have to distribute -
(B) Proprietary Educational Institutions and Hospitals. -
constructive distribution - the tax will be on the individual 35%
distribution of the GPP. Proprietary educational institutions and hospitals which
34% are nonprofit shall pay a tax of ten percent (10%) on
TAX ON CORPORATIONS

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 40
- means any trade, business or other activity, the
their taxable income except those covered by Monetary Benefit from Deposit Substitutes and
Subsection (D) hereof: Provided, that if the gross conduct of which is not substantially related to from Trust Funds and Similar Arrangements, and
income from 'unrelated trade, business or other the exercise or performance by such educational Royalties.— A final tax at the rate of twenty percent
activity' exceeds fifty percent (50%) of the total institution or hospital of its primary purpose or (20%) is hereby imposed upon the amount of interest
gross income derived by such educational function. on currency bank deposit and yield or any other
institutions or hospitals from all sources, the tax If you have allied services in your educational institution monetary benefit from deposit substitutes and from
prescribed in Subsection (A) hereof shall be hospitals, which is equal to 50% of your gross income, trust funds and similar arrangements received by
imposed on the entire taxable income. domestic corporations, and royalties, derived from
you no longer qualify for the optional 10% tax rate on
sources within the Philippines: Provided, however, That
For purposes of this Subsection, the term 'unrelated taxable income. interest income derived by a domestic corporation from
trade, business or other activity' means any trade, a depository bank under the expanded foreign
business or other activity, the conduct of which is not currency deposit system shall be subject to a final
SEC. 27 (C), NIRC as amended by the TRAIN Law
substantially related to the exercise or performance by income tax at the rate of fifteen percent (15%) of such
“(C) Government-owned or -Controlled
such educational institution or hospital of its primary interest income.
Corporations, Agencies or Instrumentalities.— The
purpose or function. A 'proprietary educational
provisions of existing special or general laws to the
institution' is any private school maintained and “(2) Capital Gains from the Sale of Shares of Stock
contrary notwithstanding, all corporations, agencies, or
administered by private individuals or groups with an Not Traded in the Stock Exchange.— A final tax at
instrumentalities owned or controlled by the
issued permit to operate from the Department of the rate of fifteen percent (15%) shall be imposed on
Government, except the Government Service
Education, Culture and Sports (DECS) [17], or the net capital gains realized during the taxable year from
Insurance System (GSIS), the Social Security System
Commission on Higher Education (CHED), or the the sale, exchange or other disposition of shares of
(SSS), the Philippine Health Insurance Corporation
Technical Education and Skills Development Authority stock in a domestic corporation except shares sold or
(PHIC), and the local water districts shall pay such
(TESDA), as the case may be, in accordance with disposed of through the stock exchange.
rate of tax upon their taxable income as are
existing laws and regulations.
imposed by this Section upon corporations or
“x x x”
associations engaged in similar business, industry,
If you are a proprietary educational institution (meaning or activity.
with shareholders or owners), which is non-profit, you can Summary:
avail of the 10% taxable income. GENERAL RULE: The tax of GOCCs is the same as a Corporation Individual
domestic corporation.
Note: Interest from 20% 20%
EXCEPTIONS: Based on Revenue Regulations. 8-2018, Deposits
NON-STOCK TAX EXEMPT
NO PROFIT (Constitution) or the implementing rules and regulations of the TRAIN.
- GSIS Foreign Currency 15% 7.5%
Deposit
STOCK 10% of Taxable Income - SS
NON-PROFIT (SEC 27 (B), NIRC) - PHIC Capital Gains from 15% 15%
- LWDs Sale of Shares (NT
Condition: in SE)
- Income from unrelated activity doesnt exceed PASSIVE INCOME
Capital gains from 6% 6%
50% of Gross Income SEC. 27 (D), NIRC as amended by the TRAIN Law Sale of RP
“(D) Rates of Tax on Certain Passive Incomes.—
Unrelated Activity
“(1) Interest from Deposits and Yield or any other

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 41
INTERCORPORATE DIVIDENDS - Dividends received by GROSS PHILIPPINE BILLINGS, Definition
and/or mail originally commencing their flights
domestic corporation from another domestic corporation. from any foreign port and whose stay in the
SEC. 28 (A) (3), NIRC
- THEY SHALL NOT BE SUBJECT TO TAX. Philippines is for more than forty-eight (48)
(3) International Carrier. - An international carrier hours prior to embarkation save in cases
Example: doing business in the Philippines shall pay a tax of two where the flight of the airplane belonging to
Domestic corporation A received dividends from Domestic and one-half percent (2 1/2 %) on its 'Gross Philippine the same airline company failed to depart
Corporation B, that is exempt from tax. Billings' as defined hereunder: within forty-eight (48) hours by reason of force
majeure;
(a) International Air Carrier. - 'Gross Philippine (3) Chartered flights of passengers, their excess
RESIDENT FOREIGN CORPORATION baggage, cargo and/or mail originally
Billings' refers to the amount of gross revenue derived
- Are foreign corporation that is engaged in from carriage of persons, excess baggage, cargo, and commencing their flights from any Philippine
business in the Philippines. mail originating from the Philippines in a continuous port to any foreign port; and
- How is it taxed? It is taxed the same way as a and uninterrupted flight, irrespective of the place of sale (4) Where a passenger, his excess baggage,
domestic. or issue and the place of payment of the ticket or cargo and/or mail originally commencing his
- Is it allowed to have deductions? Yes. It is passage document: Provided, That tickets revalidated, flight from a foreign port alights or is
exchanged and/or indorsed to another international discharged in any Philippine port and
taxed the same way as a domestic corporation,
airline form part of the Gross Philippine Billings if the thereafter boards or is loaded on another
based on taxable income. aircraft, owned by the same airline company,
passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which the flight from the Philippines to any foreign
EXEMPTIONS: originates from the Philippines, but transshipment of port shall not be considered originating from
There are specific foreign corporations taxed at a definite passenger takes place at any part outside the the Philippines, unless the time intervening
tax rates. Philippines on another airline, only the aliquot portion of between arrival and departure of said
the cost of the ticket corresponding to the leg flown passenger, his excess baggage, cargo and/or
from the Philippines to the point of transshipment shall mail from the Philippines exceeds forty-eight
Summary
form part of Gross Philippine Billings. (48) hours, except, however, when the failure
RFC RATE LEGAL to depart within forty-eight (48) hours is due to
BASIS reasons beyond his control, such as when the
It becomes part of GPB if the origin is the Philippines only next available flight leaves beyond forty-
International 2 ½% of Gross SEC 28 (A) regardless of the place of issue or the place of sale. eight (48) hours or by force majeure. Provided,
Carriers Philippine Billings (3), NIRC however, that if the second aircraft belongs to
What does “originating from the Philippines” mean? a different airline company, the flight from the
Offshore 10% Final Tax SEC 28 (A) Philippines to any foreign port shall be
Banking Units (4), NIRC considered originating from the Philippines
REVENUE REGULATIONS 15-2002 MAY 30, 2002 regardless of the intervening period between
SEC 2 (G) the arrival and departure from the Philippines
Branch Profit 15% of total profits SEC 28 (A)
by the said passenger, his excess baggage,
Remittances earmarked for (5), NIRC
(G) Originating from the Philippines - shall include cargo and/or mail.
remittance
the following:
RAHQ EXEMPT SEC 28 (A) (1) Where passengers, their excess baggage,
Examples
(6a), NIRC cargo and/or mail originally commence their
flight from any Philippine port to any other port (1) From any Philippine port - This is when you go
outside the Philippines; abroad.
ROHQ 10% of Taxable SEC 28 (A)
(2) Chartered flights of passengers of (2) Chartered Flights - This means there is a
Income (6b), NIRC
passengers, their excess baggage, cargo layover in the Philippines. If you stayed for more

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 42
than 48 hours or if the layover is more than 48 One of the contentions of the company is hindi naman Paris? Is it just going to be from Manila to Dubai or pati sa
hours, it can be construed as originating from the continuous or uninterrupted flight yun eh kasi interrupted Paris?
Philippines. Except for cases not attributable to nga. Nag stay nga for layover.
the airline like force majeure, typhoons, you Answer: ITAD Ruling dated March 19, 2002, ang
would have to stay longer. This is the reason Sabi ng BIR, if there is a change in plane belonging to the sabi ng BIR – “Although there has been a change of
why layovers are not longer than 48 hours. same airline at certain point which is not the final aircraft, there is no flight interruption considering the fact
(3) Chartered flights of passengers, their excess destination of the passenger or cargo, the flight is still that both flights belong to your company (same company).
baggage, cargo and/or mail originally continuous and uninterrupted. This is because it belongs What is contemplated by law as flight interruption is the
commencing their flights from any Philippine to the same airline. What is contemplated as a flight change or transshipment at any port outside the
port to any foreign port; interruption is the change or transshipment at any port Philippines from an airline to another airline, which in such
(4) Alights or discharged in the Philippines and outside the Philippines from an airline to another airline case only the aliquot portion of the cost of the ticket
boards another aircraft of a different airline which in such case only the aliquot portion of the cost of corresponding to the leg flown from the Philippines to the
company. the ticket corresponding to the leg flown from the point of transshipment shall form part of Gross Philippine
Philippines to the point of transshipment shall form part of Billings.” Therefore, since binili mo yung ticket as isa, it is
The flight of the Philippines to any foreign port shall not be Gross Philippine Billings. part of your Gross Philippine Billings.
considered as originating from the Philippines unless the
time intervening between the arrival and departure of said Kailangan para maging subject to tax, it has to originate Paano sya hindi magiging part?
passenger, excess baggage, cargo originating from the from the Philippines and it has to be continuous.
Philippines exceeds 48 hours, except when it is due to Let’s say pumunta ka sa Dubai and your airline is
reasons beyond the control. Let’s say pupunta ka sa Paris. You are from Manila. Mag Emirates tapos bumili ka nanaman ng another ticket from
lay-over sa Dubai kasi ang airline mo is Emirates. Pero Etihad for your flight from Dubai to Paris. In this case, only
You have the 48 hours period. ang local airline mo is Cebu Pacific. Nag book ka sa the flight from Manila to Dubai under the Emirates will
Emirates. Let’s say may codeshare and CebPac with form part of your Gross Philippine Billings.
Continuous and uninterrupted flight shall refer to a flight in Emirates. Your ticket is naka under Emirates pero the
the carrier of the same airline company from the moment servicing from Davao to Manila is CebPac. Pero from You have Offshore Banking Units. You already know the
a passenger’s excess baggage, cargo is lifted from the Manila to Dubai, Emirates na. Then Dubai to Paris, tax kapag employed ka with an Offshore Banking Unit.
Philippines up to the point of final destination of the Emirates. The question now is kung ikaw mismo yung O.B.U., how
passenger, excess baggage, cargo. much is the tax?
Question: Sino ang ma ta tax sa flight from Davao
Take note of the definition of Gross Philippines Billings. to Manila? Emirates or CebPac? How much is the tax? Income derived by offshore banking units authorized by
the Bangko Sentral ng Pilipinas (BSP) to transact
In the ITAD Ruling, there was a change of aircraft. Ang Answer: Ang ma ta tax dito ay CebPac. CebPac business with offshore banking units including any interest
nangyari dito, let’s say Cathay Pacific nag lay-over sa is a domestic corporation. So ang tax dito is 30%. income derived from foreign currency loans granted to
Manila. From Hongkong papunta ka ng L.A. kung ikaw You can only be taxed na 2.5% if you are a Resident residents shall be subject only to a final tax at the rate of
nag lay-over sa Manila, meaning nag change ng plane. Foreign Corporation like Emirates. This is because ten percent (10%).
Tapos dumeritso doon. Kasi the problem here is whether Emirates is incorporated under the laws of UAE and it is
the entire ba, is it going to be the entire length ang i doing business in the Philippines. You also have Branch Profits Remittances. Let’s say may
compute or is it only the aliquot portion. branch dito, ngayon mag re-remit sa Head Office. So how
Question: Which part will be subject to tax. Is it much is the tax rate? 15%. That 15 % is based be based
going to be just the Manila-Dubai flight or pati yung Dubai- on the total profits applied or earmarked for remittance

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 43
without any deduction for the tax component thereof. So
paid in the Philippines equivalent to twenty percent (20%),
kung magkano yung in-earmark mo for repatriation or which represents the difference between the regular income
(B) Tax on Nonresident Foreign Corporation. -
remittance, that will be taxed at 15% without any tax of thirty-five percent (35%) and the fifteen percent (15%)
deduction for the tax component thereof. (1) In General. - Except as otherwise provided in this Code, a tax on dividends as provided in this subparagraph: Provided,
foreign corporation not engaged in trade or business in the that effective January 1, 2009, the credit against the tax due
Philippines shall pay a tax equal to thirty-five percent (35%) of shall be equivalent to fifteen percent (15%), which represents
The Non-Resident Foreign Corporation is taxed at 30% of the gross income received during each taxable year from all the difference between the regular income tax of thirty percent
the gross income received during each taxable year. sources within the Philippines, such as interests, dividends, (30%) and the fifteen percent (15%) tax on dividends; [27]
rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or (c) Capital Gains from Sale of Shares of Stock not Traded in
B) Tax on Nonresident Foreign Corporation. – the Stock Exchange. - A final tax at the rates prescribed below
determinable annual, periodic or casual gains, profits and
- NRFC is taxed at 30% of the gross income income, and capital gains, except capital gains subject to tax is hereby imposed upon the net capital gains realized during
received during each taxable year. All of the under subparagraph 5 ( c ): Provided, That effective January the taxable year from the sale, barter, exchange or other
1, 2009, the rate of income tax shall be thirty percent (30%). disposition of shares of stock in a domestic corporation, except
income multiply by 30%, that is your income tax shares sold, or disposed of through the stock exchange:
[26]
for NRFC.
- NRFC are those corporated or established in any (2) Nonresident Cinematographic Film Owner, Lessor or Not over P 100,000 5%
Distributor. - A cinematographic film owner, lessor, or On any amount in excess of P 100,000 10%
other state outside the Philippines and is not
distributor shall pay a tax of twenty-five percent (25%) of its
doing business in the Philippines. gross income from all sources within the Philippines.

EXAMPLE: (3) Nonresident Owner or Lessor of Vessels Chartered by


1. Nonresident Cinematographic Film Owner, Philippine Nationals. - A nonresident owner or lessor of
vessels shall be subject to a tax of four and one-half percent (4
Lessor or Distributor. - A cinematographic film 1/2%) of gross rentals, lease or charter fees from leases or Bases 5% of Gross Income, in lieu of local
owner, lessor, or distributor shall pay a tax of charters to Filipino citizens or corporations, as approved by the
Maritime Industry Authority. Conversion and and national taxes
twenty-five percent (25%) of its gross income
Development Act
from all sources within the Philippines. (4) Nonresident Owner or Lessor of Aircraft, Machineries and of 1992
2. Nonresident Owner or Lessor of Vessels Other Equipment. - Rentals, charters and other fees derived
Chartered by Philippine Nationals. - A by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half PEZA Entitled to income tax holiday,
nonresident owner or lessor of vessels shall be percent (7 1/2%) of gross rentals or fees.
subject to a tax of four and one-half percent (4 For 4 or 6 years depending on the
1/2%) of gross rentals, lease or charter fees from (5) Tax on Certain Incomes Received by a Nonresident nature of your business, after that,
leases or charters to Filipino citizens or Foreign Corporation. - you are already taxable of 5 %
corporations, as approved by the Maritime (a) Interest on Foreign Loans. - A final withholding tax at the
Industry Authority. BOI You are taxed at ITH (4 or 6 years)
rate of twenty percent (20%) is hereby imposed on the amount
of interest on foreign loans contracted on or after August 1, depending on the nature of your
3. Nonresident Owner or Lessor of Aircraft, business plus normal income tax
1986;
Machineries and Other Equipment. - Rentals, rate
charters and other fees derived by a nonresident (b) Intercorporate Dividends. - A final withholding tax at the
lessor of aircraft, machineries and other rate of fifteen percent (15%) is hereby imposed on the amount
of cash and/or property dividends received from a domestic
equipment shall be subject to a tax of seven and
corporation, which shall be collected and paid as provided in MINIMUM CORPORATE INCOME TAX (MCIT)
one-half percent (7 1/2%) of gross rentals or Section 57 (A) of this Code, subject to the condition that the
- A minimum corporate income tax of two percent
fees. country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the (2%) of the gross income as of the end of the
nonresident foreign corporation taxes deemed to have been taxable year, as defined herein, is hereby
Related provision under the NIRC:

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 44
imposed upon any DOMESTIC corporation of the gross income. So it does not follow na kahit lugi ka, Q: What if on the 6th year:
taxable under this Title, beginning on the fourth wala kang babayarang tax, because you have your MCIT. Illustration: (to be inserted later)
taxable year immediately following the year in
which such corporation commenced its Rationale of the law: You had your earnings, it’s just that Sabihin natin hindi siya naubos, so ang nadeduct mo lang
business operations, when the minimum you have more deductions. But you still earned because is 15. Meron ka pang dapat 5 na icarry over. Pagdating
income tax is greater than the tax computed you have gross income. dito, yung MCIT ang magmalaki, hindi mo na pwede i-
under Subsection (A) of this Section for the deduct yung carry over ng MCIT. Kasi this is already your
taxable year. The only time that you would not incur any tax is when minimum, hindi na pwedeng lower pa. What would
- Shall be imposed whenever shall corporation has you have no gross income. happen then? If meron ka pa sa 3 years, icarry mo siya sa
zero or negative taxable income whenever the This is only applicable on your fourth taxable year. You next. Magpray ka na pwede mo pa siyang ideduct sa mas
amount of MCIT is greater than the normal are only taxed/ imposed of your MCIT on your fourth mataas na normal tax kaysa sa MCIT.
income tax dues from such corporation. taxable year.
- Please take note that domestic ______ now is
already applicable to domestic and resident Q: Why is it that on your first 3 years, you are not imposed REITERATION: Go Back to the example:
foreign corporation. with MCIT?
Since mas mataas si normal tax (5th year), 15 ang
ILLUSTRATION: ( I left my notes at home, i-insert lang A: Because the law will allow you to recuperate your bayaran mo, but since you have a benefit of 1.7 ( 2-0.30),
nako unya pag-uli.) losses. But once you reached your fourth year, tuloy-tuloy kasi diba dapat kung normal tax, 0.30 lang bayaran mo,
na yan. pero kang 2 na binayaran, i-deduct mo ngayon sa 15, so
13.3. For as long as pag ideduct mo, hindi siya maglower
1 2 3 4 5 6
Carry Forward of Excess Minimum Tax. ng MCIT, because MCIT is ALWAYS the minimum you
G/I 100 100 - Any excess of the minimum corporate income tax have to pay.
over the normal income tax as computed under
A/D (99) (50) Subsection (A) of this Section shall be carried Let’s say yung benefit mo is 14, so 1. Hindi parin 1 ang
forward and credited against the normal income babayaran mo kundi 2 because this is your minimum.
T/I 1 50 tax for the three (3) immediately succeeding Your minimum is always your minimum, although it is not
taxable years. the tax you will pay is the tax is higher.
T/R 30% 30%
ILLUSTRATION: (to be inserted later) The carrying forward would last for 3 consecutive years.
T/D 0.30 15
Same concept with NOLCO.
MCIT 2 2 Magkano yung excess mo dun sa normal tax? 1.7. So you
have the benefit of carrying it forward. Let’s say, on your Q: Are there exceptions, can we ask indulgence from the
5th year, your gross income is 100, your allowable government na hindi na ako pabayarin ng MCIT kasi wala
MCIT is 2% of the gross income. 2% of 100 is 2. Ang sabi deduction is 50. Taxable income is 50. 30% of 50 is 15. talaga kaming pera.
sa batas, kapag ang MCIT mo is greater than your normal So ang MCIT mo (2% of 100 =2), so whichever is higher,
tax, ____ is your MCIT. Kaya siya tinawag na minimum yung babayaran mong tax is 15. But remember, meron A: YES. Under the Relief from the Minimum Corporate
kasi that is the minimum that you could pay. In other kang carry forward na 1.7, so yung 1.7 i-deduct mo. You Income Tax Under Certain Conditions. - The Secretary
words, pag ikaw nag-negosyo, you have to determine have that benefit. So you have 13.3. You can carry this of Finance is hereby authorized to suspend the
your MCIT. Kahit luging-lugi ka, you still have to pay 2% forward up to 3 years, succeeding, parang NOLCO. imposition of the minimum corporate income tax on

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 45
any corporation which suffers substantial losses on In addition to other taxes imposed by this Title, there is
account of: hereby imposed for each taxable year on the improperly
a) prolonged labor dispute; or accumulated taxable income of each corporation Q: Are there reasons kung bakit i-aacumulate mo
REQUISITES: described in Subsection B hereof, an improperly yung earnings beside the fact na ayung mong
1. Losses must arise from strike staged by accumulated earnings tax equal to ten percent (10%) of magbayad ng tax?
employees the improperly accumulated taxable income.
2. Which lasted for more than 6 months YES. Sec 29 (C)
3. Within the taxable year; and IAET shall apply to every corporation formed or availed for Evidence of Purpose to Avoid Income Tax. –
4. Which has caused the temporary shutdown of the purpose of avoiding the income tax with respect to its (1) Prima Facie Evidence. - the fact that any
business operations shareholders or the shareholders of any other corporation, corporation is a mere holding company or investment
by permitting earnings and profits to accumulate instead company shall be prima facie evidence of a purpose to
EXAMPLE: of being divided or distributed. avoid the tax upon its shareholders or members.
A strike was staged beginning November 2017 (2) Evidence Determinative of Purpose. - The
and ended June 2018 (8 months), would that be **Example: fact that the earnings or profits of a corporation are
considered as a prolonged labor dispute? A domestic corporation. Meron siyang income and yung permitted to accumulate beyond the reasonable needs of
income nya is subject to tax. Tapos meron na naman the business shall be determinative of the purpose to
NO. Because it is not within the taxable year. syang income after the tax. Sinong nagmamay-ari nung avoid the tax upon its shareholders or members unless
Kasi within the 2017 taxable year, 2 months lang, corporation? Diba yung mga shareholders. the corporation, by the clear preponderance of evidence,
tapos 6 months for 2018. It is not more than 6 shall prove to the contrary.
months in a taxable year. And even if it is more Pero kung idedeclare sya na dividends, magkano yung
than 6 months, kung hindi naman nag-shutdown tax sa individual shareholder? = FINAL TAX of 10%. If the accumulation is within the reasonable means of the
ang operation, it is still not qualified as a company, then it cannot be subject to IAET.
prolonged labor dispute **Si Ms Baucan, may holding sya with this corporation,
pag magdeclare ng dividends, yung matatanggap nya na Q: What is the reasonable needs of the business?
b) force majeure; or dividend will be subject to 10% dividend’s tax. A: The reasonable needs of the business are those
- Causes due to irresistible force as acts of God reasonably anticipated needs of the business.
like lightning, earthquake, storm and the like. Q: What if hindi magdeclare para hindi maging
- Also includes armed conflicts and war insurgency subject ng tax? Meaning nag-accumulate yung *example: if the company wants to expand the business,
corporation kase nasa corporation lang yung dividend, buy land or car. Then i-hohold nila and hindi ididistribute
c) legitimate business reverses hindi nadistribute. That’s why we have IAET. The purpose yung kita kase gusto naming mag expand and gagamitin
- It includes substantial losses sustained by fire, of IAET is just to avoid the non-payment of tax. nila yun to buy capital assets.
robbery, theft or embezzlement or for other
economic reasons affirmed by the Secretary of Hindi ididistribute sa stockholder ang dividend because
Finance they want to avoid paying the dividend’s tax. RR 2-2001
BUT you cannot avoid paying tax even if hindi mo The touchstone of the liability is the purpose behind the
October 31, 2018 dinistribute kase merong IAET. accumulation of the income and not the consequences of
Miranda 1:07:01 - 1:20:00 the accumulation. Thus, if the failure to pay dividends is
Thus, due to some other causes, such as the use of
IAET (IMPROPERLY ACCUMULATED EARNINGS TAX) Distributed Dividend = 10% dividends/income tax undistributed earnings and profits for the reasonable
(NIRC, Sec. 29 [A]) Undistributed Dividend = 10% IAET needs of the business, such purpose would not generally

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 46
make the accumulated or undistributed earnings subject 5. Taxable partnerships Ordinary assets shall refer to all real properties specifically
to the tax. However, if there is a determination that a 6. General professional partnerships excluded from the definition of capital assets under Sec.
corporation has accumulated income beyond the (*WHY? Because GPP is subject to constructive 39(A)(1) of the Code, namely:
reasonable needs of the business, the 10% improperly distribution of income. So kahit di nila ideclare, the 1. Stock in trade of a taxpayer or other real
accumulated earnings tax shall be imposed. partners are required to declare the receipts, constructive property of a kind which would properly be included in the
receipts.) inventory of the taxpayer if on hand at the close of the
CASES: 7. Non-taxable joint ventures taxable year; or
**Cyanamid vs CA 8. Enterprises duly registered with the Philippine 2. Real property held by the taxpayer primarily
Economic Zone Authority under R.A. 7916, and for sale to customers in the ordinary course of his trade or
**Manila Wine Merchants vs CIR- asked in the bar: enterprises registered pursuant to the Bases Conversion business; or
“WHAT IS THE IMMEDIACY TEST?” and Development Act of 1992 under R.A. 7227, as well as 3. Real property used in trade or business (i.e.,
“To determine the “reasonable needs” of the other enterprises duly registered under special economic buildings and/or improvements) of a character which is
business in order to justify an accumulation of earnings, zones declared by law which enjoy payment of special tax subject to the allowance fordepreciation provided for
the Courts of the United States have invented the so- rate on their registered operations or activities in lieu of under Sec. 34(F) of the Code; or
called “Immediacy Test” which construed the words other taxes, national or local (R.R. 2-2001, Sec. 4) 4. Real property used in trade or business of the
“reasonable needs of the business” to mean the taxpayer.
immediate needs of the business, and it was generally Q: Yung iba kasi mag-claim na publicly held-
held that if the corporation did not prove an immediate corporations sila para hindi masala sa IAET. So pano Real properties acquired by banks through foreclosure
need for the accumulation of the earnings and profits, the mo sya masabing publicly-held corp? RR 2-2001 sales are considered as their ordinary assets. However,
accumulation was not for the reasonable needs of the banks shall not be considered as habitually engaged in
business, and the penalty tax would apply. American For purposes of these Regulations, closely-held the real estate business for purposes of determining the
cases likewise hold that investment of the earnings and corporations are those corporations at least fifty percent applicable rate of withholding tax imposed under Sec.
profits of the corporation in stock or securities of an (50%) in value of the outstanding capital stock or at least 2.57.2(J) of Revenue Regulations No. 2-98, as amended.
unrelated business usually indicates an accumulation fifty percent (50%) of the total combined voting power of
beyond the reasonable needs of the business.” all classes of stock entitled to vote is owned directly or **Take note that just because di mo binebenta yung
indirectly by or for not more than twenty (20) individuals. Real Property, that doesn’t mean na capital asset na
Therefore, Immediacy Test means Reasonable Domestic corporations not falling under the aforesaid yun. For as long as it is used in the business, it is
needs of the business. Thus, not subject to IAET. definition are, therefore, publicly-held corporations. considered ordinary asset.

Q: What are the treatment of sale or exchange of


Ordinary Assets & Capital Assets ordinary assets?
RR 7-03 defines OA & CA A: If ordinary asset sya, it is subject to your normal income
Q: Are there exemptions? tax. If Capital Asset naman, it is subject to capital gains
A: the 10% IAET shall not apply to: Capital Assets s shall refer to all real properties held by a tax.
1. Publicly-held corporations (NIRC, Sec. 29 [B][2]) taxpayer, whether or not connected with his trade or
2. Banks and other non-bank financial intermediaries business, and which are not included among the real Q: How about Capital assets which are NOT Real
3. Insurance companies properties considered as ordinary assets under Sec. Property?
4. Publicly-held corporations 39(A)(1) of the Code. A: in case of individual taxpayer, Sec 39 provides
(*as to #1-4, the reason is that there are other Percentage Taken into Account - In the case of a
regulatory body who will review the accumulated profits.) taxpayer, other than a corporation, only the following

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 47
percentages of the gain or loss recognized upon the sale corporation: Provided, that stocks issued for property, that will not be taxable provided may
or exchange of a capital asset shall be taken into account services shall not be considered as issued in return kapalit na shares.
in computing net capital gain, net capital loss, and net for property.
income.
Q: Why is it not taxable?
(a) A corporation, which is a party to a merger or A: Because in effect , there is really no exchange of
Q: Ano ba ng Capital asset ng individual which is not
real property? consolidation, exchanges property solely for ownership. Nagpalitan lang tayo ng medium. Pero
A: Jewelry. (Kung ibenta mo tapos nagkaroon ka ng net stock in a corporation, which is a party to the same pa rin ang owner ng mga properties. That’s
capital gain, we have this so called Holding Period). merger or consolidation; or why there is no tax.
Sec 39: So you’ll treat the capital gain One hundred For the purposes of discussion, ito yung tinatawag
percent (100%) if the capital asset has been held for not na walang gain or loss. (b) A shareholder exchanges stock in a
more than twelve (12) months; and Fifty percent (50%) if This contemplates that: Corporation A and corporation, which is a party to the merger or
the capital asset has been held for more than twelve (12) Corporation B = Merge consolidation, solely for the stock of another
months.
B is surviving and A, nag merge kay B. corporation also a party to the merger or
So all assets of A, mapapasa, mata-transfer. consolidation; or
Foreclosure sale of Real Property
Real properties acquired by bank for foreclosure sales are “ito yung stock for stock na tinatawag ”May
considered ordinary assets. stockholder ito, walang inexchange na asset pero
Q:Does the transfer or exchange taxable? inexchange ang shares. Stock for stock merger.
FORECLOSURE SALES OF REAL PROPERTY A: So ito ang 40 C (2) provision na the transfer (c) A security holder of a corporation, which is a
hindi taxable, provided that you comply with the party to the merger or consolidation, exchanges
Real property acquired by ___ of foreclosure sales requisites. his securities in such corporation, solely for
are considered as ordinary assets. However, stock or securities in such corporation, a party
banking ______s Requisites: to the merger or consolidation.
No gain or loss shall also be recognized if in Kasi wala naming binenta eh, ako parin ang may-
Foreclosure sale is considered as ordinary asset. pursuance of a plan of merger. ari, nag-iba lang ako ng corporation.
Example:
NIRC SEC 40 (2) GR: Every transfer is taxable. Meron akong property: Bahay, sasakyan. Gumawa
(2) Exception. - No gain or loss shall be XPN: No gain or loss shall also be recognized if in sila ng corporation.
recognized if in pursuance of a plan of merger or pursuance of a plan of merger or consolidation. A Investment: Property
consolidation – corporation is a party to a merger or consolidation, So nag invest kami sa corporation, nag-invest kami
No gain or loss shall also be recognized if property exchanges properties solely for stock in a ng property in exchange of shares.
is transferred to a corporation by a person in corporation which is a party to a merger.
exchange for stock or unit of participation in such a So ito yun, syempre ang nagmamay-ari ng Q: Bakit naming kinorpo?
corporation of which as a result of such exchange stockholders ng A pag na merge na sya, itatransfer A: Kasi may nanghabol sa amin na creditor. Pag na
said person, alone or together with others, not yung properties, magkakaroon na sila ng stocks kay invest na sa corpo, nandoon na ang assets.
exceeding four (4) persons, gains control of said B. Kasi na merge na. So whatever na-exchange na Therefore, hindi na ma-aagaw ni creditor.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 48
Q: Pag-i-exchange natin to may tax to? Q: What is the nature of withholding? It is a tool to for BIR to cross-match the revenue
A: Yes, unless you comply with the last paragraph. expense. Malalaman nilang may nagtatago.
A: Si B nagrender ng service kay A. si A nagbayad.
Now we have what we call withholding system in the An income, when it is required to be withhold, tapos
(d) If property is transferred to a corporation by Philippines, which is a matter of advance collection. hindi mo winidhold, you cannot declare it as an
a person in exchange for stock or unit of So let’s say, 100 ang cost of service, supposedly expense. SO meaning kapag di winidhold ni A si
participation in such a corporation, as a result of after magrender ni B ng service, magbabayad si A 10%, di nya pwedeng ideclare na expense si 100.
such exchange said person gains control of said ng 100. Kaya ma-foforce ka magwithhold. Kasi if di mo
corporation, provided that stocks issued for withhold di ka makadeclare ng expense as
services shall not be considered as issued in But we have the withholding system so ang allowable deduction. This is the mechanism of the
return for property. 
 mangyayari, si A, magwi-withhold na sya, let’s say government to ensure that there is compliance and
10%. So ang ibabayad nya na lang kay B is 90%. proper collection of taxes.
So there will be no tax, if A transferred her The 10% would be remitted to the BIR. This is a
properties in exchange of share, and A gains matter of advance collection. Q: What are non-resident Foreign Corporation?
control of said corporation.
Q: Anong mangyayari pag wala nito? A: These are foreign corporations not doing
Q: Bakit walang tax? business. They are taxable with their income within
A: Si B ang dapat magbayad ng tax. So mangyayari the Philippines.
A: Kasi she owns the corporation that owns the magdedeclare sya ng gross income. Let’s say 30%
property that she previously owned. There is no sya , so 30% ang ibayad nya kay BIR. Let’s say NRFC nagkaroon ng income dito. Nag
change of ownership so it is not taxable. render ng service or benta, ang nagbabayad ng
Ang problema kasi pag ganito, hihintayin pa ni BIR benta is from the Philippines. Now, if walang
Provided there is control. So let’s say you have
na mataopos ang buong taon bago sya magbayad withholding, paano I dedeclare ni NRFC and income
50% +1. Pero pag inexchange nya pero nagahold
or maghihintay pa tayo na ideclare ni B, bago sya sa BIR in the Philippines?
lang sya ng let’s say 49% kasi may mga iba pang
magbabayad.
tao na si B=51%. Now that exchange is already
A:Si payor in Philippines, sya ang mag withhold ng
TAXABLE. Kasi in effect ang may-ari na ng What is the advantage of withholding system, upon 30%. SO bago bayaran ang 100, iwithhold nya nag
property na inexchange nya, si B na. payment or collection, mare-remit agad sya kay BIR. 30. That would constitute the payment of the NRFC
This would also ensure proper matching. Bakit? outside the country. Kasi wala sila way to force a
WITHHOLDING OF TAXES
Kasi if alam ni BIR na ito 10%, so medaling ma- NFRC, kasi wala naman sila sa territory natin.
Q: What is withholding? match ni BIR ang total amount na dpat ideclare ni That’s why we will force the payor. Kasi if di
taxpayer. magwithhold ang payor, he cannot able to declare it
A: It is actually a manner of collection. as deductions.

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 49
Withhold fund serves are trust fund for the
Procter and Gamble Philippine Manufacturing that private respondent, as withholding agent, is obliged
government. Corporation (“P&G-Phil.”) declared dividends payable by law to withhold and to pay over to the Philippine
to its parent company and sole stockholder, Procter government the tax on the income of the taxpayer,
Q: So who is liable if nagwithhold ka tapos hindi and Gamble Co., Inc. (USA) (“'P&G-USA"). P&G-Phil. PMC-U.S. A. (parent company).
niremit? filed with petitioner Commissioner of Internal Revenue
a claim for refund or tax credit claiming, among other However, such fact does not necessarily connote that
things, that pursuant to Section 24 (b) (1) of the private respondent is the real party in interest to claim
A: The one who is liable is the withholding agent.
National Internal Revenue Code (“NIRC"), as amended reimbursement of the tax alleged to have been
Because the fact you withheld the portion of the by PD No. 369, the applicable rate of withholding tax on overpaid. Payment of tax is an obligation physically
payment, you have become the trustee for the the dividends remitted was only fifteen percent (15%) passed off by law on the withholding agent, if any, but
government. (and not thirty-five percent [35%]) of the dividends. the act of claiming tax refund is a right that, in a strict
sense, belongs to the taxpayer which is private
HELD. respondent’s parent company. The role or function of
Withholding agent: Trustee of the government
PMC-Phils., as the remitter or payor of the dividend
P&G-Phil. is a withholding agent of P&G-USA. The income, is merely to insure the collection of the
Check and balance mechanism is important withholding agent, P&G-Phil., is directly and dividend income taxes due to the Philippine
independently liable for the correct amount of the tax government from the taxpayer, “PMC-U.S.A.," the non-
XIV. TAX-FREE EXCHANGES AND OTHER TAX- that should be withheld from the dividend remittances. resident foreign corporation not engaged in trade or
EXEMPT TRANSACTIONS The withholding agent is, moreover, subject to and business in the Philippines, as “PMC-U.S.A." is subject
A. In General liable for deficiency assessments, surcharges and to tax equivalent to thirty five percent (35%) of the
B. Merger or Consolidation penalties should the amount of the tax withheld be gross income received from “PMC-Phils.” in the
C. Exchange of Property for Shares of Stock finally found to be less than the amount that should Philippines was. . .dividends. . ."(Sec. 24 [b], Phil. Tax
D Other Tax-Exempt Transactions have been withheld under law. Code). Being a mere withholding agent of the
government and the real party in interest being the
A “person liable for tax” has been held to be a parent company in the United States, private
XV. WITHHOLDING OF TAXES “person subject to tax” and properly considered a respondent cannot claim refund of the alleged overpaid
a. CIR v. Procter and Gamble, GR 66838, Dec. 2, “taxpayer.” The terms “liable for tax” and “subject to tax” taxes
1991 both connote legal obligation or duty to pay a tax. It is
b. CIR v. Procter and Gamble, 160 SCRA 560 very difficult, indeed conceptually impossible, to
c. CIR v. Procter and Gamble, 204 SCRA 377 consider a person who is statutorily made “liable for
d. Marubeni v. CIR, 177 SCRA 501 tax” as not “subject to tax,” By any reasonable
e. CIR v. CA, GR 127105, June 25, 1999 and Aug. standard, such a person should be regarded as a party G.R. No. L-66838 April 15, 1988
30, 1999 in interest, or as a person having sufficient legal CIR vs. Procter and Gamble
(NOTE: Cases a and c are the same) interest, to bring a suit for refund of taxes he believes
were illegally collected from him. ISSUES:
CIR v. Procter and Gamble ; GR 66838, Dec. 2, 1991 1.) Whether or not PMC-Phil. is the proper party
204 SCRA 377 P&G-Phil. is the real party in interest to claim to claim the refund – NO.
reimbursement of alleged tax overpayment. lt is true 2.) Whether or not the U. S. allows as tax credit

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 50
the "deemed paid" 20% Philippine Tax on such foreign corporation out of accumulated (1), the amount of its gains, profits, or income
such dividends? – NO profits [as defined in subsection (c) (1) (a)] of a computed without reduction by the amount of
3.) Whether or not private respondent is entitled year for which such foreign corporation is not a the income, war profits, and excess profits
to the preferential 15% tax rate on dividends less developed country corporation, be taxes imposed on or with respect to such
declared and remitted to its parent deemed to have paid the same proportion of profits or income by any foreign country.... ;
corporation. – NO any income, war profits, or excess profits and
taxes paid or deemed to be paid by such
HELD: foreign corporation to any foreign country or to (B) for purposes of subsections (a) (2) and (b)
any possession of the United States on or with (2), the amount of its gains, profits, or income
1. No. The submission of the Commissioner of respect to such accumulated profits, which the in excess of the income, was profits, and
Internal Revenue that PMC-Phil. is but a amount of such dividends (determined without excess profits taxes imposed on or with
withholding agent of the government and regard to Section 78) bears to the amount of respect to such profits or income.
therefore cannot claim reimbursement of the such accumulated profits in excess of such
alleged overpaid taxes, is completely income, war profits, and excess profits taxes The Secretary or his delegate shall have full
meritorious. The real party in interest being the (other than those deemed paid); and power to determine from the accumulated
mother corporation in the United States, it profits of what year or years such dividends
follows that American entity is the real party in (2) to the extent such dividends are paid by were paid, treating dividends paid in the first
interest, and should have been the claimant in such foreign corporation out of accumulated 20 days of any year as having been paid from
this case. profits [as defined in subsection (c) (1) (b)] of a the accumulated profits of the preceding year
year for which such foreign corporation is a or years (unless to his satisfaction shows
2. The law pertinent to the issue is Section 902 of the less-developed country corporation, be otherwise), and in other respects treating
U.S. Internal Revenue Code, as amended by Public deemed to have paid the same proportion of dividends as having been paid from the most
Law 87-834, the law governing tax credits granted to any income, war profits, or excess profits recently accumulated gains, profits, or
U.S. corporations on dividends received from foreign taxes paid or deemed to be paid by such earnings.
corporations, which to the extent applicable reads: foreign corporation to any foreign country or to
any possession of the United States on or with
SEC. 902 - CREDIT FOR CORPORATE respect to such accumulated profits, which the 3. There is nothing in the aforecited provision that
STOCKHOLDERS IN FOREIGN amount of such dividends bears to the amount would justify tax return of the disputed 15% to the
CORPORATION. of such accumulated profits. private respondent. Furthermore, as ably argued by the
petitioner, the private respondent failed to meet certain
(a) Treatment of Taxes Paid by Foreign xxx xxx xxx conditions necessary in order that the dividends
Corporation - For purposes of this subject, a received by the non-resident parent company in the
domestic corporation which owns at least 10 (c) Applicable Rules United States may be subject to the preferential 15%
percent of the voting stock of a foreign (1) Accumulated profits defined - For purpose tax instead of 35%. Among other things, the private
corporation from which it receives dividends in of this section, the term 'accumulated profits' respondent failed: (1) to show the actual amount
any taxable year shall- means with respect to any foreign corporation. credited by the U.S. government against the income tax
due from PMC-U.S.A. on the dividends received from
(1) to the extent such dividends are paid by (A) for purposes of subsections (a) (1) and (b) private respondent; (2) to present the income tax return

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 51
of its mother company for 1975 when the dividends profit remittance tax of P114,712 for the third quarter of remitted to and received by the Marubeni Corporation
were received; and (3) to submit any duly authenticated 1981 were paid to the Bureau of Internal Revenue by of Japan. Marubeni Corp, Phils has no participation,
document showing that the U.S. government credited AG&P on August 4, 1981. directly or indirectly, in the investments. Since income is
the 20% tax deemed paid in the Philippines. taxable to those who earned it, thus, it is taxable to
Thus, for the first and third quarters of 1981, AG&P as Marubeni Corp of Japan.
withholding agent paid 15% branch profit remittance on
cash dividends declared and remitted to petitioner at its Marubeni’s contention: Marubeni, Japan is likewise a
head office in Tokyo in the total amount of P229,424.40 resident foreign corporation subject only to the 10%
MARUBENI CORPORATION vs. COMMISSIONER OF on April 20 and August 4, 1981. intercorporate final tax on dividends received from a
INTERNAL REVENUE AND COURT OF TAX domestic corporation in accordance with Section 24(c)
APPEALS Pursuant to a BIR Ruling which states that only profits (1) of the Tax Code of 1977.
remitted abroad by a branch office to its head office
Facts: which are effectively connected with its trade or CIR’s contention: Marubeni, Japan is a non-resident
Marubeni Corporation is a Japanese Corporation duly business in the Philippines are subject to the 15% profit foreign corporation and not engaged in trade or
licensed to engage in business under Philippine laws. remittance tax. Here, the dividends received by business in the Philippines, is subject to tax on income
The said corporation had equity investments in Atlantic Marubeni from AG&P are not income arising from the earned from Philippine sources at the rate of 35% of its
Gulf & Pacific Co. (AG&P) of Manila. For the first business activity in which Marubeni is engaged. gross income under Section 24 (b) (1) of the same
quarter of 1981 ending March 31, AG&P declared and Accordingly, said dividends if remitted abroad are not Code
paid cash dividends to petitioner in the amount of considered branch profits for purposes of the 15% profit
P849,720 and withheld the corresponding 10% final remittance tax imposed by Section 24 (b) (2) of the Tax Issue:
dividend tax thereon. Similarly, for the third quarter of Code. Thus, Marubeni claims for refund of the profit Whether Marubeni Corporation of Japan is a resident
1981 ending September 30, AG&P declared and paid tax erroneously paid. foreign corporation under Philippine laws
P849,720 as cash dividends to petitioner and withheld
the corresponding 10% final dividend tax thereon. CIR denied claim for refund/credit. Ruling:
Reason: The cash dividends remitted by AG&P to Yes. Marubeni Corporation is a resident foreign
AG&P directly remitted the cash dividends to Marubeni Corporation, Japan is subject to 25% tax corporation.
petitioner’s head office in Tokyo, Japan, net not only of (based on the Tax Treaty between Phils & Japan), and
the 10% final dividend tax in the amounts of P764,748 that the taxes withheld of 10% as intercorporate Under the Tax Code, a resident foreign corporation is
for the first and third quarters of 1981, but also of the dividend tax and 15% as profit remittance tax totals one that is “engaged in trade or business” within the
withheld 15% profit remittance tax based on the (sic) 25%, the amount refundable offsets the liability, Philippines. Petitioner contends that precisely because
remittable amount after deducting the final withholding hence, nothing is left to be refunded.” it is engaged in business in the Philippines through its
tax of 10%. Philippine branch that it must be considered as a
CTA still denied the claim for refund. resident foreign corporation. Petitioner reasons that
The 10% final dividend tax of P84,972 and the 15% Reason: The dividends are income taxable to since the Philippine branch and the Tokyo head office
branch profit remittance tax of P114,712.20 for the first Marubeni Corp of Japan. The investments in the are one and the same entity, whoever made the
quarter of 1981 were paid to the Bureau of Internal Atlantic Gulf & Pacific Company of the Marubeni investment in AG&P, Manila does not matter at all. A
Revenue by AG&P on April 20, 1981. Likewise, the Corporation of Japan were directly made by it and the single corporate entity cannot be both a resident and a
10% final dividend tax of P84,972 and the 15% branch dividends on the investments were likewise directly non-resident corporation depending on the nature of

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 52
the particular transaction involved. Accordingly, Convention pursuant to Article 10 (2) (b). gross income from all sources within the
whether the dividends are paid directly to the head Philippines. [Section 24 (b) (1)].
office or coursed through its local branch is of no To simply add the two taxes to arrive at the 25% tax
moment for after all, the head office and the office rate is to disregard a basic rule in taxation that each tax Same; Tax Credit; Discounted rate of 15% is
branch constitute but one corporate entity, the has a different tax basis. While the tax on dividends is given to petitioner on dividends received from a
Marubeni Corporation, which, under both Philippine tax directly levied on the dividends received, “the tax base domestic corporation; Required condition of tax credit
and corporate laws, is a resident foreign corporation upon which the 15% branch profit remittance tax is of not less than 20%; Case at bar.—However, a
because it is transacting business in the Philippines. imposed is the profit actually remitted abroad.” discounted rate of 15% is given to petitioner on
dividends received from a domestic corporation (AG&P)
HOWEVER, Marubeni Corporation having made on the condition that its domicile state (Japan) extends
independent investment attributable only to the head in favor of petitioner, a tax credit of not less than 20% of
office, cannot now claim the increments as ordinary Same; Tax Treaty; Public respondent erred in the dividends received. This 20% represents the
consequence of its trade or business in the Philippines. automatically imposing the 25% rate under Article difference between the regular tax of 35% on non-
10 (2) (b) of the Tax Treaty; Reasons.—Public resident foreign corporations which petitioner would
In other words, the alleged overpaid taxes were respondents likewise erred in automatically imposing have ordinarily paid, and the 15% special rate on
incurred for the remittance of dividend income to the the 25% rate under Article 10 (2) (b) of the Tax Treaty dividends received from a domestic corporation.
head office in Japan which is a separate and distinct as if this were a flat rate. A closer look at the Treaty
income taxpayer from the branch in the Philippines. reveals that the tax rates fixed by Article 10 are the
There can be no other logical conclusion considering maximum rates as reflected in the phrase “shall not
the undisputed fact that the investment (totalling exceed.” This means that any tax imposable by the
283,260 shares including that of nominee) was made contracting state concerned should not exceed the 25%
for purposes peculiarly germane to the conduct of the limitation and that said rate would apply only if the tax COMMISSIONER OF INTERNAL REVENUE, vs. S.C.
corporate affairs of Marubeni, Japan, but certainly not imposed by our laws exceeds the same. In other words, JOHNSON AND SON, INC., and COURT OF
of the branch in the Philippines. It is thus clear that by reason of our bilateral negotiations with Japan, we APPEALS
petitioner, having made this independent investment have agreed to have our right to tax limited to a certain
attributable only to the head office, cannot now claim extent to attain the goals set forth in the Treaty. Facts: SC Johnson and Son Inc., a domestic
the increments as ordinary consequences of its trade or corporation organized and operating under the
business in the Philippines and avail itself of the lower Philippine laws, entered into a license agreement with
Same; Petitioner being a non-resident foreign
tax rate of 10% SC Johnson and Son, United States of America (USA),
corporation with respect to the transaction in
a non-resident foreign corporation based in the U.S.A.
question, as a general rule is taxed 35% of its gross
BUT while public respondents correctly concluded For respondent to use the trademark and technology of
income from all sources within the Philippines.—
that the dividends in dispute were neither subject to SC Johnson and Son USA, it was obliged to pay
Petitioner, being a non-resident foreign corporation with
the 15% profit remittance tax nor to the 10% royalties based on a percentage of net sales and
respect to the transaction in question, the applicable
intercorporate dividend tax, the recipient being a subjected the same to 25% withholding tax on royalty
provision of the Tax Code is Section 24 (b) (1) (iii) in
non-resident stockholder, they grossly erred in payments. Respondent filed a claim for refund of
conjunction with the Philippine-Japan Treaty of 1980.
holding that no refund was forthcoming to the overpaid withholding tax on royalties arguing that it is
xxx Proceeding to apply the above section to the case
petitioner because the taxes thus withheld totalled subject to 10% withholding tax pursuant to the most-
at bar, petitioner, being a non-resident foreign
the 25% rate imposed by the Philippine-Japan Tax favored nation clause of the RP-US Tax Treaty
corporation, as a general rule, is taxed 35% of its
[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 53
West Germany Tax Treaty [Article 12 (2) (b)]. Double taxation of income shall be avoided in the RP-Germany Tax Treaty should apply only if the taxes
following manner: imposed upon royalties in the RP-US Tax Treaty and in
CIR’s contention: the RP-Germany Tax Treaty are paid under similar
● Under Article 13(2) (b) (iii) of the RP-US Tax 1) In accordance with the provisions and subject to the circumstances. This would mean that private
Treaty, which is known as the most favored limitations of the law of the United States (as it may be respondent must prove that the RP-US Tax Treaty
nation clause, the lowest rate of the Philippine amended from time to time without changing the grants similar tax reliefs to residents of the United
tax at 10% may be imposed on royalties general principle thereof), the United States shall allow States in respect of the taxes imposable upon royalties
derived by a resident of the United States from to a citizen or resident of the United States as a credit earned from sources within the Philippines as those
sources within the Philippines only if the against the United States tax the appropriate amount of allowed to their German counterparts under the RP-
circumstances of the resident of the United taxes paid or accrued to the Philippines and, in the Germany Tax Treaty.
States are similar to those of the resident of case of a United States corporation owning at least 10
West Germany. percent of the voting stock of a Philippine corporation On the discussion on double taxation:
● Since the RP-US Tax Treaty contains no from which it receives dividends in any taxable year,
matching credit provision as that provided shall allow credit for the appropriate amount of taxes Double taxation usually takes place when a person is
under Article 24 of the RP-West Germany Tax paid or accrued to the Philippines by the Philippine resident of a contracting state and derives income from,
Treaty, the tax on royalties under the RP-US corporation paying such dividends with respect to the or owns capital in, the other contracting state and both
Tax Treaty is not paid under similar profits out of which such dividends are paid. Such states impose tax on that income or capital. In order to
circumstances as those obtaining in the RP- appropriate amount shall be based upon the amount of eliminate double taxation, a tax treaty resorts to several
West Germany Tax Treaty. tax paid or accrued to the Philippines, but the credit methods. First, it sets out the respective rights to tax of
shall not exceed the limitations (for the purpose of the state of source or situs and of the state of residence
Issue: Whether respondent is entitled to the limiting the credit to the United States tax on income with regard to certain classes of income or capital. In
concessional rate of 10% from sources within the Philippines or on income from some cases, an exclusive right to tax is conferred on
sources outside the United States) provided by United one of the contracting states; however, for other items
Held: No. States law for the taxable year. Xxx. of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by
The RP-US and the RP-West Germany Tax Treaties do The reason for construing the phrase paid under similar the state of source is limited.
not contain similar provisions on tax crediting. Article 24 circumstances as used in Article 13 (2) (b) (iii) of the
of the RP-Germany Tax Treaty, supra, expressly allows RP-US Tax Treaty as referring to taxes is anchored The second method for the elimination of double
crediting against German income and corporation tax of upon a logical reading of the text in the light of the taxation applies whenever the state of source is given a
20% of the gross amount of royalties paid under the law fundamental purpose of such treaty which is to grant an full or limited right to tax together with the state of
of the Philippines. On the other hand, Article 23 of the incentive to the foreign investor by lowering the tax and residence. In this case, the treaties make it incumbent
RP-US Tax Treaty, which is the counterpart provision at the same time crediting against the domestic tax upon the state of residence to allow relief in order to
with respect to relief for double taxation, does not abroad a figure higher than what was collected in the avoid double taxation. There are two methods of relief-
provide for similar crediting of 20% of the gross amount Philippines. the exemption method and the credit method. In the
of royalties paid. Said Article 23 reads: exemption method, the income or capital which is
Given the purpose underlying tax treaties and the taxable in the state of source or situs is exempted in the
Article 23 rationale for the most favored nation clause, the state of residence, although in some instances it may
Relief from double taxation concessional tax rate of 10 percent provided for in the be taken into account in determining the rate of tax

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 54
applicable to the taxpayers remaining income or capital. the royalties; 15 percent when the royalties are paid by
On the other hand, in the credit method, although the a corporation registered with the Philippine Board of
income or capital which is taxed in the state of source is Investments and engaged in preferred areas of
still taxable in the state of residence, the tax paid in the activities; or the lowest rate of Philippine tax that may
former is credited against the tax levied in the latter. be imposed on royalties of the same kind paid under
The basic difference between the two methods is that in similar circumstances to a resident of a third state
the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon
the tax

In negotiating tax treaties, the underlying rationale for


reducing the tax rate is that the Philippines will give up
a part of the tax in the expectation that the tax given up
for this particular investment is not taxed by the other
country. Thus the petitioner correctly opined that the
phrase royalties paid under similar circumstances in the
most favored nation clause of the US-RP Tax Treaty
necessarily contemplated circumstances that are tax-
related.

In the case at bar, the state of source is the Philippines


because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and
technology, located within the Philippines. The United
States is the state of residence since the taxpayer, S.
C. Johnson and Son, U. S. A., is based there. Under
the RP-US Tax Treaty, the state of residence and the
state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the
state of source. Furthermore, the method employed to
give relief from double taxation is the allowance of a tax
credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or
accrued to the Philippines) against the United States
tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year.
Under Article 13 thereof, the Philippines may impose
one of three rates- 25 percent of the gross amount of

Based on the lectures of Atty. Raymund Christian Ong-Abrantes


Michelle Alaba | Dave Abby M. Alano | Eunice L. Ambrocio | Kareen Baucan | Migrio Vina O. Cagampang | Andrea Mabborang | Vienna Miranda 55