PM REYES TAX 1: INCOME TAX // MONTERO
Q3.When is income taxable? (or what are the
PM REYES (TRAIN UPDATED)
2018
In General
Q1.What is an income?
Income means the gain derived from capital, from labor,
or from both combined, including profits gained from
dealings in property or as well as any asset clearly
realized whether earned or not.
It refers to all wealth which flows into the taxpayer other
than as a mere return on capital. (RR No.2)
Three Sources of Income:
1. Invest/Capital
2. Work/Labor
3. Windfall
Ballpen example:
w/ name — income to finder
w/o name — no income to finder
*Treasure Trove Test
Q2.What is an income tax?
Income Tax is a tax on the net income or the entire income
received or realized in one taxable year. It is levied upon
corporate and individual incomes in excess of specified
amounts, less certain deductions and/or specified
exemptions permitted by law.
The final tax on certain passive incomes and withholding
tax on income are embraced within the term.
In CONWI V. CTA [AUGUST 31, 1992], the Supreme Court
defined income tax as an amount of money coming to a
person or corporation within a specified time, whether as
payment for services, interest, or profit from investment.
As stated by the Supreme Court in REPUBLIC OF THE
PHILIPPINES VS. MANILA ELECTRIC COMPANY [NOVEMBER
15, 2002], income tax is imposed on an individual or entity
as a form of excise tax or a tax on the privilege of earning
income. In exchange for the protection extended by the
State to the taxpayer, the government collects taxes as a
source of revenue to finance its activities.
1
As opposed to mere reimbursements or return on capital.
2
As opposed to the common examples of unrealized forex gains or mere revaluation increments.
3
Examples of those exempt from income tax: de minimis benefits and professional fees of GPPs
Edited by: Napa - So
elements of a taxable income?)
Income, gain or profit is subject to income tax when
the following conditions are present:
Gross Income (less) Deductions = Taxable Income
1. There is income, gain or profit 1 (e.g. no
reimbursement — medrep)
2. The income, gain or profit is received or realized
during the taxable year 2 ; (known as the
realization concept) and
3. The income, gain or profit is not exempt from
income tax.3
4. Complete Dominion
Under realization concept there must be:
1. Change in substance
2. Transaction with a third party
Calamansi Example:
Let’s say I used to buy Calamansi but now I used the
seeds to plant in backyard. Will it be taxable?
No, there is an unrealized gain.
Foreign Exchange Example:
What if I exchanged dollars in 2010 and then in 2018 the
exchange rate increased. Can the gain on the exchange
rate be taxable?
No, if you don’t exchange foreign money then not taxable.
There has be realized gain. Which is a closed and
completed transaction.
It’s a way for the officers to check those that are taxable.
Q3.1. What is the difference between income and
capital?
Income is distinct from capital. Income means all the
wealth which flows into the taxpayer other than a mere
return on capital while capital is a fund or property existing
at one distinct point in time while income denotes a flow
of wealth during a definite period of time. Income is gain
derived and severed from capital. (see CHAMBER OF REAL
ESTATE AND BUILDER’S ASSOCIATION, INC. V. ROMULO
[MARCH 9, 2010]).
Income as contrasted with capital or property is to be the
test. The essential difference between capital and income
is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the
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service of wealth. A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or
gains." (see MADRIGAL VS. RAFFERTY [AUGUST 7, 1918]).
Income from capital and labor? Is it a requisite for what
constitutes income?
NO. Because it can also arise from WINDFALL. [See CIR v.
Glenshaw & Murphy v. IRS].
Does it have to be severed from the capital before it is
considered as income?
NO. Tax is subjected on the return of property/cancellation
of lease. The improvements by lessee in this case is a gain
on lessor. According to sir, you really have to look at the
convergence of all 4 elements. [Hevering v. Bruun]
Q3.1.1 Are stock dividends income or capital?
Generally, stock dividends represent capital and do not
constitute as income to its recipient. Mere issuance
thereof is not yet subject to income tax as they are nothing
but an enrichment through increase in value of capital
investment. Such are considered unrealized gain and
cannot be subjected to income tax until that gain has been
realized.
As explained by the Supreme Court in FISHER V. TRINIDAD
[OCTOBER 30, 1922], when a corporation issues stock
dividends, it shows that the corporation’s accumulated
profits have been capitalized, instead of distributed to the
stockholders or retained as surplus available for
distribution. The stockholder receives nothing out of the
corporate assets for his separate use and benefit but a
representation of his increased interest in the capital of
the corporation. The capital still belongs to the corporation
as there is no separation of interest.
Once “actually paid” in money, then does it become an
income and thus taxable.
However, stock dividends constitute as income if a
corporation redeems stock issued so as to make a
distribution. 4 This is essentially equivalent to the
distribution of a taxable dividend the amount so
distributed in the redemption considered as taxable
income. (see COMMISSIONER VS. MANNING [AUGUST 7,
1975])
*Inter-corporate dividends are subject to 0% tax.
The holder of stock dividend was not any poorer or richer
when he received stock dividends (realization). There is
also the idea of severance from capital which has been
4
The exception to the rule that stock dividends do not constitute income shall be discussed more extensively later. Knowing that there is an exception
exists will suffice for now.
Edited by: Napa - So
modified by Helvering v. Bruun.
Stock dividends cannot comply with the requirement of
“wherewithal” (i.e. the capacity to pay.) — By taxing stock
dividends, it is like asking the stockholder to sell his stock
dividends to the BIR.
You have to be liquid to be taxed. You can’t pay
stocks/chickens to the BIR. This is why realization is a
requisite for income. WHEN YOU REALIZE it is a different
question.
Q3.2. Are money received as damages income?
Yes. In COMMISSIONER V. GLENSHAW GLASS CO. [348 U.S.
426], Glenshaw Co was engaged in a protracted litigation with
Hartford-Empire Co where the former demanded exemplary
damages for fraud and treble damages for injury to its business
by reason of the latter’s violation of federal antitrust laws. The
parties settled. Glenshaw did not report the money received as
damages from the settlement in its income tax return. The
Commissioner assessed Glenshaw for the deficiency.
Glenshaw contended that punitive damages, as windfalls
flowing from culpable conduct of third parties are not taxable
income. The US Supreme Court held that money received as
damages must be reported as they constitute income. The mere
fact that such payments were extracted from wrongdoers cannot
detract from their character as taxable income. The Court also
stated that punitive damages cannot be classified as gifts.
Segues into the 3rd requisite. There may be an instance
whereby those not considered as income will be such because
the law says they are.
Tax Benefit Rule - if unable to collect, you may report it as loss.
But if after such report, you receive payment for the debt, it
becomes income in your hands. In contrast, if you receive it
before loss report, its neutral.
It need not arise from capital (unlike madrigal/fisher case) or
labor, since gross income is defined as any source whatever.
In MURPHY V. IRS [493 F.3d 170], the US Court of Appeals
(District of Columbia), held that the amount received as
compensatory damages for emotional distress and loss of
reputation constitutes taxable income.
In CESARINI V US, the court held that even “found money” cannot
be exempt from tax. Treasure trove under the law is not the
same as gifts. The computation of income tax should be done
from the day of discovery.
In HORNUNG V CIR, the court explained that for gifts to be
exempted, the only requisite is that the gift should be given with
a motive beyond a “detached and disinterested generosity.
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Q3.3. What is the constructive receipt doctrine?
The constructive receipt doctrine provides than an item
is treated as income when it is credited to the account of
the, or made unconditionally available to the, taxpayer; no
physical possession is required.
Income is received not only when it is actually handed to
a taxpayer but also when it is merely constructively
received by him. In LIMPAN INVESTMENT V. CIR [JULY
26, 1966], the lessees opted to deposit their payments
when the lessor refused to accept the same in 1957. The
lessor did not report these payments in his 1957 income
tax return. The Supreme Court held that the failure to
report the said rental income is unjustified as, when the
payments were deposited, the lessor was deemed to
have constructive received such rentals.
Conversely, constructive receipt does not apply if there
are substantial limitations or restrictions present.
(HORNUNG V CIR)
Overview of the Philippine Income Tax
System
Q4.What are the features of the Philippine tax
system?
The Philippine tax system is:
1. Direct-Direct taxes are those taxes wherein both
the tax liability as well as the impact or burden of
the tax falls on the same person
2. Progressive- Progressive taxes are those taxes
imposed where the tax rate increases as the tax
base increase
1. Semi-schedular, semi-global
Q4.1. What are the kinds of income tax systems?
The types of income tax systems adopted are as follows:
1. Global Tax System – where the taxpayer is
required to lump up all items of income earned
during a taxable period and pay under a single
set of income tax rates on these different items of
income. (Simply put, varying taxes are imposed
on passive income)
2. Schedular Tax System – where there are
different tax treatments of different types of
income so that a separate tax return is required
to be filed for each type of income and the tax is
computed on a per return or per schedule basis.
(Simply put, one rate for all types of gross
income).
Edited by: Napa - So
3. Semi-Schedular or Semi Global Tax System –
where the tax system is either (a) global (e.g.
taxpayer with compensation income not subject
to final withholding tax or business or professional
income or mixed income – compensation and
business or professional income) or (b) schedular
(e.g. taxpayer with compensation, capital gains,
passive income, or other income subject to final
withholding tax) or (c) both global and schedular
may be applied depending on the nature of the
income realized by the taxpayer during the year.
Q4.2. How do you distinguish “schedular treatment”
from “global treatment” as used in income taxation?
Under the schedular tax system, the various types of
income (i.e. compensation; business/professional
income) are classified accordingly and are accorded
different tax treatments, in accordance with schedules
characterized by graduated tax rates. Since these types
of income are treated separately, the allowable
deductions shall likewise vary for each type of income.
On the other hand, under the global tax system, all
income received by the taxpayer are grouped together,
without any distinction as to type or nature of the income,
and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a graduated
or fixed rate (see TAN VS. DEL ROSARIO [OCTOBER 3,
1994]).
Q4.3. What are the types of Philippine Income Tax
(under Title II of the NIRC)?
The types of Income tax under Title II of the NIRC are:
1. Graduated income tax on individuals
2. Normal corporate income tax on corporations
3. Minimum corporate income tax on corporations
4. Special income tax on certain corporations (e.g.
private educational institutions, FCDUs, and
international carriers)
5. Capital gains tax on sale or exchange of unlisted
shares of stock of a domestic corporation
classified as a capital asset
6. Capital gains tax on sale or exchange of real
property located in the Philippines and classified
as a capital asset.
7. Final withholding tax on certain passive
investment incomes
8. Fringe benefit tax
9. Branch profit remittance tax; and
10. Tax on improperly accumulated earnings.
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Definition of Terms Commissioner the fact of

his physical presence
Q5. Define the following terms: abroad with intention to
reside therein
3. Works and derives
In Section 22(A) to (I), (Z), (GG), and (HH), Tax Code:
income from abroad and
whose employment
Person An individual, a trust,
thereat requires him to be
estate or corporation
physically present abroad
Corporation Includes partnerships, no
most of the time during
matter how created or
the taxable year.
organized, joint-stock
4. Who has been previously
companies, joint accounts,
considered a non-
associations, or insurance
resident citizen and who
companies but does not
arrives in the Philippines
include general professional
at any time during the
partnerships and a joint
taxable year to reside
venture or consortium formed
permanently in the
for the purpose of undertaking
Philippines with respect
construction projects or
to his income derived
engaging in petroleum and
from sources abroad until
other energy operations
date of his arrival in the
pursuant to an operating
Philippines
agreement under a service
Ordinary Income Includes any gain from the sale
contract with the Government
or exchange of property which is
General Partnerships formed by
not a capital asset or property
Professional persons for the sole purpose of
described in Section 39(A)(1)5
Partnerships (GPP) exercising their common
profession, no part of the Resident An individual whose residence
income of which is derived alien is within the Philippines and who
from engaging in any trade or is not a citizen thereof
business Non- An individual whose residence is
Domestic When applied to a corporation, resident not within the Philippines and
Corporation means created or organized in Alien who is not a citizen thereof
the Philippines or under its
laws The 180 days is How to Determine if NRA
Foreign When applied to a corporation, counted on or RA:
Corporation means a corporation which is aggregated/ Relevant factors are: (1)
not domestic accumulated Duration and (2)
Non-resident The term means a citizen of basis Certainty/Definite Period
Citizen the Philippines: NRA Short and Definite
The difference 1. Who establishes to the RA Short and Indefinite
between RC and satisfaction of the RA Long and Definite
NRC is based on Commissioner the fact of RA Long and Indefinite
physical presence his physical presence Foreign Resident A foreign corporation engaged
and on the nature abroad with intention to Corporation in trade or business within the
of stay. reside therein Philippines
2. Who leaves the
Philippines during the
taxable year to reside
abroad either as an
immigrant or for Branch Not a separate
employment on a entity from the
permanent basis who head office. It is
establishes to the a mere
satisfaction of the

5
Which defines what capital assets are and those which are not
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extension, you his trade or business) EXCEPT:

secure a 1. Stock in trade of the
registration taxpayer or other property
establishing the of a kind which would
branch. It is a properly be included in the
resident alien inventory of the taxpayer if
corporation on hand at the close of the
Subsidiary Organized as a taxable year
separate entity 2. Property held by the
from its parent taxpayer primarily for sale
corporation. The to customers in the
relationship is ordinary course of his trade
based on equity or business
or shareholding. 3. Property used in trade or
It is considered business of a character
as a domestic that is subject to allowance
corporation for depreciation
even if it is 4. Real property used in trade
100% owned by or business of the taxpayer
foreign Net Capital Gain The excess of the gains from
corporation sales or exchanges of capital
Statutory Refers to the rate fixed by the assets over the losses from such
Minimum Wage Regional Tripartite Wage and sales or exchanges
Productivity Boar, as defined Net Capital loss the excess of the losses from
by the Bureau of Labor and sales or exchanges of capital
Employment Statistics (BLES) assets over the gains from such
of DOLE. sales or exchanges
Minimum Wage A worker in the private sector
earner paid the statutory minimum Q6.What are the kinds of income taxpayers?6
wage or to an employee in the
public sector with The kinds of income taxpayers under Title II of the NIRC
compensation income of not are:
more than the statutory
minimum wage in the non- A. Individuals
agricultural sector where 1. Citizens (Section 24, NIRC)
a. Resident Citizens
he/she is assigned
b. Nonresident Citizens
In Section 31, 35(B), and 39(A), Tax Code: 2. Aliens
a. Resident Aliens (Section 24, NIRC)
Taxable Income The pertinent items of gross b. Nonresident Aliens (Section 25, NIRC)
Income less income specified in the NIRC
Exclusions =
i. Engaged in trade or business in
less the deductions and/or the Philippines
GROSS personal and additional
INCOME ii. Not engaged in trade or
exemptions, if any, authorized business in the Philippines
Gross Income less
Deductions less
for such types of income by 3. Estates and Trusts (Section 60, NIRC)
Exemptions = the NIRC or other special laws. a. Revocable trust
TAXABLE INCOME b. Irrevocable trust
B. Corporations
1. Domestic Corporations (Section 27, NIRC)
2. Foreign Corporations (Section 28, NIRC)
Capital Assets Property held by the taxpayer a. Resident foreign corporations
(whether or not connected with b. Nonresident foreign corporations

6
Before proceeding to income proper, it is important to know the
different kinds of taxpayers first. This is because in analyzing any
problem involving income taxation, the first thing to do is to determine
who the taxpayer is. The only two exceptions where knowing the
taxpayer is immaterial are where the transaction involves sales of shares
of stock of a domestic corporation because it is subject to 1% of stock
transaction tax or 5%/10% capital gains tax on net capital gain whether
the seller is an individual, citizen or alien or a corporation, domestic or
foreign and (2) where the real property sold is a capital asset located in
the Philippines which is subject to 6% capital gains tax.
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3. Partnerships No. 2, whether an alien is a transient or not is determined

a. Taxable partnership (Section 73(D),
NIRC)
b. Exempt partnership
i. General Professional
Partnership (Section 26, NIRC)
ii. Joint venture or consortium
undertaking construction activity
or engaged in petroleum
operations with operating
contract with the government
Resident citizens and resident aliens
Q7.Who are citizens of the Philippines?7
The following are considered citizens of the Philippines:
1. Those who are citizens of the Philippines at the
time of the adoption of the Consitution
2. Those whose fathers or mothers are citizens of
the Philippines
3. Those born before January 17, 1973 of Filipino
mothers, who elect Philippine Citizenship upon
reaching the age of majority; and
4. Those who are naturalized in accordance with
law
Q8.Who is a non-resident alien?
by his intentions with regard to the length and nature of
his stay. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute him
as a transient. If he lives in the Philippines and has no
definite intention as to his stay, he is a resident.8 One who
comes to the Philippines for a definite purpose, which in
its nature may be promptly accomplished, is a transient9
But if his purpose is of such a nature that an extended
stay may be necessary for its accomplishment, and to that
end the alien makes the Philippines his temporary home,
he becomes a resident, although he intends to return to
his domicile abroad. 10
What are the factors to determine?
1. Length
2. Intention
3. Nature of Stay
Q8.2. When is the residence of an alien considered
lost?
RR 2 provides that an alien who has acquired residence
in the Philippines retains his status as a resident until he
abandons the same and actually departs from the
Philippines. An intention to change his residence does
not change his status as a resident alien to that of a
nonresident alien.

A non-resident alien is an individual whose residence is Non-resident citizens

within the Philippines and who is not a citizen thereof.
Q8.1. How is the residency of an alien determined?
An alien is considered a non-resident if he stays here for
a definite short period of time.
An alien will be considered a resident if the stay here is
either:
1. definite and extended;
2. indefinite
In GARRISON V. CA [JULY 19, 1990], in resolving the
contention of US nationals that they cannot be considered
resident aliens as they intend to go back to the US on
termination of their employment in the Philippines, the
Supreme Court held that what the law requires is merely
physical or bodily presence in a given place for a period
of time, not the intention to make it a permanent place of
abode.
The Supreme Court further held that, as laid clearly in RR
Q9.Who is a non-resident citizen?
The term “non-resident citizen” means a citizen of the
Philippines:
1. who establishes to the satisfaction of the
Commissioner the fact of his physical presence
abroad with intention to reside therein
2. who is an one who leaves the Philippines during
the taxable year to reside abroad either as an
immigrant or for employment on a permanent
basis
3. who is one who works and derives income from
abroad and whose employment thereat requires
him to be physically present abroad most of
the time11 during the taxable year.
4. who has been previously considered a non-
resident citizen and who arrives in the Philippines
at any time during the taxable year to reside
permanently in the Philippines with respect to
his income derived from sources abroad until
date of his arrival in the Philippines

7 9
To determine if the taxpayer is a resident citizen, just refer to the In other words, the stay is for a definite short period of time.
10
enumeration of what constitutes a non-resident citizen. In other words, the stay is definite but extended.
11
“most of the time” qualified in RR No. 01-79 to be 183 days in abroad
8
In other words, stay is indefinite
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(See Section 22E, NIRC and Section 2, RR No. 01- 79
[January 8, 1979])
Q9.1. Should a non-resident citizen file an income tax
return or information return covering his income
earned abroad?
No. Previously, under RR No. 01-79, non-resident citizens
were required to do so. In RR No. 9-99, non- resident
citizens were required to file an information return.
However, under RR 05-01 [July 31, 2001], non-resident
citizens are no longer required to file the same on
their income derived from sources outside the
Philippines.
Q9.2. What is meant by the phrase “most of the time”
as used in determining whether a citizen who derives
income from abroad and is physically present abroad
is a non-resident?
RR No. 01-79 states that to be physically present abroad
most of the time during the taxable year, a contract worker
must have been outside the Philippines for not less than
183 days during such taxable year. (aggregate # days)
The 183 day qualification is only to qualify the “most of the
time” requirement BUT this is not solely controlling.
RATHER Section 22. This applies to a citizen who needs
to be abroad for the most time but not a contract worker.
If you show intent that you want to leave the country (i.e.
being registered as an immigrant) the moment you leave
the Philippines, you are considered an NRC whether or
not you prove the requisites.
Note: As can be seen from the wording of RR No. 01-79,
“most of the time” applies to a contract worker. In BIR
Ruling 33-00 [September 5, 2000], however, the CIR
held that for overseas contract workers, the time spent
abroad is not material as all that is required is for the
worker’s employment contract to pass through and be
registered with the POEA.
Q.9.3. If a natural-born Philippine citizen who became
a citizen of the United States is later on granted
Philippine dual citizenship under RA 9225, is he
required to pay taxes for income earned in the United
States?
No. In BIR Ruling DA-095-05 [March 29, 2005], the CIR
held that such a person would be a non-resident citizen,
and hence, will not be required to pay Philippine tax for
income earned in the United States.
Dual citizens are treated as non-resident citizens of the
Philippines
Edited by: Napa - So
Non-resident aliens engaged in business in
the Philippines
Q10. Who is a non-resident alien?
A non-resident alien is an individual:
1. whose residence is not within the Philippines;
and
2. who is not a citizen thereof
Q10.1. How do you determine if a non-resident alien
is engaged in trade or business?
Once a taxpayer is determined to be a non-resident alien,
the test to determine whether the alien is a non-resident
alien engaged in trade or business is whether his total
aggregate stay for a taxable year exceeds 180 days.
Corporations
Q11. Differentiate the kinds of corporate taxpayers.
A corporation is itself a taxpaying entity and speaking
generally, for purposes of income tax, corporations are
classified into (a) domestic corporations and (b) foreign
corporations. Foreign corporations are further classified
into (1) resident foreign corporations and (2) non-
resident foreign corporations.
A domestic corporation is one created or organized in
the Philippines or under its laws. A foreign corporation
is one created or organized under the laws of a foreign
country.
A resident foreign corporation is a foreign corporation
engaged in trade or business within the Philippines or
having an office or place of business therein. A non-
resident foreign corporation is a foreign corporation not
engaged in trade or business within the Philippines and
not having any office or place of business therein.
A domestic corporation is taxed on its income from
sources within and without the Philippines, but a foreign
corporation is taxed only on its income from sources
within the Philippines. However, while a foreign
corporation doing business in the Philippines is
taxable on income solely from sources within the
Philippines, it is permitted to deductions from gross
income but only to the extent connected with income
earned in the Philippines. On the other hand, foreign
corporations not doing business in the Philippines
are taxable on income from all sources within the
Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital
gains.” (see N.V. REEDERIJ “AMSTERDAM” VS. CIR [JUNE 23, 1988])
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Q12. Is a partnership liable for income tax?
Yes. The term “corporations” includes partnerships, no
matter how created or organized.
Q12.1. Is a GPP liable for income tax?
No. A GPP is not considered a taxable entity for income
tax purposes. Section 26 of the NIRC provides that
persons engaging in business as partners in a GPP shall
be liable for income tax only in their separate and
individual capacities computed on their respective
distributive shares of the partnership profit.
Q12.2. Distinguish between a GPP and an ordinary
business partnership.
A general professional partnership, unlike an ordinary
business partnership (which is treated as a corporation for
income tax purposes and so subject to the corporate
income tax), is not itself an income taxpayer. The income
tax is imposed not on the professional partnership, which
is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares
of partnership profits (see CARAG, CABALLES,
JAMORA AND SOMERA LAW OFFICES VS. DEL
ROSARIO [OCTOBER 3, 1994])
Q12.2.1. A and B, co-owners, bought 3 parcels of land
in one transaction and bought 2 more parcels of land
in another. They decided to sell the 3 parcels to C and
the 2 parcels to D. They realized a net profit gain and
paid CGT. CIR assessed them for deficiency
corporate income tax. Is the co-ownership taxable as
a corporation?
No. A Co-Ownership who own properties which produce
income should not automatically be considered partners
of an unregistered partnership, or a corporation, within the
purview of the income tax law. The essential elements of
a partnership are two, namely:
(a) an agreement to contribute money, property or
industry to a common fund; and
(b) intent to divide the profits among the contracting
parties. Here, there is no evidence that petitioners entered
into an agreement to contribute money, property or
industry to a common fund, and that they intended to
divide the profits among themselves. The sharing of
returns does not in itself establish a partnership whether
or not the persons sharing therein have a joint or common
right or interest in the property.
There must be a clear intent to form a partnership, the existence
of a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the whole
property. (see OBILLOS v. CIR [OCTOBER 29, 1985] and
PASCUAL V. CIR [OCTOBER 18, 1988]).
Edited by: Napa - So
To simply put it, the difference between co-ownership and
unregistered partnership: (1) Common Fund, (2) Intent to
divide profits, and (3) Habituality.
Q.12.2.2. A group of insurance companies in the
Philippines decided to form a pool and entered into a
reinsurance treaty with a non-resident reinsurance
company. Is such a pool subject to corporate taxes
and withholding taxes on dividends paid to the non-
resident reinsurance company?
Yes. Where several local insurance ceding companies
enter into a Pool Agreement or an association that would
handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance
treaty with a non-resident foreign reinsurance company,
the resulting pool having a common fund, and functions
through an executive board and its work is indispensable,
beneficial and economically useful to the business of the
ceding companies and the foreign firm, such
circumstances indicate a partnership or an association
taxable as a corporation (see AFISCO INSURANCE
CORPORATION VS. CIR [JANUARY 25, 1999])
Q12.2.3. A and B inherited properties. They did not
partition the same and instead invested them to a
common fund and divide the profits therefrom.
Should they be classified as an unregistered
partnership subject to corporate income tax?
Yes. The income from inherited properties may be
considered as individual income of the respective heirs
only as long as the inheritance or estate is no distributed,
or, at least, partitioned. But the moment their respective
known shares are used as part of the common assets of
heirs to be used in making profits, it is but proper that the
income from such shares should be considered as part of
the taxable income of an unregistered partnership. (see
ONA V. CIR [MAY 25, 1972]).
Q12.3. Are joint ventures taxable?
Generally, Yes. However, a joint venture or consortium
undertaking construction projects or engaged in
petroleum operations with an operating contract with
the government are not liable for income tax.
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PM REYES TAX 1: INCOME TAX // MONTERO
Q12.3.1. What are the requirements in order for a joint
venture formed for construction purposes be not
liable for income tax?
In RR No. 010-12 [JUNE 1, 2012], a joint venture or
consortium formed for the purpose of undertaking
construction projects which is not considered as a taxable
corporation should be:
1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources
by licensed local contractors, licensed by the
Philippine Contractors Accreditation Board
(PCAB) of the DTI;
3. The local contractors are engaged in
construction business;
4. The joint venture itself must likewise be duly
licensed as such by the PCAB
Absent one of the requirements, the joint venture formed
for construction purposes shall be considered a taxable
corporation.
Q12.3.2. May joint ventures involving foreign
contractors be treated as a non-taxable corporation?
Yes, provided that the member foreign contractor is:
1. covered by a special license as contractor by
the PCAB; and
2. construction project is certified by the
appropriate government office as a foreign
financed/internationally-funded project and that
international bidding is allowed under the bilateral
agreement between the Philippine government;
and foreign/international financing institution
Q12.3.3. Two local contractors entered into a joint
development agreement to construct a residential
subdivision. One local contractor shall contribute the
parcel of land while the other shall contribute the
construction and development of the parcel of land
into a subdivision. Each shall receive an allocation of
saleable house and lot units from the project. Is the
joint venture liable for income tax?
No. In BIR Ruling No. 108-2010 [October 19, 2010],12
involving a joint venture between Avida and Aurora, the
CIR held that the joint development agreement between
the two is not subject to income tax because joint ventures
formed by local contractors for construction purposes are
deemed as not falling under the definition of a taxable
corporation.
12
It is also important to note in this BIR Ruling that the CIR held that the
allocation of saleable units does not constitute as a taxable event as no
income is actually realized by Avida or Aurora.
13
Previously, we looked into the types of taxpayers. Now, before
proceeding to general principles and source of income rules, let us look
Edited by: Napa - So
Income13
Statutory Inclusions
Q13.What are deemed included in (gross) income?
All income derived from whatever source, including,
but not limited to, the following items:
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions and similar items;
2. Gross income derived from the conduct of trade
or business or the exercise of a profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions; and
11. Partner’s distributive share from the net
income of the GPP
Note: Section 78 states that specific types of payment are
not considered as taxable income (i.e. domestic labor)
(see Section 32(A), NIRC)14
Q13.1. Is the enumeration provided in Section
32(A) exclusive?
No. Section 32(A) does not intend the enumeration to be
exclusive. It merely directs that the types of income listed
therein be treated as income from sources within the
Philippines (see CIR VS. AMERICAN AIRLINES [DECEMBER
19, 1989])
Compensation for services
Q13.2. If an employer pays the income taxes
assessable against an employee, is the payment by
the employer taxable income on the part of the
employee? What is being taxed is the employee-
employer relationship.
Yes. In OLD COLONY TRUST CO. V. COMMISSIONER [279 U.S.
716], the US Supreme Court held that the payment of the tax by
the employer was in consideration of services rendered by the
employee. The payment constituted income to the employee.
The Court also added that it cannot be argued that the payment
was a gift. The payment for services, even though voluntary, was
nevertheless compensation for services rendered.
into what is included in the term “income” and what is excluded therefrom.
14
The above answer is the definition of gross income. This will be
discussed in greater detail later. For now, we focus on determining
what is considered income and what is not considered income or
excluded therefrom.
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Rents
Q13.3. Are improvements made by lessees
taxable as income on the part of the lessor?
Yes, provided the such buildings or improvements are not
subject to the removal by the lessee. The lessor may
either:
(1) report the improvements as income at the time when
such improvements are completed based on its fair market
value; or
(2) spread the life of the lease the estimated depreciate
value of the improvements at termination of the lease and
report as income for each year of the lease an aliquot part
thereof (Section 49, RR No. 2)
Q13.3.1. Should the improvement be
capable of being separated from the land in
order to be considered a taxable gain?
No. The US Supreme Court in HELVERING V. BRUUN [309
US 461] stated that it is not necessary to recognition of
taxable gain that the lessor be able to sever the
improvement begetting the gain from his original capital.
Dividends
Q13.4. What are dividends?
The term “dividends” means any distribution made by a
corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money
or in other property.15 Mere issuance/declaration of stock
dividends doesn’t result to an income.
Q13.5. Are property dividends taxable?
Yes. As provided in Section 251, RR No. 2, dividends
paid in securities or other property (other than its own
stock), in which the earnings of a corporation have been
invested, are income to the recipients to the amount of
the full market value of such property when receivable by
individual stockholders.
Q13.6. Are stock dividends subject to
income tax?
No. As discussed earlier, a stock dividend only
represents the transfer of surplus to capital account and,
as such, is not subject to income tax.
15
If in money, it is called a cash dividend. If it is in property, it is called
a property dividend.
16
There must be a bona fide plan of liquidation involving the transfer of
all assets.
Edited by: Napa - So
Q13.6.1. What is the exception to the rule
that stock dividends are not subject to
income tax?
Stock dividends constitute as income if a corporation
redeems stock issued so as to make a distribution. This
is essentially equivalent to the distribution of a taxable
dividend the amount so distributed in the redemption
considered as taxable income. (see COMMISSIONER VS.
MANNING [AUGUST 7, 1975])
The redemption converts into money the stock dividends
which become a realized profit or gain and consequently,
the stockholder's separate property. Profits derived
from the capital invested cannot escape income tax. As
realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless
of the existence of any business purpose for the
redemption. (see CIR VS. CA [JANUARY 20, 1999])
As provided in Section 252, RR No. 2: A stock dividend
constitutes income if its gives the shareholder an interest
different from that which is former stock holdings
represented. A stock dividend does not constitute income
if the new shares confer no different rights or interests that
did the old.
Q13.7. Are liquidating dividends subject to income
tax?
Yes. Where a corporation distributes all of its property or
assets in complete liquidation or dissolution, 16 the gain
realized from the transaction by the stockholder, whether
individual or corporate, is taxable income or a deductible
loss,17 as the case may be.20
Previously, the CIR has ruled in BIR RULING 039-02
[NOVEMBER 11, 2002] and other previous rulings that
the transfer by a liquidating corporation of its remaining
assets to its stockholders and the receipt of the shares
surrendered by the shareholder are not subject to income
tax. However, in BIR RULING 479-11 [DECEMBER 5,
2011], the CIR reversed and set aside the above- cited
ruling and all previous rulings to that effect. The rule now
is that they are subject to income tax.
Basically, all liquidation whether inter-corporate or extra-
corporate then taxable.
17
If the amount received by the stockholder in liquidation is less than
the cost or other basis of the stock, the loss in the transaction is
deductable.
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“From whatever source”
Q13.8. What is meant by the phrase “all income
derived from whatever source"
The phrase “all income derived from whatever source”
encompasses all accessions to wealth, clearly realized,
and over which the taxpayers have complete dominion. A
gain constitutes taxable income when its recipient has
such control over it that as a practical matter, he derives
readily realizable economic value from it.
Q13.8.1. Is an unlawful gain subject to income tax?
Yes. In JAMES V. US [366 US 213], the Supreme Court
ruled that embezzled money constitutes gross income. It
opined that unlawful, as well, as lawful gain are
comprehended within the term “gross income.” The Court
has given a liberal construction to “gross income” in
recognition of the intent of Congress to tax all gains
except those specifically exempted.
This case shows the validity of the element of complete
dominion.
The Tax you paid for embezzled income is non-
refundable.
What prevails is actual benefit and actual command
Q13.8.2. May cancellation or forgiveness of
indebtedness amount to a gain subject to income
tax?
Yes. If, for example, an individual performs services for a
creditor, who, in consideration thereof cancels the debt,
income to that amount is realized by the debtor as
compensation for his services. (see Section 50, RR No.
2).21
Q13.8.3. Should taxes previously claimed and
allowed as deductions but subsequently refunded or
granted as tax credit be considered part of gross
income?
Yes. RMC No. 13-80 [April 10, 1980] provides that taxes
previously claimed and allowed as deductions but
subsequently refunded or granted as tax credit should be
declared as part of the gross income of the taxpayer in
the year of receipt of the refund or tax credit. However,
taxes which are not allowable as deductions, when
refunded or credited, are not declarable for income tax
purposes.22
Gambler lost 3.4M but was only required to pay 0.5M. Is
there taxable income in his hands? No. The US-SC is not
income.
For discharge of debt to be applicable:
18
The CIR shall not exercise this authority more often than every 3
Edited by: Napa - So
1. Liability
2. Debtors holds property. (e.g. the chips don’t
represent property. It is only an accounting
mechanism)
Inventories
Q13.9. Explain the use of inventories to determine the
income of a taxpayer.
For certain businesses, the use of inventories may be
deemed necessary in order to determine clearly the
income of a taxpayer. If such is the determination, the
taxpayer shall take inventories upon such basis as the
Secretary of Finance, upon recommendation of the CIR,
may prescribe as conforming as nearly as may be to the
best accounting practice in the trade or business and as
most clearly reflecting the income.
Q13.9.1. Is there a particular method of valuing
inventory that a taxpayer should follow?
No. The taxpayer may choose the method of valuing its
inventory for any taxable year, and such method should
be used in all subsequent years unless:
1. With the approval of the CIR, a change to a
different method is authorized; or
2. The CIR finds that the nature of the stock on
hand is such that inventory ains should be
considered realized for tax purposes and therefore it
is necessary to modify the valuation method.18
Thus, in BIR RULING DA-128-08 [AUGUST 11, 2008],
Pilipinas Shell requested to change its valuation method
from the Weighted Average Method (WAVE) to the First-
In-First-Out (FIFO) to conform with the adoption by a new
computerized accounting system based on the Global
Systems Application and Product Data Processing
(GSAP) by its parent company and its affiliates, including
Pilipinas Shell. They system uses FIFO. The CIR
approved the shift to FIFO noting that the WAVE method
is no longer compatible with the new accounting system
to be introduced and to be consistent with the inventory
method used by its parents company and affiliates all over
the world.
years
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Exclusions RA 7641 and those received by

officials and employees of private
Q14. What are “exclusions?” firms, whether individual or corporate, in
accordance with a reasonable private
The term “exclusions” refers to items that are not included benefit plan 21 maintained by the
in the determination of gross income because: employer provided
1. They represent return of capital or are not i. that the retiring official or
income, gain or profit (e.g. life insurance) employee has been in the
2. They are subject to another kind of internal service of the same employer for
revenue tax (e.g. gifts, bequests, devices) at least ten (10) years and is not
3. They are income, gain or profits that are less than fifty (50) years of age at
expressly exempt from income tax under the the time of his retiremen
Constitution, tax treaty, Tax Code, or general or ii. That the benefits granted shall
special law. (e.g. PEZA) be availed by an official
employee only once.
Q15. What are deemed excluded from (gross) b. Any amount received by an official or
income? employee or by his heirs from the
employer as a consequence of
As provided in Section 32(B), NIRC, the following items separation of such official or employee
shall not be included in gross income and shall be exempt from the service of the employer because
from income tax of death sickness or other physical
disability or for any cause beyond the
1. Proceeds of life insurance, 19 payable upon control of the said official or employee.
the death of the insured to the heirs or c. The provisions of any existing law to the
beneficiaries, but not the interest payments contrary notwithstanding, social
thereon if such amounts are held by the insurer security benefits, retirement
under an agreement to pay interest. gratuities, pensions and other similar
2. Amounts received by the insured as return benefits received by resident or non-
of premiums paid under life insurance, resident citizens of the Philippines or
endowment or annuity contracts, either during aliens who come to reside permanently
the term or at the maturity of the contract or in the Philippines from foreign
upon the surrender thereof. government agencies and other
3. Gifts, bequests, and devises 20 but not the institutions, private or public.
income from such property; if the amount d. Payments of benefits due or to
received is on account of services rendered become due to any person (residing in
whether constituting a demandable debt or not the Philippines) under the laws of the
such as remuneratory donations or the use or United States administered by the
opportunity or use of capital, the receipt is United States Veterans Administration.
income. e. Benefits received from or enjoyed
4. Compensation for injuries or sickness under the Social Security System in
whether by suit or agreement including accordance with the provisions of
amounts received through accident or health Republic Act No. 8282.
insurance or under the Workmen’s f. Benefits received from the GSIS under
compensation Act, but not damages or Republic Act No. 8291, including
compensation recovered for loss of profit in loss retirement gratuity received by
or damage to property which would be taxable government officials and employees.
5. Income exempt under treaty binding upon the 7. Miscellaneous items, likewise exempt,
Government of the Philippines. including:
6. Certain retirement benefits, pensions, a. Income of foreign governments or
gratuities, more particularly: financing institutions owned, controlled
a. Retirement benefits received under or enjoying refinancing from such foreign

19
It is considered as indemnity rather than income
20
They are instead subject to estate or gift taxes (see PIROVANO VS.
COMMISSIONER [JULY 31, 1965])
21
Reasonable private benefit plan means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an employer for the benefit
of some or all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or both, for the
purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein its is provided
in said plan that at no time shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.
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PM REYES TAX 1: INCOME TAX // MONTERO
governments and of international or
regional financial institutions established
by foreign governments from their
passive investments in the Philippines
b. Income of the Philippine government
and its political subdivisions derived
from public utilities or in the exercise of
essential governmental functions
c. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievement but only if:
• The recipient was selected
without any action on his part
to enter the contest or
proceedings; and
• The recipient is not required
to render substantial future
services as a condition to
receiving the prize or award
d. All prizes and wards granted to
athletes in local and international sports
competitions whether held in the
Philippines or abroad. Manny pacquiao is
not exempt under his “prizes” are
contractual
e. Gross benefits received by officials
and employees of public and private
entities provided, however, that the total
exclusion shall not exceed P30,000
which shall cover:
• Benefits received by officials and
employees of the national and
local government pursuant to RA
6686
• Benefits received by employees
pursuant to PD 851
• Benefits received by officials and
employees not covered by PD
851
• Other benefits such as
productivity incentives and
Christmas bonus provided that
the ceiling of P30,000 may be
increased through the rules and
regulations issued by the
Secretary of Finance, upon
recommendation of the
Commissioner, after
considering, among others, the
effect on the same of the inflation
rate at the end of the taxable
year.
f. GSIS, SSS, Medicare and Pag-ibig
22
Fringe benefits means any goods, service or other benefit furnished
or granted in cash or in kind by an employer to an individual employee
Edited by: Napa - So
contributions and union dues of
individuals
g. Gains from the sale of bonds, debentures
or other certificate of stock in a mutual
company.
Also, under Section 33(C), NIRC, the following fringe
benefits22 are not taxable:
1. Fringe benefits authorized and exempted
from tax under special laws;
2. Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization plans;
3. Benefits given to rank and file employees,
whether granted under a CBA or not;
4. De minimis benefits.
Retirement benefits
Q15.1. What are the requirements to exempt
retirement benefits from income tax?
For the retirement benefits to be exempt from income tax,
the taxpayer is burdened to prove the concurrence of the
following elements:
1. a reasonable private benefit plan is maintained
by the employer;
2. the retiring official or employee has been in the
service of the same employer for at least ten
(10) years;
3. the retiring official or employee is not less than
fifty (50) years of age at the time of his
retirement; and
4. the benefit had been availed of only once
5. The retirement plan must be submitted to and
approved
INTERCONTINENTAL BROADCASTING
CORPORATION V AMARILLA [OCTOBER 29,
2006])
Q15.2. An employer maintains an employees’ trust to
provide retirement, pension, disability benefits to its
employees. The trust made investments and earned
therefrom interest income. Is it proper to subject the
interest income to withholding tax?
No. As held by the Supreme Court in CIR V. CA & GCL
RETIREMENT PLAN [MARCH 23, 1992], said retirement
benefits received by officials and employees of private
firms in accordance with a reasonable private benefit
maintained by the employer shall be exempt from all
taxes.
(except rank and file employees). This will discussed more later.
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PM REYES TAX 1: INCOME TAX // MONTERO
Q15.3. A government employee, retired from service.
Upon retirement, he received, among other benefits,
terminal leave pay which the CIR withheld a portion
allegedly representing income tax thereon. Is
terminal leave pay considered part of gross income
of the recipient?
No. In COMMISSIONER OF INTERNAL REVENUE VS. CA &
EFREN CASTANEDA [OCTOBER 17, 1991], the Supreme
Court held that terminal leave pay received by a
government official or employee is not subject to
withholding (income) tax. The rationale behind the
employee’s entitlement to an exemption from withholding
tax on his terminal leave is that commutation of leave
credits, more commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns
or is separated from the service through no fault of his
own. In the exercise of sound personnel policy, the
Government encourages unused leaves to be
accumulated. Terminal leave payments are given not
only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not
being part of the gross salary or income of a government
official or employee but a retirement benefit, terminal
leave pay is not subject to income tax. (see RE:
REQUEST OF ATTY. BERNANDINO ZIALCITA [OCTOBER 18,
1990]).])
Q15.4. Are contributions to SSS, GSIS, PHIC and
Pag-Ibig in excess of the mandatory
contributions subject to income tax?
Yes. Previously, SSS, GSIS, PHIC and Pag-Ibig
contributions in excess of the mandatory contributions
were considered exempt from income tax. However,
because it was deemed to have been abused and the
excess contributions are being made as a form of
investment, RMC No. 027-11 [JULY 1, 2011] now
considers the excess contributions as not excludible
from gross income and not exempt from income and
withholding tax.
Income derived by foreign government
Q15.5. A domestic corporation entered into a loan and
sales contract with a foreign corporation where the
latter shall extend a loan to the former and the former
shall sell to the latter all copper concentrates to be
produced from the machine to be purchased using
the loaned amount. The foreign corporation applied
23
This was included in RR 3-98 and in RR 8-00 [August 21, 2000] but
referred to employees in general. RR No. 005-11 [March 16, 2011]
specifically provided “private” employees.
24
Introduced by RR 10-00 [December 14, 2000]
25
Provided under RR 3-98 and RR 8-00 [August 21, 2000]
26
Under RR 3-98, the amount was P350. RR 8-00 [August 21, 2000]
increased this to P1,000 and added the alternative 1 sack of
Edited by: Napa - So
for the loan from one of its government financing
institutions. Is the interest income from the loans
automatically exempt from withholding tax?
No. As held in CIR V. MITSUBISHI METAL CORPORATION
[JANUARY 22, 1990], the burden of proof rests upon the
party claiming an exemption to prove that it is in fact
covered by the exemption. In the said case, the Supreme
Court found that the foreign government financing
institution had nothing to do with the sales and loans
agreement. It is the foreign corporation, not the foreign
government financing institution that is the sole creditor of
the domestic corporation.
De Minimis/PERA
Q15.6. What are de minimis benefits?
As defined by RR 3-98 [MAY 21, 1998], de minimis
benefits are benefits of relatively small value offered or
furnished by the employer to his/her employees as a
means of promoting the health, goodwill, contentment,
efficiency of his/her employees. These benefits are
exempt from the withholding tax on compensation
income, and consequently from income tax, regardless of
whether or not the recipients of the benefits are
managerial or rank-and- file employees.
Q15.6.1. What are deemed de minimis benefits?
As provided in RR No. 005-11 [March 16, 2011], as
amended recently by RR No. 008-12 [MAY 11, 2012], the
following shall be considered de minimis benefits not
subject to income tax as well as withholding tax on
compensation income of both managerial and rank and
file employees:
1. Monetized unused vacation leave credits of
private employees not exceeding ten (10) days
during the year;23
2. Monetized value of vacation and sick leave
credits paid to government officials and
employees;24
3. Medical cash allowance to dependents of
employees, not exceeding P750 per employee
per semester or P125 per month; 25
4. Rice subsidy of P1,500 or one (1) sack of 50 kg.
rice per month amounting to not more than
P1,500;26
5. Uniform and clothing allowance not exceeding
P5,000 per annum;27
50kg of rice. This was increased by RR 5-2008 [APRIL 17, 2008] to
P1,500.
27
RR 3-98 did not provide for an amount. RR 8-00 [August 21,
2000] provided for an amount of P3,000. RR No. 005-11 [March 16,
2011] provided for an amount of P4,000. This was again increased by
RR No. 008-12 [MAY 11, 2012] to P5,000.
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6. Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical check-up, maternity
assistance, and routine consultations, not
exceeding P10,000 per annum;28
7. Laundry allowance not exceeding P300 per
month;29
8. Employees achievement awards, e.g. for length
of service or safety achievement, with an
annual monetary value not exceeding
P10,000;30
9. Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum;31
10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the
basic minimum wage per region basis.32
Alternative Memory Aid for De Minimis Enumeration:
(RUMMMCOLA-CBA)
1. Rice Subsidy
2. Uniform and clothing allowance
3. Medical cash allowance
4. Monetized unused vacation leave for
private employees
5. Monetized unused value of vacation and
sick leave credits paid to government
officials and employyes
6. Christmas Gifts
7. Overtime work pay for daily meal
allowance
8. Laundry allowance
9. Awards/Achievements to employments
10. Collect Bargaining Agreement benefits
Equity and Retirement Act (PERA) assets subject to
income tax?
No. As provided in RR No 017-11 [OCTOBER 27, 2011],
implementing the tax provisions of RA 9505, otherwise
known as the Personal Equity and Retirement Account
(PERA) Act of 2008, investment income of a contributor
consisting of all income earned from the investments and
reinvestments of his PERA assets in the maximum
amount allowed shall be exempt from the following taxes
as may be applicable:
1. Final withholding tax on interest from any
currency bank deposit, yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements,
including a depository bank under the EFCDS;
2. Capital gains tax on the sale, exchange,
retirement or maturity of bonds, debentures or
other certificates of indebtedness;
3. 10% tax on cash and/or property dividends
actually or constructively received from a
domestic corporation, including a mutual fund
company;
4. Capital gains tax on the sale, barter, exchange,
or other disposition of shares of stock in a
domestic corporation;

Train Law Amendment: Amount of exempt 13th

month pay and other bene ts is increased to
PHP90,000.

Q15.6.2.Is the enumeration of de minimis benefits

exclusive?
Yes. As provided in RR No. 005-11 [March 16, 2011], all
other benefits given by employers which are not included
in the enumeration shall not be considered de minimis
benefits, and, hence, shall be subject to income tax as
well as withholding tax on compensation income.

Q15.7. Is income earned by a contributor from the

investments and reinvestments of his Personal

28
RR 3-98 simply said “medical benefits” with no corresponding P10,000
31
amount. RR 8-00 [August 21, 2000] provided the amount of P10,000 RR 3-98 did not provide for a ceiling amount. RR 8-00 [August 21,
as the ceiling. 2000] introduced the P5,000 ceiling.
29 32
RR 3-98 provided for an amount of P150. RR 8-00 [August 21, 2000] Introduced by RR 8-00 [August 21, 2000].
increased it to P300.
30
RR 3-98 provided for a ceiling of ½ month of the basic salary of the
employee. RR 8-00 [August 21, 2000] changed the ceiling amount to
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General Principles Source of Income Rules33

Q16. What are the general principles of income
taxation in the Philippines (Section 23, Title II, NIRC)? Q17. What is meant by “source of income”?

Except as otherwise provided in this Code, the general The source of an income is the property, activity or service
principles are: that produced the income. It is the physical source where
the income came from. (see CIR VS. BAIER-NICKEL
Resident Citizen taxable on all income derived [AUGUST 29, 2006]).
from sources within and outside
the Philippines You need to know first know what type of income you
Non-Resident taxable only on income derived have then the source and whether it would be taxable in
from sources within the the Philippines or not.
Citizen
Philippines [By definition of a
non-resident citizen, this Q18. What are the source of income rules in the
applies to an overseas contract Philippines? (Section 42, Title II, NIRC)
worker (a citizen working and
deriving income from abroad)] Interests The source of an interest
Alien (whether taxable only on income derived payment is the place of
resident or from sources within the residence of the person
Philippines. Whether or not obligated to make that
non-resident)
engaged in trade and business payment (residence-of-the-
in the Philippines. (Always obligor rule).
withint_
It is income within the
Domestic taxable on all income derived Philippines if the residence of
corporation from sources within and outside the obligor is in the
the Philippines Philippines.
Foreign taxable only on income derived
corporation from sources within the It is income without the
Philippines Philippines if the residence
(This applies whether the of the obligor is abroad.
foreign corporation is engaged
or not in trade or business in the Dividends Generally, a dividend has its
Philippines) source in the country where
• Simply put, only resident citizens and domestic the corporation paying the
corporations are taxable on their worldwide dividend is incorporated.
income
Thus, if the dividend is
o while the other types of individual and received from a domestic
corporate taxpayers are taxable only on corporation, it is income
income derived from sources within the within the Philippines. If the
Philippines. dividend is from the foreign
• Additionally, it must be noted that only a non- corporation, it is income
resident alien not engaged in trade or without the Philippines.
business in the Philippines and non-resident
foreign corporations are taxed on gross The exception to the
income general rule that dividends
paid by a foreign
o while all other types of taxpayers are corporation are from
subject to tax on net income (i.e. may sources without the
claim deductions). Philippines is when a
foreign corporation derives

33
For the source of income rules, my reference IS MICHAEL J. is warranted. The rules are applicable as they are based on the US Tax
MCINTYRE, INTERNATIONAL TAX: TEXT, CASES, PROBLEMS, AND Code, of which our own tax laws are modeled after.
QUESTIONS (2013). Most, if not all, of our tax books fail to sufficiently
explain source of income rules and, thus, recourse to a foreign material
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50 percent of its gross
income from sources within
the Philippines for a three-
year period ending with the
close of its taxable year
preceding the declaration of
its dividends
Services Income from services is
sourced in the country where
the services are performed.
Thus, it is income within the
Philippines if the service is
performed in the
Philippines. It is income
without the Philippines if it
is performed abroad.
Rents¬ and The rental income and
Royalties royalty income derived from
the use of property has its
Royalties – source in the country where
You pay the tax the property is used.
depending where the
capital in usedl For tangible property, the
So if you use the place of use is the place
intellectual property where the tangible property
here – construct the is actually located.
design here then
you have to pay Thus, it is income within the
taxes here. Philippines if rents and
royalties are derived from
property located in the
Philippines
For intangible property, the
country of use is the country
that protects the owner of
that property against its
unauthorized use by other
persons.34
Thus, it is income within the
Philippines if it is used in the
Philippines and the
unauthorized use of such
intangible property
protected by Philippine law.
Sale Sale of Real Income from the sale of real
Property property is sourced in the
country where the real
property is located.
34
This is the generally accepted rule.
35
In the US, the rule is that income from sale of personal property is
Edited by: Napa - So
Thus, it is income within the
Philippines if the real
property is located in the
Philippines. It is income
without if the real property is
located abroad.
Sale Sale of Personal The income from the sale of
Property personal property has its
source in the country where
the personal property is
sold.35
Thus, if the personal
property is sold in the
Philippines, it is income
within the Philippines. If
sold abroad, it is income
without the Philippines.
Note that gains from sale of
shares of stock of a
domestic corporation are
treated as derived entirely
from sources within the
Philippines regardless of
where the said shares are
sold.
Summary:
1. Interest – where the obligor is
2. Dividends – only when domestic corporation
declares it
• Exception: When a foreign corporation
derives 50% of its gross income from
sources within the Philippines for a 3-
year period.
3. Services – where the services are performed
4. Rents and Royalties – where it is used
5. Real Property Sale – where the property is located
6. Personal Property sale – where it is sold, unless
shares of stock of domestic treated as within PH
Q18.1. In CIR v. MARUBENI [DECEMBER 18, 2001],
assuming that Marubeni was disqualified from
availing of the income tax amnesty, would the income
from the services rendered in connection with the
is turn-key projects constitute as income from
Philippine sources?
The answer is both yes and no. The answer is yes with
regard to those services performed in the Philippines. The
answer is, however, no with regard to those services
rendered in Japan. Such services were rendered outside
the taxing jurisdiction and thus constitute as income
sourced in the country where the seller is resident (residence- of-the-
seller rule)
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without the Philippines. Marubeni, being a foreign
corporation, is taxable only on income within the
Philippines and, hence, income from services rendered in
the Philippines.
Q18.2. ABC Airways is a foreign airline.36 While it did
not carry passengers and/or cargo to or from the
Philippines, ABC maintains a general sales agent of
its tickets in the Philippines. Is the sale of the tickets
taxable as income from sources within the
Philippines?
Yes. For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In ABC’s case,
the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here
in the country and the payments for fares were also made
with Philippine currency. The site of the source of
payments is the Philippines. The absence of flight
operations to and from the Philippines is not determinative
of the source of income/site of income taxation for the test
of taxability is the “source.” (see CIR VS. JAPAN
AIRLINES [MARCH 6, 1991]; CIR VS. BOAC [APRIL 30,
1987])
Q18.3. XYZ entered into reinsurance contracts with
foreign insurance companies not doing business in
the Philippines. XYZ was to cede portions of
premiums underwritten in the Philippines to the
foreign corporations in consideration for the
assumption of risk. Is the cession of the premiums
taxable as income from sources within the
Philippines?
Yes. “Sources” means the activity, property, or service
giving rise to the income. The original insurance
undertakings took place in the Philippines. It is not
required that the foreign corporation be engaged in
business in the Philippines. What is controlling is no the
place of business, but the place of activity that created the
income. Thus, the income is subject to income tax. (see
PHILIPPINE GUARANTY V. CIR [APRIL 30, 1965] and
HOWDEN & CO. V. CIR [APRIL 14, 1965]).
Q18.4. ABC, a domestic corporation, entered into a
36
It is a resident foreign corporation. In order that a foreign corporation
may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary
character. ABC maintained a general sales agent and it was engaged in
selling or issuing tickets, which is considered the main lifeblood of an
airline.
37
This confirms the acceptance of the Philippine taxing jurisdiction of
the rule that as to intangible property, the country of use is the country
Edited by: Napa - So
“Management Service Agreement” with XYZ, a non-
resident foreign corporation under which the latter
shall provide services for ABC’s US branch and
advice on ABC’s corporate structure, all performed
abroad. Is the compensation for services taxable as
income from sources within the Philippines?
Yes. The services covered by the management service
agreement fall under the meaning of royalties. It is
immaterial if the non-resident foreign corporation has no
properties in the Philippines. The test of taxability is the
source and the source of an income is that activity which
produced the income. It is not the presence of any
property from which one derives rentals and royalties that
is controlling, 37 but rather as expressed under the
expanded meaning of royalties, it includes “royalties for
the supply of scientific, technical, industrial, or
commercial, knowledge or information; and the technical
advice, assistance or services rendered in connection
with the technical management and administration of any
scientific, industrial or commercial undertaking, venture,
project or scheme. (see PHILAMLIFE V. CTA [CA-GR SP.
NO. 31283, APRIL 25, 1995]).
Q18.5. A, a non-resident citizen, was engaged by a
domestic corporation as a commission agent. A will
receive a sales commission on all sales actually
concluded. A argues that the income is not taxable as
A does not reside in the Philippines and that the place
of payment of the income is outside the Philippines.
Is A’s contention correct?
No. The source of an income is the property, activity
or service that produced the income. With respect of
rendition of labor or personal service, as in the
instant case, it is the place where the labor or service
is performed that determines the source of income.
There is therefore no merit in A’s interpretation which
equates source of income in labor or personal service with
the residence of the payor or the place of payment of the
income. (see CIR VS. BAIER-NICKEL [AUGUST 29, 2006])38
43
What she failed to do was prove that the sale was
consummate in Germany.
Q18.6. Quill Corp is an office supply retailer with no
physical presence in North Dakota but it has a
licensed computer software program that its
that protects the owner of that property against its unauthorized use by
other persons.
38
Note that in this case, Baier-Nickel argued that the services were
done in Germany. However, she failed to prove that such was the fact.
Thus, the services were deemed performed in the Philippines, and, as
such, is subject to income tax.
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customers in North Dakota use for checking Quill’s
current inventories and for placing orders directly.
North Dakota attempted to impose a “use tax”39 on
Quill. Is Quill liable for the tax?
Even in Philippines tax treaties, the corporation has to
have physical presence be taxable to the locality.
Yes. In QUILL CORP V. NORTH DAKOTA [504 US 298, MAY
26, 1992], the US Supreme Court ruled that there must
be physical presence in a state for the corporation to be
liable for sales and use taxes. It applied its ruling in
NATIONAL BELLAS HESS V. DEPARTMENT OF REVENUE OF
ILLINOIS [386 US 753] where it held that a seller whose
only connection with customers in the State is by common
carrier or the mail lacked the requisite minimum contacts
with the
State. Thus, such vendors are free from state- imposed
duties to collect sales and use taxes. Nevertheless, the
US Supreme Court opined that if interstate commerce
would be subject to intolerable or undesirable burdens
because of this, Congress has the power to legislate
make such vendors liable for sales and use taxes.40
What has to be the subject is the stocks of the company
and not the company itself.
Q18.7. Vodafone International Holdings (VIH), a
corporation in the Netherlands, acquired a controlling
interest of CGP holdings, a company in the Cayman
Islands. By virtue of this controlling interest, VIH
acquired a 52% stake in Hutchinson Essar Limited
(HEL) 41 in India from Hutchinson Telecom
International Limited (HTIL). Simply stated, VIH
acquired control over CGP and its subsidiaries,
including HEL. The Indian tax authorities contended
that the transfer of shares was subject to income tax.
VIH argues that the transfer of shares took place
outside the Indian taxing jurisdiction, and, hence, is
not taxable. Which contention is correct?
The contention of VIH was held to be correct. In
VODAFONE INTERNATIONAL HOLDINGS B.V. V. UNION OF
INDIA (SUPREME COURT OF INDIA, CIVIL APPEAL NO. 733 OF
39
A use tax is a type of excised tax levied in the United States upon
otherwise "tax free" tangible personal property purchased by
a resident of the assessing state for use, storage or consumption of
goods in that state (not for resale), regardless of where the purchase
took place.
40
Note that, as of this updated version, the BIR plans to impose a
sales tax on online retailers in the opinion that such sellers are no
different from merchants who sell their goods in physical stores. A RR
on the matter is forthcoming.
41
HEL was an Indian joint venture between HTIL, a corporation in
Hong Kong, and Essar, an Indian corporation.
42
It is also important to note, that in this case, the Indian Supreme
Court stated that, on the context of taxation of a holding company
structure, the corporate veil may be lifted only if it is established that
the transaction was a sham or there was abuse. In this case, the
Edited by: Napa - So
2012, JANUARY 20, 2012), 42 the Indian Supreme Court
ruled that VIH had no liability to withhold tax as the
transaction was between two non- residents with no
taxable presence in India. Under Section 9(1) of the
Income Tax Act of India, all income accruing or arising,
whether directly orindirectly through transfer of capital
assets situated in India shall be deemed to accrue or arise
in India. 43 The Supreme Court stated that the section
clearly applied to a transfer of capital asset situated in
India and could not be expanded to cover indirect
transfers of capital assets or property situated in India.
The words “directly or indirectly” go with the income and
not with the transfer of a capital asset.44
Q18.8. Is the gross income of branches of foreign
corporations generated from solicitation of orders
from local importers where the branches merely relay
to its head office abroad said purchase orders and
where the head office is the entity which actually
consummates the sale liable for income tax?
Yes. By virtue of RAMO No. 1-86 [April 25, 1986], an
income tax is imposed on the gross income generated
from “constructive” trading and commission income
derived from brokering activities of Philippine branches of
foreign corporations engaged in trading activities. RAMO
No. 01-95 [March 21, 1995] expanded RAMO No. 1-86
to cover taxation of Philippine branches of foreign
corporations engaged in soliciting orders, purchases,
service contracts, trading, construction and other
activities.
Q18.9. ABC, a multinational company, claimed as
deduction from gross income its share of the
overhead expenses of its foreign head office. Can
these overhead expenses of the foreign head office
be deducted from the gross income of the Philippine
branch?
It depends. Either it can be deducted in full or partly.
Where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations (e.g.
salaries of Philippine personnel, rental or office binding
in the Phulippines), expense can be deducted from the
shares of CGP were transferred only for a commercial benefit and not
with the object of tax evasion. The structure was in existence over a
decade, it was not created or used as an instrument for tax avoidance,
VIH was not a short-time investor and it did not introduce any new
practice to grant itself a “controlling interest.”
43
The Indian taxing authorities argued that this was a “look- through
provision” a “look through” provision so that if there was a transfer, of a
capital asset, situated in India, it meant income from capital gains
accruing or arising outside India would be fictionally deemed to accrue
or arise in India.
44
The Indian Supreme Court also noted that the existence of the Direct
Tax Code Bill of 2010 which expressly stated that income
accuring even from indirect transfer of capital assets situated in India
would be deemed to accrue in India but this is not yet in force.
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gross income acquired in the Philippines without resorting
to apportionment. However, where there are items
included in the overhead expenses incurred by the parent
company, all of which cannot be definitely allocated or
identified with the operations of the Philippine branch, the
company may claim as its deductible share a ratable part
of such expenses based upon the ratio of the local
branch's gross income to the total gross income,
worldwide, of the multinational corporation. (see
COMMISSIONER VS. CTA & SMITH KLINE [JANUARY 17,
1984]; see also RAMO 4-86 [April 5, 1986])
Deductions
Q19. What are the kinds of deductions?
1. Deductions from compensation income –
refers to the personal and additional exemptions
in Section 35, NIRC and premium payments on
health and/or hospitalization insurance which are
allowed to be deducted by an individual taxpayer
who receives income for personal services
rendered under an employer-employee
relationship (Train law repealed Sec 35)
2. Deductions from business and/or
professional income – refers to the itemized
deductions in Section 34 (A) to (M) including
those deductible from compensation income,
which a self-employed individual or professional
engaged in the practice of a profession may
deduct.
3. Deductions from corporate income – refers to
the itemized deductions in Section 34 (A) to (J)
which corporations (including partnerships other
than GPPs) engaged in trade or business are
authorized to claim
4. Special deductions – refers to the deductions
allowed in addition to the itemized deductions
allowable to corporations which may be availed
of by insurance companies and proprietary
educational institutions and non-profit hospitals
as well as estates and trusts.
Q19.1. Who can avail of the deductions provided for
under the law?
All taxpayers except:
1. Nonresident aliens not engaged in trade or
business
2. Nonresident foreign corporations or those
corporations not engaged in trade or business in
the Philippines
3. Citizens and resident aliens earning purely
compensation income
45
This is the general rule which is to be followed for all business
expenses. The enumeration provided in certain business expenses
Edited by: Napa - So
4. Resident citizen who opted for OSD (Sec 34, par
1)
Sections 34 and 35, Tax Code
Q20. What are the allowable and itemized deductions
under the Tax Code?
The allowable and itemized deductions include:
1. Business Expenses (Expenses in connection
with taxpayer’s trade, business or profession)
2. Interest on Indebtedness
3. Taxes in connection with taxpayer’s business,
trade or profession [except income taxes, estate
and donor’s taxes, special assessments, and
foreign income taxes (unless the taxpayer does
not make use of the tax credit privilege)]
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and other contributions
9. Research and development expenditures
10. Contributions to pension trusts
Business expenses
Q21. What are the requisites for deductibility of
business expenses?45
The requisites are:
1. The expense must be ordinary and necessary
2. Paid or incurred during the taxable year
3. In carrying on the trade or business of the
taxpayer
4. Reasonable in amount
5. Substantiated by sufficient evidence
6. Must not be against law, morals, public policy,
or public order
7. Must be paid to the BIR
“Substantiated” à What if the income to be taxed comes
from a drug cartel?
“Reasonable” (Kuezle & Aguinaldo) — if the amount was
indicative of being a dividend, then it is not deductible.
Another form (deductible) is if the amount was
compensation, but this is hard to defend if the amount
is too huge or bloated. This veil of reasonableness is
to protect the government from tax evasion by the
taxpayer who may shift all income to the income tax-
exempt entity. (p.24)Must be paid to the BIR or the
withholding tax should have been paid.
• As to withholding tax, the tax must be
provide for additional requisites.
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withheld first before it can be
deducted because there is a
presumption that if such was not
withheld, another taxing jurisdiction is
claiming it.
• Expenses: Not necessary — would never be
deductible.
• Extraordinary — may be capitalized (deductible
but spread through a period of time) from a case
to case basis. Usually these are necessary on top
of being extraordinary.
Ex: VP of the corp borrowed money from the
employees. The VP died, so the P took
company funds to repay the debts. This is an
extra-ordinary expense, but not deductible.
Rather, it was capitalized.
Q21.1. What is meant by ordinary and necessary
expenses?
An expense is 'ordinary' when it connotes a payment
which is normal in relation to the business of the taxpayer
and the surrounding circumstances.
An expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development
of the taxpayer's business
Example of necessary: Pet shop incident where the
snake bit the client and you need to pay for medical
expenses of client
Example of NOT necessary: Insuring the president is
not related to the business
Q21.2. What is meant by “paid or incurred during the
taxable year?”
Paid or incurred during the taxable year means that the
deduction shall be taken for the taxable year in which paid
or accrued or paid or incurred dependent on the
accounting method in which net income is computed
Q21.2.1. ABC Corp failed to claim expenses for
professional services that accrued in past years. May
ABC Corp still claim these expenses as deductions?
No. In COMMISSIONER OF INTERNAL REVENUE VS. ISABELA
CULTURAL CORPORATION (FEBRUARY 12, 2007), Isabela
Corp failed to claim the expenses for professional
services that accrued in 1984 and 1985 during the said
years. Instead, it sought to claim them as deductions
during the taxable year of 1986. The Supreme Court held
that one of the requisites for the deductibility of a business
46
In the latter case, he may claim depreciation allowance
Edited by: Napa - So
expenses is that it must have been paid or incurred during
the taxable year. Hence, the professional fees should
have been claimed as deductions during the years where
they were paid or incurred.
Q21.3. What are the types of business expenses
specifically included in the Tax Code as deductions?
As provided in Section 34(A)(1)(a), these are:
1. Reasonable allowance for salaries or other
compensation for personal services actually
rendered to the taxpayer
2. Reasonable allowance for travel expenses in
the pursuit of trade, business or profession
3. Reasonable allowance for rentals and or other
payments required for the continued use or
premium of the property for the purpose of the
trade or business and to which property the
taxpayer has not taken or is not taking title or in
which he has no equity.46
4. Reasonable allowance for entertainment,
amusement and recreation expenses
provided that they are connected to the
development and operation of the trade, business
or profession and that it is not contrary to law,
morals, public policy or public order.
Q21.4. Is the enumeration of business expenses
provided in the Tax Code exclusive?
No. A taxpayer is entitled to deduct the ordinary and
necessary expenses paid in carrying on his business from
his gross income from whatever source.
Q21.4.1. Name some special laws which provide for
deductible business expenses.
1. Republic Act 10028 (Expanded
Breastfeeding Promotion Act)
The law provides that the expenses incurred by a private
health and non-health facility, establishment or institution,
in complying with the provisions of this Act, shall be
deductible expenses for income tax purposes up to twice
the actual amount incurred provided:
1. That the deduction shall apply for the taxable
period when the expenses were incurred
2. That all health and non-health facilities,
establishments and institutions shall comply with
the provisions of this Act within six (6) months
after its approval
3. That such facilities, establishments or institutions
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shall secure a "Working Mother- Baby-Friendly
Certificate" from the Department of Health to be
filed with the Bureau of Internal Revenue, before
they can avail of the incentive.
2. Republic Act 8502 (Jewelry Industry
Development Act)
The law provides for a deduction from taxable income of
fifty percent (50%) of expenses incurred in training
schemes in connection with the Act and which shall be
deductible during the financial year the expenses were
incurred.
3. Republic Act 8525 (Adopt a school act)
The law provides for a deduction from the gross income
equivalent to fifty percent (50%) of expenses incurred in
connection with the said act.
4. Republic Act 9999 (Free Legal Assistance
Act)
The law provides that a lawyer or professional
partnerships rendering actual free legal services, as
defined by the Supreme Court, shall be entitled to an
allowable deduction from the gross income, the amount
that could have been collected for the actual free legal
services rendered or up to ten percent (10%) of the gross
income derived from the actual performance of the legal
profession, whichever is lower
Q21.4.2. Name some revenue regulations
implementing special laws which provide for
deductible business expenses.
1. RR 1-2009 [December 9, 2008]
The RR provides that sales discounts given to persons
with disabilities shall be deductible from gross income
subject to certain conditions.
2. RR 7-2010 [July 20, 2010]
The RR provides that discounts given to senior citizens
on certain goods and services shall be deductible from
gross income. Also, private establishments employing
senior citizens shall be entitled to additional deductions
from gross income equivalent to fifteen (15%) of the total
amount paid as salaries and wages to senior citizens.
Q21.4.3. Are “advertising expenses” deductible from
gross income?
It depends on the nature of the advertising expense. In
COMMISSIONER OF INTERNAL REVENUE VS. GENERAL FOODS
Edited by: Napa - So
(PHILS.) INC. [APRIL 24, 2003], General Foods claimed as
deductions its advertising expenses for its product “Tang.”
The CIR disallowed the deduction arguing that the
advertising expenses are not business expenses but
capital expenditures.
The Supreme Court ruled in favor of the CIR. Advertising
is generally of two kinds: (1) advertising to stimulate the
current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question
of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the
second kind, then normally they should be spread out
over a reasonable period of time. The protection of brand
franchise is analogous to the maintenance of goodwill or
title to one’s property. This is a capital expenditure which
should be spread out over a reasonable period of time.
This was akin to the acquisition of capital assets and
therefore expenses related thereto were not to be
considered as business expenses but as capital
expenditures. The advertising expense incurred by
General Foods fall under the second type.
Advertising expense to be considered as ordinary:
1. Reasonabless of the amount incurred
2. Amount incurred must not be capital outlay to create
“goodwill”
Ex of ordinary expense: advertisement to stimulate the
current sale or use of service or merchandise
Q21.4.4. ABC Corporation paid a PR firm to campaign
for the sale of ABC’s additional capital stock. Is the
compensation paid to the PR firm deductible as a
business expense?
No. In ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE
(JANUARY 27, 1981), the Supreme Court held that this is
not deductible because it is a capital expenditure.
Expenses relating to the recapitalization and
reorganization of the corporation, promotion expenses
and commission or fees for the sale of stock
reorganization are capital expenditures.
Q21.4.5. Are litigation expenses deductible as a
business expense?
No. As held in ATLAS CONSOLIDATED MINING &
DEVELOPMENT CORPORATION VS. COMMISSIONER OF
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INTERNAL REVENUE (JANUARY 27, 1981), litigation
expenses incurred in defense or protection of title are
capital in nature and not deductible.
Q21.4.6. A, a hotel owner, claimed as deduction
promotion expenses incurred by his wife for the
promotion of the hotel. Half of the said expenses were
disallowed as deductions because on the finding that
his wife went abroad on a combined business and
medical trip. Is the disallowance proper?
Yes. In ZAMORA VS. COLLECTOR OF INTERNAL
REVENUE [MAY 31, 1963], Zamora, a hotel owner,
claimed as deduction promotion expenses incurred by
his wife for the promotion of the hotel. On appeal, the
CTA only allowed 50% of the promotional expenses as
deductions because it was found in the Central Bank
dollar allocation that his wife went abroad on a combined
business and medical trip.
The Supreme Court stated that promotional expenses are
deductible but must be substantiated. When some of the
representation expenses claimed by the taxpayer were
evidenced by vouchers or chits, but others were without
vouchers or chits, documents or supporting papers; that
there is no more than oral proof to the effect that
payments have been made for representation expenses
allegedly made by the taxpayer and about the general
nature of such alleged expenses; that accordingly, it is not
possible to determine the actual amount covered by
supporting papers and the amount without supporting
papers, the court should determine from all available data,
the amount properly deductible as representation
expenses. In view of this, the Supreme Court held CTA
did not commit error in allowing as promotion expenses in
A’s income tax returns at merely one-half.
REPRESENTATION EXPENSE:
• A deductible expense on the part of the employer.
But it is not considered as income on the part of
the employee.
• In representation expense, there must be some
benefit to the business of the taxpayer (e.g. dining
out of office guests/clients).
As compared to Fringe Benefits — deductible expense
and income.
Q21.4.7. Are police protection fees and gifts for an
exhibition for charitable
purp
oses deductible as a business expense?
No. In CALANOC VS. COLLECTOR OF INTERNALREVENUE
[NOVEMBER 29, 1961], at issue in this case is the
deductibility of the expenses incurred for police protection
and for gifts and parties in connection with the boxing and
Edited by: Napa - So
wrestling exhibition that Calanoc financed and promoted
whose proceeds would be given to the orphans and
destitute children of the Child Welfare Workers Club of the
Social WelfareCommission. The Supreme Court held that
the police protection fees were not deductible as they are
illegal since it was consideration for the performance of
functions required of policemen by law. As to the gifts and
parties, they were deemed excessive considering that the
purpose of the exhibition was for a charitable cause.
Q21.5. What is the rule on the deductibility of
compensation payments?
The test of deductibility in the case of compensation
payments is whether they are reasonable and payments
purely for the personal services actually rendered.
Q21.5.1. A, an experience realtor, was paid
supervision fees in the amount of P100,000 annually
by XYZ Corporation for a three-year project, an
amount when combined with his salary and bonuses
is double the XYZ’s income. Are the supervision fees
deductible?
No. In C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF
INTERNAL REVENUE [NOVEMBER 28, 1969], Hoskins & Co.
claimed as deductions the payment of P100,000 to its
founder and controlling stockholder, Hoskins representing
50% of the 8% supervision fees the company received as
managing agent for Paradise Farms. In this case, the
Supreme Court held that such was not deductible for
failing to pass the reasonableness test. If allowed, Hoskin
would be receiving on his salary, bonus, and supervision
fees at total of P185,000 which is double the company’s
reported net income. The Supreme Court stated that if it
was a one-time payment, it could have been deducted
since Hoskin was an experienced realtor. However, the
P100,000 supervision fee was being paid every year (for
three years) for the entire duration of the company’s
project with Paradise Farms.
Q21.6. Are salaries deductible?
Yes, provided that they comply with the following
requisites:
1. The expense must be both ordinary and
necessary
2. The salaries must be paid or incurred within
the taxable year
3. The salaries must be incurred in carrying on a
trade or business
4. The salaries must be for personal services
actually rendered
5. The salaries must be reasonable in amount.
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Q21.7. Are bonuses to employees allowable
deductions from gross income?
Yes provided that:
1. They are made in good faith
2. They are given for personal services actually
rendered
3. They do not exceed a reasonable
compensation for the services rendered when
added to the stipulated salaries.
Q21.7.1. Can a bonus given to corporate officers be
deducted from gross income from the sale of one of
its properties on the representation that corporate
officers, by virtue of their positions, contributed to
the consummation of the sale?
No. In AGUINALDO INDUSTRIES CORPORATION VS.
COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 25,
1982], Aguinaldo Industries sought to claim as deductions
the bonuses given to its corporate officers from the sale
of one of its properties. The Supreme Court held that the
said bonuses cannot be deducted because there is no
evidence that the said officers did any work which would
be the basis of the grant of the bonuses. One of the
requisites for the deductibility of bonuses is that they are
given for personal services actually rendered.
This case is an example of disguised dividends. It is when a
corporation is making payments, to a person actually entitled to
receive dividends but did not claim them as dividends.
OLIVEN’S TEST (to determine if ordinary):
1. Fixing of a right of income or liability to pay
2. Availability of the reasonable accurate determination of
(1).
àrather if payment has been made
Q21.7.2. ABC Corporation claimed as deductions
bonuses it gave to its non-resident president and
vice-president and the bonuses it gave to its resident
officers and employees. The company gave its
resident officers and employees much more. The
deductions for bonuses given to resident officers and
employees were disallowed for being excessive and
for no special reason. Is the disallowance proper?
It would depend on the nature, extent, and quality of the
services actually rendered by the resident officers and
employees. In KUENZLE & STREIFF, INC. VS. COLLECTOR
OF INTERNAL REVENUE [OCTOBER 20, 1959], the Supreme
Court held that the bonuses to its resident officers and
employees were reasonable taking into account the
situation at the time when the services were rendered:
unsettling conditions after the war, the imposition of
controls on exports and imports, and he use of foreign
exchange which resulted in diminution of the amount of
business.
Edited by: Napa - So
Q21.8. What are some factors that may be considered
in determining the reasonableness of the
compensation paid for services?
They are:
1. The payment must be made in good faith
2. The character of the taxpayer’s business
3. The volume and amount of its net earnings
4. The locality in which the business is in
5. The type and extent of the services rendered
6. The salary policy of the corporation
7. The size of the particular business
8. The employee’s qualifications and business
venture
9. The general economic conditions
There is no fixed test in determining the reasonableness
of a given bonus as compensation. This depends on
many factors and the situation must be considered as a
whole.
Q21.9. What is the rule on the deductibility of
representation or entertainment, amusement and
recreation expenses?
Such expenses must:
1. be directly related to or in furtherance of the
conduct of the trade, business or exercise of the
profession
2. not be contrary to law, morals, public policy or
public order
3. not exceed such ceilings prescribed by the
Secretary of Finance.
Q21.9.1. Is there a ceiling on entertainment,
amusement and recreational expenses?
Yes. RR 10-2002 [JULY 10, 2002] provides that sellers
of goods or properties are allowed to deduct 0.5% of their
net sales as representation expenses while sellers of
services are granted 1% of their net revenues as
representation expenses. However, when supporting
documents reflect a lower amount, then such lower
amount shall be used.
Interest (as amended by Republic Act 9337)
Q22. How is interest defined under the Tax
Code?
Interest shall refer to the payment for the use or
forbearance or detention of money, regardless of the
name it is called or denominated. It includes the amount
paid for the borrower’s use of money during the term of
the loan, as well as for his detention of money after the
due date for its repayment.
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Q23. What is indebtedness?
Indebtedness is something owned by one who is
unconditionally obligated or bound to pay
Q24. What are the requisites for the deductibility of
interest expenses from gross income?
The requisites are:
1. There must be indebtedness
2. The indebtedness must be connected with the
taxpayer’s trade, business or exercise of
profession
3. The interest must be legally due
4. The interest expense must have been paid or
incurred during the taxable year.
5. The interest must have been stipulated in writing
6. Not related parties
7. Interest Arbitrage
Q24.1. Do tax obligations constitute indebtedness?
Yes. In COMMISSIONER OF INTERNAL REVENUE VS. VDA. DE
PRIETO [SEPTEMBER 30, 1960], Vda. de Prieto conveyed
real property by way of gifts to her four children. She was
assessed for donor’s gift taxes including interests due
thereon. She claimed as deduction the total interest on
account of the delinquency. She contends that the
interests due from her tax obligations are deductible from
gross income. The Supreme Court held that although
interest payment for delinquent taxes is not deductible as
tax under Section 34(C) of the Tax Code, the taxpayer is
not precluded thereby from claiming said interest payment
as deduction under Section 34(B) of the same Code. It is
a well-settled rule that tax obligations constitute
indebtedness for purposes of deduction from gross
income of the amount of interest paid on indebtedness.
Q24.2. Are there any additional requisites provided
for revenue regulations for the deductibility of
interest expenses?
Yes. RR 13-2000 [NOVEMBER 20, 2000] provides three
more, namely:
1. the interest payment arrangement must not be
between related taxpayers
2. the interest must not be incurred to finance
petroleum operations
3. in case of interest incurred to acquire property
used in trade, business, or exercise of profession,
the same was not treated as a capital expenditure
47
The case of a parent company-subsidiary loan will not be disallowed
because it does not refer to a case of a commonly- owned entity
(commonly owned at 50%) but one where one entity owns the other. of
200,000 to be depreciated for 20 years. On the 10th year, it was lost due
to fire and for the loss, you received P50,000 from your insurance. How
Edited by: Napa - So
The RR also provides for a limitation in that the amount of
interest expense paid or incurred by a taxpayer in
connection with his trade, business, or exercise of a
profession from an existing indebtedness shall be
reduced by an amount equal to 38% of the interest
income earned which had been subject to final
withholding taxes.52
Q24.3. What are the rules on the deductibility of
Interest expenses?
The general rule is that the amount of interest expense
paid or incurred within a taxable year on indebtedness in
connection with the taxpayer’s trade, business or exercise
of profession shall be allowed as a deduction from the
taxpayer’s gross income provided that the taxpayer’s
otherwise allowable deduction for interest expense shall
be reduced by 38% of the interest income subject to final
tax.
The exceptions (where interest expense is not deductible
from gross income) are:
1. If within the taxable year an individual reporting
income on the cash basis incurs an indebtedness
on which an interest is paid in advance
through discount or otherwise. Such interest
shall be allowed as a deduction in the year the
indebtedness is paid. If the indebtedness is
payable in periodic amortization, the amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as deduction in such taxable year.
2. If both the taxpayer and the person to whom the
payment has been made or is to be made are
“related” persons specified under Section
36(B).
3. If the indebtedness is used to finance petroleum
exploration.
Q24.4.1. Enumerate the cases when no deduction is
allowed because the loan is between related
taxpayers.
1. Between members of the family
2. Between an individual and a corporation – where
the individual paid interest on a loan granted by
the corporation more than 50% of the capital
stock of which is owned by the individual
3. Between two corporations – where one
corporation owns more than 50% of the other47
much can you deduct? Get the depreciated cost which is now 100,000
and deduct the insurance received. The amount that can be deducted is
then 50,000.
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4. Between a grantor and fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary
of another trust with the same grantor
6. Between a fiduciary of a trust and a beneficiary of
such trust
Q24.4.2 Loan agreement provides an interest
between X and Y (corps). Is the interest deductible?
Depends. If X and Y are individuals, it is deductible.
Lender has to be an individual and must own less than
50% of the entities.
Q25. May the taxpayer choose to treat interest
expense as capital expenditure?
Yes. Section 34(B)(3) provides that at the option of the
taxpayer, interest incurred to acquire property used in
trade, business or exercise of a profession may be
allowed as a deduction or treated as a capital
expenditure.
However, should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer cannot
at the same time capitalize the interest payments because
that would constitute double tax benefits which is not
authorized by law.
In PAPER INDUSTRIES CORPORATION OF THE
PHILIPPINES VS. COURT OF APPEALS [DECEMBER
1, 1995], Paper Industries claimed as deductions
against gross income interest payments on loans for the
purchase of machinery and equipment. The CIR
disallowed the deduction on the ground that because the
loans had been incurred for the purchase of machinery
and equipment, the interest payments on the said loans
should have been capitalized instead and claimed as a
depreciation deduction taking into account the adjusted
basis of the machinery and equipment (original
acquisition cost plus interest charges) over the useful life
of such assets.
The Supreme Court ruled that Paper Industries is entitled
to its claimed deduction for interest payments on loans
for, among other things, the purchase of machinery and
equipment. The general rule is that interest expenses are
deductible against gross income and this certainly
includes interest paid under loans incurred in connection
with the carrying on of the business of the taxpayer. In this
case, the CIR does not dispute that the interest payments
were made on loans incurred in connection with the
carrying on of the registered operations of Paper
Industries, i.e., the financing of the purchase of machinery
and equipment actually used in the registered operations
of Paper Industries. Neither does the CIR deny that such
interest payments were legally due and demandable
under the terms of such loans, and in fact paid by Paper
Indusries during the tax year. The CIR has been unable
Edited by: Napa - So
to point to any provision of the Tax Code or any other
Statute that requires the disallowance of the interest
payments made by Paper Industries. The general rule
that interest payments on a legally demandable loan are
deductible from gross income must be applied.
Interest arbitrage
Q26. What is interest arbitrage?
Interest arbitrage results in the reduction of the interest
expense by a percentage of the interest income subject
to final tax. It is also defined as a circumstance which is
presumed to exist because by putting excess funds in
deposits/securities subject to 20% withholding, taxpayers
are able to avoid the 32% tax which will happen if the
same funds are invested in revenue-generating activities.
Another illustration of this is when a taxpayer borrows
money from the bank (interest payments on which can
then be claimed as expense and thus a 32% benefit) then
deposits it in a bank (and subsequently suffers only a 20%
final withholding tax) thus benefiting by 12% representing
the difference the 32% deduction and the 20%
withholding tax. It does not matter if the taxpayer actually
intended to save taxes.
In BIR RULING NO. 006-00 [JANUARY 5, 2000],
PNB requested the BIR to exclude the interest income
derived by it from treasury bonds in the determination of
the interest expense not allowable as deduction as gross
income. PNB argues that the said bonds were given by
the Government for payment for its liabilities to PNB and
hence, it has not engaged in a tax arbitrage scheme.
Although as a general rule, the amount of interest
expense paid or incurred by a taxpayer within a taxable
year on indebtedness in connection with his trade,
business or exercise of profession shall be allowed as a
deduction from his gross income, the said interest
expense, however, shall be reduced if the taxpayer has
derived certain interest income which had been subject to
final withholding tax. The CIR ruled that this limitation on
the deductibility of interest expenses applies whether or
not a tax arbitrage scheme was entered into by the
taxpayer.
Elements of Interest Arbitrage:
1. Interest income subject to deduction
2. Interest expense subject to final tax
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Taxes
Q27. Are all taxes deductible from gross income?
No. Section 34(C)(1) provides that all taxes, national or
local, paid or accrued during the taxable year in
connection with the trade or business or profession
of the taxpayer are deductible from gross income
except:
1. Philippine income tax
2. Foreign income taxes unless the taxpayer does
not make use of the tax credit privilege under
Section 34(C)(3)
3. Estate and donor’s taxes
4. Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed (special assessments)
5. VAT
In case of nonresident alien individual or a foreign
corporation, deduction is only allowed if and to the
extent that the taxes for which deduction is claimed are
connected with income from sources within the
Philippines.
Also, to be deductible, the taxes must be imposed by law
on, and payable by the taxpayer. Thus, a VAT is not
deductible by the customer upon whom the burden of
the tax is shifted by the seller (on whom the tax is
imposed by law).
Q27.1. May a resident alien deduct from their gross
income income taxes they paid to their government?
Generally, the answer is no. In COMMISSIONER OF
INTERNAL REVENUE VS. LEDNICKY [JULY 31, 1964],48
US citizens residing in the Philippines who derives income
wholly from sources within the Philippines, sought to
deduct from their gross income the income taxes they
have paid to the US government.
The Supreme Court held that to allow an alien resident to
deduct from his gross income whatever taxes he pays to
his own government is incompatible with the status of the
Philippines as a sovereign state. This is because the
foreign government will have the power to reduce the tax
income of the Philippine government simply by increasing
their tax rates.
Also important is this case is the statement made by the
court on the exception: a taxpayer may only be allowed to
deduct from his gross income, taxes paid to a foreign
48
Note that at the time this case was decided, resident aliens were still
allowed to claim a tax credit. The present rule is that only resident
citizens and domestic corporations can claim a tax credit. Also, in this
Edited by: Napa - So
country when such taxpayer is entitled to a foreign tax
credit and he does not choose to exercise such right. The
right to deduct foreign tax paid is only an alternative to the
taxpayer’s right to the foreign tax credit.
Q28. What is the rule on credit for taxes?
If the taxpayer signifies in his return his desire to claim a
credit for taxes, the basis of such credit, in the case of a
resident citizen of the Philippines, and in the case of a
domestic corporation is as follows:
a. The amount of income taxes paid or
incurred during the taxable year to
any foreign country
b. An individual’s proportionate share of
any such taxes of which he is a
partner or of an estate or trust of
which he is a beneficiary paid or
accrued during the taxable year to a
foreign country if his distributive
share of the income of such
partnership or trust is reported for
taxation under Title II.
Only those subject to tax on worldwide income (resident
citizen and domestic corporations) may avail of tax
credits because they pay taxes for foreign sources
income twice (in the Philippines and abroad) and the tax
credit is meant to lessen the impact of double taxation,
Q28.1. What are the limitations on credit for foreign
taxes?
The amount of the credit shall be subject to the following
limitations:
1. The amount of the credit in respect to the tax paid
or incurred to any country shall not exceed the
same proportion of the tax against which such
credit is taken, which the taxpayer’s taxable
income from sources within such country under
this Title bears to his entire taxable income for the
same taxable year.
2. The total amount of the credit shall not exceed the
same proportion of the tax against which such
credit is taken, which the taxpayer’s taxable
income from sources without the Philippines
taxable under this Title bears to his entire taxable
income for the same taxable year.
In mathematical terms, this can be expressed as:
case, their net income for foreign sources was zero and, thus, there was
no need to apply the tax credit.
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Thus, the tax payable is whichever comes out from this
formula or the actual foreign taxes paid, whichever is
lower.
Rationale for allowing foreign income taxes to be
deductible: To prevent double taxation. HOWEVER, only
citizens and domestic corporations are allowed to claim
to tax deductions because they are the only ones taxed
globally (e.g. Pacquiao)
Losses
Q29. How are losses classified under the Tax Code?
Losses are generally classified into:
1. Those incurred in a trade or business for
profit
2. Those incurred in any transaction entered into
for profit, although not connected with the
trade or business
3. Casualty losses that arise from fire, storm,
shipwreck, or other casualty, or from theft or
robbery, even though not connected with the
trade or business of the taxpayer.
Q30. What are the conditions for deductibility of
losses?
In order that losses may be allowed as deductions, the
following conditions must concur:
a. The losses must actually be sustained and
charged off within the taxable year
b. Evidenced by a closed and completed transaction
c. Loss is not compensated by insurance or
otherwise
d. In the case of an individual, the loss must have
been incurred in the business, trade or profession
of the taxpayer or incurred in any transaction
entered into for profit though not connected with
his trade or business
e. In the case of casualty loss, declaration of loss is
filed within 45 days from the occurrence of the
casualty loss
Q30.1. How shall the amount of the loss deductible
be determined?
The amount of loss deductible is limited to the difference
between the value of the property immediately preceding
the loss and its value immediately thereafter but shall not
49
For example, you purchased a piece of machinery for the value of
200,000 to be depreciated for 20 years. On the 10th year, it was lost
due to fire and for the loss, you received P50,000 from your insurance.
Edited by: Napa - So
exceed an amount equal of the cost or other adjusted
basis of the property, or depreciated cost reduced by any
insurance or other compensation received.49
Example: you purchased a piece of machinery for the
value of 200,000 to be depreciated for 20 years. On the
th
10 year, it was lost due to fire and for the loss, you
received P50,000 from your insurance. How much can
you deduct? Get the depreciated cost which is now
100,000 and deduct the insurance received. The amount
that can be deducted is then 50,000
Q30.2. What are the special rules on losses?
Certain special rules on losses are:
1. Losses are deductible only by the person
sustaining them. They are purely personal and
cannot be used as deductions by another
2. Net Operating Loss Carry Over (NOLCO) can
be availed of by any taxpayer engaged in trade,
business, or practice of profession. Net
Operating loss of business for any taxable year,
which refers to the excess of allowable deduction
over gross income, can be carried over as
deduction for the next three consecutive taxable
years immediately following the year of such loss.
NOLCO shall be allowed only if there has been
no substantial change in the ownership of the
business or enterprise.
3. Capital losses may not be deducted from ordinary
gains; such capital losses may only be deducted
from capital gains unless a final tax on the capital
transaction is imposed.
4. Losses from wagering transaction shall be
allowed only to the extent of the gains from such
transactions.
In the case of petroleum operations which are
abandoned, wholly or partially, accumulated exploration
and development expenditures to a certain extent may
be allowed as deduction as abandonment losses
5. In the case of petroleum operations which are
abandoned, wholly or partially, accumulated
exploration and development expenditures to a
certain extent may be allowed as deduction as
abandonment losses.
6. Losses on account of the shrinkage in value of
securities or shares of stock are not deductible
until after the loss would have been actually
How much can you deduct? Get the depreciated cost which is now
100,000 and deduct the insurance received. The amount that can be
deducted is then 50,000.
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sustained by the disposition of the said securities.
When, however, such securities become
worthless during the taxable year and are capital
assets the loss thereform shall be considered as
a loss from the sale or exchange on the last day
of such taxable year, of capital assets.
7. Voluntary advances to a corporation made
without expectation of repayment do no warrant,
upon on-payment, a deduction for losses
8. Losses from investments are not deductible as
ordinary losses or as bad debts from other
income. Shares of stock becoming worthless in
the hands of an investor are capital assets, as
such capital losses are allowed to be deducted
only to the extent of capital gains.
Q30.3. What is the rule with respect to loss resulting
from shrinkage in the value of the stock
A person cannot deduct from gross income any amount
claimed as a loss merely on account of shrinkage in
value of such stock through fluctuations of the market or
otherwise.
Q30.4. What is the rule with respect to loss resulting
from stocks becoming worthless?
If the securities become worthless during the taxable year
and are capital assets, the loss resulting therefrom shall
be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets.
Q30.5. What are the substantiation requirements for
losses arising from casualty, robbery, theft, or
embezzlement?
Generally, under RR 12-77 [OCTOBER 6, 1977], the
substantiation requirements are:
1. A declaration of loss filed with the CIR or his
deputies within a certain period as prescribed in
the RR after the occurrence of the casualty,
robbery, theft, or embezzlement
2. Proof of the elements of the loss claimed
RMO 31-2009 [OCTOBER 16, 2009] provides for
policies and guidelines for the reporting of casualty
losses.
Edited by: Napa - So
Section 38, Tax Code
Q31. Define Wash sale.
Wash sale is a sale or other disposition of stock or
securities where substantially identical securities are
acquired or purchased within a 61-day period, beginning
30 days before the sale and ending 30 days after the sale.
Q31.1. Are losses from wash sales deductible?
No. This is an exception to the general rule that losses
from sales or exchanges of stock or securities are
deductible as losses from sales or exchange of property.
This will not apply to a loss incurred by a dealer in
securities.
Ingles Notes on Wash Sales (2018 Ingles)
• Losses are not allowed to be claimed in sales of
stock or securities if:
o Within a period of 30 days before the sale,
and 30 days after the sale (61 days total)
o The taxpayer acquires or enters into an
open option to purchase substantially the
same/identical stocks or securities.
• Losses are allowed only if the taxpayer is a
stockbroker and the sale/purchase was made in
the regular course of business.
o Example: Rupert buys Epic Inc shares. He
sells the shares at a loss. 20 days from
the sale, he buys it again. The loss will not
be allowed as a deduction
Q101.14. What is a Wash sale?
Wash sale is a sale or other disposition of stock or
securities where substantially identical securities are
acquired or purchased within a 61-day period, beginning
30 days before the sale and ending 30 days after the sale.
Q101.15. Are losses from wash sales deductible?
No. This is an exception to the general rule that losses
from sales or exchanges of stock or securities are
deductible as losses from sales or exchange of property.
This will not apply to a loss incurred by a dealer in
securities. A loss incurred by a dealer in securities with
respect to a transaction made in the ordinary course of
the business of such dealer is deductible.
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Example:
A, whose taxable year is the calendar year, on December
1, 2012, purchased 100 shares of common stock in the
ABC Company for P100,000 and on December 15, 2012,
purchased 100 additional shares for P80,000. On January
2, 2012, he sold the 100 shares purchased on December
1, 2012, for P80,000. Because of the provisions of Section
38, no loss from the sale is allowable as a deduction.
(see Section 38, Tax Code and Section 131, RR 2)
Forex losses
Q33. Are foreign exchange losses deductible?
No. In BIR RULING 206-90 [OCTOBER 30, 1990] and BIR
RULING NO. 144-85 [AUGUST 26, 1985], the CIR held that,
with regard to foreign exchange losses, the annual
increase in value of an asset is not taxable income
because such increase has not yet been realized, The
increase in value could only be taxed when a disposition
of the property occurred which was of such a nature as to
constitute a realization of such gain. The same conclusion
obtains to losses. The annual decline in the value of
property is not normally allowable as a deduction. Hence,
to be allowable the loss must be realized.
Bad Debts
Q34. What are bad debts?
Bad debts shall refer to those debts resulting from the
worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money
lent or form uncollectable amounts of income from goods
sold or services rendered.
Q34.1. How do you distinguish bad debts from loss?
Voluntary cancellation or forgiveness of a debt does not
give rise to a deductible loss. However, if the debt is
actually worthless, there may be a bad debt deduction.
That deduction would be allowed because the debt was
worthless, not because it was forgiven.
Q34.2. What are the conditions for bad debts to be
deductible?
As provided in RR 5-99 [March 10, 1999], the
requisites for deductibility of bad debts are:
1. There must be an existing indebtedness due to
the taxpayer which must be valid and legally
demandable
2. The same must be connected with the
Edited by: Napa - So
taxpayer’s
3. trade, business or practice of profession
4. The same must not be sustained in a transaction
entered into between related parties
5. The same must actually be charged-off within the
taxable year
6. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year.
RR 5-99 [March 10, 1999] provides for two exceptions
to requisite no. 5, namely:
1. The BSP, through the Monetary Board, shall
ascertain the worthlessness and uncollectibility of
the bad debts and it shall approve the
writing off of the said indebtedness from
the banks; books of accounts at the end
of the taxable year.
2. In no case may a receivable from an insurance or
surety company be written-off from the taxpayer's
books and claimed as bad debts deduction
unless such company has been declared closed
due to insolvency or for any such similar reason
by the Insurance Commissioner
In both cases, requisites nos. 1-4 should still be complied
with,
Q34.3. What is meant by “actually ascertained to be
worthless?”
The phrase means that a debt is not worthless simply
because it is of doubtful value or difficult to collect.
Conclusive evidence must be presented to show that the
taxpayer’s receivable from a debtor has definitely become
worthless.
Q34.4. What is meant by “actually charged off?”
The phrase means that the amount of money lent by the
taxpayer to his debtor has been recorded in his books of
account as a receivable that has actually become
worthless of as of the end of the taxable year, that the said
receivable has been cancelled and written-off from the
said taxpayers books of account.
Q34.5. ABC mining entered into a management
contract with XYZ mining. ABC made advances of
cash and property. However, XYZ’s mine suffered
continuing losses which led to ABC;s withdrawal as
manager and cessation of mine operations. ABC and
XYZ entered into two compromises: the first involved
alleged indebtedness by XYZ from the advances of
ABC and the second involved long-term loans
guaranteed by ABC. ABC deducted the amounts as
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bad debt. Is the deduction proper?
No. In PHILEX MINING CORPORATION VS. COMMISSIONER OF
INTERNAL REVENUE [APRIL 16, 2008], the Supreme Court
held that Philex cannot deduct the amounts as bad debt.
The agreement provided for a distribution of assets of the
mine upon termination, a provision that is more consistent
with a partnership than a creditor-debtor relationship. In
this connection, there is no contractual basis for the
execution of the two compromise agreements in which
Baguio Gold recognized a debt in favor of Philex. Philex’s
advances should be treated as investments in a
partnership. The advances were not "debts" of Baguio
Gold to Philex inasmuch as the latter was under no
unconditional obligation to return the same to the former.
As for the amounts that Philex paid as guarantor to
Baguio Gold’s creditors, the debts were not yet due and
demandable at the time that Philex paid the same. Philex
cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income tax purposes
partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction
claimed. In this case, Philex failed to substantiate its
assertion that the advances were subsisting debts of
Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as
a valid bad debt deduction.
When incurring debts you have to follow the ratio of 1:4.
For every debt you have to have an equity of 4x the debt.
Q34.6. Is the declaration by the taxpayer that a debt is
worthless sufficient for it to claim a bad debt
deduction?
No. In PHILIPPINE REFINING COMPANY VS. COURT OF
APPEALS [MAY 8, 1996], at issue was PRC’s (now
Unilever) claimed of bad debt deduction. On appeal, the
CTA disallowed the same as there was no iota of
documentary evidence to prove the worthlessness of the
debts sought to be deducted. The Supreme Court stated
that before a debt can be considered worthless, the
taxpayer must also show that it is indeed uncollectible
even in the future. PRC here failed to prove the
worthlessness of the amounts receivable.
There should have been diligent efforts from the taxpayer
in trying to collect the debt.
Q34.7. ABC, an investment company made advances
to XYZ under an agreement that a portion of its net
profits would go to ABC. XYZ suffered substantial
losses but continued to operate. ABC made a partial
50
Not all tangible property can be depreciated. Land, for example,
cannot be depreciated because its value continues to increase
Edited by: Napa - So
write-off of the losses and deducted the amount in its
return. Is the deduction proper?
No. In FERNANDEZ HERMANOS, INC. VS. COMMISSIONER OF
INTERNAL REVENUE [SEPTEMBER 30, 1969], the
Supreme Court held that the deduction was improper. The
Court opined that assuming that in this case there was a
valid and subsisting debt and that the debtor was
incapable of paying the debt, the debt is still not
deductible as a worthless debt because the debtor was
still in operation. It has been held that if the debtor
corporation, although losing money or insolvent, was still
operating at the end of the taxable year, the debt is not
considered worthless and therefore not deductible.
Q34.8. What is the Tax Benefit Rule?
Under the Tax Benefit Rule or Equitable Doctrine of
Tax Benefit, the recovery of amounts deducted in
previous years shall be included as part of the gross
income in the year of recovery to the extent of the income
tax benefit of said deduction.
If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due
from him on account of said deduction, his subsequent
recovery thereof from his debtor shall be treated as a
receipt of realized taxable income. Conversely, if the said
taxpayer did not benefit from the deduction if the said bad
debt written-off, then his subsequent recovery shall be
treated as a mere recovery or a return of capital, hence,
not treated as receipt of realized taxable income.
Depreciation
Q35. What is depreciation?
Depreciation is the gradual diminution in the useful value
of tangible property50 resulting from wear and tear and
normal obsolescense.
The term is also applied to amortization of the value of
intangible assets, 51 the use of which in the trade or
business is definitely limited in duration.
Q35.1. What is the rationale behind depreciation?
Depreciation commences with the acquisition of the
property and its owner is not bound to see his property
gradually waste, without making provision out of earnings
for its replacement. It is entitled to see to it that from
earnings the value of the property invested is kept
unimpaired so that at the end of any given term of years,
the original investment remains as it was in the beginning
51
Like those with limited duration
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Q35.2. What are the requisites for the deductibility of
a depreciation expense?
1. The allowance for depreciation must be
reasonable
2. It must be for property used in the trade,
business, or profession
3. It must be charged off during the taxable year;
and
4. A statement on the allowance must be attached
to the return
5. Used for a finite period
Capital Recovery Concept — you should be able to
recover your capital during the time that you’re using
your asset. Such asset can either be tangible or
intangible (e.g. patents).
Q35.3. Can an asset be depreciated beyond its
acquisition cost?
No. In BASILAN ESTATES, INC. VS. COMMISSIONER OF
INTERNAL REVENUE [SEPTEMBER 5, 1967], Basilan
Estates claimed deductions for the depreciation of its
assets up to 1949 on the basis of their acquisition cost.
In 1950, however, it changed the depreciable value of
the assets by increasing it to conform with the increase
in cost of their replacement. Accordingly, in 1950 to
1953, the company deducted from gross income the
value of the depreciation based on this reappraised
value.
The Supreme Court held that such value cannot be
deducted from gross income as it was beyond the
acquisition cost. Depreciation as a deduction is allowed
so that the owner of the assets can set aside some money
to buy a replacement or, in other words, to gradually
recover the acquisition cost. The income tax law does not
authorize the depreciation of an asset beyond its
acquisition cost. The reason is that deductions from gross
income are privileges, not matters of right. More
importantly, the recovery, free of income tax, of an
amount more than the invested capital in an asset will run
counter to the purpose of a depreciation allowance. For
then, the taxpayer can not only recover the acquisition
cost, but also make some profit. Recovery in due time
through depreciation of investment made is the
philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the
underlying reason for the allowance of a deduction for
depreciation.
Q35.4. The BIR found that ABC claimed excessive
depreciation of its buildings. In its defense, ABC
Limpan argued that that some of its buildings are old
and out of style; hence, they are entitled to higher
Edited by: Napa - So
rates of depreciation than those adopted by the BIR
in its assessment. On appeal, the CTA found that the
depreciation was excessive. Should the findings of
the CTA be affirmed?
Yes provided there no arbitrariness and abuse of
discretion on the part of the CTA. In LIMPAN INVESTMENT
CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE
[JULY 26, 1966], the Supreme Court opined that
depreciation is a question of fact and is not measured by
theoretical yardstick, but should be determined by a
consideration of actual facts. The findings of the tax court
in this respect should not be disturbed when not shown to
be arbitrary or in abuse of discretion. Limpan has not
shown any arbitrariness or abuse of discretion on the part
of the CTA. In fact, the CTA applied rates of depreciation
in accordance with Bulletin F of the US Federal Internal
Revenue Service, which the Supreme Court, has
pronounced as having strong persuasive effect.
Q35.5. What are the special rules on deductibility of
depreciation on vehicle expenses?
RR 12-2012 [OCTOBER 12, 2012] provides for the
following rules:
1. Only one vehicle for land transport is allowed for
the use of an official or employee
2. The value of which should not exceed
P2,400,000
3. It must be substantiated with sufficient evidence,
such as official receipts or other adequate
records; and
4. There is a direct connection or relation of the
vehicle to the development, management,
operation, and/or conduct of the trade or business
or profession of the taxpayer
Generally, no deduction in the gross income shall be
allowed for depreciation of the following:
1. Yachts, helicopters, airplanes, and/or aircrafts;
and
2. Land vehicles with a value of more than
P2,400,000
Exception: the taxpayer is in the business of transport
operations or lease of transportation equipment and the
vehicles purchased are used in such operations.
In addition, the following shall be disallowed as
deductions in the gross income:
1. All maintenance expenses on account of non-
depreciable vehicles;
2. Input taxes on the purchase of non-depreciable
vehicles and all input taxes on maintenance
expenses.
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Depletion
Q36. What is depletion?
Depletion is the exhaustion of natural resources like
mines and opil and gas wells as a result of production or
severance from such mines or wells.
Q36.1. Who may avail of the cost of depletion?
Annual depletion deductions are allowed only to persons
who own an economic interest in the property that are
entitled to depletion allowance.
Q36.2. What is the difference between depletion and
depreciation?
Both depletion and depreciation are predicated on the
same basic premise of avoiding a tax on capital. The
allowance for depletion is based on the theory that the
extraction of minerals gradually exhausts the capital
investment in the mineral deposit. The purpose of the
depletion deduction is to permit the owner of a capital
interest in mineral in place to make a tax-free recovery of
that depleting capital asset. A depletion is based upon the
concept of the exhaustionof a natural resource whereas
depreciation is based upon the concept of the exhaustion
of the property, not otherwise a natural resource, used in
a trade or business or held for the production of income.
Thus, depletion and depreciation are made applicable to
different types of assets. And a taxpayer may not deduct
that which the Code allows as a deduction of another.
Q36.3. What is the rule on depletion?
A reasonable allowance for depletion or amortization,
under a cost depletion method, shall be allowed for oil and
gas wells and mines. The allowance is deductible from the
net taxable income. However, when the allowance for
depletion has equal the capital invested, no further
allowance shall be granted
In CONSOLIDATED MINES, INC. VS. COURT OF TAX
APPEALS [AUGUST 29, 1974], the BIR among other
disallowances claimed that the depletion expense
deductions of Consolidated Mines have been
overcharged. Thus, Consolidated was assessed for
income tax deficiency. The CIR and Consolidated
differed with regard to the cost of the mining property as
well as the estimated ore deposit. On appeal to the CTA,
the CTA ruled in favor of the CIR on the issue of
depletion deductions. Consolidated contested the rate of
mine depletion adopted by the CTA in arriving at its
conclusion.
52
NGOs are accredited by the PCNC (Philippine Council for NGO
Edited by: Napa - So
In depletion, evidence must be shown to show the
produce mined and for how much they were sold during
the year for which the return or computation were made.
This is necessary in order to determine the amount of
depletion that can be legally deducted from gross income.
Given the evidence presented, the Supreme Court held
that the CIR was correct as to the cost of the mining
property but both the CIR and Consolidated were wrong
as to estimated ore deposit.
Charitable and other contributions
Q37. What are the conditions for deductibility of
charitable contributions?
The requisites are:
1. Actually paid or made to the Philippine
Government or any political subdivision thereof,
or any of the domestic corporation or association
specified in the Tax Code
2. Made within the taxable year
3. Not exceeding 10% (individuals) or 5%
(corporations) of the taxpayer’s taxable income
before charitable contributions
4. Evidenced by adequate receipts or records
Q37.1. What contributions are deductible in full?
Donations to the following institutions are deductible in
full:
1. Donations to the Government, its entities,
political subdivisions or fully owned corporations
exclusively for undertaking priority activities in
accordance with the national priority plan to
be determined by NEDA
2. Donations to foreign institutions or international
organizations pursuant to agreements, treaties
entered into by Government or special laws
3. Donations to accredited Non-Government
Organizations (non-profit domestic
corporation)52
Q37.2. When are donations subject to limitations?
When the donation is made to:
1. The government for public purposes
2. Accredited domestic corporations for religious,
charitable, scientific, etc. purposes
3. Social welfare institutions
4. NGOs (not accredited)
The limitations are 10% of net income for individual
taxpayers and 5% of net income for corporate taxpayers.
Certification)
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Q37.3. What is a non-government organization?
A non-government organization shall refer to a non-
stock, non-profit domestic corporation organized and
operated exclusively for scientific, research,
educational, character-building and youth and sports
development, health, social welfare, cultural or
charitable purposes or a combination thereof, no part
of the net income of which inures to the benefit of any
private individual.
Q37.3.1. Is an international NGO qualified to be
granted accreditation?
No. In BIR RULING 19-01 [MAY 10, 2001], at issue was
whether or not international organizations with home
offices based abroad are qualified to be granted done
institution status (accreditations as NGO), the CIR ruled
that a non-stock, non-profit corporation or organization
must be created or organized under Philippine laws and
that an NGO must be a non-profit domestic corporation, a
foreign corporation whether resident or non-resident
cannot be accredited as a done institution.
Research and Development
Q38. What is the rule on the deductibility of
expenses for research and development?
A taxpayer may treat research or development
expenditures which are paid or incurred by him during the
taxable year in connection with his trade, business, or
profession as ordinary and necessary expenses which
are not chargeable to capital account. The expenditures
so treated shall be allowed as deduction during the
taxable year when paid or incurred.
Q38.1. When is the above rule inapplicable?
The rule does not apply to:
1. Any expenditure for the acquisition or
improvement of land, or for the improvement of
property to be used in connection with research
and development of a character which is subject
to depreciation and depletion
2. Any expenditure paid or incurred for the purpose
of ascertaining the existence, location, extent,
quality of any deposit of ore or other mineral,
including oil or gas.
In 3M PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL
REVENUE [SEPTEMBER 26, 1988], 53 3M Philippines, a
subsidiary of 3M (nonresident foreign corporation based
in the US), claimed as deductions the entire amount paid
by 3M Philippines to 3M for royalties and technical
services. The Supreme Court ruled that the entire amount
53
Note, however, that during this time, there was a 5% threshold for
royalty payments.
Edited by: Napa - So
is not deductible. Improper payments of royalty are not
deductible as legitimate business expenses. Proper
reference must be given to CB Circular 393 which
provides that royalties shall be paid only on commodities
manufactured by the licensee under the royalty
agreement. In this case, there were some finished
products imported by the licensee from the licensor. No
royalty is payable on the wholesale price of such imported
finished products.
CB Circular is no longer present, so the standard is
“reasonableness”
Q38.2. May the taxpayer elect to amortize/capitalize
its research and development expenses?54
Yes. The taxpayer may elect to amortize the following
research and development expenditures:
1. Paid or incurred by the taxpayer in connection
with his trade, business, or profession
2. Not treated as research and development
expenses (not capitalized)
3. Chargeable to capital account but not chargeable
to property of a character which is subject to
depreciation or depletion.
Additional requirements for deductibility
Q39. What are the additional requirements for
deductibility of deductions?
Any amount paid or payable which is otherwise deductible
from or taken into account in computing gross income or
for which depreciation or amortization may be allowed
shall be allowed as a deduction ONLY if it is shown that
the tax required to be deducted and withheld therefrom
has been paid to the BIR in accordance with:
1. Section 34, Section 58 (on returns and payment
of taxes withheld at source); and
2. Section 81 (on filing of return and payment of
taxes withheld) .
RMO 38-83 [NOVEMBER 14, 1983] provides for the
guidelines for allowance of deductions for certain income
payments.
54
This is similar to interest expense where you can capitalized.
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Optional Standard Deduction
Section 34 (L), Tax Code as amended by Republic Act
9504
Q40. What is meant by “Optional Standard
deduction?”
Section 34(L) provides that in lieu of the itemized
deductions, an individual subject to tax excluding a
nonresident alien may elect a standard deduction of
not exceeding 40% of his gross sales or gross receipts,
as the case may be. In the case of a domestic
corporation and a resident foreign corporation, it may
elect a standard deduction in an amount not exceeding
40% of its gross income.
A non-resident alien (whether engaged or not) and a non-
resident foreign corporation cannot claim OSD.
The election to use OSD when made in the return shall be
irrevocable for the taxable year for which the return is
made.
Q40.1. What are the rules in the determination of the
amount of OSD?
RR 16-2008 [NOVEMBER 26, 2008] provides for the
following rules:
For individuals
1. If on accrual basis of accounting, the OSD shall
be based on gross sales
2. If on cash basis of accounting, the OSD shall be
based on gross receipts
3. Cost of sales and cost of services are not allowed
to be deducted for purposes of determining the
basis of the OSD
For corporations
1. It shall be based on gross income
Q40.2. What are the rules in the determination of the
amount of OSD of GPPs?
RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6 to
7 of RR 16-2008 with respect to the determination of the
OSD of GPPs.
A GPP is not subject to income tax but the partners shall
be liable to pay income tax on their separate and
individual capabilities for their respective distributive
share in the net income of the GPP.
For purposes of computing the distributive share of the
partners, the net income of the GPP shall be computed in
the same manner as a corporation. The GPP may claim
Edited by: Napa - So
itemized deductions or in lieu thereof may opt to avail of
the OSD allowed to corporations. The net income
determined by either claiming the itemized deductions or
OSD from the GPP’s gross income is the distributable net
income from which the share of each partner is
determined.
If the GPP availed of the itemized deductions in
computing its net income, a partner may still claim
itemized deductions from his share in the net income of
the partnership.
However, if the GPP availed of the OSD in computing its
net income, the partner can no longer claim further
deduction from his share in the said net income.
TRAIN Law Amendment: [R.A. 10693, 2018]
In case of a general professional partnership, the
OSD may be availed only once by either the general
professional partnership or the partners comprising
such partnership.
NOLCO
Q32. What is a net operating loss?
Net Operating loss refers to the excess of allowable
deduction over gross income of a business for any taxable
year.
Q32.1. What are the rules on the carry-over of net
operation loss by a taxpayer?
1. The net operating loss of the business or
enterprise for any taxable year immediately
preceding the current taxable year, which had not
been previously offset as deduction from gross
income shall be carried over as a deduction from
gross income for the next 3 consecutive taxable
years immediately following the year of such loss
2. Any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax
shall not be allowed as a deduction
3. A net operating loss carry-over shall be allowed
only if there has been no substantial change in
the ownership of the business or enterprise in that
–
(a) not less than 75% in nominal value of
outstanding issued shares, if the business is
in the name of a corporation is held by or on
behalf of the same persons; or
(b) Not less than 75% of the paid-up capital of
the corporation. If the business is in the name
of a corporation is held by or on behalf of the
same persons.
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Q32.2. XYZ entered into a merger agreement with
ABC. Under this agreement, the rights, properties,
privileges, powers and franchises of the said ABC
were to be transferred, assigned and conveyed to
XYZ as the surviving corporation. Before merger, the
company had over preceding years accumulated
losses. XYZ claimed these losses as a deduction
against its gross income. Should the deduction be
allowed?
No. In PAPER INDUSTRIES CORPORATION OF THE
PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1,
1995], the Supreme Court ruled that the deduction was
improper. NOLCO of the taxpayer shall not be
transferred or assigned to another person, whether
directly or indirectly, such as, but not limited to, the
transfer or assignment thereof through merger,
consolidation or any form of business combination of
such taxpayer with another person. To allow the
deduction claimed by the surviving corporation would be
to permit one corporation or enterprise to benefit from
the operating losses accumulated by another corporation
or enterprise.
Q32.3. If a corporation has paid its MCIT, will the
three-year reglementary period on the carry-over of
NOLCO continue to run?
Yes. RR 14-01 [AUGUST 27, 2001] provides that that the
three-year reglementary period on the carry-over of
NOLCO shall continue to run notwithstanding the fact that
the corporation paid its income tax under the MCIT
computation
Q32.4. If several corporations enter an agreement to
integrate their respective businesses, can each of the
corporations continue to carry-over their respective
net operating losses?
It depends on the nature of the integration plan. In BIR
RULING 30-00 [AUGUST 10, 2000], three cement
companies (Republic, Fortune and Blue Circle) sought the
opinion of the CIR on the tax implications of their
integration plan. With regard to NOLCO, the CIR held that
since, under the plan, the corporation are not dissolved
but merely integrated for a specific bona fide purpose, the
net operation losses of each of the cement corporations
are preserved after the proposed share swap and may be
carried over and claimed as a deduction from their
respective gross income because there is no substantial
change in the ownership of either of the three cement
companies.
Premium payments on health and/or
hospitalization insurance
Edited by: Napa - So
Q41. May a taxpayer deduct from his gross income
premium payments for health and hospitalization
insurance?
Yes. An individual taxpayer can claim as deduction from
his gross income the premium payment for health and/or
hospitalization insurance for an amount not exceeding
P2,400 per family during the taxable year provided the
gross family income does not exceed P250,000 for the
taxable year. Only one spouse claiming the additional
exemption for dependents shall be entitled to this
deduction.
Non-deductible expenses
Section 36, Tax Code
Q42. What items are not deductible from gross
income?
No deduction shall in any case be allowed in respect to:
1. Any amount paid out for new buildings or for
permanent improvements or betterments made
to increase the value of any property or estate.
(Capital expenditures)
2. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made (capitalized
interest)
3. Premiums paid on any life insurance policy
covering the life of any officer or employee or of any
person financially interested in any trade or
business carried on by the taxpayer, individual, or
corporate when the taxpayer is directly or indirectly
a beneficiary under such policy
Losses from sales or exchanges of property directly or
indirectly between related persons
a. Between members of a family
b. Between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned by such individual (except in the
case of distributions in liquidation)
c. Between two corporations more than 50% in
value of the outstanding stock of each of which is
owned by the same individual if either one of the
companies is a holding company
d. Between the grantor and a fiduciary of any
trust
e. Between the fiduciary of a trust and the
fiduciary of another trust if the same person is
a grantor with respect to each trust
f. Between a fiduciary of a trust and a
beneficiary of such trust.
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Section 119-122, RR 2 reiterates the enumeration
provided above.
Personal Expense that are NOT deductible:
1. Insurance paid on a dwelling owned &
occupied by the taxpayer
2. Premiums paid for life insurance
3. When a professional man rents a
property for residential purposes but
receives clients in connection with his
work, no part of the rent is allowable as
business expense. (But if he uses part of
his house as an office, that portion is
considered business expense, thus
deductible)
4. Allowance given by daddy to kids
5. Alimony or allowance paid under a
separation agreement
The following Capital expenses are NOT deductible:
1. New buildings, permanent
improvements, or any amount spent in
restoring property
2. Cost of defending or perfecting title to
property
3. Architect’s services
4. Expense for administration of estate,
court costs, attorney’s fees and
executor’s commissions
5. Amount assess & paid under an
agreement between bondholders &
shareholders of a corporation, to be
used in the reorganization of the
corporation
Q42.1. Are margin fees deductible business
expenses?
No. In ESSO STANDARD EASTERN, INC. VS. COMMISSIONER
OF INTERNAL REVENUE [JULY 7, 1989], Esso made profit
remittances to its New York Head Office. Esso claims that
the margin fees it paid to the Central Bank on the
remittances are ordinary and necessary expenses and
should be deducted from its gross income.
The Supreme Court held that margin fees are not
necessary and ordinary expenses. The margin fees are
not expenses in connection with the production or earning
of petitioner's incomes in the Philippines.
Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New
York, which is a separate and distinct income taxpayer
from the branch in the Philippines, for its disposal abroad,
55
The next three parts will be on Individuals, Corporations, and
Withholding Tax. This part provides the key terms and an overview of
how net income tax payable for individuals and corporations are
Edited by: Napa - So
it can never be said therefore that the margin fees were
appropriate and helpful in the development of petitioner's
business in the Philippines exclusively or were incurred
for purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively
Determining Net Income Tax Payable55
Section 31, 32(A), NIRC
Q43. What is taxable income?
As defined in Section 31, the term “taxable income”
means the pertinent items of gross income specified in
this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of
income by this Code or other special laws.
Q44. What is gross income?
As provided in Section 32(A), gross income means all
income derived from whatever source, including, but not
limited to, the following items:
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions and similar items;
2. Gross income derived from the conduct of trade
or business or the exercise of a profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions; and
11. Partner’s distributive share from the net income
of the GPP
Q45. Is income subject to final tax included in the
taxpayer’s taxable income?
No. Under the Tax Code, "taxable income" does not
include passive income subjected to final withholding
taxes. The definition of gross income is broad enough to
include all passive incomes subject to specific rates or
final taxes. However, since these passive incomes are
already subject to different rates and taxed finally at
source, they are no longer included in the computation of
gross income, which determines taxable income (see CIR
VS. PHILIPPINE AIRLINES [OCTOBER 9, 2006]).
determined.
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2. From all sources within the Philippines only by a

Such income is no longer “returnable,” meaning it will no non-resident citizen including overseas contract
longer be declared as income in the income tax return workers;
and, hence, will not be subject to the schedular income 3. From all sources within the Philippines only, by a
tax rates on individuals or the corporate income tax rate. resident alien or a non-resident alien engaged in
trade or business in the Philippines; 58
Q46. How is net income tax payable determined?
shall be subject to the graduated income tax in
In all cases, other than when a final tax is imposed or accordance with the following schedule provided under
when the gross compensation income tax system applies, Section 24, TRAIN LAW.
the income tax is imposed on the net taxable income
computed as follows: Not over PHP250,000 0%
Over 250,000 but not over 20% of the excess over
1. All income minus exclusions equals gross 400,000 250,000
income; Over 400,000 but not over 30,000 + 25% of the
2. Gross income less allowable deductions 800,000 excess over 400,000
equals net income (in case of corporations, this Over 800,000 but not over 130,000 + 30% of the
is already the taxable net income)56 2,000,000 excess over 800,000
3. Taxable net income times income tax rates (on Over 2,000,000 but not 490,000 + 32% of the
the graduated basis) equals net income tax due over 5,000,000 excess over 2,000,000
4. Income tax less creditable withholding tax and/or Over 5,000,000 1,450,000 + 35% of the
tax credit equals net income tax payable. excess over 5,000,000

Individuals Q47.1.a. How are Purely self-employed or

Ordinary and Passive Income
Q47. Differentiate ordinary income from passive
income.
Ordinary income is income other than capital gain and
those incomes which fall under the category of passive
income.
On the other hand, if the income is generated in the active
pursuit and performance of the corporation’s primary
purposes, the same is not passive income. Generally,
passive income is income generated by the taxpayer’s
assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation
that earn dividends or interest income received from
savings.
Q47.1. What is the income tax rate imposed on
ordinary income?
professionals taxed?
They have two options, either:
1. 8% of gross sales/receipts and other non-
operating income in excess of PHP250,000 in
lieu of graduated rates and percentage tax; or
2. Graduated rates in (A) above.
Provided, the gross sales/receipts and other non-
operating income must not exceed the PHP3M VAT
threshold.
Q47.1.b. What if the individual is both self-employed
or professional and compensation earner?
1. If the PSE chooses graduated then he must first
deduct his deductibles and then aggregate with
the income from the compensation earnings
before applying the graduated income rate
2. If the PSE chooses the 8% you cannot
aggregate but apply the tax rate separately.

It shall be subject to the graduated income tax with rates Q47.1.c. Is the option available to all PSE?
from 0% to 35%.57
No, regardless if within the 3M threshold the ff can’t avail
In relation to Section 23 of the NIRC, the taxable income of 8%:
derived for each taxable year: 1. GPP
1. From all sources within and without the 2. VAT exempt
Philippines by resident citizens; 3. Subject to other percentage tax

56
Simply multiply it with the corporate income tax rate to the graduated income tax rate.
57 58
For ordinary income over P400,000 but not over P800,000 and Only difference really is the source of income
upper brackets, a fixed amount is added to the taxable amount subject
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Q47.1.1. Is the income of minimum wage earners
subject to the graduated income tax rates?
No. Minimum wage earners shall be exempt from the
payment of income tax on their taxable income.
Further, their holiday pay, overtime pay, night shift
differential pay, and hazard pay received by them shall
likewise be exempt from income tax.
Q47.2. What is the income tax rate imposed on
passive income?
Passive incomes are subject to different final taxes.
As stated earlier, since they are already subject to
different rates and taxed finally at source, they are no
longer included in the computation of gross income, which
determines taxable income.
Q47.3. What are the incomes subject to final tax
rates?
As a general rule, income, gain or profit derived by an
individual during the taxable year shall be subject to the
graduated income tax rates.
As exceptions, certain incomes subject to tax are not
subject to the graduated tax rates and are instead subject
to final tax rates. They are:
1. Tax on certain passive income
under Section 24(B)
a) Interests, royalties, prizes and
other winnings under Section
24(B)(1)
b) Cash and/or property dividends
under Section 24(B)(2)
2. Capital gains from sale of shares of stock
not traded in the Stock exchange under
Section 24(C)
3. Capital gains from sale of real property
under Section 24(D)
4. Compensation income of alien and Filipino
employees of
o Regional or area headquarters and
regional operating headquarters of MNCs
under Section 25(C)
o Offshore Banking Units under Section
25(D)
Foreign petroleum service contractors and
sub-contractors under Section 25(E)
Edited by: Napa - So
Q47.3.1. What is the proper tax treatment on
individual taxpayers of income derived from
royalties, prizes and other winnings?
• Royalties (except books, literary works, musical
compositions), prizes amount to more than
P10,000 and other winnings (except PCSO and
Lotto)
• Final tax in case of citizens (whether resident or
nonresident), resident aliens and non-resident
aliens engaged in trade or business is 20%.
• In case of non-resident aliens not engaged in
trade or business, the amount received shall form
part of their gross income subject to a flat 25%.
(see Section 25(B))
Exceptions:
1. For royalties from books, literary works, musical
compositions, the final tax is 10%.
2. Prizes amounting to P10,000 or less shall form
part of ordinary taxable income and, subject, to
the graduated income tax rates.
3. Interests from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements and
Royalties
a. Income derived under the Expanded
Foreign Currency Deposit System
b. Intercorporate Dividends
c. Capital gains from sale of shares of
stock not traded in the Stock exchange
under
d. Capital gains from sale of real property85
4. PCSO and Lotto Winnings are tax-exempt.
TRAIN Law Amendment PCSO and lotto winnings
exceeding PHP10,000 would be subject to the 20% final tax.
Interest income from a depository bank under the expanded
foreign currency deposit system is subject to an increased
final tax of 15%
Q47.3.2. What is the proper tax treatment on
individual taxpayers of income derived from
dividends?
• Dividends from domestic corporations and
shares in net profits of taxable partnerships
received by citizens (whether resident or
nonresident) or resident aliens are subject to
10%.
• In the case of non-resident aliens engaged in
trade or business, it is 20%.
• As for non-resident aliens not engaged in trade or
business, it shall form part of their taxable gross
income subject to flat rate of 25%.
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Q47.3.3. What are deposit substitutes?
Deposit An alternative form of obtaining funds
substitutes from the public (the term public means
borrowing from 20 or more individual or
corporate lenders at any one time),
other than deposits, through the
issuance, endorsement, or acceptance
of debt instruments for the borrower’s
own account for purposes of re-lending
or purchasing receivables and other
similar obligations, or financing their
own needs or the needs of their agent
or dealer
Q47.3.4. What is the proper tax treatment on
individual taxpayers of income derived from interests
As provided in RR 14-2012 [NOVEMBER 7, 2012]:
1. Interest from Philippine currency bank
deposits and yield from deposit substitute
and from trust funds or similar arrangements
Final tax in case of citizens, resident aliens and
non- resident aliens engaged in trade or business
is 20%.
In case of non-resident aliens not engaged in
trade or business, the amount received shall form
part of their gross income subject to flat 25%
income tax.59
2. Interest income derived from government
debt instruments and securities
They are considered “deposit substitutes.”60 The
same tax treatment as above is applied.
3. Interest derived from long long-term deposits
or investments
They are exempt from tax, provided the following
requisites are met:
a. Depositor is an individual citizen
(resident or non-resident), a resident
alien or a nonresident alien engaged in
trade or business in the Philippines;
b. The long-term deposit or investment
certificates under name of the individual;
c. The long-term deposits or investments
must be in the form of savings, common
or individual trust funds, deposit
59
A non-resident foreign corporation is subject to a FWT of 30%.
60
Irrespective of the number of lenders at the time of origination if
such debt instrument and securities are to be traded or exchanged in
the secondary market.
Edited by: Napa - So
substitutes, etc evidences by certificates
in the BSP- prescribed form
d. The long-term deposits or investments
must be issued by banks only;
e. The long-term deposits or investments
must have a maturity period of not less
than 5 years
f. The long-term deposits or investments
must be in the denominations of P10,000
and other BSP-prescribed denomination
g. The long-term deposits or investments
should not be pre-terminated.
h. Except those specifically exempted by
law, any other income such as gains from
trading, foreign exchange gain shall not
be covered by income tax exemption.
If the deposit or investment is pre-terminated, a final tax
shall be imposed on the entire income.
• Four years to less than five year – 5%.
• Three years to less than four years – 12%
• If less than three years – 20%.
4. Interest income derived from a depository
bank under the expanded foreign currency
deposit system (EFCDS)
Derived from FCDUs:
a) The interest income must be derived by
residents. If the interest income is derived by a
resident individual taxpayer, it shall be subject to
a final tax of 15%.61
b) Any income of non-residents, whether individuals
or corporations, shall be tax-exempt.
c) If the bank account is jointly in the name of a non-
resident and a resident, 50% shall be treated as
exempt and the remaining 50% shall be subject
to the final tax of 15%
Derived by FCDUs:
a) The interest income must be derived by
residents. Interest income from foreign currency
loans granted by such depository banks under
the EFCDS other than OBUs shall be subject to a
final tax of 10%.
b) Any income of non-residents, whether individuals
or corporations, shall be tax-exempt.
1- 4 are derived from dealings with banks not interest
income derived by banks.
61
Domestic and resident foreign corporations are also subject to the
final tax of 15%. Nonresident foreign corporations are exempt
[Amended by TRAIN Law]
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5. Interest income derived from
banking units of OBUs
a) Income derived by OBUs from foreign currency
transactions with nonresidents, other OBUs, and
local commercial banks are tax-exempt.
b) If the foreign currency transactions are with
residents other than OBUs and local commercial
banks, the interest income shall be subject to
10%
6. Interest income derived all other instruments
Any other debt instrument not within the coverage of
deposit substitutes shall be subjected to a creditable
withholding tax of 20%.
Capital Gains Tax 62
Q48. Define the following terms.
Section 22(Z) and 39(A) Tax Code
Ordinary Any gain from the sale or exchange of
Income property which is not a capital asset or
property described in Section 39(A)(1)
(which defines what capital assets
are and those which are not)
Ordinary Includes any loss from the sale or
loss exchange of property which is not a
capital asset
Capital Means property held by the taxpayer
Assets (whether or not connected with his trade
or business) but does not include:
1. Stock in trade of the taxpayer or
other property of a kind which would
properly be include in the inventory
of the taxpayer if on hand at the
close of the taxable year
2. Property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or
business
3. Property used in the trade or
business of a character which is
subject to the allowance for
depreciation
4. Real property used in trade or
business of the taxpayer assets over
the gains from such sales or
exchanges
62
This will be discussed in greater detail in the section on Capital
Gains and Losses.
Edited by: Napa - So
Section 22(T) to (X), Tax Code
offshore Securities Means share of stock in a
corporation and rights to subscribe
for or to receive such shares
A merchant of stocks or securities,
Dealer in
securities whether an individual, partnership
or corporation, with an established
place of business, regularly
engaged in the purchase of
securities and the resale thereof to
customers
Bank Every banking institution
as defined in RA 337 as
amended by RA 8791 (General
Banking Act of 2000)
Non-bank A financial intermediary as defined
financial in RA 337 as amended by RA 8791
institution (General Banking Act of 2000)
authorized by the BSP to perform
quasi-banking activities
Means borrowing funds from 20 or
Quasi-
banking more personal or corporate lenders
at any one time, through the
activities
issuance, endorsement, or
acceptance of debt instruments of
any kind other than deposits for the
borrower’s own account or through
the issuance of certificates of
assignments or similar
instruments, with recourse, or of
purchase agreements for purposes
of re-lending or purchasing
receivables and other similar
obligations
Q49. What is a capital gains tax?
A capital gains tax is a tax on capital gains, the profit
realized from the sale of capital assets.
Q49.1. If the asset sold is not a capital asset, what
tax will be imposed?
If the asset is an ordinary asset, any gain from the sale
thereof shall form part of the ordinary income which shall
be subject either to graduated income tax rates (if
individual) or corporate income tax (if corporation).
Q49.2. What capital gains are subject to capital gains
tax?
1. Capital gains from the sale of shares of stock no
trade in the stock exchange
2. Capital gains from the sale of real property
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As far as the taxing authority is concerned, the seller is
liable for the tax. EXCEPT for mortgage where the
mortgagee will now be the statutory seller, even if it’s
really the mortgagor who’s the seller.
Q49.3. From the above transactions, who are the
individual taxpayers whose transactions would be
subject to capital gains tax?
The capital gains tax shall be imposed on such
transactions by any individual taxpayer, whether citizen or
alien. 63
Q49.4. Is the capital gain from the sale or exchange of
a capital asset always taxable in full?
No. In the case of a taxpayer other than a corporation, the
following percentages of the gain upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain:
1. 100% if the capital asset has been held for not
more than 12 months
2. 50% if the capital asset has been held for more
than 12 months
Capital Gains Tax with respect to shares of
stock
3 Types of Stocks:
1. not listed but traded
2. listed but traded
3. listed but not traded
4. given at the initial offering
Q50. What are stocks classified as capital assets?
Stocks classified as capital assets mean all stocks and
securities held by taxpayers other than dealers in
securities.
Q51. What is the rule on capital gains from sales of
shares of stock?
Capital gains tax shall be imposed upon the net capital
gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in
a domestic corporation except shares, sold or disposed
through the stock exchange.
The final tax imposed shall be:
• Capital gains not over P100,000 – 5%
• Capital gains over P100,000 – 10%
The tax base shall only be the gain on the sale and such
63
Note that any corporate taxpayer, domestic or foreign as well as all
other taxpayers may be subjected to pay capital gains tax on stock or
Edited by: Napa - So
sale will always be subject to capital gains tax without any
exemption.
The capital gains tax must be paid within 30 days
following each sale or disposition. In case of installment
sale, the return shall be filed within 30 days following the
receipt of the first down payment and within 30 days
following the subsequent installment payments.
(See RR 06-2008 [APRIL 22, 2008])
Q51.1. If the share of stock is traded through the stock
exchange, what tax is applicable?
A percentage tax of ½ of 1% is imposed on the gross
selling price of shares of stock if they are listed and sold,
exchanged or transferred through the facilities of the local
stock exchange. (see Section 127(A) and RR 06-2008
[APRIL 22, 2008])
However, even if trade through the stock exchange, a sale
of shares by companies not complying with the 10%
minimum public float shall be subject to capital gain tax
(see RR 16-2012 [November 7, 2012])
Q51.2. What are exempted from capital gains tax on
stock transactions?
1. Gains derived by dealers in securities
2. Gains from sales of stock to the extent invested
in new shares of stocks in banks, financial
intermediaries, and corporations organized
primarily to hold equities in banks
3. All other gains which hare specifically exempt
from income tax under existing investment
incentives and other special laws.
Q51.3. Is an assignment of deposits on stock
subscriptions subject to capital gains tax?
YES. The assignment of the deposits on stock
subscriptions results in a net gain. A tax on the profit of
sale on net capital gain is the very essence of the net
capital gains tax law. To hold otherwise will ineluctably
deprive the government of its due and unduly set free
from tax liability persons who profited from said
transactions (see COMPAGNIE FINANCIERE SUCRESET
DENREES VS. CIR [AUGUST 28, 2006])
real property transactions
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Q51.4. What is the effect of non-payment of capital
gains tax on stock transactions?
As provided in Section 11 of RR 06-2008, no sale,
exchange, transfer or similar transaction intended to
convey ownership of, or title to any share of stock shall be
registered in the books of the corporation unless the
receipts of payment of the tax herein imposed is filed with
and recorded by the stock transfer agent or secretary of
the corporation.
RMC 37-2012 [AUGUST 3, 2012] clarified RR 06-2008 in
stating that a Certificate Authorizing Registration [CAR]
is still necessary before any transfer of shares of stock
not traded in the Stock Exchange may be transferred in
the books of a corporation.
Capital Gains Tax with respect to disposition
of real property
Q52. What is the rule on capital gains from
dispositions of real property?
The rate of 6% shall be imposed on capital gains
presumed to have been realized by the seller from the
sale, exchange, or other disposition of real properties
located in the Philippines classified as capital assets,
including pacto de retro sales and other forms of
conditional sales based on the gross selling price or fair
market value as determined by the CIR, whichever is
higher.
The tax base shall be the entire selling price.
The capital gains tax must be paid within 30 days
following each sale or disposition. In case of installment
sale, the return shall be filed within 30 days following the
receipt of the first down payment and within 30 days
following the subsequent installment payments.
Why? Because of the “PRESUMED GAIN” — you
always assume they sell for gain
For there to be capital gains tax, the property should be
a capital asset (property not used in the business & not
principal residence)
Q52.1. What is the special rule for disposition of real
property made by an individual to the government?
As provided in RR 8-98, in case of disposition of real
property made by an individual to the government or to
any of its political subdivisions or agencies or to
64
RR 14-2000 added the escrow agreement requirement and
conditions relating thereto.
65
If the same is insufficient to cover the entire amount assessed, he
Edited by: Napa - So
government-owned or controlled corporations, the seller
may elect to:
1. compute the tax on the gain derived from such
sale under the normal income tax rates; or
2. under a final capital gains tax of 6%.
When included as income, there may be deductions you
can avail of.
Q52.2. What are the conditions for the exemption of
capital gains tax on the sale by a natural person of his
principal residence?
As provided in RR 13-99 [JULY 26, 1999], as amended
by RR 14-2000 [NOVEMBER 20, 2000]:64
1. The 6% capital gains tax otherwise due shall be
deposited in cash or manager’s check in an
interest-bearing account with an authorized agent
bank under an Escrow Agreement.
2. He shall file his Capital Gains Tax Return
3. The proceeds from the sale, exchange or
disposition must be fully utilized in acquiring or
constructing his new principal residence within 18
calendar months from date of its sale. To ensure
compliance, he must within 30 days from the
lapse of the said period the required documents
to prove full utilization.
4. Upon a showing that the proceeds of the sale,
exchange or disposition have been fully utilized,
the escrow on the bank deposit shall be released.
5. The tax exemption may be availed of only once
every 10 years
6. The historical cost or adjusted basis of his old
principal residence sold, exchanged disposed
shall be carried over to the cost basis of his new
principal residence
7. If he fails to submit the required documents within
30 days after the lapse of the 18-month period, it
shall be presumed that he did not fully utilize the
proceeds of the sale, exchange or disposition of
his old principal residence, and shall be assessed
deficiency capital gains tax. The escrow shall be
applied in payment of this.65
8. If there is no full utilization of the proceeds of sale,
exchange or disposition of his old principal
residence, he shall be liable for deficiency capital
gains tax, inclusive of 20% interest per annum,
9. Computed from the 31st day after the date of
sale or disposition of the said old principal
residence.
shall remain liable for the remaining balance of the assessment.
The excess of the deposit in escrow, if any, shall be returned to him.
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Q52.3. Who is liable to pay the capital gains tax?
The seller is liable to pay the capital gains tax. As provided
in RR NO. 8-98 [AUGUST 25, 1998], the capital gains tax
return will be filed by the seller within 30 days following
each sale or disposition of real property.
because before the period expires there is yet no transfer
of title and no profit or gain is realized by the mortgagor.
Q52.6. If title to property is transferred to one spouse
as a result of a court decision in an annulment case,
is the transfer subject to capital gains tax?

Q52.3.1. Can the buyer pay the capital gains tax?
Yes. The buyer can retain the amount for the capital gains
tax and pay it upon authority of the seller,66 or the seller
can pay the tax, depending on the agreement of the
parties.
Q52.4. Is the payment of the capital gains tax a pre-
requisite to the transfer of ownership to the buyer?
No. Payment of the capital gains tax, however, is not a
pre-requisite to the transfer of ownership to the buyer. The
transfer of ownership takes effect upon the signing and
notarization of the deed of absolute sale. (see Chua v.
CA [APRIL 9, 2003])
Q52.5. If a mortgagee foreclosed the mortgaged
property but the mortgagor exercises his right of
redemption within the applicable period, will capital
gains tax still be imposed on the foreclosure sale?
No. In BIR Ruling DA-029-08 [JANUARY 23, 2008], title to
a house and lot was transferred to the husband by virtue
of a decision of the court declaring his marriage with his
wife null and void. In BIR Ruling DA 287-07 [MAY 8,
2007], title to a condominium unit was transferred to the
wife as a result of an agreement to distribute communal
property executed in the course of annulment
proceedings. In both BIR Rulings, the CIR held that the
transfer of the title of the subject properties are not subject
to capital gains tax, as such transfers are equivalent to a
conveyance but without monetary consideration, made in
accordance with the Court's Decision granting parties
agreement for the distribution of communal property.
Q. What will you prefer for tax purposes, SHARES
OF STOCK or REAL PROPERTY? Which is more
beneficial?

RR 4-99 [MARCH 9, 1999] provides that in case the

mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, 67 no
capital gains tax shall be imposed because no capital
gains has been derived by the mortgagor and no sale or
transfer of real property was realized. If the mortgagor
does not exercise his right of redemption, capital gains
tax on the foreclosure sale shall become due.
Factors to consider:
Q52.5.1. ABC Company took out a loan from XYZ • Shares of stock is listed or not
bank and mortgaged one of its properties as • Selling price of the real property
collateral. ABC was unable to pay so XYZ • Fair Market Value of the real property
extrajudicially foreclosed the property and bought it. • Selling price of the shares
Before the expiration of the one-year redemption • Net Capital Gains of shares
period, 68 the mortgagor notified the bank of its
• Whether the corporation is Domestic or Foreign
intention to redeem the property. Is XYZ liable to pay
• Is it a real property in the Philippines
the capital gains tax as a result of the foreclosure
sale?

No. In foreclosure sale, there is no actual transfer of the

mortgaged real property until after the expiration of the
one-year period and title is consolidated in the name of
the mortgagee in case of non-redemption. This is
66
The buyer has more interest in having the capital gains tax paid registration of the certificate of foreclosure sale with the Register of
immediately since this is a pre-requisite to the issuance of a new Torrens Deeds which in no case shall be more than 3 months after foreclosure
title in his name.
68
67
Note Section 47 of the General Banking Act, judicial persons The foreclosure sale in the case on which the question is based took
whose property is being sold pursuant to an extrajudicial foreclosure place prior to the effectivity of the Act.
shall have the right to redeem the property until, but not after, the
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OCWs/Senior Citizens/Disabled
Q53. What are the requirements for OCWs and
seafarers or seamen to be considered OCWs for
taxation purposes?
To be considered as an OCW, they must be duly
registered as such with the POEA with a valid Overseas
Employment Certificate (OEC). In the case of seafarers or
seamen, they must be duly registered with the POEA with
a valid OEC and with a valid Seafarers Identification
Record Book or Seaman’s book issued by the MARINA.
(see RR NO. 001-11 [FEBRUARY 24, 2011]).
Q53.1. What is the tax treatment of OCWs for
purposes of income tax?
An OCW’s income arising out of his overseas
employment is exempt from income tax. If he has income
earnings from business activities or properties within the
Philippines, such income earnings are subject to
Philippine income tax.
Q53.2. Are OCWs and seafarers exempt from the 7.5%
final tax on interest income from a depository bank
under the EFCDS?
No, because OCW and seamen are non-residents. As
such, they are exempt from the final tax. To avail of the
tax exemption, they must present proof of non- residency
such as their OEC or Seaman’s book. However, if the
account is jointly in the name of the OCW and an
individual living in the Philippines, half of the interest
income will be treated as tax-exempt and the remaining
half shall be subject to the final tax. (see RR NO. 001-11
[FEBRUARY 24, 2011]).
Q54. What is the tax treatment of senior citizens for
purposes of income tax?
Generally, qualified senior citizens deriving returnable
income during the taxable year, whether from
compensation or otherwise, are required to file their
income tax return and pay the tax.
However, he shall be exempt under the following cases:
1. The returnable income is in the nature of
compensation income but he qualifies as a
minimum wage earner; and
2. If the aggregate amount of gross income earned
by the Senior Citizen during the taxable year
does not exceed the amount of his personal
exemptions (basic and additional)
69
Previously, we have said that a partnership is liable for income tax
as the term “corporations” includes partnerships no matter how created
Edited by: Napa - So
Note that the exemption of senior citizens from income tax
does not extend to all types of income earned during the
taxable year such as those subject to final taxes. (see RR
No. 007-10 [JULY 20, 2010].)
Q54.1. Is the 20% sales discount granted by
establishments to qualified senior citizens
considered a tax credit or a tax deduction?
In M.E. HOLDING CORPORATION V. COURT OF APPEALS
[MARCH 3, 2008], the Supreme Court noted that under RA
9257 or the Expanded Senior Citizens Act of 2003,
starting taxable year 2004, the 20% sales discount shall
be treated as a tax deduction and no longer as a tax
credit.
Q54.1.1. What is the difference between a tax credit
and tax deduction?
A tax credit is a peso-for-peso deduction from the
taxpayer’s tax liability or a full recovery while a tax
deduction only benefits the taxpayer to the extent of a
percentage of the amount granted as a discount. (See
CARLOS SUPERDRUG CORP. V. DSQS [JUNE 29, 2007] and
M.E. HOLDING CORPORATION V. COURT OF APPEALS
[MARCH 3, 2008])
Q55. Can a benefactor77 of a PWD whose civil status
is single avail of the “head of family” status to be
entitled to personal exemption?
It is no longer necessary. RA 9442, which amends RA
7277 or the Magna Carta for Persons with Disability,
provides that a benefactor of a PWD whose civil status is
single shall be considered as “head of family” and, as
such, shall be entitled to personal exemption. However,
the terms “head of
Partnerships (GPPs)69
Q61. What is the tax treatment of a GPP?
The GPP as an entity is not liable for income tax.
However, the persons engaging in business as partners
in a GPP shall be liable for income tax only in their
separate and individual capacities for their respective
distributive share in the net income of the GPP.
or organized except GPPs. In this, GPPs will be discussed instead.
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Q61.1. How is the distributive share of the partners
computed?
The net income of the GPP shall be computed in the same
manner as a corporation. Each partner shall report as
gross income his distributive share, actually or
constructively received, in the net income of the
partnership.
Q61.2. When is the net income of a partnership
deemed constructively received by partners?
The taxable income declared by a partnership which is
subject to corporate income tax, after deducting the said
corporate income tax, shall be deemed to have been
actually or constructively received by the partners in the
same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not.
Q62. May GPPs claim OSD?
Yes. Train Law states In case of a general professional
partnership, the OSD may be availed only once by either
the general professional partnership or the partners
comprising such partnership.
Corporations
Q63. Define taxable income and gross income for
purposes of corporate income taxes.
Taxable means the pertinent items of gross
Income income specified in the Code, less the
deductions and/or personal and
additional exemptions, if any authorized
for such types of income by the Code or
other special laws. For corporations,
taxable income would mean net income.
Net income and taxable
income is used interchangeably when
it comes to corporations.
Gross Shall mean gross sales less sales
Income returns, discounts, allowances and
cost of goods sold.
Edited by: Napa - So
Q63.1. Why is the distinction of the two relevant for
purposes of corporate income tax?
1. For domestic corporations and resident foreign
corporations, Regular Corporate Income Tax
(RCIT) is imposed on taxable income. For non-
resident foreign corporations, RCIT is imposed on
its gross income.
2. When applicable, MCIT is imposed on the gross
income of domestic and resident foreign
corporations.
Domestic Corporations Ordinary Income
Q64. What is the regular corporate income tax
imposed on corporations?
The rate of RCIT imposed on corporations is 30%.
For domestic corporations:
1. The rate is imposed on taxable income from
sources within and without the Philippines.
2. Different rates of tax apply on certain passive
incomes.
For resident foreign corporations:
1. The rate is imposed on taxable income from
sources within the Philippines.
2. Different rates of tax apply on certain passive
incomes.
For nonresident foreign corporations:
1. The rate is imposed on gross income from all
sources within the Philippines.
2. The gross income includes those income sourced
from certain passive incomes including capital
gains.
3. However, capital gains from sales of shares of
stock not traded in the stock exchange are, not
included in the gross income as well as interest
from foreign loans and intercorporate dividends
which are subject to final tax rates.
Q65. May the President allow domestic and resident
foreign corporations the option to be taxed on their
gross income?
Yes. As provided under Section 27(A)(1) and Section
28(A)(1), the President upon recommendation of the
Secretary of Finance may allow domestic and resident
foreign corporations the option to be taxed at 15% of
gross income after the following conditions have been
satisfied:
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1. a tax effort ratio of 20% of the GNP
2. a ratio of 40% of income tax collection to total
tax revenues
3. a VAT tax effort of 4% of GNP
4. a 0.9% ratio of Consolidated Public Sector
Financial Position (CPSFP) to GNP
This option is available to firms whose ratio of cost of
sales to gross sales or receipts from all sources does not
exceed 55%. Upon election of the gross income tax
option, it shall be irrevocable for 3 consecutive taxable
years during which the corporation is qualified.
Q66. What domestic corporations are subject to
preferential tax rates?
As a general rule, all domestic corporations are subject to
the RCIT. As exceptions, certain domestic corporations
are subject to final tax rates. They are:
1. Proprietary education institutions and hospitals
2. Foreign currency deposit unit of a local universal
or commercial bank
3. Firms that are taxed under a special income tax
regime
4. Private educational institutions
5. Hospitals
Q67. Are GOCCs subject to corporate income tax?
As a general rule, yes. As provided under Section 27(C),
the provisions of special or general laws to the contrary
notwithstanding, all corporations, agencies or
instrumentalities owned or controlled by the Government,
except the GSIS, SSS, Philhealth, and the PCSO, shall
pay such rate of tax upon their taxable income as imposed
by this section upon corporations or associations
engaged in a similar business, industry or activity.
Passive Income
Q68. What are some of the certain passive incomes
received by corporations?
1. Interests from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements and
Royalties
2. Income derived under the Expanded Foreign
Currency Deposit System
3. Intercorporate Dividends
4. Capital gains from sale of shares of stock not
traded in the Stock exchange under
5. Capital gains from sale of real property70
70
Note that this is not considered a passive income for foreign
corporations, whether resident or nonresident. The simple reason is
because of the prohibition imposed by the Constitution on foreign
Edited by: Napa - So
Q68.1. What is the tax treatment on corporations of
income derived from dividends?
1. If the dividends are from a domestic corporation:
Domestic and resident foreign corporations are tax-
exempt as they are treated as inter-corporate dividends.
However, for resident foreign corporations, they are
subject to the 15% branch profit remittance tax.
For non-resident foreign corporations, the dividend is
subject to:
1. Tax treaty rate, if applicable
2. 15% if no tax treaty but satisfies the tax-sparing
provision (20% à 15%)
3. 30% if no tax treaty and does not comply with the
tax-sparing provision
2. If the dividends are from a foreign corporation:
The income shall form part of the gross income of the
corporation but the situs of the income becomes material
except for a domestic corporation which is taxed on
worldwide income.
Q68.2. What is the tax treatment on corporations of
interest income from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements and
Royalties?
1. Domestic and resident foreign corporations are
subject to a final tax of 20%.
2. Subject to a final withholding tax of 30% if
received by a foreign nonresident corporation,
unless the interest income is from foreign loans
contracted on or before August 1, 1986, in which
case it is subject to a FWT of 20%
If the tax rate for something is not specifically stated, it does
not mean it is exempt. Rather, it will form part of your
regular income subject to 30% tax.
Q68.3. What is the tax treatment on corporations of
income derived under the EFCDS?
1. Domestic and resident foreign corporations are
subject to a final tax of 15%. Any income of non-
residents, whether individuals or corporations,
shall be tax-exempt.
2. Income derived by a depository bank under the
EFCDS from foreign currency transactions with
non-residents, OBUs in the Philippines, local
commercial banks, including branches of foreign
ownership of lands.
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PM REYES TAX 1: INCOME TAX // MONTERO
banks and other depository banks under the
EFCDS shall be exempt from ll taxes.
3. Interest income from foreign currency loans
granted by such depository banks under the
EFCDS other than OBUs shall be subject to a
final tax of 10%.
Capital Gains Tax71
Q69. Is the assignment and delivery of the developed
units to joint owners in a Build-To-Own (BTO) scheme
subject to capital gains tax?
In a BTO, the developer makes it appear that it merely
manages the construction of the condominium project,
and that the funds as contributed by the individual
investors are pooled in a bank with the developer, as
project manager, receiving a project management fee, In
that scheme, it is claimed that the assignment and
delivery to the individual investors of the developed units
is not taxable as it is merely a transfer of property held in
trust by the Trustee for the individual trustors. Previous
BIR rulings have exempted the assignment from capital
gains tax. In In BIR RULING DA-455-07 [AUGUST 17,
2007], the conveyance of the condominium units by the
trustee to the individual trustors pursuant to the terms of
the BTO contract and without consideration was held not
subject to capital gains tax. However, in RMC NO. 055-
10 [JUNE 28, 2010], the CIR nullified all BIR Rulings
exempting the scheme from capital gains tax. Thus, the
present rule is that the assignment and delivery in BTO
schemes are subject to capital gains tax.
Resident Foreign Corporations
Semi-global aspect of taxation — Section 24(A) —
because it just states all the income that are taxable and
provides a fixed tax rate.
In general
*You dont need to be registered as long as you are
“engaged in business”. But if you are registered then it’s
automatic
Q70. What is the difference between a branch
and a subsidiary?
For purposes of taxation, a subsidiary is considered a
71
Same rates and rules as in the case of individual taxpayers. Refer to
that discussion in the reviewer.
72
They are tax-exempt.
73
An international carrier doing business in the Philippines shall pay a
tax of 2.5% on its Gross Philippine Billings
74
Income derived by OBUs from foreign currency transactions with
Edited by: Napa - So
domestic corporation while a branch is a resident foreign
corporation.
Domestic v. Resident Foreign Corp.
Q: Sells at a price lower than acquisition
A: D would be taxed under presumed gain. RFC would
not be taxed since “no gain” would reflect in their taxable
income.
Q71. What resident foreign corporations are subject
to preferential tax rates?
As a general rule, all resident foreign corporations are
subject to the RCIT. As exceptions, certain resident
foreign corporations are subject to final rates. They are:
1. Regional or area headquarters (RHQ) (a branch
established in the Philippines by MNCs and which
does not earn or derive income from the
Philippines and whose role is supervisory)72
2. Representative office (a branch in the Philippines
of a MNC whose activities are limited to
information dissemination, product promotion)
3. International carriers by air or water73
4. Offshore Banking Units74
5. Foreign Currency deposit Unit (FCDU) in the
Philippines of a foreign bank75
6. Regional Operating Headquarters (ROHQ)76
7. Branch of foreign corporation with respect to
profit remittances to head office.
8. Branch of foreign corporations registered with
PEZA, SBMA, CDA, CDJHA.
9. Qualified service contractor or subcontractor
engaged in petroleum operations in the
Philippines
International Carrier
Q72. For purposes of income taxation, what is an
international carrier?
An International carrier shall refer to a foreign airline
corporation doing business in the Philippines having been
granted landing rights in any Philippine port to perform
international air transportation services/activities or flight
operations anywhere in the world (see RR NO. 15-2002)
Just because you have landing rights does not mean you
are “engaged in business”. If you sell tickets in the PH, it
automatically makes you engaged in business.
Q73. What is Gross Philippine Billings?
nonresidents, other OBUs, and local commercial banks are tax-
exempt. If the foreign currency transactions are with residents other
than OBUs and local commercial banks, the interest income shall be
subject to 10%
75
See Q68.3.
76
They shall pay a tax of 10% of their taxable income
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The 2.5% tax on gross Philippine billings is an income
tax levied on the presumed gain of the airline and shipping
companies. It ensures that they aretaxed on the income
they derive from Philippine sources.
R.A. No. 10378 — the airline would be exempt from tax if
the PH has a counterpart in their jurisdiction which enjoys
similar exemption. — This affects the UA v. CIR decision,
although not the focus.
For an international air carrier, Gross Philippine Billings
refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage
document.
For International Shipping, Gross Philippine Billings
means gross revenue whether for passenger, cargo or
mail originating from the Philippines up to final
destination, regardless of the place of sale or payments
of the passage or freight documents
Q73.1. ABC Shipping is a foreign corporation. XYZ
chartered one of ABC’s ships to load raw sugar in the
Philippines. Upon arriving at the port, the vessel
found no sugar for loading. The ship sailed back
without carrying any sugar. Is ABC Shipping liable for
gross Philippine billings tax?
No. A resident foreign corporation engaged in the
transport of cargo is liable for taxes depending on the
amount of income it derives from sources within the
Philippines. ABC derived no receipt from its charter
agreement with XYZ. The vessel arrived in the port on but
found no raw sugar to load and returned without any
cargo laden on board (see CIR vs. Tokyo Shipping [MAY
26, 1995])
Q73.2. What is the tax treatment of an international air
carrier with flights originating from Philippine ports?
RR No. 15-2002 provides that such an international air
carrier, irrespective of the place where passage
documents are sold or issued, is subject to the Gross
Philippine Billings tax unless subject to a different tax rate
under the applicable tax treaty to which the Philippines is
a signatory.
Edited by: Napa - So
Q73.3. What is the tax treatment of foreign airline
companies who do not have flights from or passing
through any point in the Philippines but have a
branch office or a sales agent in the Philippines
which sells tickets?
RR No. 15-2002 provides that such off-line airline is not
considered engaged in business as an international air
carrier and is, therefore, not subject to the Gross
Philippine billings tax.
However, the sale of tickets is taxable as income from
sources within the Philippines.
Q73.4. ABC Airlines is an off-line international carrier
selling passage documents through an independent
sales agent in the Philippines. Is ABC engaged in
trade or business in the Philippines and, as such,
subject to the corporate income tax on resident
foreign corporations?
In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of
conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of
a temporary character. Here, ABC maintained a general
sales agent and it was engaged in selling or issuing
tickets, which is considered the main lifeblood of an
airline.
The absence of flight operations to and from the
Philippines is not determinative of the source of income
for purposes of ascertaining income tax liability. It is
sufficient that the income is derived from activity within the
Philippine territory. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the
Philippines. In ABC’s case, the sale of tickets in the
Philippines is the activity that produces the income. The
tickets exchanged hands here in the country and the
payments for fares were also made with Philippine
currency. The site of the source of payments is the
Philippines.
If an international air carrier maintains flights to and from
the Philippines, it shall be taxed at the rate of 2.5% of its
Gross Philippine billings, while international air carriers
that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the
country will be taxed at the corporate income tax rate.
Here, ABC earns income from the sale of tickets. (see CIR
V. BOAC [APRIL 30, 1987], AIR NEW ZEALAND V. CIR [CTA
CASE, JANUARY 30, 2008] and UNITED AIRLINES V. CIR
[SEPTEMBER 29, 2010])
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OBUs/FCDUs77
Branch Profit Remittance Tax
If Philippine peso not taxable because it’s an incentive of
the State.
You tax first the net income of the resident foreign
corporation at 30%, and then you withhold 15% on the
part of the parent corporation. This is not a case of double
taxation because income recipients are different
Q74. What is a branch profit remittance tax?
Any profit remitted by a branch to its head office shall be
subject to a tax of 15% which shall be based on the total
profits applied or earmarked for remittance without any
deduction for the tax component thereof except those
activities which are registered with the PEZA.
Q74.1. What is the purpose of the branch profit
remittance tax?
The purpose of a branch profit remittance tax is to
equalize the tax burden on foreign corporations
maintaining on one hand, local branch offices, and
organizing, on the other hand, a subsidiary domestic
corporation where at least majority of all the latter’s stocks
are owned by such foreign corporations.
As explained in the case of BANK OF AMERICA VS. COURT
OF APPEALS [JULY 21, 1994], prior to
amendment, local branches were made to pay only the
usual corporate income tax of 25% to 35% then on net
income applicable to resident foreign corporations while
Philippine subsidiary corporations were subject to the
same rate on their net income but their dividend payments
were additionally subjected to a 15% withholding tax.
Thus to eliminate this unequal tax treatment, a branch
profit remittance tax was imposed on local branches on
their remittance of profits abroad.
Q74.2. What is the correct tax base for computing the
branch profit remittance tax? Is it the “profit actually
remitted” or “the amount actually applied for”?
The correct tax base is the amount actually applied for by
the branch with the Central Bank as profit to be remitted
abroad.
In BANK OF AMERICA VS. COURT OF APPEALS [JULY 21,
1994], the Supreme Court held that the the tax baseupon
which the 15% which the 15% branch profits remittance
tax shall be imposed is the profit actually remitted abroad
and not the total branch profits out of which the remittance
is to be made. We note, however, that the applicable law
77
Refer to questions on the tax treatment of interest income derived
from transactions with OBUs and FCDUs as provided in RR 14-2012.
Edited by: Napa - So
for the branch profit remittance tax specifies the tax base
to be on the profit remitted abroad.
In COMPANIA GENERAL V. CIR [CTA CASE NO. 4141
AUGUST 23, 1993], Compania General contended that
the correct tax base for computing the branch profit
remittance tax is the profit actually remitted abroad given
its reliance on previous BIR rulings and the case of CIR
v. Burroughs. On the other hand, the CIR contends that,
because of RMC Circular No. 8-82 [March 17, 1982], the
tax base should be the amount actually applied for by
the branch with the Central Bank of the Philippines as
profit to be remitted abroad. The CTA ruled in favour of
the CIR as the branch profit remittance taxes were paid
after the effectivity of RMC No. 8-82.
As stated in Compania General, the 15% withholding
tax should be the amount actually applied for in the
Central Bank.
NOTE: If PEZA is the one remitting, they are not subject
to BPRT
Q74.3. Norway and the Philippines entered into a tax
treaty. Article 25 of the Convention provides for equal
treatment between nationals of the two countries and
as between a Norwegian enterprise in the Philippines
and a domestic enterprise. Det Norske Philippines, a
local branch of De Norske, a Norwegian enterprise,
invokes Article 25 for the non-imposition of the
branch profits remittance tax. Is its contention valid?
No. In ITAD BIR RULING NO. 018-09 [JUNE 23, 2009], the
CIR ruled that the principle of equal treatment in Article 25
does not prevent the imposition of the branch profit
remittance tax. First, the principle of equal treatment is
limited to nationals of the Philippines and of Norway who
are both residents of the Philippines. While indeed Det
Norske is a national of Norway, it is not a resident of the
Philippines. Second, while the treaty lays down a principle
of equal treatment between a Norwegian enterprise in the
Philippines and a domestic enterprise, as long as the
aggregate taxes imposed by the Philippines on such
Norwegian enterprise is not greater than the taxes
imposed by the Philippines on a domestic enterprise, it
cannot be considered that such Norwegian enterprise is
treated less favourably in the Philippines than the
domestic enterprise.
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Regional or Area Headquarters and ROHQs employed by RHQs and ROHQs of multinational
companies, regardless of whether or not there is an alien
Q75. Define regional or area headquarters and a executive occupying the same position. (see RR 11-2010
regional operating headquarters. [October 26, 2010])

Q75.2.1. Can the Filipino employee opt to be taxed

Regional Shall mean a branch established in
at the regular income tax rate?
or the Philippines by MNCs and which
area headquarters do not earn or derive
headquarters income from the Philippines and Yes, such Filipinos employed by RHQs and ROHQs in a
(RHQs) which act as supervisory, managerial or technical position shall have the option to
communications and coordinating be taxed at either 15% of gross income or at the regular
center for their affiliates, subsidiaries, rate on their taxable income in accordance with the Tax
or branches in the Code if the RHQ or ROHQ is governed by Book III of E.O.
226,78 as amended by R.A. No. 8756. (see RR 11-2010
Asia-Pacific Region and other
foreign markets [October 26, 2010])
Regional Shall mean a branch established in
Operating the Philippines by multinational Q75.2.2. If the Filipino is not a managerial or technical
Headquarters companies which are engaged in any employee, can he avail of the 15% final income tax
(ROHQs) of the following services: general rate?
administration; business planning
and coordination; sourcing and No. As clarified by RR 11-2010 [October 26, 2010], all
procurement of raw materials and other employees other than those in managerial or
components; corporate finance technical positions are considered as regular employees
advisory services; marketing control who are subject to the regular income tax rate on their
and sales promotion; training and taxable compensation income.
personal management; logistic
services; research and
development services and product
development; technical support and
maintenance; data processing
and communications; and
business development

Q75.1. What is the tax treatment of RHQs and

ROHQs?

RHQs are not subject to income tax while ROHQs shall

pay a tax of 10% of their taxable income

Q75.2. What is the tax treatment of the income derived

by alien individuals and qualified Filipino personnel
employed by RHQs and ROHQs?
A FWT of 15% shall be withheld from the gross income
derived by every alien individual occupying managerial
and technical positions in RHQs and ROHQs and
representative offices established in the Philippines
multinational companies as salaries, wages, annuities,
compensation, remuneration, and other emoluments,
such as honoraria and allowances, except income which
is subject to fringe benefits tax, from such regional or area
headquarters and regional operating headquarters.

The same tax treatment shall apply to Filipinos employed

and occupying the same positions as those aliens
78
Book III of EO 226 (or the Omnibus Investments Code) refers to Incentives to MNCs establishing RHQs and ROHQs in the Philippines
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Q75.2.3. What are the requirements in order for a

Filipino to be deemed occupying a managerial or
technical position the same as that of an alien
employed in an ROHQs or RHQ?

• Position and Function Test — The employee

must occupy a managerial position or technical
position AND must actually be exercising such
managerial or technical functions pertaining to
said position;
• Compensation Threshold Test — In order to be
considered a managerial or technical employee
for income tax purposes, the employee must
have received, or is due to receive under a
contract of employment, a gross annual taxable
compensation of at least PhP975,000.00
(whether or not this is actually received);79
• Exclusivity Test — The Filipino managerial or
technical employee must be exclusively working
for the RHQ or ROHQ as a regular employee and
not just a consultant or contractual personnel.
Exclusivity means having just one employer at a
time.

THREE-FOLD TEST applicable to FIlipinos

1. Function
2. Compensation
3. Exclusivity

79
If there is a change in compensation as a consequence of which,
such employee subsequently receiving less than the compensation
threshold, the employee shall be subject to the regular income tax rate
for the calendar year when the change becomes effective.
Beginning December 31, 2013 and on December 31 every three years
thereafter, the compensation threshold shall be adjusted to its present
value using the Philippine Consumer Price Index (CPI), as published
by the National Statistics Office.
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Nonresident Foreign Corporations
Tax base is gross because of administrative feasibility
à Hard to determine
à Practically no expense in the Philippines
In general
Q76. XYZ Corporation is a domestic corporation
which entered into a license agreement with ABC
Corporation, a non-resident foreign corporation
based in the US pursuant to which the former was
granted the right to use trademark, patents and
technology owned by the latter. For such use, XYZ
paid royalties to ABC and subjected the same to the
25% withholding tax on royalty payments. XYZ
claimed for a refund and argues that the withholding
tax should only be 10% pursuant to the most-
favoured nation clause of the RP-US Tax Treaty in
relation to the RP-West Germany Tax Treaty. Is
XYZ’s contention correct?
No. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25,
1999], the Supreme Court held that the concessional tax
rate of 10% provided for in the RP-Germany Tax Treaty
could not apply to taxes imposed upon royalties in the RP-
US Tax Treaty since the two taxes imposed under the two
tax treaties are not paid under similar circumstances and
do not contain similar provisions on tax crediting. It is not
proved that the RP-US Tax Treaty grants similar tax
reliefs to residents of the US in respect of the taxes
imposable upon royalties earned from sources within the
Philippines as those allowed to their German
counterparts. Further, the RP-Germany Tax Treaty allows
for crediting against German income and corporate tax of
20% of the gross amount of royalties paid under the law
of the Philippines. On the other hand, the RP-US Tax
Treaty does not provide for the similar crediting of 20% of
the gross amount of royalties paid. The similarity in the
circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment. since the
RP-US Tax Treaty does not give a matching tax credit of
20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax
Treaty, XYZ cannot be deemed entitled to the 10 percent
rate granted under the latter treaty for the reason that
there is no payment of taxes on royalties under similar
circumstances.
Most favored nation clause: It is the similarity in the
circumstances of payment of taxes, not the subject
matter, is a condition for the application of this clause.
Edited by: Napa - So
Q77. ABC Corporation, a foreign corporation in Japan
and licensed to do engage in business in the
Philippines (hence, a resident foreign corporation)
has equity investments in XYZ Company, a domestic
corporation. XYZ declared and paid cash dividends to
ABC. XYZ directly remitted the cash dividends to
ABC’s head office in Japan (hence, a non-resident
foreign corporation) net not only of the 10% final
dividend tax but also of the withheld 15% profit
remittance tax based on the remittable amount after
deducting the final withholding tax of 10%. ABC
argues that following the principal-agent relationship
theory, ABC is a resident foreign corporation subject
only to the 10% intercorporate final tax on dividends
received from a domestic corporation. Is ABC
correct?
No. The general rule that a foreign corporation is the
same juridical entity as its branch office in the Philippines
cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted
through its branch office, following the principal agent
relationship theory. It is understood that the branch
becomes its agent here. So that when the foreign
corporation transacts business in the Philippines
independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of
the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or
the resident foreign corporation. Corollary, if the business
transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign
corporation. (see MARUBENI CORPORATION VS. CIR
[SEPTEMBER 14, 1989]).
Marubeni wanted to be an RFC because the tax was
lower than if it was classified as an NRFC, in which case
the dividends are taxes at 15%.
GR: Foreign corporation is the same juridical entity as its
branch office in the Philippines
ER: When the foreign transacts business in the
Philippines directly and independently of its branch;
taxpayer is the foreign corporation.
Q78. XYZ is a foreign shipping company. It does not
have a branch office in the Philippines and it made
only two calls in Philippine ports. What kind of foreign
corporation is XYZ?
XYZ is a foreign corporation not authorized or licensed to
do business in the Philippines. In order that a foreign
corporation may be considered engaged in trade or
business, its business transactions must be
continuous. A casual business activity in the
Philippines by a foreign corporation does not amount
to engaging in trade or business in the Philippines for
income tax purposes. Accordingly, its taxable income
for purposes of our income tax law consists of its gross
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income from all sources within the Philippines. (see N.V.

REEDERIJ “AMSTERDAM” VS. CIR [JUNE 23, 1988]) Q80.2.1. What is a tax-sparing provision?

Special nonresident foreign corporations
Q79. Enumerate the non-resident foreign
corporations whose income is subject to preferential
tax rates.
As a general rule, the gross income of a non-resident
foreign corporation is subject to the flat rate tax of 30%.
As exceptions, the following are subject to final tax rates
and final withholding taxes:
1. Income of a non-resident cinematographic film
owner, lessor or distributor – 25% on gross
2. Income of a non-resident owner or lessor of
vessels chartered by Philippine nationals –
4.5% on gross
3. Income of a non-resident owner of aircraft,
machineries and other equipment – 7.5% on
gross
Tax on Certain Incomes of Non-resident
Foreign Corporations
As explained in the case of CIR V. PROCTER & GAMBLE
PHILIPPINES [DECEMBER 2, 1999]: A more general way of
mitigating the impact of double taxation is to recognize the
foreign tax as a tax credit. However, the principal defect
of the tax credit system is when low tax rates or special
tax concessions are granted in a country for the obvious
reason of encouraging foreign investments. For instance,
if the usual tax rate is 35 percent but a concession rate
accrues to the country of the investor rather than to the
investor himself.80 To obviate this, a tax sparing provision
may be stipulated. With tax sparing, taxes exempted or
reduced are considered as having been fully paid.
In the Philippines, the 15% tax on dividends received by
a non-resident foreign corporation from a domestic
corporation is imposed subject to the condition that the
country in which the nonresident foreign corporation is
domiciled shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 15%, which
represents the different between the regular income tax
of 30% and the 15% tax on dividends.100

Q80. Enumerate the incomes of non-resident foreign Q80.2.2. Illustrate the application of the tax-sparing
provision by providing an example. 101
corporations subject to preferential tax rates
1. "X" Foreign Corp. (FC) Tax Liability with no
1. Interest income on foreign loans contract on or preferential rates
after August 1, 1986.
Philippines Foreign Country
2. Intercorporate dividends received from a
domestic corporation FC income. 400 FC income. 400
3. Income covered by Tax Treaties Phil Tax Rate 30% F Tax Rate 50%
FC paid. 120 F Tax due 200
Q80.1. What is the tax treatment on interest income TaxCredit (120)
on foreign loans from a non-resident foreign Payable in Foreign. 80
corporation?
Here, the total tax payable of the foreign corporation is
If the foreign loan is contracted on or after August 1, 1986, 200.
it shall be subject to a FWT at the rate of 20%.
"X" Foreign Corporation income 400
Q80.2. What is the tax treatment on dividends Foreign Tax rate (50%)102 200
received from a domestic corporation by a non- RP Tax Rate (30%)103 120
resident foreign corporation? Foreign Tax Credit 120
"X" tax payable to Foreign104 80
For non-resident foreign corporations, the dividend is "X" tax payable to RP 120
subject to:
• Tax treaty rate, if applicable
• 15% if no tax treaty but satisfies the tax-sparing
provision
• 30% if no tax treaty and does not comply with
the tax-sparing provision

80
This means that, at the end of the day, the foreign investor would be
paying the same total amount of taxes due to the foreign country and
the Philippines.
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2. "X" Foreign Corp. Tax Liability with Preferential corporation to have paid the dividend tax waived by the
Rate and without Tax Sparing Philippines. The Code only requires that the foreign
country shall allow the corporation a “deemed paid” tax
credit in an amount equivalent to the percentage points
Philippines Foreign Country waived by the Philippines.
FC income. 400 FC income. 400
PH Pref Tax Rate 30% F Tax Rate 50% Q80.2.4. When does a non-resident foreign
corporation become entitled to the 15% FWT?
FC paid. 60 F Tax due 200
TaxCredit (60)
In INTERPUBLIC GROUP OF COMPANIES, INC. VS.
Payable in Foreign. 140 COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO.
7796 DATED FEBRUARY 21, 2011], a US Corporation, who
Here, the total tax payable of the foreign corporation is owns 30% of the total and outstanding voting capital stock
still the same at 200. of a Philippine advertising company filed a claim for the
refund or issuance of a TCC for overpaid FWT on
"X" Foreign Corporation income 400 dividends withheld and remitted by the Philippine
Foreign Tax rate (50%) 200 company. In the administrative claim, the US corporation
RP Tax Rate (15%) 60 alleged that, as a non-resident foreign corporation, it may
Foreign Tax Credit 60 avail of the preferential FWT rate of 15% on cash
"X" tax payable to Foreign 140 dividends received from a domestic corporation during the
"X" tax payable to RP 60 taxable year 2006. The CIR, in response, raised the
question of whether the US corporation is entitled to the
3. "X" Foreign Corp. Tax Liability with FWT at the rate of 15% or the rate of 20% in accordance
Preferential Rate and with Tax Sparing with the RP- US Tax Treaty.
Philippines Foreign Country The CTA, applying the ruling in CIR V. PROCTER &
FC income. 400 FC income. 400 GAMBLE PHILIPPINES [DECEMBER 2, 1999], concluded that
Phil Tax Rate 15% F Tax Rate 50% if the country of domicile of the recipient corporation
FC paid. 60 F Tax due 200 allows a credit against the tax imposable by it an amount
TaxCredit (60) equivalent to 20% of the dividends remitted from a
Phantom Tax. (60) Philippine domestic corporation to corporations domiciled
Payable in Foreign. 80 therein, the dividends remitted are subject to FWT at the
preferential rate of 15% in accordance with Section 28
(b)(5)(b) of the Tax Code of 1997, as amended.

"X"Foreign Corporation income
Foreign Tax rate (50%)
RP Tax Rate (15%)
Foreign Tax Credit
"X" tax payable to Foreign
"X" tax payable to RP
Total tax payable of the foreign corporation is now 140.
The additional 60 will be considered as tax deemed paid
or also known as the phantom tax. It is the foreign
jurisdiction that will allow the deemed paid tax credit.
Q80.2.3. Is it required that the foreign country must
give a “deemed paid” tax credit for the dividend tax
waived by the Philippines making applicable the
preferred dividend tax rate of 15%?
As ruled in CIR V. PROCTER & GAMBLE PHILIPPINES
[DECEMBER 2, 1999], the Tax Code does not require that
the foreign country’s tax laws deemed the parent-
400 Q80.2.5. Is there a need for a prior ruling from the
200 BIR in order to avail of the benefit?
60
120 In INTERPUBLIC GROUP OF COMPANIES, INC. VS.
80 COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO.
60 7796 DATED FEBRUARY 21, 2011], the CIR also contended
that the US company’s transactions were bereft of any tax
treaty relief application with the International Tax Affairs
Division (ITAD). On this point, the CTA ruled that the
same is not necessary.81
Q80.2.6. If the foreign country does not impose a tax
on the dividend, is the dividend received by the non-
residentforeign corporation subject to the 15% FWT?
Yes. In BIR RULING DA-145-07 [MARCH 8, 2007], SM
Investments asked for the BIR’s opinion on whether the
cash dividends declared by them to Asia Opportunities
Limited, a corporation organized and existing under the
laws of the British Virgin Islands are subject to 15% FWT.
The CIR noted that the International Business Companies

81
This is subject to debate. This case implies that the benefit is automatic without need for a TTRA.
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Ordinance of the Territory of the British Virgin Islands
does not impose any tax on dividends from foreign
sources, which logically would include those received
from Philippine corporations. As such, the dividend is
subject only to the FWT of 15%.
Q80.3. To avail the benefits of a tax treaty provision,
must it be preceded by an application for a tax treaty
relief with the International Tax Affairs Division
(ITAD)?
Yes. As provided in RMO 072-10 [AUGUST 25, 2010], the
ITAD is the sole office charged with the receiving of tax
treaty relief applications (TTRA). All tax treaty relief
applications relative to the implementation and
interpretation of the provisions of Philippine tax treaties
shall only be submitted to and received by the
International Tax Affairs Division (ITAD). All rulings
relative to the application, implementation and
interpretation of the provisions of Philippine tax treaties
shall emanate from ITAD.
If the payor is liable on the Tax Treaty, he won’t be liable
in the Tax Code provisions.
• You will make a decisions based on whether or
not the other country has a tax credit provision.
In MIRANT V. CIR [CTA CASE NO. 7796, FEBRUARY 21,
2011], Mirant made income payments to VHL
enterprises, a US nonresident foreign corporation and to
WES World, a UK nonresident foreign corporation. It
accordingly withheld the tax due on these interest
payments. Thereafter, Mirant filed for a refund
contending that the two foreign corporations have
created “permanent establishments” in the Philippines
and thus making applicable the lower withholding tax
rate under the RP-UK and RP-US tax treaties. The CTA
noted that under those treaties, VHL and WES World,
while not having a fixed place of business have
established “permanent establishments” in the
Philippines because they have “furnished services
through their employees or other personnel for a period
or periods the aggregate of which is more than 183 days
in a twelve-month period."
However, under RMO 01-2000, it is provided that the
availment of a tax treaty provision must be preceded by
an application for a tax treaty relief with its International
Tax Affairs Division (ITAD). A foreign corporation wishing
to avail of the benefits of the tax treaty should invoke the
provisions of the tax treaty and prove that indeed the
provisions of the tax treaty applies to it, before the benefits
may be extended to such corporation.The CTA noted that
Mirant did not make such application. Thus, the CTA
finally held that the income payments of Mirant to VHL
and WES, which are both non-resident foreign
corporations, are subject to the final tax of 30%.
Edited by: Napa - So
Note, however, that in INTERPUBLIC GROUP OF
COMPANIES, INC. VS. COMMISSIONER OF
INTERNAL REVENUE [CTA CASE NO. 7796 DATED
FEBRUARY 21, 2011], the CTA, by way of obiter, stated
that, even with respect to the applicability of the 20%
FWT under the RP-US Tax Treaty, a tax treaty relief
application “is not made a condition precedent by law.”
Q80.4. What is the meaning of most- favoured nation
(MFN) and how is it applied to applications for tax
treaty reliefs?
The most-favoured nation simply means that a country
which is the recipient of this treatment must, receive equal
advantages as the "most favoured nation" by the country
granting such treatment. Most tax treaties would have a
MFN clause making a benefit which is more
advantageous accorded to one country demandable.
In ITAD RULING 102-02 [MAY 28, 2002], Energizer
Philippines claims that its royalty payments to Eveready
Battery are subject to the preferential tax rate of 15%
pursuant to the MFN clause of the RP- US Tax Treaty in
relation to the RP-Netherlands Tax Treaty. The CIR
applied the ruling in CIR V. S.C. JOHNSON AND SONS, INC.
[JUNE 25, 1999], where the Supreme Court interpreted
the MFN clause, or the phrase “paid under similar
circumstances” as referring to the manner of payment of
taxes and not the subject matter of the tax which is
royalties. The CIR found that the RP-US and RP-
Netherland tax treaties show a similarity on the manner of
payment of taxes, that is, the allowable foreign tax credit
on both treaties is the amount actually paid in the
Philippines. Thus, the royalty payments by Energizer to
Eveready are subject to the preferential tax rate of 15% of
the gross amount of royalties pursuant to the "most-
favored-nation" provision of the RP-US tax treaty in
relation to the RP-Netherlands tax.
Deutsche Bank AG Manila Branch v. CIR (G.R. No.
188550)
• you can take the benefit of the 20% even without
a tax ruling if the other country does not have a
tax credit system and you are left with a 30%
(NIRC provision for NRFC) or 20% (treaty
provision).
Withholding Tax
Withholding tax is a direct tax. However, if the agent is the one
who shoulders the penalties in case of non-payment, isn’t it an
indirect tax?
In general
Q81. What is the withholding tax system?
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The withholding tax system is a procedure through which
taxes (including income taxes) are collected.
Q81.1. Who is the withholding agent?
The withholding agent is the one who has control,
custody, or receipt of the funds that is subject to income
tax and to be withheld and remitted to the BIR. The
withholding agent holds the amount withheld from the
income of another person in trust for the government until
paid.
The duty to withhold is different from the duty to pay
income tax. The obligation to withhold is imposed upon
the buyer-payor of income but the burden of tax is really
upon the seller-income earner.
The obligation to withhold is compulsory as it makes such
withholding agent personally liable for payment of the tax.
Such liability of the withholding agent is direct and
independent from the liability of the income recipient.
Q81.2. Who are required by law to withhold on
income payments?
1. Agents or employees of withholding agents
2. Persons having control of the payment and
claiming the expense
3. Payor having control of the payment where
payment is made thru brokers
Q81.3. When does the obligation to withhold arise?
Either when:
1. It is paid
2. It becomes payable (i.e. it is legally due,
demandable, or enforceable)
3. It is accrued as an asset or expense
• If you’re already recognizing the paid amount as
a deduction in your books, you will have to
withhold such at the end of the quarter.
o Ex: debt was due on Feb. 17, but was
paid 15th. When is the tax due? 15th
since it was paid then, but if it wasn’t
paid on the 15th nor 17th, then tax is
due by the 17th.
In FILIPINAS SYNTHETIC FIBER CORPORATION V. CA
[OCTOBER 12, 1999], the Supreme Court stated that the
Tax Code is silent as to when the duty to withhold taxes
arises. In this case, to determine when the duty to
withhold the taxes arose, the Court inquired into the
nature of accrual method of accounting, the procedure
used by the taxpayer, and to the modus vivendi of
withholding tax at source come. It noted that under the
accrual basis method of accounting, income is reportable
Edited by: Napa - So
when all the events have occurred that fix the taxpayer’s
right to receive the income and the amount can be
determined with reasonable accuracy. Such method is
allowed by law in reporting incomes.
Q81.4. May a withholding agent file a claim for tax
refund?
Generally, the person entitled to claim a tax refund is the
taxpayer. However, if the taxpayer does not file the claim,
the withholding agent may file the same. In CIR V. SMART
COMMUNICATIONS [AUGUST 25, 2010], it was submitted
that rule allowing the withholding agent to file the claim is
applicable only when the withholding agent and the
taxpayer are related parties. The Supreme Court
disagreed and stated that such relationship is not
required. A withholding agent has a legal right to file a
claim for refund. First, he is considered a taxpayer under
the Tax Code as he is personally liable for the withholding
tax as well as for deficiency assessments, surcharges,
and penalties, should the amount withheld be finally found
to be less than the amount that should have been
withheld. Second, as an agent of the taxpayer, his
authority to file the income tax return and remit the tax
withheld to the government includes the authority to file a
claim for refund and to bring an action for recovery of such
claim.
Q81.5. Is the withholding agent who filed the claim for
tax refund obliged to remit the same to the taxpayer?
Yes. In CIR V. SMART COMMUNICATIONS
[AUGUST 25, 2010], the Supreme Court ruled that while
the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the
obligation to remit the same to the principal taxpayer
under the principle of unjust enrichment.
Q81.6. What are the three categories of income
subject to withholding tax?
Under Section 57 of the Tax Code, the types of income
subject to withholding tax are divided into three
categories:
1. withholding of final tax on certain incomes;
2. withholding of creditable tax at source and
3. tax-free covenant bonds.
Q81.7. What are the three types of withholding tax?
1. Final withholding tax (FWT)
2. Creditable Withholding Tax (WT)
3. Withholding Tax on Wages
Q82. Differentiate final withholding tax (FWT) from
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creditable withholding tax (CWT).

The differences are as follows:
FWT CWT
The amount of income Taxes withheld on certain
tax withholding agent is income payments are
constituted as a full and income payments are
final payment of the income payments are
income tax due from the least approximate the tax
payee on the said due of the payee on said
income. income.
The liability for payment The liability for payment
of the tax rests primarily required to report the
on the payor as a income and/or pay the
withholding agent. difference between the
tax withheld and the tax
due on the income. The
payee also has the right
to ask for a refund if the
tax withheld is more than
the tax due.
The payee is not required The income recipient is still
to file an income tax required to file an income
return for the particular tax return, as prescribed in
income. Sec. 51
Creditable Withholding Tax
Q84. What is meant by creditable withholding tax?
Under the CWT tax system, taxes withheld on certain
payments are but intended to approximate the tax due
from the payee. The withheld taxes remitted to the BIR
are treated as deposits or advances on the actual tax
liability of the taxpayer, subject to adjustment at the
proper time when the actual tax liability can be fully and
finally determined.
Q84.1. What are the three general types of creditable
withholding taxes?
The three types of creditable withholding taxes are:
1. Expanded withholding tax on certain income
payments made by private persons to resident
taxpayers (e.g. professional fees, income
payments to brokers, income payments to
partners of GPPs, etc)
2. Withholding tax on compensation income for
services done in the Philippines
3. Withholding tax on money payments made by
the government

(see Section 2.57(A) and (B), RR 2-98 [April 17, 1998] Q84.2. What is the rule on creditable withholding of
and CHAMBER OF REAL ESTATE AND BUILDER’S income payments to medical petitioners as laid down
ASSOCIATION, INC. V. ROMULO [MARCH 9, 2010]) in RR 13-98 [August 14, 1998]?

Final Withholding Tax at Source
Q83. What is meant by withholding tax at source?
Since the withholding taxes are deducted by the
withholding agent when the income payments are paid or
payable, they are described as “withholding taxes-at-
source.” This means that the income tax of the recipient
of income is withheld and deducted at the source and at
the time of accrual or payment of the expense by the
withholding agent-payer of income.
It shall be presumed that the hospital or clinic has
collected the professional fee of the said medical
practitioner and shall, accordingly, be liable for the
withholding of the tax vis-a-vis each and every patient
admitted into the hospital or clinic under the care of the
said medical practitioner.
However, the withholding tax shall not apply whenever
there is proof that no professional fee has in fact been
charged by the medical practitioner and paid by his
patient.

Q83.1. What are the four general types of income
payments subject to FWT?
1. Passive Incomes
2. Income payments to entities where their gross
income is subject to tax (i.e. non-resident aliens
not engaged in trade or business, non-resident
foreign corporations, special aliens)
3. Fringe Benefits
4. Informer’s Reward to Persons Instrumental in
the Discovery of the Violations of the Tax
Code.
(see Section 2.57.1, RR 2-98 [April 17,
1998])
Q84.3. When is the liability to withhold tax at source
on income payments to foreign corporation
supposed to arise? Upon remittance of the amounts
due to the foreign corporation, or upon accrual?
According to the case of FILIPINAS SYNTHETIC FIBER
CORPORATION V CA, if the parties are under the accrual
basis, income is reportable when all the events have
occurred to fix taxpayer’s right to receive the income and
the amounts can be determined with reasonable
accuracy, hence, it is the right to receive income, and not
the actual receipt thereof, that determines when the
amount is includible in gross income. Thus, the duty of the
withholding agent to withhold the corresponding tax arises
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at the time of such accrual.
Q84.4. Is the BIR Form the only way of proving that
there the creditable withholding tax was used?
No. In PNB V CIR, although it may be necessary to prove
that the taxpayer did not use the claimed creditable
withholding tax to pay for his/its tax liabilities, there is no
basis in law or jurisprudence to say that BIR Form No.
2307 is the only evidence that may be adduced to prove
such non-use.
Return and Payment of Tax Withheld at
Source
Q85. Who is obliged to file the return and pay the tax
withheld?
The withholding agent shall file the return and pay the tax:
1. FWT - within 25 days from the close of each
calendar quarter for FWT
2. CWT - not later than the last day of the month
following the close of the quarter during which
withholding was made. (see Section 58(A),
Tax Code)
Q85.1. What are the other obligations of the
withholding agent with respect to the return and
payment of the tax withheld?
1. He shall furnish the recipient of the income a
written statement showing the income or other
payments made by him during such quarter or
year, and the amount of the tax deducted and
withheld therefrom.
2. He shall submit an annual information return
containing the list of payees and income
payments, amount of taxes withheld for each
payee and other pertinent information. (see
Section 58(B) and (C), Tax Code)
Q85.2. Since CWT is but an approximation, what
happens if there is excess payment or deficiency in
payment?
The excess of the amount of tax so withheld over the tax
due on his return shall be refunded.
If the income tax collected at source is less than the tax
due on his return, the difference shall be paid. (see
Section 58(D), Tax Code)
Q85.3. What is the effect of non-payment of CWT to
the transfer of real property?
No registration of any document transferring real property
82
Minimum wage earners are exempt from income tax.
Edited by: Napa - So
shall be effected by the Register of Deeds unless the CIR
or his duly authorized representative has certified that
such transfer has been reported and the capital gains or
CWT, if any, has been paid. (see Section 58(E), Tax
Code)
Withholding on Wages
Q86. What income payments are exempted from the
requirement of withholding tax on compensation?
As provided in SECTION 2.78, RR 2-98 [APRIL 17,
1998], as amended by RR 1-2006 [DECEMBER 29,
2005]:
1. Compensation income of individuals that do
not exceed the statutory minimum wage or
P5,000 pesos per month whichever is higher.
2. Compensation income of government
employees with salary grades 1 to 3.
Withholding tax on compensation income whether alien or
citizen provided its service is rendered in the Philippines.
Q87. Who is obliged to deduct, withhold, file the
return and pay the tax upon wages?
Every employer making payment of wages shall deduct
and withhold upon such wages the applicable tax except
in the case of minimum wage earners. 82 (see Section
79(A), Tax Code)
The return shall be filed and the payment made within 25
days from the close of each calendar quarter (see
Section 81, Tax Code)
However, if the employer is the Government or any
political subdivision, agency, or instrumentality, the return
of the amount deducted and withheld upon any wage shall
be made:
1. by the officer or employee having control over
the payment of such wage, or
2. by any officer duly designated for the purpose
(see Section 82, Tax Code)
Q87.1. What are the other obligations of the employer
with respect to the withholding of tax on wages?
1. Every employer shall furnish to each such
employee a written statement confirming
wages paid by the employer during the
calendar year and the amount of tax deducted
and withheld
2. Every employer shall submit to the CIR an
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annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of
taxes, accompanied by copies of the written
statements, and other information as may be
deemed necessary.
Q87.2. Who is liable if there is a failure to withhold and
remit the correct amount of tax?
The employer shall be liable. If he fails to withhold and
remit the correct amount, such tax shall be collected from
him together with penalties or additions to the tax
otherwise applicable (see Section 80(A), Tax Code)
Q87.3. What is the consequence if the employer fails
to deduct and withhold the tax but the tax against
which such tax may be credited is paid (the tax is paid
by the recipient)/employee)?
If the employer fails to deduct and withhold the tax and
thereafter the tax against which such tax may be credited
is paid, the tax so required to be deducted and withheld
shall not be collected from the employer. The employer
shall not be relieved of liability for any penalty for non-
compliance (see Section 79(A), Tax Code)
Q87.4. What is the rule when there is an overpayment
of tax withheld on wages by the employer?
If the overpayment was not deduced and withheld by the
employer, he shall be given a refund or credit.
If the overpayment was deducted and withheld by the
employer, the employee shall be allowed a credit.
Q87.6. What is the consequence if an employee fails
or refuses to file an exemption certificate or wilfully
supplies false or inaccurate information?
The tax shall be collected from the employee including
penalties or additions to the tax. Further, excess taxes
withheld by the employer shall not be refunded to the
employee but shall be forfeited to the government
Q87.7. What is the withholding treatment when the
husband and the wife each are recipients of wages?
1. The husband shall be deemed the head of the
family and proper claimant of the additional
exemption unless he explicitly waives this right
in favor of his wife
2. Taxes shall be withheld from the wages of the
83
A GOCC which is listed as one of the top 5,000 corporations shall
withhold the tax in its capacity as a GOCC rather than as one of the
Edited by: Napa - So
wife with the schedule for zero exemption
Q88. Are backwages, allowances and benefits
awarded in a labor dispute subject to withholding
tax?
Yes. Backwages, allowances, and benefits awarded in a
labor dispute constitute remunerations for services that
would have been performed by the employee in the year
when actually received, or during the period of his
dismissal from the service which was subsequently ruled
to be illegal. The said back wages, allowances and
benefits are subject to withholding tax on wages. (see
RMC 39-2012 [August 3, 2012])
Q88.1. Who should withhold the tax due thereon?
The employers are mandated to withhold taxes on wages
and this includes those backwages, allowances, and
benefits awarded in a labor dispute.
Q88.2. If the backwages, allowances, disputes are
received by virtue of a labor dispute award through
garnishment of debts due to the employer and other
credits to which the employer is entitled to subject to
withholding tax?
In RMC 39-2012 [August 3, 2012], the CIR answered this
question in the affirmative. Persons having control of the
payment of wages or salaries are authorized to deduct
and withhold upon such wages or salaries the withholding
tax due thereon. In this case, the garnishees are the
persons owning debts due to the employer or in
possession or control of credits to which the employer are
entitled. Accordingly, they are in control of the payment of
backwages, allowances and benefits. Thus, in order to
ensure the collection of the appropriate withholding taxes
on wages, garnishees of a judgment award in a labor
dispute are constituted as withholding agents with the
duty of deducting the corresponding withholding tax on
wages due thereon in an amount equivalent to five
percent (5%) of the portion of the judgment award
representing the taxable backwages, allowances and
benefits.
Withholding Tax by Government Agencies
Q89. What income payments made by the
government are subject to withholding?
Income payments, except any single purchase which is
P10,000 and below, which are made by a government
office, national or local, including GOCCs83 ,111 on their
purchases of goods from local suppliers shall be subject
to a withholding tax of 1%. (see Section 2.57.2(N), RR 2-
top 5,000 corporations.
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98 [April 17, 1998])
Special Rules
Minimum Corporate Income Tax
Q90. What is the minimum corporate income tax
(MCIT?)
A minimum corporate income tax of 2% of gross income
shall be imposed on a domestic corporation and
resident foreign corporation beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations when:
1. the MCIT is greater than the RCIT for the
taxable year.
2. such operation has zero or negative taxable
income
(see Section 27(E), Section 28(A)(2), Tax Code and RR
9-98 [August 5, 1998], as amended by RR 12- 2007
[October 10, 2007])
Q90.1. What is the purpose of MCIT?
As held in the case of CHAMBER OF REAL ESTATE AND
BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH 9,
2010]), the primary purpose of any legitimate business is
to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of
minimal net income render its financial statements and its
tax payments suspect. For sure, certain tax avoidance
schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax
shelters. As a tax on gross income, it prevents tax evasion
and minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and
other stratagems. Since the tax base was broader, the tax
rate was lowered.
Q90.2. Is MCIT a tax on capital and an additional tax
imposition?
The Supreme Court in CHAMBER OF REAL ESTATE AND
BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH 9, 2010]
answered this in the negative. The MCIT is imposed on
gross income which is arrived at by deducting the capital
spent by the corporation in the sale of its goods, i.e. the
cost of goods and other direct expenses from gross sales.
Thus, the capital is not being taxed. Furthermore, the
MCIT is not an additional tax imposition. It is imposed in
lieu of the RCIT.
Q90.3. What is the difference between RCIT and
84
This only shows that deductions are not taken into account in MCIT.
Edited by: Napa - So
MCIT?
The tax base of RCIT is taxable income while the tax base
of MCIT is gross income.
In COMMISSIONER VS. PAL [JULY 7, 2009], PAL under PD
1590 (its franchise) was liable only for basic corporate
income tax or franchise tax, whichever is lower and this is
in lieu of all other taxes, except real property. The CIR
contends that PAL is subject to MCIT while it was the
contention of PAL that the MCIT was included in the “in
lieu of all other taxes” provision. The Supreme Court
noted there is a distinction between taxable income,
which is the basis for basic corporate income tax; and
gross income, which is the basis for the MCIT under
Section 27(E). The two terms have their respective
technical meanings, and cannot be used interchangeably.
Hence, the basic corporate income tax cannot cover
MCIT since the basis for the first is the annual net taxable
income; while the basis for the second is gross. Thus,
MCIT is included in “all other taxes” from which PAL is
exempted.
Q90.4. For purposes of MCIT, what is gross income?
As provided in RR 9-98 [August 5, 1998], as amended
by RR 12-2007 [October 10, 2007]:
For purposes of MCIT, the term "gross income" means:
• For Sales of Goods: GROSS SALES less sales
returns, discounts, and allowances and cost of
goods sold
• For Sale of Services: GROSS REVENUE less
sales returns, discounts, allowances and cost of
services/direct cost.
Note that “cost of goods sold” shall include all business
expenses directly incurred to produce the merchandise to
bring them to their present location and use while “cost of
services” shall mean all direct costs and expenses
necessarily incurred to provide the services required by
the customs and clients84
As noted by the Supreme Court in COMMISSIONER VS. PAL
[JULY 7, 2009], inclusions and exclusions/deductions
from gross income for MCIT purposes are limited to those
directly arising from the conduct of the taxpayer’s
business. It is thus more limited than the gross income
used in the computation of basic corporate income tax.
Q90.4.1. What if apart from the income from core
business activities, other items of gross income are
realized or earned by the corporation, are these items
included as part of gross income?
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Yes. If apart from deriving income from these core
business activities there are other items of gross income
realized or earned by the taxpayer during the taxable
period which are subject to the normal corporate income
tax, the same items must be included as part of the
taxpayer's gross income for computing MCIT85.
Q90.5. Explain the carrying forward of excess MCIT
against normal income tax.
Any excess MCIT against the normal income tax is
creditable within the next three (3) years from payment
thereof. To illustrate:
YEAR RCIT MCIT
1998 50,000 75,000 (tax to be paid)86
1999 60,000 100,000 (tax to be paid)
2000 100,000 (tax to be paid) 87 60,000
Always remember that MCIT begins only on the fourth
year of the corporate life. You pay whichever is higher.
In the year 2000, since the RCIT is greater than MCIT, the
firm will have to pay the RCIT of P100,000. To this
amount, the corporation can credit the excess MCIT is
has so far which totals 65,000. The amount of income tax
payable now becomes 35,000. Note that with respect to
the excess MCIT of 25,000, that can be claimed as tax
credit against the normal income tax up to the year 2001
or three years from payment of the MCIT in 1998 and only
when the RCIT is greater than MCIT. You cannot credit
the MCIT against the MCIT or other losses.
Q90.6. Can the imposition of MCIT be suspended?
Yes, the Secretary of Finance can suspend its imposition
on any corporation which:
1.
suffers losses on account of prolonged labor
dispute,88 or
2.
because of force majeure,89 or
3.
because of legitimate business reverses.90
Improperly Accumulated Earnings Tax
(IAET)
85
This means that the term "gross income" will also include all items of
gross income enumerated under Section 32(A) of the Tax
Code, as amended, except income exempt from income tax and income
subject to final withholding tax
86
This is the tax to be paid because MCIT > RCIT
87
This Is the tax to be paid because MICT < RCIT
88
Defined as losses arising from a strike staged by the employees which
lasted for more than six (6) months within a taxable period
and which has caused the temporary shutdown of business operations.
89
It means a cause due to an irresistible force as by "Act of God"
like lightning, earthquake, storm, flood and the like. This term shall also
include armed conflicts like war or insurgency.
90
It shall include substantial losses sustained due to fire, robbery,
Edited by: Napa - So
Q91. What is an improperly accumulated earnings
tax?
This is the income tax imposed on a corporation if its
earnings and profits are accumulated (undistributed)
instead of being divided and distributed to its
stockholders.
The improperly accumulated earnings tax (IAET) equal to
10% is imposed for each taxable year on the improperly
accumulated taxable income of each corporation. It is
imposed on domestic corporations which are classified as
closely-held corporations.91
Excess MCIT against RCIT
25,000
40,000
Q91.1. Define “improperly accumulated taxable
income.”
The term “improperly accumulated taxable income”
means taxable income adjusted by:
Includes
1. Exempt from Income Tax
2. Excluded from Gross income these are those
you add back
3. Subject to Final tax
Deducts
4. Amount of NOLCO
5. Reduced by the sum of:
a. Dividends actually or constructive paid
b. Income tax paid for the taxable year
c. Amount reserved for the reasonable
needs of the business92
In relation to 5(c), RMC 35-2011 [March 14, 2011] states
that the amount that may be retained, taking into
consideration the reasonable needs of the business shall
be 100% of the paid-up capital or the amount contributed
to the corporation representing the par value of the shares
of stock. Any excess capital over and above the par shall
be excluded.93
theft or embezzlement, or for other economic reason as determined by
the Secretary of Finance.
91
Closely-held corporations are those corporations at least fifty percent
(50%) in value of the outstanding capital stock or at least fifty percent
(50%) of the total combined voting power of all classes of stock entitled
to vote is owned directly or indirectly by or for not more than twenty (20)
individuals. Domestic corporations not falling under the aforesaid
definition are, therefore, publicly-held corporations.
92
Added by RR 2-01.
93
For example, if only Dec 31, 2010, you have a paid-up capital of
100,000. You can only retain up to 100,000. A subsequent infusion of
capital of 500,000 a week later cannot be considered.
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Q91.2. What is the purpose and nature of IAET?
The imposition of IAET discouraged tax avoidance
through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are
not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel
corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed (see
CYNAMID PHILIPPINES INC VS. CA [JANUARY 20, 2000])
There was no reason for Cynamid to increase its working
capital when there was no reason to expect an impending
working capital.
The IAET is being imposed in the nature of a penalty to
the corporation for the improper accumulation of its
earnings, and as a form of deterrent to the avoidance of
tax upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them by the
corporation (see RR 2-01 [FEBRUARY 12, 2001]).
Q91.3. What corporations are subject to IAET?
As a general rule, the IAET shall apply to every
corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting
earnings and profits accumulate instead of being divided
or distributed.
As exceptions, the IAET shall not apply to:
1. Publicly-held corporations
2. Banks and other non-bank financial
intermediaries; and
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZs (see RR 2-01
[FEBRUARY 12, 2001]).
Q91.4. What is the main factor to consider in holding
a corporation liable for IAET?
The touchstone of the liability is the purpose behind the
accumulation of the income and not the consequences of
the accumulation. Thus, if the failure to pay dividends is
due to some other causes, such as the use of
undistributed earnings and profits for the reasonable
needs of the business, such purpose would not generally
make the accumulated or undistributed earnings subject
to the tax. However, if there is a determination that a
corporation has accumulated income beyond the
reasonable needs of the business, the 10% improperly
accumulated earnings tax shall be imposed. [see RR 2-
01 [FEBRUARY 12, 2001]).
Q91.5. What circumstances are indicative of a
Edited by: Napa - So
purpose to avoid the income tax with respect to
shareholders?
The fact that any corporation is a mere holding company
or investment company shall be prima facie evidence of
a purpose to avoid the tax upon its shareholders or
members. (see Section 29(C)(1), Tax Code)
Moreover, the fact that the earnings or profits of a
corporation are permitted to accumulate beyond the
reasonable needs (including reasonably anticipated
needs) of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or
members unless the corporation, by the clear
preponderance of evidence shall prove the contrary (see
Section 29(C)(2), Tax Code)
In CIR v. TUASON [MAY 15, 1989], the CIR assessed
Tuason, Inc. for IAET. The CIR presumed that when
Tuason, Inc. accumulated profits, the purpose was to
avoid the income tax on its shareholders on the finding
that it was a mere holding or investment company.
Tuason contended it was for the purpose of expanding
their business as a real estate broker. The Supreme
Court ruled that Tuason was liable for IAET. Tuason was
a mere holding company as it was not involved itself in
the development of the subdivisions but merely
subdivided its own lots and sold them for bigger profits. It
derived its income from interest, dividends, and rental
from the sale of realty. The touchstone of liability is the
purpose behind the accumulation of the income and not
the consequences of the accumulation. The company's
failure to distribute dividends to its stockholders was
clearly for reasons other than the reasonable needs of
the business.
Q91.6. What is the “Immediacy Test?”
The Immediacy Test is used to determine the “reasonable
needs of business” in order to justify an accumulation of
earnings. Under this test, the term "reasonable needs of
the business" are hereby construed to mean the
immediate needs of the business, including reasonably
anticipated needs. The corporation should be able to
prove an immediate need for the accumulation of the
earnings and profits, or the direct correlation of
anticipated needs to such accumulation of profits.
Otherwise, such accumulation would be deemed to be not
for the reasonable needs of the business, and the penalty
tax would apply.
In order to escape IAET, dividends must be declared
within 1yr from the close of the fiscal year. Otherwise, you
will have to justify the accumulation
In MANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984],
Manila Wine Merchants (MWM) invested in several
companies and bought shares in Wack Wack Golf and
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Country Club and likewise acquired US Treasury Bills.
CIR found that MWM had unreasonably accumulated a
surplus. On appeal, the CTA ruled that the purchase of
shares were harmless. However, the CTA also ruled that
the purchase of US Treasury Bills was in no way related
to the business of importing and selling wines and
ordered MWM to pay IAET on the said treasury bills. One
of the contentions of MWM was that it will be used to aid
its importations The Supreme Court ruled against MWM.
It noted that the bonds were bought in 1951 and until
1961; it was never used to aid MWM’s importations. To
justify an accumulation of earnings and profits for the
reasonably anticipated future needs, such accumulation
must be used within a reasonable time after the close of
the taxable year.
In determining reasonable needs of the business you look
as well into accounts to prior accumulations, since
subsequent accumulation may not now be necessary
unlike before.
In CYNAMID V. CA [JANUARY 20, 2000], Cynamid argued
that the increase of working capital by a corporation
justifies accumulating income. It invoked the Bardahl
Formula which allowed retention, as working capital
reserve, sufficient amounts of liquid assets to carry the
company though one operating cycle and pay all of its
current liabilities and any extraordinary expenses
reasonably anticipated. The Supreme Court ruled that, as
stressed by American authorities, the formula is used only
for administrative convenience and not a precise rule. The
Court found that in companies where the formula was
applied, they had operating cycles shorten than that of
Cynamid. The ratio of current assets to current liabilities
should be used to determine the sufficiency of working
capital which ideally should be 2:1. Cyanamid’s ratio is
2.21:1 and, thus, there was no need to infuse working
capital.
One operating cycle means it’s from production until
distribution.
Q91.7. In determining if profits are reasonably
accumulated for business needs, the intention of the
taxpayer is reckoned at what time?
It is reckoned at the time of accumulation. In MANILA WINE
MERCHANTS V. CIR [FEBRUARY 20, 1984], one of
the contentions of MWM was that it held on to said bonds
for several years to wait for 60% of its stock to be owned
by Filipinos so it can purchase its own lot and building.
The Supreme Court stated that to determine if profits are
reasonably accumulated for business needs, the
controlling intention is that manifested at the time of
accumulation and not later ones. The second reason
given by MWM was too indefinite and was a mere
afterthought.
Edited by: Napa - So
Q91.8. Are there ways by which to avoid liability from
IAET?
Yes, when the accumulation is justified by reasonable
needs of the business such as:
1. Accumulation up to 100% of the paid-up capital
2. For definite corporate expansion projects or
programs
3. For buildings, plants or equipment acquisitions
4. For compliance with a loan covenant or pre-
existing obligation under a legitimate business
agreement
5. When there is a legal prohibition for its
distribution
6. In the case of Philippine subsidiaries of foreign
corporations, undistributed earnings intended or
reserved for investments within the Philippines
Q91.9. Abbot-Phils, domestic corporation, is a wholly
owned subsidiary of Abbot-US, a non- resident
foreign corporation. Abbot-Phils claims that by virtue
of this, it is exempt from the IAET. Is this contention
correct?
Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR ruled
that Abbot-Phils was exempt from IAET. Since Abbott-
Phils. is a wholly-owned subsidiary of Abbott- US, such
shares will be considered as being owned proportionately
by the Abbott-US shareholders. The ownership of a
domestic corporation for purposes of determining whether
it is a closely held corporation or a publicly held
corporation is ultimately traced to the individual
shareholders of the parent company. Thus, where at least
50% of the outstanding capital stock or at least 50% of the
total combined voting power of all classes of stock entitled
to vote in a corporation is owned directly or indirectly by
at least 21 or more individuals, the corporation is
considered publicly- held corporation. As of the year-end
2000, Abbott-US had 101,272 shareholders holding a
combined 1,545,934,133 shares of common stock and
the twenty largest shareholders of Abbott-US as of
September 30, 2001 own an aggregate of 30.1 percent of
Abbott-US' issued and outstanding shares. Thus, Abbot-
Phils is a publicly-held corporation exempt from IAET.
• The subsidiaries of foreign corporations are
exempt from IAET provided that after applying
the grandfather rule, they are not closely-held
corporations.
• Basically, it says that being 100% owned by
corporation A then corporation B owned it 100%
until it reaches the parent corporation that is
publicly held (publicly held is more than 20
shareholders) therefore, being publicly held does
not make the corporation liable to IAET.
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Fringe Benefit Tax
Q92. What is a fringe benefit tax?
The State imposes a final tax of 35% under the Train Law
on the grossed-up monetary value of fringe benefit
furnished or granted to the employee except rank and file
employees by the employer, whether an individual,
professional partnership or a corporation regardless of
whether the corporation is taxable or not, or the
government and its instrumentalities except when:
1. The fringe benefit is required by the nature of or
necessary to the trade, business or profession of
the employer; or
2. When the fringe benefit is for the convenience or
advantage of the employer
(see Section 33, Tax Code and RR 3-98 [JANUARY 1,
1998])
Q92.1. What is a fringe benefit?
As defined by Section 33(B), the term “fringe benefit”
means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined
herein) such as, but not limited to, the following:
1. Housing; for short-term only
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and
others;
5. Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted;
6. Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents; and connected to trade + service
contract
10. Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows.
• For education discounts given to teachers for their
children, the general rule is that it is not Fringe
94
A managerial employee refers to one who is vested with powers or
prerogatives to lay down and execute management policies and/or to
hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees
95
A supervisory employee is one who, in the interest of the employer,
effectively recommends such managerial actions if the
exercise of such authority is not merely routinary or clerical in nature but
Edited by: Napa - So
Benefit if such scholarship was given by virtue of a
screening and because of the employee
Q92.2. What is the rationale behind the Fringe
Benefits Tax?
As a general rule, the income recipient is the person liable
to pay the income tax. In order to improve collection of
income on the compensation income of employees, the
State requires the employer to withhold the tax upon
payment of the compensation income. However, it has
been observed that many of the fringe benefits paid by the
employer to his employees are not subjected to income
tax and withholding tax on compensation. To plug this
loophole, RA 8424 was passed. It imposed a fringe
benefits tax on the fringe benefits received by supervisory
and managerial employees. The law mandates that the
employer shall assume the fringe benefits tax imposed on
the taxable fringe benefits of the managerial 94 or
supervisory employees, 95 but allows the employer to
deduct such fringe benefit tax as a business expense from
its gross income. However, the fringe benefits of rank-
and-file employees 96 are treated as part of his
compensation income, which must be withheld and
deducted by his employer from the compensation income
of the employee.
• FB no longer form part of the income of the
employee since FBT is a final tax for which the
employer is paying already.
Q92.3. What is meant by “grossed-up monetary value
of the fringe benefit?”
As defined in RR 3-98 [JANUARY 1, 1998], the grossed-
up monetary value of the fringe benefit represents the
whole amount of income received by the employee which
includes the net amount of money or net monetary value
of property which has been received plus the amount of
the fringe benefit tax thereon otherwise due from the
employee, but paid by the employer for and in behalf of
his employee.97
Q92.3.1. How is the grossed-up monetary value of
the fringe benefit determined?
It is determined by dividing the actual monetary value of
the fringe benefit by 68% (effective January 1, 2000.)
The tax paid is the difference between the monetary value
and the gross monetary value. The formula is applied in
requires the use of independent judgment.
96
A rank-and-file employee means all employees who are holding
neither managerial or supervisory position
97
The purpose of getting the grossed-up monetary value is to preserve
the benefit to the employer as a whole.
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order to preserve the full value of the fringe benefits and at
the same time satisfy the tax liability (e.g. you cannot give a
car and tell the employee to leave behind three wheels to
pay for the tax.)
Q92.3.2. Is the above formula absolute?
No. In the case of non-resident aliens not engaged in
trade or business and alien and Filipino individuals
employed in RHQs, ROHQs of MNCs, OBUs and
petroleum subcontractors, the grossed-up value of the
fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by the difference
between one hundred percent (100%) and under their
respective rates of income tax.
Q92.4. Are all fringe benefits subject to FBT?
No. The following fringe benefits are not taxable:
1. Fringe benefits exempted by law
2. Benefits required by the business or for the
convenience of the employer
3. Benefits given to the rank and file employees;
and
4. De minimis benefits 98
Transfer Pricing
Q93. What is transfer pricing?
It is the power of the CIR to distribute, apportion, allocate,
and shift income and expenses between related
taxpayers to reflect their true taxable income or to prevent
evasion of taxes.
At present, the Philippines does not have any guidelines
on transfer pricing unlike in other jurisdictions. RMC 026-
08 [March 24, 2008] states that while the BIR is still
revising the final draft of the RR on transfer pricing, the
BIR as a matter of policy subscribes to the OECD
Transfer Pricing Guidelines in the interim.
This holds true only when both are related parties.
However, where A is not subject to income (e.g. tax
holiday), then overpricing becomes an issue. The
principle behind TP is that you want what is an acceptable
tax between the parties.
The elements of transfer pricing are:
1. They must be related parties
2. You have to have the commissioner to
distribute, apportion or allocate
3. Such act is being done to truly reflect income or
98
For the discussion of this, see Q15.6
Edited by: Napa - So
prevent tax ordinance
Q93.1. GSK purchase a pharmaceutical ingredient
from Adechsa, a related non-residency company for
between $1,512 and $1,651 per kg. During the same
period, two Canadian pharmaceutical companies
purchase the same ingredient for between $194 and
$304 per kg from arm’s length suppliers. Canada’s
minister for internal revenue reassessed GSK
because the prices it paid for the ingredient were
greater than an amount that would have been
reasonable in the circumstances had they been
dealing at arm’s length. GSK argues the License and
Supply Agreement it entered with Adechsa should be
considered in determining if it is an arm’s length
transaction. Is GSK’s contention correct?
Yes. As held by the Supreme Court of Canada in HM vs,
GLAXOSMITHKLINE [2012 SCC 52, OCTOBER 18, 2012], a
proper application of the arm’s length principle requires
that regard be had for the “economically relevant
characteristics” of the arm’s length and non-arm’s length
circumstances to ensure they are “sufficiently
comparable.” The “economically relevant characteristics
of the situations being compared” may make it necessary
to consider other transactions that impact the transfer
price under consideration. Such circumstances will
include agreements that may confer rights and benefits in
addition to the purchase of property where those
agreements are linked to the purchasing agreement. The
objective is to determine what an arm’s length purchaser
would pay for the property and the rights and benefits
together where the rights and benefits are linked to the
price paid for the property. In this case, GSK was paying
for at least some of the rights and benefits under the
Licence Agreement as part of the purchase prices for
ranitidine from Adechsa. As such, the Licence Agreement
could not be ignored in determining the reasonable
amount paid to Adechsa which applies not only to
payment for goods but also to payment for services.
From RR: Advance Pricing Agreement — get someone
to say that the amount (though seemingly overpriced) is
acceptable because of certain circumstances; Doctrine of
HM v. GlaxoSmithKline
Q93.2. What is the “arm’s length bargaining
standard” with respect to the determination of the
taxable income on inter-company loans or advances
in relation to transfer pricing?
RMC 026-08 [MARCH 24, 2008] adopts the arm’s length
standard as the ultimate test for determining the fairness
of related party transactions. The standard to be applied
in every case is that of an uncontrolled taxpayer dealing
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at arm’s length with another uncontrolled taxpayer.
• Basically two unrelated parties selling similar
Thus, where a member of a group of controlled entities
makes a loan or advances directly or indirectly or
becomes a creditor of another member of such group and
charges no interest, or charges interest at a rate which is
not equal to an arm’s-length rate,99 the CIR may make
appropriate allocations to reflect an arm’s length interest
rate for use of such loan or advance.
Q93.1.1.Filinvest Development Corporation (FDC)
extended advances in favour of its affiliate. The BIR
assesses FDC for deficiency income by unilaterally
imputing an “arm’s length” interest rate on its
advances. FDC disputes this by saying the CIR lacks
authority to impute theoretical interest and the rule is
that interests cannot be demanded in the absence of
a stipulation to that effect. Is FDC’s contention
correct?
Yes. According to the case of CIR V. FILINVEST
DEVELOPMENT CORPORATION [JULY 19, 2011], Despite the
seemingly broad power of the CIR to distribute, apportion
and allocate gross income under Section 50, the same
does not include the power to impute theoretical interest
even with regard to controlled taxpayers’ transactions.
This is true even if the CIR is able to prove that the interest
expense was in fact claimed by FDC. The term in the
definition of gross income that even those income “from
whatever source derived” is covered still requires that
there must be actual or at least probable receipt or
realization of the time of gross income sought to be
apportioned, distributed or reallocated. Finally, under the
Civil Code, no interest shall be due unless expressly
stipulated in writing.100
Q93.3. Is transfer pricing applicable only to taxable
entities
Section 27(B) of the Tax Code provides that they shall pay
a tax of 10% on their taxable income except:
1. Certain passive incomes subject to final tax
2. If the gross income from unrelated trade,
business, or other activity101 exceeds 50% of the
total gross income derived by such proprietary
educational institution 102 and hospital which are
non-profit from all sources, the tax shall be
imposed on the entire taxable income.
99
The arm's length interest rate shall be the rate of interest which was
charged or would have been charged at the time the indebtedness arose
in independent transaction with or between unrelated parties under
similar circumstances.
100
The case would have been decided differently if we had an RR on
Transfer Pricing.
Edited by: Napa - So
No. Section 50 does not apply only to taxable entities.
Reallocation may also apply to tax-exempt organizations.
(see RMC 026-08 [MARCH 24, 2008])
Special Entities
• Reconcile Sec.30 (activity for profit) & Article XIV
of the Constitution (utilization) — harmonized in
the sense that your activity is for the benefit of
profit-making and not exclusively for
educational/charitable purposes. However, if it
was income from profit, then there would be
contradiction with C.
• 100M derived from the education business. 60%
is dedicated for non-educational purposes.
• Under Sec.27, the 50% rule applies to (1) non-
stock, proprietary schools and (2) non-stock, non-
proprietary hospitals. — The source has to arise
from the primary purpose. Income should be
generated by the educational purpose.
Otherwise, it is not shielded by the 10% benefit.
Proprietary Educational Institutions and
Hospitals
• General Rule: non-stock, proprietary hospital,
exempt from tax.
• Exception: You will be subject to 10% if you do
things outside of your essential function
(educ/charity). — 30% imposed on the full if
more than 50% of your income arises from
unrelated business.
Q94. What is the tax treatment of proprietary
education institutions and hospitals which are non-
profit?
Q94.1. What is meant by the terms “proprietary” and
“non-profit?”
Proprietary means private while non-profit means no net
income or asset accrues to or benefits any member or
specific person, with all the net income or asset devoted
to the institution’s purposes and all its activities.
As noted by the Supreme Court IN CIR V. ST. LUKES
MEDICAL CENTER [SEPTEMBER 26, 2012], “non-profit”
does not necessarily mean “charitable.”
101
Means any trade, business, or other activity, the conduct of which is
not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function.
102
Is any private schoolm maintained and administered by private
individuals or groups with an issued permit to operation from the
Department of Education or CHED, or TESDA, as the case may be
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Q94.2. St. Lukes Medical Center is a hospital
organized as a non-stock and non-profit corporation.
It admits both paying and non- paying patients. The
CIR claimed that St. Lukes was liable for income tax
at 10% as provided under Section 27(B)131 of the
NIRC. St. Lukes argues that it is a non- stock, non-
profit institution for charitable and social welfare
purposes exempt from income tax under Section
30(E) and (G) of the NIRC.132 Decide.
In CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26,
2012], the Supreme Court ruled that St. Lukes cannot
claim full tax exemption under Section 30 because it has
paying patients and this is notwithstanding the fact that it
is a non-profit hospital. For Section 27(B) to apply, the
hospital must be non- profit which means that no net
income or asset accrues to or benefits any member or
specific person and all the activities of the hospital are
non-profit. On the other hand, Section 30(E) and (G),
while providing for an exemption is qualified by the last
paragraph which, in turn, provides that activities
conducted for profit shall be taxable. Section 30(E) and
(G) requires that an institution be operated exclusively for
charitable purposes to be completely exempt from income
tax. In this case, however, St. Lukes is not operated
exclusively for charitable purposes insofar as its revenues
from paying patients are concerned. Such revenue is
subject to income tax at 10% under Section 27(B).
Q94.3. Reconcile the tax treatment of proprietary
educational institutions and hospitals which are non-
profit under Section 27(B) and non-stock, non-profit
charitable institutions under Section 30(E) and (G).
To be exempt from income taxes, Section 30(E) requires
that the charitable institution must be organized and
operated exclusively for charitable purpose. It is
nevertheless allowed to engage in “activities conducted
for profit” without losing its tax- exempt status for its not-
for-profit activities. The consequence, however, is that
such income from activities conducted for profit,
regardless of the disposition made of such income, shall
be subject to tax.
For proprietary educational institutions and hospitals
which are non-profit, to avail of the preferential tax rate,
no net income or asset accrues to or benefits any member
or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities.
Thus, in CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER
26, 2012], while the St. Lukes did not qualify as a non-
profit, non-stock charitable institution under Section
103
Inserted by RA 10026.
104
The Court, however, made clear that PAGCOR remains to be exempt
from indirect taxes.
Edited by: Napa - So
30(E) as it was not operated exclusively for charitable
purposes, it remains to be a proprietary non-profit
hospital under Section 27(E) as long as it does not
distribute any of its profits to its members and such
profits are reinvested pursuant to its corporate purposes.
St. Lukes, as a proprietary non-profit hospital, is entitled
to the preferential tax rate of 10% on its net income from
its for-profit activities.
GOCCs
Q95. Are GOCCs, agencies and instrumentalities
owned and control by the government liable to pay
income tax?
All corporations, agencies, or instrumentalities owned or
controlled by the government shall pay such rate of tax
upon their taxable income except:
1) GSIS
2) SSS
3) Phil Health
4) Local Water Districts103
5) PCSO
(see Section 27(C), Tax Code)
Q95.1. Is RA 9337 constitutional insofar as it excluded
PAGCOR from the enumeration of GOCCs exempt
from the payment of corporate income tax?
Yes. In PAGCOR V. BIR [MARCH 15, 2011], the Supreme
Court held that the original exemption of PAGCOR from
corporate income tax was not made pursuant to a valid
classification based on substantial distinction so that the
law may operate only on some and not on all. Instead, the
same was merely granted to the acquiescence of the
House Committee on Ways and Means to the request of
PAGCOR. The argument that the withdrawal of the
exemption violates the non-impairment clause will not
hold since any franchise is subject to amendment,
alteration or repeal by Congress.104
Q96. What are the exempt corporations enumerated
in Section 30 of the Tax Code?
1. Labor, agricultural or horticultural organization
not organized principally for profit
2. Mutual savings bank not having a capital stock
represented by shares and cooperative bank
without capital stock organized and operated
for mutual purposes and without profit
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3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or other
benefits exclusively to the members of such
society, order, or association, or non-stock
corporation or their dependents
4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Non-stock corporation or association organized
and operated exclusively for religious,
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong
to or inure to the benefit of any member,
organizer, officer or any specific person
6. Business league, chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stockholder or individual
7. Civil league or organization not organized for
profit but operated exclusively for the promotion
of social welfare
8. A non-stock and non-profit educational
institution
9. Government educational institution
10. Farmers or mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company or
like organization of a purely local character, the
income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and
11. Farmers, fruit growers, or like association
organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them.
Q96.1. Are recreational clubs exempt from income
tax?
No. As clarified by RMC 35-2012 [AUGUST 3, 2012], clubs
which are organized and operated exclusively for
pleasure, recreation, and other non-profit purposes
(hereinafter referred to as "recreational clubs") are not
exempt from income tax. The provision in the National
Internal Revenue Code of 1977 which granted income tax
exemption to such recreational clubs was omitted in the
current list of tax exempt corporations under National
Internal Revenue Code of 1997, as amended.
Edited by: Napa - So
Q96.2. A credit cooperative was assessed deficiency
withholding tax on interest from savings and time
deposits of its members. The CTA ruled against the
credit cooperative stating that
withholding tax on income payments subject to FWT
includes said interests as “interests from similar
arrangements.” Is CTA’s ratio correct?
No. Since interest from any Philippine currency bank
deposit yield or any other monetary benefit from deposit
substitutes are paid by banks, other entities such as
cooperative are not required to withhold the
corresponding tax on the interest from savings and time
deposits of its members. The fact that “similar
arrangements” is preceded by banking terms means that
those subject to withholding must have deposit
peculiarities. This is also consistent with the preferential
treatment accorded to members of cooperatives who are
exempt in the same way as the cooperative themselves.
(see DUMAGUETE CREDIT COOPERATIVE V. CIR [JANUARY
22, 2010]).
Q96.3. Are all the activities of corporations
enumerated in Q90 exempt from tax?
No. Notwithstanding that they are exempt corporations,
the income of whatever kind and character of the
organizations mentioned above from any of their
properties, real or personal, or form any of their activities
conducted for profit regardless of the disposition made of
such income shall be subject to tax imposed under the
Code.
Q96.1.1. If a non-stock, non-profit educational
institution charges tuition and other fees for the
different services it renders, does the institution lose
its tax-exempt status?
No. In CIR V. G. SINCO EDUCATIONAL CORP [OCTOBER
23, 1956], the Supreme Court held that the amount of
fees charged by the school depends upon the policy and
a given administration at a given time and is not
conclusive of the purposes of the institution. It does not
in itself make a school a profit-making enterprise.
Q96.1.2. What is the difference in tax treatment on
interest income from currency bank deposits and
yield, etc and on interest income from a depository
bank under the EFCDS of non- stock, non-profit
corporations and non-stock, non-profit educational
institutions?
As provided in RMC 76-03 [November 14, 2003]:
For non-stock non profit corporation, their interest
income from currency bank deposits and yield or any
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other monetary benefit from deposit substitute
instruments and from trust funds and similar arrangement,
and royalties derived from sources within the Philippines
are subject to the 20% final withholding tax and interest
income derived by them from a depository bank under the
expanded foreign currency deposit system shall be
subject to 71/2% final withholding tax.
Unlike non-stock, non-profit corporations, their
interest income from currency bank deposits and yield
from deposit substitute instruments used actually, directly
and exclusively in pursuance of their purposes as an
educational institution, are exempt from the 20% final tax
and 7 ½% tax on interest income under the expanded
foreign currency deposit system imposed provided they
submit on an annual basis submit to the Revenue District
Office concerned an annual information return and duly
audited financial statement together with the following:
1) Certification from their depository banks as to the
amount of interest income earned from passive
investment not subject to the 20% final withholding
tax and 7 ½% tax on interest income under the
expanded foreign currency deposit system.
2) Certification of actual utilization of the said income;
and
3) Board Resolution by the school administration on
proposed projects to be funded out of the money
deposited in banks or placed in money markets, on or
before the 14th day of the fourth month following the
end of its taxable year.
Q96.4. Enumerate some special laws granting exempt
status to certain types of corporations
1.) Executive Order 226 (Article 39) or the
Omnibus Investment Code
Registered Enterprises are granted an Income Tax
Holiday as follows:
a. For six (6) years from commercial operation for
pioneer firms and four (4) years for non- pioneer
firms, new registered firms shall be fully exempt from
income taxes levied by the National Government.
This tax exemption will be extended for another year
in each of the following cases:
i. the project meets the prescribed
105
No registered pioneer firm may avail of this incentive for a period
exceeding eight (8) years.
106
During the period within which this incentive is availed of by the
expanding firm it shall not be entitled to additional deduction for
incremental labor expense.
107
A “Greenfield Tourism Zone” refers to a new or pioneer development,
as determined by the TIEZA (Tourism Infrastructure and Enterprise
Edited by: Napa - So
ration of capital equipment to
number of workers set by the
BOI
ii. utilization of indigenous raw
materials at rates set by the BOI
iii. the net foreign exchange savings
or earnings amount105
b. For a period of three (3) years from commercial
operation, registered expanding firms shall be
entitled to an exemption from income taxes levied
by the National Government.106
2.) RA 7916 (Sections 23 to 25) or the Special
Economic Zone Act
• Except for real property taxes on land owned by
developers, no taxes, local and national, shall be
imposed on business establishments operating
within the ECOZONE. In lieu thereof, 5% of the
gross income earned by all business enterprises
within the ECOZON shall be paid and remitted as
follows:
a. 3% to the National Government
b. 2% to the Treasurer’s office of the municipality of
city where the enterprise is located.
3. RA 9178 or the Barangay Micro Business
Enterprises Act
All BMBEs shall be exempt from tax for income arising
from the operations of the enterprise.
4. RA 9593 (Section 4 & 86, 88) or Tourism Act
1. New enterprises in Greenfield and
Brownfield Tourism Zones107shall, from the
start of business operations, be exempt
from tax on income for a period of six (6)
years. This income tax holiday may be
extended if the enterprise undertakes a
substantial expansion or upgrade of its
facilities prior to the expiration of the first
six (6) years.108
2. These enterprises shall likewise be allowed
to carry over as deduction from the gross
income for the next six (6) consecutive
years immediately following the year of the
Zone Authority) while a “Brownfield Tourism Zone” refers to an area with
existing infrastructure or development as determined by the TIEZA.
108
This extension shall consider the cost of such expansion or upgrade
in relation to the original investment, but shall in no case exceed an
additional six (6) years.
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loss, their net operating losses for any
taxable year immediately preceding the
current taxable year which had not been
previously offset as deduction from gross
income.
3. An existing enterprise in a Brownfield
Tourism Zone shall be entitled to avail of a
non-extendible income tax holiday if it
undertakes an extensive expansion or
upgrade of facilities.109
4. In lieu of all other national and local taxes,
license fees, imposts and assessments,
except real estate taxes and such fees as
may be imposed by the TIEZA, a new
enterprise shall pay a tax of five percent
(5%) on its gross income earned, which
shall be distributed as follows:
a. 1/3 to be proportionally allocated
among affected LGUs
b. 1/3 to the National Government;
and
c. 1/3 to the TIEZA
5. RA 9856 or the Real Estate Investment Trust
(REIT) Act
A REIT110 shall be subject to income tax on its taxable net
income defined in the Act as the pertinent items of gross
income less all allowable deductions, less the dividends
distributed by the REIT out of its distributable income.111
In no case, shall the REIT be subject to MCIT.
Note, however, that if the REIT (1) fails to maintain its
status as a public company as defined in the Act; (2) fails
to maintain the listed status of the investor securities on
the Exchange; and (3) fails to distribute at least 90% of its
distributable income, the income tax shall be imposed on
taxable net income not as defined in the Act but as defined
in the Tax Code.
(see RR 13-2011 [JULY 25, 2011])
Capital Gains and Losses
Q97. What is the importance of knowing if an
asset/income is capital or ordinary
The tax treatment will vary depend on the nature of the
asset. For example, if real property is a capital asset, the
gain from the sale thereof shall be subject to the final
capital gains tax of 6%. If it is an ordinary asset, any gain
109
Such an income tax holiday shall consider the cost of such expansion
or upgrade in relation to the original investment, but shall in no case
exceed six (6) years to be counted from the time of completion of the
expansion or upgrade.
Edited by: Napa - So
from the sale thereof shall form part of the ordinary
income which shall be subject either to graduated income
tax rates (if an individual) or corporate income tax (if a
corporation).
Capital assets/income v. Ordinary
Assets/income
Q97.1. What are capital assets?
The term capital assets means property held by the
taxpayer (whether or not connected with his trade or
business, except:
1. Stock of trade if the taxpayer or other property of a
kind which would properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year
2. Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business;
3. Property used in trade or business of a character
that is subject to allowance for depreciation
4. Real property used in trade or business of the
taxpayer
(see Section 39 Tax Code, and Section 132, RR 2)
Q97.1.1. A inherited from his father an agricultural
land. He had the land surveyed and subdivided into
lots. Improvements, such as good roads, concrete
gutters, drainage and lighting system, were
introduced to make the lots saleable. Soon after, the
lots were sold to the public at a profit. The Revenue
examiner adjudged A as engaged in business as real
estate dealers and required him to pay the real estate
dealer’s tax and assessed a deficiency income tax on
profits derived from the sale of the lots based on the
rates for ordinary income and not as capital gains at
capital gain rates. Is the Revenue Examiner correct?
Yes. The statutory definition of capital assets is negative
in nature. If the asset is not among the exceptions, it is a
capital asset; conversely, assets falling within the
exceptions are ordinary assets. And necessarily, any gain
resulting from the sale or exchange of an asset is a capital
gain or an ordinary gain depending on the kind of asset
involved in the transaction. In this case, the activities of A
are indistinguishable from those invariably employed by
one engaged in the business of selling real estate. One
strong factor is the business element of development
which is very much in evidence. A did not sell the land in
110
A REIT is a stock corporation established principally for the purpose
of owning income - generating real estate assets.
111
Dividends are allowed deductions.
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the condition in which he acquired it. In the course of
selling the subdivided lots, A engaged in the real estate
business and accordingly, the gains from the sale of the
lots are ordinary income taxable in full (see CALASANZ VS.
COMMISSIONER [OCTOBER 9, 1986])
Q97.2. What are ordinary assets?
The statutory definition of capital assets is negative in
nature. If the asset is not among the exceptions, it is a
capital asset; conversely, assets falling within the
exceptions are ordinary assets
Q97.2.1. Y inherited from his mother several tracts of
land. When his mother was still alive, these lands
were subdivided into lots and leased. Y sold the
leased lots to the occupants except for one lot which
needed filling because of low elevation. Said lot was
filled and subdivided into smaller lots and sold to the
public. Y reported his income from the sales as long-
term capital gains. The CIR denied this and ruled that
Y was engaged in the business of leasing the lots and
the subsequent sale are sales of real property used in
trade or business of the taxpayer. Is the CIR correct?
Yes. In this case, the properties should be regarded as
ordinary assets. When Y obtained by inheritance the
parcels in question, transferred to him was not merely the
duty to respect the terms of any contract thereon, but as
well the correlative right to receive and enjoy the fruits of
the business and propertya different characterization for
tax purposes. The following circumstances in combination
show unequivocally that the petitioner was, at the time
material to this case, engaged in the real estate business
(see TUASON VS. LINGAD [JULY 31, 1974])
Q97.3. What is the tax consequence if the property is
sold by a seller- corporation engaged in real estate
business?
It depends. In BIR RULING 27-02 [JULY 15, 2002],142 the
CIR was asked to rule on the tax consequences of certain
transactions involving a seller that is engaged n real
estate business but without any specification as to
whether the property is capital or ordinary. The CIR stated
that it is necessary to first determine the character of the
real property being sold.
If the real property is a land or building which is not
actually used in the business of the seller-corporation and
is treated as a capital asset, then a final tax of six percent
112
This ruling also stated that registration with the HLURB or HUDCC
shall be sufficient for a seller/transferor to be considered as habitually
engaged in the real estate business. If the seller/transferor is not
registered with HLURB or HUDCC, he/it may prove that he/it is engaged
in the real estate business by offering other satisfactory evidence
Edited by: Napa - So
(6%) shall be imposed on the gain presumed to have
been realized on its sale, exchange or disposition of such
land or building based on the gross selling price or fair
market value, whichever is higher of such land and/or
building. This rule applies, whether or not the seller-
corporation is engaged in real estate business.
If the real property being sold is an ordinary asset,
withholding tax rates shall apply. The rate of withholding
tax will depend on whether, first, the seller is exempt or
taxable; second, whether the seller is habitually engaged
in real estate business or not; and third, if the seller is
habitually engaged in real estate business, the gross
selling price.
Q97.4. Is an equity investment a capital asset?
Yes. As ruled by the Supreme Court in CHINABANK V. CA
[JULY 19, 2000], an equity investment is a capital, not
ordinary, asset of the investor the sale or exchange of
which results in either a capital gain or a capital loss.
which the decedent had established and maintained.
Under the circumstances, Y’s sales of the several lots
forming part of his rental business cannot be
characterized as other than sales of ordinary assets. The
sales concluded on installment basis of the subdivided
lots comprising the last lot do not deserve112
Net capital gain, net capital loss
Q97.5. Define net capital gain and net capital loss.
Net Capital excess of the gains from sales or
Gain exchanges of capital assets over the
losses from such sales or exchanges
Net Capital the excess of the losses from sales or
Loss exchanges of capital assets over the
gains from such sales or exchanges
Percentage taken into account
Q97.6. Is the capital gain from the sale or
exchange of a capital asset always taxable in
full?
No. In the case of a taxpayer other than a corporation,11314
the following percentages of the gain upon the sale or
exchange of a capital asset shall be taken into account in
113
The holding period is material only if the capital asset is sold by an
individual. This does not apply to corporations.
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computing net capital gain:
1. 100% if the capital asset has been held for not
more than 12 months
2. 50% if the capital asset has been held for more
than 12 months
Limitations on capital loss
Q97.7. What is the allowable extent of losses from
sales or exchanges of capitals assets?
Losses from sales of exchanges of capital assets shall be
allowed to be deducted only to the extent of the gains from
such sales or exchanges.
In CHINABANK V. CA [JULY 19, 2000], Chinabank
made a 53% equity investment in the First CBC Capital
(Asia) Ltd, a Hong Kong subsidiary. First CBC became
insolvent. With BSP approval, Chinabank wrote-off the
investment in its ITR as a bad debt or as an ordinary
loss deductible from its gross income. The BIR
disallowed the deduction on the basis that the debt was
not worthless. The Supreme Court ruled that the equity
investment is not indebtedness in the first place but
rather capital, not an ordinary, asset. Shares of stock
would be ordinary assets only to a dealer in securities
or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In the
hands, however, of another who holds the shares of
stock by way of an investment, the shares to him would
be capital assets. When the shares held by such
investor become worthless, the loss is deemed to be a
loss from the sale or exchange of capital assets.
The Court further stated that assuming that the equity
investment of CBC has indeed become "worthless," the
loss sustained is a capital, not an ordinary, loss. The rule
thus is that capital loss can be deducted only from capital
gains. The capital loss sustained by CBC can only be
deducted from capital gains if any derived by it during the
same taxable year that the securities have become
"worthless.
Determination of Gains or Loss from Sale or
Transfer of Property
Computation of Gain or Loss
Q98. How is gain or loss from the sale or other
disposition of property computed?
The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over
114
By way of illustration, if a taxpayer owning ten shares of stock
exchanges his stock certificate for a voting trust certificate, no income
Edited by: Napa - So
the basis or adjusted basis for determining gain.
The loss shall be the excess of the basis or adjusted
basis for determining loss over the amount realized.
Q98.1. Define “amount realized”
Amount The sum of the money received plus
realized the fair market value of the property
(other than money).
Q98.2. When is gain or loss realized?
Gain or loss arising from the acquisition and subsequent
disposition of property is realized only when as the result
of a transaction between the owner and another person
the property is converted into other property that:
1. is essentially different from the property
disposed of, and
2. has a market value.
The requirement that the property received in exchange
must be "essentially different from the property disposed
of" implies that there must be a change in substance and
not merely a change in form.114
The term "market value" means the fair value of the
property in money as between one who wishes to
purchase and one who wishes to sell.
Cost or basis for determining gain or loss
Q99. Define “basis”
Basis 1. The cost thereof in the case of property ac
acquired by purchase;
2. The FMV as of the date of acquisition if the s
3. If the property was acquired by gift, the basi
donor or the last preceding owner by whom
than FMV of the property at the time of the g
be such FMV;
4. If the property was acquired for less than an
basis of such property is the amount paid by
5. The basis as defined in paragraph (C)(5) of
where the gain or loss is not recognized und
[see Section 40 (B) Tax Code and RR-2]
Basis of The basis of the substantially identical stock so s
Stocks and may be, by the difference, if any, between the p
Securities the price at which such substantially identical sto
acquired in Section 143, RR 2]
Wash Sales
realized.
115
This refers to the basis used in tax-free exchanges
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Exchange of Property (Tax-Free
Exchanges)
Definitions
Q100. For purposes of Section 40, define the
following terms:
Securities Means bonds and debentures but
not notes of whatever class or
duration
Merger or Shall be understood to mean (i) the
Consolidation ordinary merger or consolidation or
(ii) the acquisition by one
corporation of all or substantially
all the properties of another
corporation solely for stock.
For a transaction to be regarded as
a merger or consolidation under
Section 40:
It must be undertaken for a bona
fide business purpose and not
solely for escaping the burden of
taxation. In determining if a bona
fide transaction exists, the whole
transaction or series of
transactions shall be treated as a
single unit and every step of the
transaction shall be considered In
determine if the property
transferred constitutes a agreement, all business, property, assets and
substantial portion of the property
of the transferor, property shall be
taken to include cash assets
Control Means ownership or stocks in a
corporation possessing at least 51%
of the total voting power of all
classes of stock entitled to vote
Q101. What are considered as tax-free
exchanges?
As a general rule, the entire amount of the gain or loss
shall be recognized upon the sale or exchange of property
The exceptions (tax free exchanges) are:
1. No gain or loss shall be recognized if in
pursuance of a plan of merger or
consolidation:
a. A corporation which is a party to a
Edited by: Napa - So
merger or consolidation exchanges
property solely for stock in a
corporation, which is a party to the
merger or consolidation
b. A shareholder exchanges stock in a
corporation, which is a party to a
merger or consolidation solely for
the stock of another corporation also
a party to a merger or consolidation
c. A security holder of a corporation,
which is a party to a merger or
consolidation, exchanges his
securities in such corporation, solely
for stock or securities in another
corporation, a party to the merger or
consolidation
2. No gain or loss shall be recognized if
property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation of
which as a result of such exchange, said
person, alone or together with others, not
exceeding four (4) persons gains control of
said corporation provided that stocks issued
for services shall not be considered as
issued in return for property.
Merger or Consolidation
Q101.1. A, B, C were majority stockholders of ABC
Theatrical Co. They were also majority stockholders
of XYZ Theatrical Co which was engaged in the same
business. ABC and XYZ agreed to merge. Under the
goodwill of ABC will be transferred to XYZ in
exchange for XYZ stocks for each stock held in ABC.
Is the exchange subject to capital gains tax?
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It is
well established that where stocks for stocks were
exchanged, and distributed to the stockholders of the
corporations, parties to the merger or consolidation,
pursuant to a plan of reorganization, such exchange is
exempt from capital gains tax. The basic consideration, of
course, is the purpose of the merger, as this would
determine whether the exchange of properties involved
therein shall be subject or not to the capital gains tax. The
criterion laid down by the law is that the merger" must be
undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation."
It is clear, in fact, that the purpose of the merger was to
continue the business of the Old Corporation, whose
corporate life was about to expire, through the New
Corporation to which all the assets and obligations of the
former had been transferred. The exemption from the tax
of the gain derived from exchanges of stock solely for
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stock of another corporation was intended to encourage
corporations in pooling, combining or expanding their
resources conducive to the economic development of the
country. The merger in question involved a pooling of
resources aimed at the continuation and expansion of
business and so came under the letter and intendment of
the NIRC exempting from the capital gains tax exchanges
of property.
Transfer of property for shares of stock
Q101.2. Filinvest Development Corporation (FDC), a
holding company, is the owner of 80% of the
outstanding shares of Filinvest Alabang, Inc. (FAI)
and 67.42% of the outstanding shares of Filinvest
Land, Inc. (FLI). FDC and FAI entered into a Deed of
Exchange with FLI whereby the former both transfer
in favor of the latter parcels of land in exchange for
shares of stock of FLI. The CIR argues that the taxable
gain should be recognized for the exchange as FDC’s
controlling interest in FLI was decreased as a result
of the exchange. Is the CIR’s contention correct?
No. The Supreme Court in CIR V. FILINVEST DEVELOPMENT
CORPORATION (JULY 19, 2011] stated that the requisites
for the non-recognition of gain or loss of a transfer of
property for shares of stock are as follows:
(a) the transferee is a corporation;
(b) the transferee exchanges its shares of stock
for property/ies of the transferor;
(c) the transfer is made by a person, acting alone
or together with others, not exceeding four persons; and,
(d) as a result of the exchange the transferor,
alone or together with others, not exceeding four,
gains control of the transferee. Rather than
isolating FDC, the shares issued to FDC should
be appreciated in combination with the new
shares issued to FAI. Together, FDC and FAI’s
shares add to 70.99% of FLI’s shares. Since the
term "control" is clearly defined as "ownership of
stocks in a corporation possessing at least fifty-
one percent of the total voting power of classes
of stocks entitled to one vote, “ the exchange of
property for stocks between FDC-FAI and FLI
clearly qualify as a tax-free transaction.
Q101.3. ABC is a domestic corporation. Shareholders
transferred their real property in exchange for more
shares in the corporation. In effect, they gained
control of more than 51% of the shares of the
corporation entitled to vote. Is the exchange tax-
exempt?
116
It depends. In BIR Ruling 274-87, the CIR ruled that
no gain or loss would be recognized if property is
116
Note that in this BIR Ruling, there were 6 transferors
Edited by: Napa - So
transferred to a corporation by a person in exchange for
stock in such a corporation of which as a result of such
exchange, said person alone or together with others, not
exceeding four persons, gains control of said corporation.
The term "control" shall mean ownership of stocks in a
corporation possessing at least 51% of the total voting
power of all classes of stocks entitled to vote. In
determining the 51% stock ownership, only those persons
who transferred property for stock in the same transaction
may be counted up to a maximum of five.
Transfer of “substantially all” the assets
Q101.4. What is a de facto merger?
To constitute a de facto merger, the following elements
must concur:
1. There must be a transfer of all or substantially all
of the properties of the transferor corporation
solely for stock, and
2. It must be undertaken for a bona fide business
purpose and not solely for the purpose of
escaping the burden of taxation. (see RMC 1-02
[April 25, 2002])
Q101.5. What is meant by “substantially all”?
As provided by RR 2, "substantially all" means the
acquisition by one corporation of at least 80% of the
assets, including cash, of another corporation, which has
the element of permanence and not merely momentary
holding
Q101.6. What are the differences between a de facto
merger and a statutory (ordinary) merger?
In a de facto merger, the Transferor is not automatically
dissolved unlike in the case of a statutory merger.
Likewise, there is no automatic transfer to the Transferee
of all the rights, privileges, and liabilities of the Transferor
in the case of de facto merger.
Q101.7. What are the similarities and differences
between a de facto merger and a transfer of property
for shares under Section 40(C)(2) of the Tax Code?
De facto merger is in procedure similar to a transfer to a
controlled corporation under the same Section 40(C)(2) of
the Tax Code of 1997, except that at least 80% of the
Transferor's assets, including cash, are transferred to the
Transferee, with the element of permanence and not
merely momentary holding.
However, a de facto merger and a transfer to a controlled
corporation are different in that, (1) the Transferor in a de
facto merger is a corporation, while in a transfer to a
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controlled corporation, the Transferors may either be a
corporation or an individual, and (2) in a de facto merger,
there is no requirement that the transferor gains control
(that is, 51% of the total voting powers of all classes of
stocks of the Transferee entitled to vote) of the Transferee
as a prerequisite to enjoying the benefit of non-recognition
of gain or loss. What is essential in a de facto merger is
that the Transferee acquires all or substantially all of the
properties of the Transferor. (see RMC 1-02 [April 25,
2002])
Administrative Requirements in case of tax-
free exchanges
Q101.8. What are the administrative requirements in
case of tax-free exchanges?
1. The parties who are applying for confirmation that
the transaction is indeed a tax-free exchange
shall submit the following:
a. A sworn certification on the basis of the
property to be transferred
b. Certified true copies of the TCT and/or
CCT of real properties transferred
c. Certified true copies of the corresponding
latest Tax Declaration of the real
properties to be transferred
d. Certified true copies of the certificates of
stocks evidencing shares of stocks to be
transferred
e. Certified true copy of the inventory of
other property/ies to be transferred/
2. The BIR shall issue a certification or ruling
confirming that an exchange of property for
shares complies with the requisites for it to be tax-
free. The certification or ruling shall contain the
substituted basis of the properties.
3. The Certificate Authorizing Registration (CAR) or
Tax Clearance (TCL) shall be issued by the
RDO/Authorized Internal Revenue Officer on the
basis of the BIR certification or ruling
4. The information that the transaction is a tax-free
exchange and the substituted basis of the
properties shall be annotated in the TCT and/or
CCT.
5. The applicant/taxpayer shall pay the processing
and certification fee of P5,000 for each
application not involving more than 10 real
properties and/or certificates of stock. An
additional P100 shall be paid for every TCT/CCT
and/or certificate of stock in excess of 10.
6. Every official, agent, or employee of the Registry
of Deeds and corporate secretary or the duly
authorized officer of the corporation who fails to
annotate the information shall be subject to a
penalty.
Edited by: Napa - So
Exchange not solely in kind
Q101.9. What is the effect if the tax-free exchange is
not solely in kind?
1. If an individual, shareholder, security holder or
corporation receives money and/or property in
addition to the stock, the gain, but not the loss,
shall be recognized but in amount not in excess
of the sum of the money and the fair market
value of such other property received.
2. As to the shareholder, if the money and/or
property has the effect of a distribution of a
taxable dividend, there shall be taxed an
amount of the gain recognized not in excess of
his proportionate share of the undistributed
earnings and profits of the corporation; the
remainder, if any, shall be treated as capital
gain.
3. If the transferor corporation receives money
and/or property in addition to the stock, then:
a. If the corporation distributes it in
pursuance of the plan of merger or
consolidation, no gain shall be
recognized
b. If the corporation does not distribute it,
the gain, if any, but not the loss shall be
recognized but not in an amount not in
excess of the sum of such money and
the fair market value of the property so
received.
Assumption of Liability in Tax-Free
Exchanges
Q101.10. What is the effect of the assumption of the
transferee of the liabilities of the transferor in addition
to the transfer of property?
Section 40(C)(4) provides that if the taxpayer receives
the stock as if it were the sole consideration, and, as part
of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires property
subject to a liability, such shares and paid the
corresponding CGT based on a lower cost basis. Is the
transfer valid? assumption or acquisition shall not be
treated as money and/or property and shall not prevent
the exchange from being tax-free.
However, if the amount of liabilities assumed plus the
amount of liabilities to which the property is subjected to
exceed the total adjusted basis of the property, then such
excess shall be considered either a capital gain or
ordinary gain, as the case may be.
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Q101.11. What is the cost or basis in tax- free
exchanges?
The basis of the stock or securities shall be the same as
the basis of the property, stock, or securities exchanged:
1. minus the money received
2. minus the fair market value of the property
received
3. plus the amount treated as dividend of the
shareholder
4. plus the amount of any gain that was recognized
on the exchange.
Note that the assumption or acquisition of liability shall be
treated as money and/or property received if as part of the
consideration to the transferor, the transferee of the
property assumes a liability of the transferor or acquires
from the latter property subject to a liability.
The basis of the property transferred in the hands of the
transferee shall be the same as it would be in the hands
of the transferor increased by the amount of the gain
recognized to the transferor on the transfer.
Business Purpose
Q101.12. A owns all the stock of ABC Corp. ABC Corp.
had 1,000 shares of XYZ Corp. A formed a new
corporation called DEF Corp. A had ABC transfer all
1,000 XYZ shares to DEF. She then dissolved DEF and
liquidated the assets (the XYZ shares). A then sold
the XYZ
No. As held in GREGORY V. HELVERING [293 US 465,
JANUARY 7, 1935], a transfer of assets by one corporation
to another must have a business purpose. Here, it was a
mere device which followed the form of a corporate
reorganization to conceal its real character which was a
transfer of stock of XYZ shares to A.
Rulings
Q101.13. Is there a prescriptive period for rulings
issued in connection to tax-free exchanges?
Yes. RMC 40-2012 [August 3, 2012] provides that
rulings issued under Section 40 (C) (2) of the NIRC, as
amended, shall be valid only for ninety (90) days counted
from the date of receipt of the ruling by any of the parties
to the exchange transaction. The properties and shares
of stocks involved in the transfer should be conveyed to
the transferee/s and transferor/s, respectively, within this
period.
Losses from Wash Sales of Stocks or
Securities
Edited by: Napa - So
Administrative Provisions
Accounting Methods
Q102. What are accounting methods that may
be used by taxpayers?
The methods are:
1. Cash Method – a method of accounting whereby
all items of gross income received during the year
shall be accounted for in such taxable year and
that only expenses actually paid shall be claimed
as deductions during the year
2. Accrual Method – method of accounting for
income in the period it is earned, regardless of
whether it has been received or not. Expenses
are accounted for in the period they are incurred
and not in the period they are paid.
3. Installment Method – method of accounting
considered appropriate when collections of the
proceeds of sales and incomes extend over
relatively long periods of time and there is strong
possibility that full collection will not be paid. As
customers make installment payments, the seller
recognizes the gross profit on sale in proportion
to the cash collected during the year. (see
Section 49, Tax Code)
4. Percentage of Completion Method – method of
accounting applicable in the case of a building,
installation or construction contract covering a
period in excess of one year, whereby gross
income derived from such contract may be
reported upon the basis of percentage of
completion. (see Section 48, Tax Code)
5. Crop Year Basis – method of accounting
applicable only for farmers engaged in the
production of crops which take more than a year
from the time of planting to the process of
gathering and disposal of the harvest. Expenses
paid or incurred are deductible in the year the
gross income from the sale of the crops is
realized.
Hybrid Method
Q102.1. Can a taxpayer use a combination of two
or more methods of accounting?
No. The rule is that a taxpayer may use any one method
of accounting but not a combination of two or more
methods of accounting for each type of business during
the taxable year. The use of a hybrid method of
accounting is not allowed (see CONSOLIDATED MINES VS.
CTA [AUGUST 29, 1974])
Percentage of Completion Method
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Q102.2. Can gross income be instead reported
when the long term contract is finally
completed?
Yes. Section, 44, RR 2 provides that gross income may
be reported in the taxable year in which the contract is
finally completed and accepted if the taxpayer elects as a
consistent practice to so treat such income, provided such
method clearly reflects the net income. If this method is
adopted there should be deducted from gross income all
expenditures during the life of the contract which are
properly allocated thereto, taking into consideration any
material and supplies charged to the work under the
contract but remaining on hand at the time of the
completion.
Installment Basis
Q102.3. A sold lots to ABC Corp and was paid less
than 25%, the balance was covered by 4 checks. On
the same day, the checks were discounted (exchange
for cash at an amount lower than face value) also ABC
Corp. A reported as income for the year of the sale for
the year of the sale only the cash amount received
from sale and excluded the amount received from the
discounted checks. The balance was reported as
income only in the next four years. A argues that
initial payment excludes evidence of indebtedness. Is
A’s contention correct?
Yes. As held in BANAS V. CA [FEBRUARY 10, 2000], the
transaction remains to be an instalment (not cash) sale
as the law expressly excludes evidence of indebtedness
in the determination of how much was paid for the year.
However, even if the proceeds of discounted note is not
considered as part of the initial payment, the income
realized from the discounting itself is still a separate
taxable income in the year it was converted into cash
because it was at this year that there was actual gain on
the discounted notes.
Even if the proceeds of a discount promissory note is not
considered initial payment, it must still be included as
taxable income on the year it was converted to cash.
Accounting Period
Q103. What is the general rule for computing
the taxpayer’s taxable income?
The taxable income shall be computed upon the basis of
the taxpayer’s annual accounting period – fiscal year or
calendar year as the case may be.
Q103.1. What is the difference between fiscal year
Edited by: Napa - So
and calendar year?
Calendar year is an accounting period which starts from
January 1 and ends on December 31 while Fiscal year is
an accounting period of 12 months ending on the last day
of any month other than December 31.
Income tax returns, whether individuals or for
corporations, are required to be made and their income
computed for each calendar year. However, corporations
may with the approval of the CIR, file their returns and
compute their income on the basis of a fiscal year. (see
Section 43, Tax Code)
Change of Accounting Period
Q103.2. Can a taxpayer change his accounting
period?
Yes, but this applies only to corporate taxpayers. If the
corporate taxpayer wishes to change his accounting
period from fiscal to calendar year, from calendar year to
fiscal year, or from one fiscal year to another, the net
income shall, with the approval of the CIR, be computed
on the basis of such new accounting period. (see
Section 46, Tax Code)
The corporation must file the corresponding final or
adjustment return (see Section 47, Tax Code)
Allocation of Income and Deductions
Q103.3. When are items of gross income included?
The amount of all items of gross income shall be included
in the gross income for the taxable year in which received
by the taxpayer unless under the accounting method such
amounts are to be properly accounted for as for a different
period. (see Section 44, Tax Code)
Q103.4. When is the period for which deductions and
credits are taken?
The deductions shall be taken for the taxable year in
which paid or accrued or paid or incurred dependent
upon the accounting method used unless in order to
clearly reflect the income the deductions should be taken
as of a different period. (see Section 45, Tax Code)
Q103.5. When is the CIR authorized to allocate
income and deductions? (Transfer pricing)
CIR to authorized to distribute, apportion, allocate, and
shift income and expenses between related taxpayers to
reflect their true taxable income or to prevent evasion of
taxes.
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Returns and Payments of Taxes
Q104. Enumerate the BIR forms used in income tax
filing.
1. BIR Form 1700: Annual ITR for Individuals
Earning Purely Compensation Income
2. BIR Form 1702: Annual ITR for Self- Employed
Individuals, Estates and Trusts;
3. BIR Form 1702: Annual ITR for Corporation,
Partnership and Other Non-Individual
Taxpayer. (see RR 019-11 [DECEMBER 9,
2011])
Individual Return
Who are required to pay
Q105. Who are required to file an income tax
return?
The following individuals are required to file an income
tax return:
1. Resident citizen
2. Nonresident citizen, on his income from sources
within the Philippines
3. Resident alien, on income derived from sources
within the Philippines
4. Nonresident alien engaged in trade or business
or in the exercise of profession in the Philippines
(see Section 51, Tax Code)
Those not required to pay
Q106. Who are not required to file an income tax
return?
A: The following individuals are not required to file an
income tax return:
1. However, a citizen of the Philippines and any
alien individual engaged in business or practice
of profession within the Philippines shall file an
income tax return, regardless of the amount of
gross income.
2. An individual with respect to pure compensation
income derived from sources within the
Philippines (substituted filing)
3. However, (1) an individual deriving compensation
concurrently from two or more employers at any
time during the taxable year shall file an income
tax return and (2) an individual whose
compensation income derived from sources
within the Philippines exceeds P60,000 shall also
file an income tax return
4. An individual whose sole income has been
Edited by: Napa - So
subjected to final withholding tax
5. An individual who is exempt from income tax
Always required to file, will be those earning:
1. Self-employed income
2. Business Income
Where to file
Q107. Where will the income tax return be filed?
The return shall be filed with the
1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent
4. Duly authorized Treasurer of the city or
municipality in which such person has his legal
residence or principal place of business in the
Philippines
5. if there be no legal residence or place of business
in the Philippines, with the Office of the
Commissioner. (see Section 51, Tax Code).
When to file
Q108. When is the income tax return filed?
The following rules shall govern the time of filing of
income tax returns:
1. The return of any individual shall be filed on or
before April 15 of each year covering income for
the preceding taxable year.
2. Individuals subject to tax on capital gains
a. From the sale or exchange of shares of
stock not traded thru a local stock
exchange shall file a return within thirty
(30) days after each transaction and a
final consolidated return on or before
April 15 of year covering all stock
transactions of the preceding taxable
year; and
b. From the sale or disposition of real
property shall file a return within thirty
(30) days following each sale or other
disposition.
3. Married individuals who do not derive income
purely from compensation, shall file a return for
the taxable year to include the income of both
spouses, but where it is impracticable for the
spouses to file one return, each spouse may file
a separate return of income.
4. The income of unmarried minors derived from
property received from a living parent shall be
included in the return of the parent, except:
a. when the donor's tax has been paid on
such property, or
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b. when the transfer of such property is
exempt from donor’s tax.
5. If the taxpayer is unable to make his own return,
the return may be made by his duly authorized
agent or representative or by the guardian or
other person charged with the care of his person
or property.
Where to pay
Q109. Where is the income tax paid?
1. At the nearest Authorized Agent Bank (AAB) of
the Revenue District Office where the taxpayer is
registered.
2. In places where there are no AABs, to the
Revenue Collection Officer or duly Authorized
City or Municipal Treasurer located within the
Revenue District Office where the taxpayer is
registered.
Quarterly Income Tax
Q110. When should income tax be declared for
individuals?
Individuals117 subject to income tax, who is receiving self-
employment income, 118 whether it constitutes the sole
source of his income or in combination with salaries,
wages, and other fixed or determinable income, shall
make and file a declaration of his estimated income for
the current taxable year on or before April 15 of the same
taxable year. (see
Section 74(A), Tax Code)
Q110.1. When should the estimated tax be
paid?
The estimated tax due with respect to his declared income
shall be paid in four (4) instalments. The first shall be paid
at the time of the declaration and the second and third
shall be paid on August 15 and November 15 of the
current year, respectively. The fourth instalment shall be
paid on or before April 15 of the following calendar year
when the final adjusted income tax return is to be filed.
(see Section 74(B), Tax Code)
Corporation Returns
Q111. Who are required to file a corporate return?
Every corporation, except foreign corporations not
engaged in trade or business in the Philippines, shall
117
Nonresident citizens, with respect to income without the Philippines
and nonresident aliens not engaged in trade or business, are not
required to make a declaration.
Edited by: Napa - So
render, in duplicate, a true and accurate quarterly income
tax return and final or adjustment return.
The return shall be filed by the president, vice-president
or other principal officer, and shall be sworn to by such
officer and by the treasurer or assistant treasurer.
Quarterly Income Tax
Q112. When should corporate income tax be
declared and paid?
Every corporation shall file a quarterly summary
declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters,
upon which the income tax shall be levied, collected and
paid.
The tax so computed shall be decreased by the amount
of tax previously paid or assessed during the preceding
quarters and shall be paid not later than 60 days from the
close of each of each of the first three quarters of the
taxable year, whether calendar or fiscal year (see Section
75, Tax Code)
Final Adjustment Return
Q113. What are the options available to the
corporation when the sum of the quarterly tax
payments made during the taxable year is not equal
to the total tax due on the entire taxable income of
that year?
The corporation shall either
1. Pay the balance of tax still due
2. Carry-over the excess credit
3. Be credited or refunded with the excess amount
paid
Q113.1. Differentiate a tax credit from a tax refund
In a tax refund, any tax on income that is paid in excess
of the amount due the government is refunded. In a tax
credit, the refundable amount is applied against the
estimated quarterly income tax liabilities of the
succeeding taxable year
Q113.2. Are the options to file a tax refund and to avail
of tax credit alternative remedies?
Yes. As held in PHILAM ASSET MANAGEMENT V. CIR
[DECEMBER 14, 2005], these two options are alternative.
118
Consists of earnings derived by the individual from the practice of
profession or conduct of trade or business carried on by him as a sole
proprietor or by a partnership of which he is a member.
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The choice of one precludes the other. One cannot get a
tax refund and a tax credit at the same time for the same
excess income taxes paid.
Q113.2.1. If the corporate taxpayer fails to signify his
intention in the Final Adjustment Return, is it barred
from making a valid request for refund should it
choose this option later on?
No. As held in PHILAM ASSET MANAGEMENT V. CIR
[DECEMBER 14, 2005], failure to indicate a choice will not
bar a valid request for a refund, should this option be
chosen by the taxpayer later on.
Q113.3. What is the irrevocability rule?
No. Once the option to carry-over the excess and apply
the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered
irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be
allowed. (see Section 76, Tax Code and SYSTRA
PHILIPPINES V. CIR [SEPTEMBER 21, 2007])
Q113.4. What is the implication when a corporation
fills out the portion “Prior Year’s Excess Credits” in
the Final Adjustment Return?
As held in PHILAM ASSET MANAGEMENT V. CIR
[DECEMBER 14, 2005], the fact that the corporation filled
out the portion “prior year’s excess credits” in the Final
Adjustment Return means that it categorically availed
itself of the carry-over option. If an application for tax
refund has been or will be filed, that portion should
necessarily be blank.
Q113.5. What is the implication when the initial
option is to refund the excess creditable tax when
there is a subsequent carry over?
As held in UNIVERSITY PHYSICIANS SERVICES, INC. V. CIR
[MARCH 27, 2018], only the option of carry-over is
irrevocable. The phrasing of the law, under Sec 228,
states that “the options are alternative, the choice of one
precludes the other”. However, in order to place a
sensible meaning to the whole paragraph of the law, it
should be interpreted as contemplating only that situation
when an application for refund or tax credit certificate had
already been previously granted. Issuing an assessment
against the taxpayer who benefited twice because of the
application of automatic tax credit is a wholly acceptable
remedy for the government.
Q113.5 Does a pending administrative case in the
BIR bar the subsequent selection of excess carry-
over?
No. On the premise that the carry-over is to be disallowed
Edited by: Napa - So
due to the pending application for refund, it would be more
complicated and circuitous if the government were to
grant first the refund claim and then later assess the
taxpayer for the claim of automatic tax credit that was
previously disallowed. Such procedure is highly inefficient
and expensive on the part of the government due to the
costs entailed by an assessment. It unduly hampers,
instead of eases, tax administration and unnecessarily
exhausts the government’s time and resources. It defeats,
rather than promotes, administrative feasibility Such
could not have been intended by our lawmakers.
Congress is deemed to have enacted a valid, sensible,
and just law.
Where to file
Q114. Where should the quarterly income tax
declaration and final adjustment return be filed?
They shall be filed with the
1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent
4. Duly authorized Treasurer of the city or
municipality having jurisdiction over the location
of the principal office of the corporation filing the
return or place where its main books of accounts
and other data from which the return is prepared
(see Section 77, Tax Code)
When to file
Q115. When should the quarterly income tax
declaration and final adjustment return be filed?
The corporate quarterly declaration shall be filed within 60
days following the close of each of the first here quarters
of the taxable year.
The final adjustment return shall be filed on or before May
15, or on or before the 15th day of the 4th month following
the close of the fiscal year, as the case may be.
When to pay
Q116. When should the income tax due be paid?
The income due on the corporate quarterly returns and
final adjustment income tax returns shall be paid at the
time the declaration or return is filed.
Corporation
Individual Returns
Returns
1. Resident citizens 1. Domestic
Who are 2. Non-resident Corporation
required citizens 2. Resident
to file? 3. Residents aliens Foreign
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PM REYES TAX 1: INCOME TAX // MONTERO Edited by: Napa - So

4. Non-residents Corporation treaded Corporate

aliens à by the through Quarterly
President, local Declaration:
VP or other stock 1. Filed
principal exchange within 60
officer • Sale/ days
1. An individual disposition of following
Who’s whose taxable Foreign Corps real property the close
not income does not not engaged in within 30 days of each of
required exceed trade or of each sale or the 3
to file? PHP250,000 business in the other quarters of
based on the tax Philippines disposition the taxable
schedule for 1. Authorized Agent
compensation Where Bank
income earners to file? 2. Revenue. District
shall not be Where Officer
required to le an to pass? 3. Collection Agent
ITR. 119 or duly
2. Pure authorized
compensation treasurer of the
income Municipality
Substituted filing 4. Office of the
provided: Commissioner
a. Must derive
income from Capital gains on shares of stock
only 1
employee or Q117. When should the return for capital gains on
none shares of stock be filed?
b. Income
correctly Every corporation deriving capital gains from the sale or
withheld exchange of shares of stock not traded thru a local stock
(tax due exchange shall file a return within 30 days after each
equals tax transaction and a final consolidated return of all
withheld)120 transactions during the taxable year on or before the 15th
3. Individuals day of the 4th month following the close of the taxable
subjected to final year.
withholding tax
4. Individuals also Return of corporations contemplating
are exempt dissolution/reorganization
1. On or before May Final
When to 15121of each year Adjustment Q118. If a corporation plans to dissolve or reorganize,
file? 2. Individuals subject Return: what are its obligations with respect to returns and
tax on Capital 1. Calendar payments of taxes?
Gains year – on
• Sale/exchange or before Yes. RR 2 provides that all corporations, contemplating
of stock within April 15 dissolution or retiring from business without formal
30 days after 2. Fiscal year dissolution shall, within 30 days after the approval of such
each – 15th of resolution authorizing their dissolution, and within the
transaction and the 4th same period after their retirement from business, file their
a final return month income tax returns covering the profit earned or business
on or before following done by them from the beginning of the year up to the
May 15 the close date of such dissolution or retirement and pay the
o Except of the corresponding income tax due thereon upon demand by
those fiscal year the CIR.

119 121
TRAIN law amendment, Sec. 51 (A)(2)(a) TRAIN law amendment
120
TRAIN law amendment, Sec. 51-A
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In BPI V. CIR [CA-G.R. SP. NO. 38304, APRIL 14, 2000],
by virtue of a merger, BPI became the successor-in-
interest of FEBTC on July 1, 1985. On April 10, 1986,
FEBTC filed its final income tax return with the BIR
showing, among others, a refundable amount of
P174,065.77. BPI filed a claim for refund of this amount.
The BIR and CTA stated that the claim for refund has
already prescribed because the return should have been
filed by FEBTC within 30 days from SEC's approval of the
Articles of Merger. BPI contended that the said return
should have been filed on the 15th day of the 4th month
following the close of FBTC's taxable year. The CA
agreed with the BIR and CTA. Section 78 of the Tax Code
and Section 224 of RR 2 required FEBTC as a dissolving
corporation to file its income tax return within 30 days after
the cessation of its business or 30 days after the approval
of the merger on July 1, 1985 or up to July 31, 1985. Thus,
the claim for refund has already prescribed.
Return of GPPs
Q119. Is a GPP required to file a return?
Yes. Although a GPP is not a taxable entity, it is required
to file a return of its income setting forth the items of
gross income and deductions, and the names, taxpayer
identification numbers (TIN), addresses and shares of
each of the partners. (see SECTION 55, Tax Code).
Return of Receivers, Trustees in
Bankruptcy or Assignees
Q120. Who shall make the return if the property or
business of a corporation is being operated by
receivers, trustees or assignees?
If receivers, trustees in bankruptcy or assignees are
operating the corporation, such receivers, trustees or
assignees shall make the returns of net income as and
for such corporation and the tax due shall be assessed
and collected in the same manner as if assessed directly
against the corporation.
Others not captured
Q121. How shall the tax upon gains, profits, and
income not falling and not returned and paid under
the provisions on returns and payment of tax be
assessed?
They shall be assessed by personal return. The rule is
122
RA 10021 or the Exchange of Information on Tax Matters Act of 2009
provides that income tax returns of specific taxpayers subject of a
request for exchange of information by a foreign tax authority pursuant
to an international convention or agreement on tax matters to which the
Philippines is a signatory or a party of, shall be open to inspection upon
Edited by: Napa - So
that all gains, profits, and income of a taxable class, shall
be charged and assessed with the corresponding tax and
the said tax shall be paid by the owners of such gain,
profits or income or the proper person having receipt,
custody, or control or disposal of the same
Other income tax requirements
Q122. Enumerate the other income tax requirements
under Section 67-72 of the Tax Code
1. All persons, corporations, duly registered general
co-partnerships undertaking for profit or
otherwise the collection of foreign payments of
interests or dividends shall obtain a license from
the CIR. (see Section 67, Tax Code)
2. All persons, corporations, duly registered general
co-partnerships making income payments to
another are required to render a true and
accurate return to the CIR setting forth the
amount of such gains, profits and income and the
name and address of the recipient of such
payments. (see Section 68, Tax Code)
3. All persons, corporations, duly registered general
co-partnerships, doing business as a broker, shall
render a correct return showing the names of
customers for whom such persons, corporations,
duly registered general co- partnerships
transacted business with. (see Section 69, Tax
Code)
4. Any attorney, accountant fiduciary, bank, trust
company, financial institution or other person,
who aids, assists, counsels or advises in, or with
respect, to the formation, organization or
reorganization of any foreign corporation shall
within 30 days thereafter file a return with the CIR.
(see Section 70, Tax Code)
5. After the assessment shall have been made,
returns, including corrections thereto made by the
CIR, shall be filed in the Office of the CIR and
shall constitute public records and be open to
inspection upon order of the President 122 (see
Section 71, Tax Code)
6. When an assessment is made in case of any list,
statement or return, which in the opinion of the
CIR was false or fraudulent or contained any
understatement or undervaluation, no tax
collected under such assessment shall be
recovered by any suit unless the said list,
statement or return was not false nor fraudulent
and did not contain any understatement or
undervaluation. 123(see Section 72, Tax Code)
order of the President
123
This provision does not apply to statement or returns made or to be
made in good faith regarding annual depreciation of oil or gas wells
and mines
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In UNITED AIRLINES V. CIR [SEPTEMBER 29, 2010], the CTA

found that United Airlines underpaid its Gross Philippine
Billings because United made erroneous deductions from
its gross cargo revenues in the ITR. United questioned the
proprietary of the CTA’s determination. The Supreme
Court held that under Section 72 of the Tax Code, the
CTA can make a valid finding that the taxpayer made
erroneous deductions on its gross cargo revenue, that
because of such erroneous deductions, it reported a lower
cargo revenue and paid a lower income tax thereon, and
that its underpayment of the income tax on cargo revenue
is even higher than the income tax it paid on passenger
revenue subject of the refund, such that refund cannot be
granted.

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