TAXATION.

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DEDUCTIONS:

rate of tax on interest income and a higher rate of

tax on interest expense deduction.

(B) Interest.
Requisites
for
deductibility,
implemented by Rev. Reg. 13-2000

DEDUCTIBLE INTEREST EXPENSE:

1. interest on taxes, such as those paid for
deficiency or delinquency, since taxes are
considered indebtedness (provided that the
tax is a deductible tax, except in the case of
income tax). However, fines, penalties, and
surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation on
deduction.
2. Interest paid by a corporation on scrip
dividends.
3. Interest on deposits paid by authorized banks
of the BSP to depositors, if it is shown that
the tax on such interest was withheld.
4. Interest paid by a corporate taxpayer who is
liable on a mortgage upon real property of
which the said corporation is the legal or
equitable owner, even though it is not directly
liable for the indebtedness.

as

(a) there must be an indebtedness

(b) there should be an interest expense paid or
incurred upon such indebtedness
(c) indebtedness must be that of the taxpayer
(d) indebtedness must be connected with the
taxpayers trade, business or exercise of
profession
(e) interest expense must have been paid or
incurred during the taxable year
(f) interest must have been stipulated in writing
(g) interest must be legally due
(h) interest payment arrangement must not be
between related taxpayers
(i) interest must not be incurred to finance
petroleum operations
(j) 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
(k) the interest id not expressly disallowed by law
to be deducted from gross income of the
taxpayer.

NON-DEDUCTIBLE INTEREST
(a) interest paid in advance through discount or
otherwise(in case of cash basis taxpayer)
allowed as deduction in the year the
debt is paid
if indebtedness is payable in periodic
amortizations, int. is deducted in
proportion of the amt. of the principal
paid.
(b) payments made:
1. between members of a family (include
only brothers & sisters, spouse, ancestors,
& lineal descendants)
2. between an individual & a corp. more
than 50% in value of outstanding stock is
owned by such individual (except in case
of distributions in liquidation)
3. between 2 corps. more than 50% in value
of outstanding stock owned by same
individual, if either one is a personal
holding co. or a foreign holding co.
during the taxable yr. preceding the date
of sale/exchange
4. between grantor & fiduciary of any trust
5. between Fiduciary of a trust & the
fiduciary of another if same person is a
grantor to each trust
6. between Fiduciary & a beneficiary of a
trust
7. indebtedness is incurred by a service
contractor to finance petroleum corp.

GENERAL RULE ON DEDUCTION - The

amount of interest expense paid or incurred
within a taxable year of indebtedness in
connection with the taxpayers trade, business, or
exercise of profession shall be allowed as a
deduction from the taxpayers gross income.
LIMITATION ON DEDUCTION
Interest expense shall be reduced by an amt.
equal to the ff. % of interest income subjected to
FT: beginning 01/01/2000 38%
01/01/2005 42%
01/01/2009 33%
The objective of the limitation is to discourage
tax arbitrage on back to back loans, the proceeds
of which are invested in income earning interest
that is subject to 20% final tax.
Tax arbitrage- is a method of borrowing
without entering into a debtor/creditor
relationship, often to resolve financing and
exchange control problems. In tax cases, back-toback loan is used to take advantage of the lower

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8. interest on preferred stock which in

reality is dividend
9. interest on unpaid salaries and bonuses
10. interest calculated for cost keeping on
account of capital or surplus invested in
business which does not represent
charges arising under interest-bearing
obligation
11. interest paid when there is no stipulation
for the payment thereof

b) for interest and surcharge on unpaid

transaction tax and
c) for Documentary and Science Stamp
Taxes.
2. Whether Picop are entitled to deductions:
a) Deduction against current income
interest payments on loans for the
purchase of machinery and equipment,
b) Deduction against current income net
operating losses incurred by Rustan Pulp
and Paper Mills, Inc. and
c) Deduct against current income certain
claimed financial guarantee expenses.

OPTIONAL TREATMENT OF INTEREST

EXPENSE - at the option of taxpayer, interest
incurred to acquire property used in trade or
business may be allowed as:

3. Whether PICOP is liable for deficiency

income tax.

(a) as expense (deduction)

(b) as capital expenditure

Held:
1.A) YES. Both the CTA and the Court of
Appeals sustained the assessment of transaction
tax. We agree with the CTA and the Court of
Appeals that Picop's tax exemption under R.A.
No. 5186, as amended, does not include
exemption from the thirty-five percent (35%)
transaction
tax.
In
Western
Minolco
Corporation v. Commissioner
of
Internal
Revenue this Court held:

PAPER INDUSTRIES CORPORATION OF

THE PHILIPPINES (PICOP) versus CA,
CIR and CTA
G.R. Nos. 106949-50 and G.R. Nos. 106984-85
December 1, 1995
Facts:
The Paper Industries Corporation of the
Philippines ("Picop"), petitioner in G.R. Nos.
106949-50 and private respondent in G.R. Nos.
106984-85, received from the Commissioner of
Internal Revenue ("CIR") two (2) letters of
assessment and demand both: (a) one for
deficiency transaction tax and for documentary
and science stamp tax; and (b) the other for
deficiency income tax for 1977, for an aggregate
amount of P88, 763,255.00. Picop protested the
assessment but were not formally acted upon by
respondent CIR. On 26 September 1984, the CIR
issued a warrant of distrain on personal property
and a warrant of levy on real property against
Picop, to enforce collection of the contested
assessments; in effect, the CIR denied Picop's
protests. Thereupon, Picop went before the CTA
appealing the assessments and held that Picop is
liable for the reduced aggregate amount of
P20,133,762.33. Picop and the CIR both went to
the Supreme Court on separate Petitions for
Review of the above decision of the CTA but SC
referred the said to CA in which further reduced
the liability of Picop to P6,338,354.70 and denied
the appeal of the CIR.

The 35% transaction tax is an income tax on

interest earnings to the lenders or
placers. The latter are actually the
taxpayers. Therefore, the tax cannot be a tax
imposed upon the petitioner. In other words,
the petitioner who borrowed funds from
several financial institutions by issuing
commercial papers merely withheld the 35%
transaction tax before paying to the
financial institutions the interests earned by
them and later remitted the same to the
respondent Commissioner of Internal
Revenue. The tax could have been collected
by a different procedure but the statute
chose this method. Whatever collecting
procedure is adopted does not change the
nature of the tax.
It is thus clear that the transaction tax is
an income tax and as such, in any event, falls
outside the scope of the tax exemption granted to
registered pioneer enterprises by Section 8 of
R.A. No. 5186, as amended. Picop was the
withholding agent, obliged to withhold thirty-five
percent (35%) of the interest payable to its
lenders and to remit the amounts so withheld to

Issues:
1. Whether Picop is liable:
a) for the transaction tax,
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the Bureau of Internal Revenue ("BIR"). As a

withholding agent, Picop is made personally
liable for
the
thirty-five
percent
(35%)
transaction tax 10 and if it did not actually
withhold thirty-five percent (35%) of the interest
monies it had paid to its lenders, Picop had only
itself to blame.

that such interest payments were legally due and

demandable under the terms of such loans, and
in fact paid by Picop during the tax year 1977. We
have already noted that our 1977 NIRC
does not prohibit the deduction of interest on a
loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel
the capitalization of interest payments on such a
loan. The 1977 Tax Code is simply silent on a
taxpayer's right to elect one or the other tax
treatment
of
such
interest
payments.
Accordingly, the general rule that interest
payments on a legally demandable loan are
deductible from gross income must be applied.

B) NO. P.D. No. 1154 did not itself impose, nor

did it expressly authorize the imposition of, a
surcharge and penalty interest in case of failure
to pay the thirty-five percent (35%) transaction
tax when due. Neither did Section 210 (b) of the
1977 Tax Code which re-enacted Section 195-C
inserted into the Tax Code by P.D. No. 1154.

B) NO. R.A. No. 5186 introduced the carry-over

of net operating losses as a very special
incentive to be granted only to registered pioneer
enterprises and only with respect to their
registered operations. The statutory purpose can
be served only if the accumulated operating
losses are carried over and charged off against
income subsequently earned and accumulated by
the same enterprise engaged in the same
registered operations.

C) Tax exemptions are, to be sure, to be "strictly

construed," that is, they are not to be extended
beyond the ordinary and reasonable intendment
of the language actually used by the legislative
authority in granting the exemption. The
issuance of debenture bonds is certainly
conceptually distinct from pulping and paper
manufacturing operations. But no one contends
that issuance of bonds was a principal or regular
business activity of Picop; only banks or other
financial institutions are in the regular business
of raising money by issuing bonds or other
instruments to the general public. We consider
that the actual dedication of the proceeds of the
bonds to the carrying out of Picop's registered
operations constituted a sufficient nexus with
such registered operations so as to exempt Picop
from stamp taxes ordinarily imposed upon or in
connection with issuance of such bonds. We
agree, therefore, with the Court of Appeals on
this matter that the CTA and the CIR had erred in
rejecting Picop's claim for exemption from stamp
taxes.

To allow the deduction claimed by Picop would

be to permit one corporation or enterprise, Picop,
to benefit from the operating losses accumulated
by another corporation or enterprise, RPPM. To
grant Picop's claimed deduction would be to
permit Picop to shelter its otherwise taxable
income (an objective which Picop had from the
very beginning) which had not been earned by
the registered enterprise which had suffered the
accumulated losses. In effect, to grant would be
to permit Picop to purchase a tax deduction and
RPPM to peddle its accumulated operating
losses. Under the CTA and Court of Appeals
decisions, Picop would benefit by immunizing
P44,196,106.00 of its income from taxation
thereof although Picop had not run the risks and
incurred the losses which had been encountered
and suffered by RPPM. Conversely, the income
that would be shielded from taxation is not
income that was, after much effort, eventually
generated by the same registered operations
which earlier had sustained losses. We consider
and so hold that there is nothing in Section 7 (c)
of R.A. No. 5186 which either requires or permits
such a result. Indeed, that result makes nonsense of the legislative purpose which may be
seen clearly to be projected by Section 7 (c), R.A.
No. 5186.

2. A) YES. Interest payments on loans incurred

by a taxpayer (whether BOI-registered or not) are
allowed by the NIRC as deductions against the
taxpayer's gross income. 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. 20 In
the instant case, the CIR does not dispute that the
interest payments were made by Picop on loans
incurred in connection with the carrying on of
the registered operations of Picop, i.e., the
financing of the purchase of machinery and
equipment actually used in the registered
operations of Picop. Neither does the CIR deny
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C) NO. A taxpayer has the burden of proving

entitlement to a claimed deduction. 36 In the
instant case, even Picop's own vouchers were not
submitted in evidence and the BIR Examiners
denied that such vouchers and other documents
had been exhibited to them. Moreover, cash
vouchers can only confirm the fact of
disbursement but not necessarily the purpose
thereof. 37 The best evidence that Picop should
have presented to support its claimed deduction
were the invoices and official receipts issued by
the Register of Deeds. Picop not only failed to
present such documents; it also failed to explain
the loss thereof, assuming they had existed
before. 38 Under
the
best
evidence
rule, 39 therefore, the testimony of Picop's
employee was inadmissible and was in any case
entitled to very little, if any, credence.

surnamed Prieto, real property with a total

assessed value of P892,497.50.
After the filing of the gift tax returns, CIR
appraised the real property donated for gift tax
purposes at P1,231,268.00, and assessed the total
sum of P117,706.50 as donor's gift tax, interest
and compromises due thereon. Of the total sum
of P117,706.50 paid by respondent on April 29,
1954, the sum of P55,978.65 represents the total
interest on account of deliquency. This sum of
P55,978.65 was claimed as deduction, among
others, by respondent in her 1954 income tax
return. Petitioner, however, disallowed the claim
and as a consequence of such disallowance
assessed respondent for 1954 the total sum of
P21,410.38 as deficiency income tax due on the
aforesaid P55,978.65, including interest up to
March 31, 1957, surcharge and compromise for
the late payment.

3.Picop did not deny the existence of the

discrepancies in their Books of Account and
Income Tax Returns, accordingly PICOP's
procedure of recording its export sales (reckoned
in U.S. dollars) on the basis of a fixed rate, day to
day and month to month, regardless of the actual
exchange rate and without waiting when the
actual proceeds are received. In other words,
PICOP recorded its export sales at a predetermined fixed exchange rate. That predetermined rate was decided upon at the
beginning of the year and continued to be used
throughout the year and as a result the CIR has
made out at least a prima facie case that Picop
had understated its sales and overstated its cost
of sales as set out in its Income Tax Return. For
the CIR has a right to assume that Picop's Books
of Accounts speak the truth in this case since, as
already noted, they embody what must appear to
be admissions against Picop's own interest.

Under the law, for interest to be deductible, it

must be shown that there be an indebtedness,
that there should be interest upon it, and that
what is claimed as an interest deduction should
have been paid or accrued within the year. It is
here conceded that the interest paid by
respondent was in consequence of the late
payment of her donor's tax, and the same was
paid within the year it is sought to be declared.
To sustain the proposition that the interest
payment in question is not deductible for the
purpose of computing respondent's net income,
CIR relies heavily on section 80 of Revenue
Regulation No. 2 (known as Income Tax
Regulation) promulgated by the Department of
Finance, which provides that "the word `taxes'
means taxes proper and no deductions should be
allowed for amounts representing interest,
surcharge, or penalties incident to delinquency."

THE COMMISSIONER OF INTERNAL

REVENUE vs. CONSUELO L. VDA. DE
PRIETO

ISSUES:
1. Whether or not such interest was paid upon
an indebtedness within the contemplation of
section 30 (b) (1) of the Tax Code.

This is an appeal from a decision of the Court of

tax Appeals reversing the decision of the
Commissioner of Internal Revenue which held
herein respondent Consuelo L. Vda. dePrieto
liable for the payment of the sum of P21,410.38
as deficiency income tax, plus penalties and
monthly interest.

SEC. 30 Deductions from gross income. In

computing net income there shall be allowed
as deductions
x xxxxxxxx
(b) Interest:
(1) In general. The amount of interest
paid within the taxable year on
indebtedness, except on indebtedness

On December 4, 1945, the respondent conveyed

by way of gifts to her four children, namely Antonio, Benito, Carmen and Mauro, all
4

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incurred or continued to purchase or

carry obligations the interest upon
which is exempt from taxation as
income under this Title.

2. No. The court below, however, held section

80 as inapplicable to the instant case because
while it implements sections 30(c) of the Tax
Code governing deduction of taxes, the
respondent taxpayer seeks to come under
section 30(b) of the same Code providing for
deduction of interest on indebtedness. We
find the lower court's ruling to be correct.
Contrary to petitioner's belief, the portion of
section 80 of Revenue Regulation No. 2
under consideration has been part and parcel
of the development to the law on deduction of
taxes in the United States. Thus, Mertens in
his treatise says: "Penalties are to be
distinguished from taxes and they are not
deductible under the heading of taxs." . . .
Interest on state taxes is not deductible as
taxes." This notwithstanding, courts in that
jurisdiction, however, have invariably held
that interest on deficiency taxes are
deductible, not as taxes, but as interest.
Section 80 of Revenue Regulation No. 2,
therefore,
merely
incorporated
the
established application of the tax deduction
statute in the United States, where deduction
of "taxes" has always been limited to taxes
proper and has never included interest on
delinquent taxes, penalties and surcharges.

2. Whether or not petitioner is correct when it

relies heavily on section 80 of Revenue
Regulation No. 2.
HELD:
1. Yes. The term "indebtedness" as used in the
Tax Code of the United States has been
defined as an unconditional and legally
enforceable obligation for the payment of
money.1Within the meaning of that
definition, it is apparent that a tax may be
considered an indebtedness.
As stated by this Court in the case of Santiago
Sambrano vs. CTA and CIR (101 Phil., 1; 53 Off.
Gaz., 4839) Although taxes already due have
not, strictly speaking, the same concept as debts,
they are, however, obligations that may be
considered as such.
The term "debt" is properly used in a
comprehensive sense as embracing not merely
money due by contract but whatever one is
bound to render to another, either for contract,
or the requirement of the law. (Camben vs. Fink
Coule and Coke Co. 61 LRA 584)

To give to the quoted portion of section 80 of our

Income Tax Regulations the meaning that the
petitioner gives it would run counter to the
provision of section 30(b) of the Tax Code and
the construction given to it by courts in the
United States. Such effect would thus make the
regulation invalid for a "regulation which
operates to create a rule out of harmony with the
statute, is a mere nullity." (Lynch vs. Tilden
Produce Co., 265 U.S. 315; Miller vs. U.S., 294
U.S. 435.) As already stated, section 80
implements only section 30(c) of the Tax Code,
or the provision allowing deduction of taxes,
while herein respondent seeks to be allowed
deduction under section 30(b), which provides
for deduction of interest on indebtedness.

Where statute imposes a personal liability for a

tax, the tax becomes, at least in a board sense, a
debt. (Idem).
A tax is a debt for which a creditor's bill may be
brought in a proper case. (State vs. Georgia Co.,
19 LRA 485).
It follows that the interest paid by herein
respondent for the late payment of her donor's
tax is deductible from her gross income under
section 30(b) of the Tax Code above quoted. The
above conclusion finds support in the established
jurisprudence in the United States after whose
laws our Income Tax Law has been patterned.
Thus, under sec. 23(b) of the Internal Revenue
Code of 1939, as amended 1 , which contains
similarly worded provisions as sec. 30(b) of our
Tax Code, the uniform ruling is that interest on
taxes is interest on indebtedness and is
deductible. The rule applies even though the tax
is nondeductible.

In conclusion, we are of the opinion and so hold

that although interest payment for delinquent
taxes is not deductible as tax under Section 30(c)
of the Tax Code and section 80 of the Income Tax
Regulations, the taxpayer is not precluded
thereby from claiming said interest payment as
deduction under section 30(b) of the same Code.
RR 13-2000 (November 20, 2000)
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BIR Ruling No. 006-00

(January 5, 2000)

The said reduction shall be equal to the following

percentages of the interest income earned
depending on the year when the interest income
was earned, viz:

Philippine National Bank

PNB Financial Center
Roxas Boulevard, Metro Manila
Attention: Atty. Julian B. Soriano

(41%) beginning January 1, 1998;

(39%) beginning January 1, 1999; and
(38%) beginning January 1, 2000 and thereafter.

Gentlemen :
This refers to your letter dated November 6, 1998
stating that with reference to Section 34(B) of the
Tax Reform Act of 1997 disallowing as a
deduction a portion of Bank's interest expense
representing 41% of interest income subjected to
final tax, you are of the understanding that the
said provision was introduced to mitigate the
effects of the so-called tax arbitrage scheme
where taxpayers save approximately 14% on taxes
by placing their excess funds in government
securities and pay only a 20% tax on the interest
derived therefrom instead of the 34% corporate
tax that will be imposed had such excess been
used for other income-generating activities not
subject to final tax; that as a result of the Codal
provision, taxpayers will no longer enjoy the tax
benefit/savings that otherwise may be derived
from the tax arbitrage; that the 12-year treasury
bonds were given by the Government as payment
for its liabilities to PNB as embodied in the
Memorandum of Agreement (MOA) dated
August 14, 1995 executed between the National
Government, as represented by the Department
of Finance, and PNB; and that PNB, therefore,
has not engaged in a tax arbitrage scheme.

This limitation shall apply regardless of whether

or not a tax arbitrage scheme was entered into by
the taxpayer or regardless of the date of the
interest-bearing loan and the date when the
investment was made, for as long as, during the
taxable year, there is an interest expense incurred
on one side and an interest income earned on the
other side, which interest income had been
subjected to final withholding tax.
Accordingly, your request that your interest
income derived from the said treasury bonds be
excluded in the determination of the interest
expense not allowable as deduction from gross
income is hereby denied pursuant to Section
34(B) of the Tax Code of 1997.
(C) Taxes. - the term taxes refers to national
and local taxes, and means TAXES PROPER,
hence, no deductions are allowed for:
1.
2.
3.
4.

Based on the foregoing representations and

documents submitted, you are now requesting for
a ruling that interest income derived by PNB
from the treasury bonds be excluded in the
determination of the interest expense not
allowable as deduction from gross income.

Interests
Surcharges
penalties or fines incident to
delinquency (sec. 80, Rev. Reg. 2)

DEDUCTIBLE TAXES - All taxes, national, or

local, paid or incurred during the taxable year in
connection with the taxpayers profession, trade
or business, are deductible from gross income.
REQUISITES FOR DEDUCTIBILITY:
a. it must be paid or incurred within the taxable
year
b. it must be paid or incurred in connection
with the taxpayers trade, profession or
business
c. it must be imposed directly on the taxpayer
d. it must not be specifically excluded by law
from being deducted from the taxpayers
gross income

In reply, please be informed that pursuant to

Section 34(B) of the Tax Code of 1997, 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 Copyright 2014 CD
Technologies Asia, Inc. and Accesslaw, Inc.
Philippine Taxation Encyclopedia First Release
2014 derived certain interest income which had
been subjected to final withholding tax.

NON-DEDUCTIBLE TAXES
(a) Philippine income tax (but FBT can be
deducted from gross income RR 8-98))

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(b) income tax imposed by authority of any

foreign country (except when the taxpayer
signifies his desire to avail of the tax credit
for taxes of foreign countries)
(c) estate & donors taxes
(d) taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed
(e) final taxes, being in the nature of income tax
(f) special assessments

WHO CANNOT CLAIM?

1. Alien individual (except resident aliens
deriving income from within & without
the Phils., if there is reciprocity)
2. Foreign Corp.
Limitation of
Requirements)

(Substantiation

The tax credit shall be allowed only if the

taxpayer establishes to the satisfaction of the
Commissioner the following:

Taxes, when refunded or credited, shall be

included as part of GI in the year of receipt to the
extent of income tax benefit of said deduction.
(Tax Benefit Rule)

a. The total amount of the income derived

from sources without the Philippines;
b. The amount of income derived from each
country, the tax paid or incurred to which
is claimed as a credit under said
paragraph,
such
amount
to
be
determined under rules and regulations
prescribed by the Secretary of Finance;
and
c. All other information necessary for the
verification and computation of such
credits.

For NRAETB and RFC, taxes paid or incurred are

allowed as deductions only if and to the extent
that they are connected from income within the
Philippines.
Exceptions to the rule that only such persons on
whom the tax is imposed by law can claim
deduction thereof:
a. taxes of shareholder upon his interest as such
and paid by the corporation without
reimbursement from him, can be claimed by
the corporation as deduction.
b. A corporation paying the tax for the holder its
bonds or other obligation containing a taxfree covenant clause cannot claim deduction
for such taxes paid by it pursuant to such
covenant.

What amount may be taken as tax credit:

The amount of tax credit allowed is equivalent to
the tax paid or incurred to a foreign country
during the taxable year but NOT TO EXCEED
THE FOLLOWING LIMITS:
Per Country Limitation Amount of credit to
tax paid/incurred to any country shall not exceed
same proportion of the tax against which such
credit is taken

LIMITATIONS ON DEDUCTIONS
In case of a nonresident alien individual engaged
in trade/business in the Philippines, taxes to be
deducted shall be allowed only if & to the extent
that they are connected with income from
sources w/in the Philippines

Income from outside the Phils (per country)

Divided by Phil. Income
Subtotal
Multiplied by: TOTAL income from ALL sources
Limitation per country

Tax Credit: a right of an income taxpayer to

deduct from income tax payable the foreign
income tax he has paid to his foreign country
subject to limitation.

Global Limitation Total amount of credit

shall not exceed same proportion of tax which
such credit is taken

WHO CAN CLAIM?

1.
2.
3.
4.

Credit

Citizen
Domestic Corp
Member of GPP
Beneficiary of an estate or trust

Total income from OUTSIDE the Phils.

Divided by total income from ALL sources
Subtotal
Multiplied by Philippine Income
Global Limitation

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[DEDUCTIONS]

WHEN CREDIT FOR TAXES MAY BE

TAKEN:
The credit for taxes provided by Section 34(C)(3)
to (7) may ordinarily be taken either in the return
for the year in which the taxes accrued or on
which the taxes were paid, dependent upon
whether the accounts of the taxpayer are kept
and his returns filed upon the accrual basis or
upon cash receipts and disbursements.

the respondents filed their petition with the Tax

Court on 11 April 1959.
The Tax Court held that they may be deducted
because of the undenied fact that the respondent
spouses did not "signify" in their income tax
return a desire to avail themselves of the benefits
of paragraph 3 (B) of the subsection, which reads:
SEC. 30.Deduction from gross income. In
computing net income there shall be allowed
as deductions
(c) Taxes:
(1) In general. Taxes paid or accrued within
the taxable year, except
(A) The income tax provided for under this
Title;
(B) Income, war-profits, and excess profits
taxes imposed by the authority of any foreign
country; but this deduction shall be allowed
in the case of a taxpayer who does not signify
in his return his desire to have to any extent
the benefits of paragraph (3) of this
subsection (relating to credit for foreign
countries);

DIFFERENCES:
Deduction: included in the gross income but
later deducted.
Exclusion: not included in the computation of
gross income. Refers to income received or
earned but is not taxable as income because of
exemption by virtue of a law or treaty.
Tax Credit: paid beforehand and is deducted
from the tax liability of the taxpayer.
CIR v Lednicky
July 31, 1964
Facts:
The respondents, V. E. Lednicky and Maria
Valero Lednicky, are husband and wife,
respectively, both American citizens residing in
the Philippines, and have derived all their income
from Philippine sources for the taxable years in
question.

Par. (c) (3) Credits against tax for taxes of

foreign countries. If the taxpayer signifies
in his return his desire to have the benefits of
this paragraph, the tax imposed by this Title
shall be credited with
(A) ...;
(B) Alien resident of the Philippines. In the
case of an alien resident of the Philippines,
the amount of any such taxes paid or accrued
during the taxable year to any foreign
country, if the foreign country of which such
alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to
citizens of the Philippines residing in such
country

In compliance with local law, the aforesaid

respondents, on 27 March 1957, filed their
income tax return for 1956, reporting therein a
gross income of P1,017,287. 65 and a net income
of P733,809.44 on which the amount of
P317,395.4 was assessed after deducting
P4,805.59 as withholding tax. Pursuant to the
petitioner's assessment notice, the respondents
paid the total amount of P326,247.41, inclusive of
the withheld taxes, on 15 April 1957.

ISSUE:
WON a citizen of the US residing in Phil who
derives income wholly from sources within the
Phil may deduct from his gross income the
income taxes he has paid to US govt for the
taxable year?

On 17 March 1959, the respondents Lednickys

filed an amended income tax return for 1956. The
amendment consists in a claimed deduction of
P205,939.24 paid in 1956 to the United States
government as federal income tax for 1956.
Simultaneously with the filing of the amended
return, the respondents requested the refund of
P112,437.90.

RULING:
No. The Construction and wording of Section 30
(c) (1) (B) of the Internal Revenue Act shows the
law's intent that the right to deduct income taxes
paid to foreign government from the taxpayer's
gross income is given only as an alternative or

When the petitioner Commissioner of Internal

Revenue failed to answer the claim for refund,
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[DEDUCTIONS]

substitute to his right to claim a tax credit for

such foreign income taxes under section 30 (c)
(3) and (4); so that unless the alien resident has a
right to claim such tax credit if he so chooses, he
is precluded from deducting the foreign income
taxes from his gross income. For it is obvious that
in prescribing that such deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any
extent the benefits of paragraph (3) (relating to
credits for taxes paid to foreign countries), the
statute assumes that the taxpayer in question also
may signify his desire to claim a tax credit and
waive the deduction; otherwise, the foreign taxes
would always be deductible, and their mention in
the list of non-deductible items in Section 30(c)
might as well have been omitted, or at least
expressly limited to taxes on income from
sources outside the Philippine Islands.

made in the ordinary course of the business

of such dealer.
(C) If the amount of stock or securities acquired
(or covered by the contract or option to
acquire) is lessthan the amount of stock or
securities sold or otherwise disposed of, then
the particular shares of stock or securities,
the loss from the sale or other disposition of
which is not deductible, shall be
determinedunder rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of theCommissioner.
(D) If the amount of stock or securities acquired
(or covered by the contract or option to
acquire which)resulted in the nondeductibility of the loss, shall be determined
under rules and regulations prescribedby the
Secretary of Finance, upon recommendation
of the Commissioner.

Petitioners admit in their brief that the purpose

of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of
foreign taxes, by deduction from gross income
(subs. c-1) and by tax credit (subs. c-3). This
danger of double credit certainly cannot exist if
the taxpayer cannot claim benefit under either of
these headings at his option, so that he must be
entitled to a tax credit (respondent taxpayers
admittedly are not so entitled because all their
income is derived from Philippine sources), or
the option to deduct from gross income
disappears altogether.

RR 12-77 (October 6, 1977)

RMO-31-2009 (October 16, 2009)
NOLCO
RR 14-01 (August 27, 2001)
BIR Ruling 30-00 (August 10, 2000)
BIR Ruling 206-90)October 30, 1990)
BIR Ruling No. 144-85 (August 26, 1985)
Requisites for deductibility of ordinary
loss
(a) loss must be of the taxpayer
(b) actually sustained during the taxable year
(c) not compensated for by insurance or other
forms of indemnity
(d) incurred in trade, business or profession OR
property connected w/ trade, business or
profession lost through fires, storm,
shipwreck, or other casualties OR from
robbery, theft or embezzlement
(e) evidenced by a completed transaction
(f) not claimed as a deduction for estate tax
purposes
(g) notice of loss must be filed with the BIR
within 45 days from the date of discovery of
the
casualty or robbery, theft or
embezzlement

(D) Losses. SEC. 38.Losses from Wash Sales of Stock

or Securities. (B) In the case of any loss claimed to have been
sustained from any sale or other disposition
of shares of stock or securities where it
appears that within a period beginning thirty
(30) days before the date of such sale or
disposition and ending thirty (30) days after
such date, the taxpayer has acquired (by
purchase or by exchange upon which the
entire amount of gain or loss was recognized
by law), or has entered into a contact or
option so to acquire, substantially identical
stock or securities, then no deduction for the
loss shall be allowed under Section 34 unless
the claim is made by a dealer in stock or
securities and with respect to a transaction

No loss shall be allowed as a deduction for

income tax purposes if such loss has been
claimed as a deduction for estate tax purposes.
The taxpayers failure to record in his books
the alleged loss proves that the loss had not
been suffered, hence, not deductible. (City
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[DEDUCTIONS]

Lumber Vs. Domingo and CA, January 30,

1964).

condition, but in no case shall the deductible loss

be more than the net book value of the property
as a whole, immediately before casualty.

Category and Types of Losses

Partial Destruction - the excess over the net

book value immediately before the casualty
should be capitalized, subject to depreciation
over the remaining useful life of the property.

1. Ordinary Losses
a. incurred in trade or business, or practice
of profession
NET OPERATING LOSS CARRY-OVER
(NOLCO) - Refers to the excess of allowable
deductions over gross income of the business for
any taxable year, which has not been previously
offset as deduction from gross income.

2. Special Types of Losses

(a) Capital Losses deductions allowed only
to the extent of the gains from such sales
or exchanges of capital assets (does not
apply to banks and trust companies)
a. losses from sale or exchange of
capital assets
b. losses resulting from securities
becoming worthless and which
are capital assets
c. losses from short sales of
property
d. losses due to failure to exercise
privilege or option to buy or sell
property
(b) Losses from wash sales of stock or
securities

REQUIREMENTS:
1. the taxpayer was not exempt from income tax
in the year of such net operating loss;
2. the loss was not incurred in a taxable year
during which the taxpayer was exempt from
income tax, and
3. there has been no substantial change in the
ownership of the business or enterprise.
There is no substantial change in the
ownership of the business when:
a. not < 75% in nominal value of outstanding
issued shares is held by same persons
b. not < 75% of paid up capital of corp. is held
by same persons

30 days before and after the date of the

sale, the taxpayer has acquired or has
entered into a contract or option so as to
acquire,
substantially
identical
stock/securities
General rule: not deductible unless
claim is made by a dealer in
stock/securities & made in ordinary
course of business

(a) Net operating loss of a business shall be

carried over as deduction from GI for the
next
3
consecutive
taxable
yrs.
immediately ff. the yr. of such loss
the 3 year period shall continue to run
notwithstanding that the corporation
paid its taxes under MCIT, or that the
individual availed of the 10% Optional
Standard Deduction
(b) Net Operating Loss = excess of
allowable deduction over the GI
(c) For mines other than oil & gas wells, if
loss incurred in any of the 1st 10 yrs. Of
operation, carry-over for the next 5 yrs.

(c) Wagering Losses - allowed only to the

extent of the gains from such losses
(d) Abandonment Losses
In case of abandoned petroleum
operations, accumulated expenditures
incurred prior to 1/1/79 allowed as
deduction only from income derived from
same
contract
area;
notice
of
abandonment shall be filed with
Commissioner
In case of abandoned producing well,
unamortized cost & undepreciated costs
of equipment directly used, allowed as
deduction in the yr. of abandonment

b. of property connected with the trade,

business, or profession, if the loss arises
from fires, storms, shipwreck or other
casualties, or from robbery, theft or
embezzlement
Total Destruction - the replacement cost to
restore the property to its normal operating
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(e) Losses from Illegal Transactions not

deductible

4. Actually ascertained to be worthless and

uncollectible as of the end of the taxable year,
and
5. Actually charged off in the books of accounts
of the taxpayer as of the end of the taxable
year.

(f) Losses due to voluntary removal of

building incident to renewal or
replacements deductible expense from
gross income

Recovery of bad debts previously allowed as

deduction in the preceding yrs. shall be
included as part of gross income in the yr. of
recovery to the extent of the income tax
benefit of such deduction (Tax Benefit
Rule)
Ascertainment of Worthlessness:

(g) Loss of useful value of capital assets due

to charges in business conditions
deductible expense only to the extent of
actual loss sustained (after adjustment
for improvement, depreciation, and
salvage value)

Proof of two facts:

a. taxpayer did in fact ascertain the debt to
be worthless in the year for which the
deduction was sought;
b. that in so doing, he acted in good faith
(Collector Vs. Goodrich, December 22,
1967)
depends
upon
the
facts
and
the
circumstances of the case
good faith does not require that the taxpayer
be an incorrigible optimist but on the other
hand, he may not be unduly pessimistic

(h) Losses from sales or exchanges of

property between related taxpayers
Not deductible as provided under Section
36 of the NIRC but the gains are taxable
(i) Losses of Farmers deductible if
incurred in the operation of farm
business
(j) Loss in shrinkage in value of stock if the
stocks of the corporation become
worthless, the cost or other basis may be
deducted by the owner in the taxable year
in which the stocks became worthless.
Any amount claimed as a loss on account
of shrinkage in value of the stock through
fluctuation in the market or otherwise
cannot be deducted from gross income

Philex Mining Corp vs. CIR

FACTS:
On April 16, 1971, petitioner Philex Mining
Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining Company
(Baguio Gold) for the former to manage and
operate the latters mining claim, known as the
Sto. Nino mine, located in Atok and Tublay,
Benguet Province. The parties agreement was
denominated as Power of Attorney."

(E) Bad Debts. - debts due to the taxpayer

actually ascertained to be worthless and
charged off during the year.
Actually ascertained to be worthlessWorthlessness is not determined by an inflexible
formula or slide rule calculation but upon the
exercise of sound business judgment. The
determination of worthlessness must depend
upon the particular facts and circumstances of
the case. It must be uncollectible even in the
future. (Collector v. Goodrich International
Rubber Co., 21 SCRA 1336)

Philex Mining made advances of cash and

advances however, the mine suffered continuing
losses over the years which resulted to
petitioners withdrawal as manager of the mine
on January 28, 1982 and in the eventual
cessation of mine operations on February 20,
1982.
Thereafter, the parties executed a Compromise
with Dation in Payment wherein Baguio Gold
admitted an indebtedness to petitioner in the
amount of P179,394,000.00 and agreed to pay
the same in three segments by first assigning
Baguio Golds tangible assets to petitioner,
transferring to the latter Baguio Golds equitable

REQUISITES FOR DEDUCTIBILITY:

1. Existing indebtedness due to the taxpayer
which must be valid and legally demandable,
2. Connected with the taxpayers trade, business
or practice of profession,
3. Must not be sustained in a transaction
entered into between related parties,
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[DEDUCTIONS]

title in its Philodrill assets and finally settling the

remaining liability through properties that
Baguio Gold may acquire in the future.

exploitation of the Sto. Nino mine. The CTA held

that the Power of Attorney executed by
petitioner and Baguio Gold was actually a
partnership agreement. Since the advanced
amount partook of the nature of an investment, it
could not be deducted as a bad debt from
petitioners gross income.

In 1982, the parties executed an Amendment to

Compromise with Dation in Payment" where
Baguio Gold undertook to pay petitioner in two
segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its
equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained
that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of
P114,996,768.00.

CA- affirmed the decision of the CTA.

ISSUE:
WON the advances as investments were bad
debts.
HELD:
NO. The lower courts did not err in treating
petitioners advances as investments in a
partnership known as the Sto. Nino mine. The
advances were not debts of Baguio Gold to
petitioner inasmuch as the latter was under no
unconditional obligation to return the same to
the former under the Power of Attorney. As for
the amounts that petitioner paid as guarantor to
Baguio Golds creditors, we find no reason to
depart from the tax courts factual finding that
Baguio Golds debts were not yet due and
demandable at the time that petitioner paid the
same. Verily, petitioner pre-paid Baguio Golds
outstanding loans to its bank creditors and this
conclusion is supported by the evidence on
record.

Subsequently, petitioner wrote off in its 1982

books of account the remaining outstanding
indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that
were set up in 1981 and P2,860,768.00 to the
1982 operations.
In its 1982 annual income tax return, petitioner
deducted from its gross income the amount of
P112,136,000.00 as loss on settlement of
receivables from Baguio Gold against reserves
and allowances. However, the Bureau of Internal
Revenue (BIR) disallowed the amount as
deduction for bad debt and assessed petitioner a
deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that
the deduction must be allowed since all requisites
for a bad debt deduction were satisfied, to wit: (a)
there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was
charged off within the taxable year when it was
determined to be worthless.

Petitioner 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, petitioner 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.

BIR- denied petitioners protest for lack of legal

and factual basis. It held that the alleged debt was
not ascertained to be worthless since Baguio Gold
remained existing and had not filed a petition for
bankruptcy; and that the deduction did not
consist of a valid and subsisting debt considering
that, under the management contract, petitioner
was to be paid fifty percent (50%) of the projects
net profit.

Petition DENIED.
PHILIPPINE REFINING COMPANY (now
known as UNILEVER PHILIPPINES
[PRC], INC.), petitioner, vs. CA

CTA- Petition for Review was DENIED. The CTA

rejected petitioners assertion that the advances it
made for the Sto. Nino mine were in the nature of
a loan. It instead characterized the advances as
petitioners investment in a partnership with
Baguio Gold for the development and

FACTS:
This is an appeal by certiorari from the decision
of respondent Court of Appeals affirming the
decision of the Court of Tax Appeals which
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[DEDUCTIONS]

disallowed petitioners claim for deduction as bad

debts of several accounts in the total sum of
P395,324.27, and imposing a 25% surcharge and
20% annual delinquency interest on the alleged
deficiency income tax liability of petitioner.

ISSUE:
Whether or not all bad debts should be treated as
deductions.
HELD:
No. Both the CTA and CA relied on the case of
Collector vs. Goodrich International, which laid
down the requisites for worthlessness of a debt
to wit:

Petitioner Philippine Refining Company (PRC)

was assessed by respondent Commissioner of
Internal Revenue (Commissioner) to pay a
deficiency tax for the year 1985 in the amount of
P1,892,584.00. The assessment was based on the
erroneous disallowances of bad debts and
interest expense although the same are both
allowable and legal deductions.

In said case, we held that for debts to be

considered as "worthless," and thereby qualify as
"bad debts" making them deductible, the
taxpayer should show that (1) there is a valid and
subsisting debt. (2) the debt must be actually
ascertained to be worthless and uncollectible
during the taxable year; (3) the debt must be
charged off during the taxable year; and (4) the
debt must arise from the business or trade of the
taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the
future.
Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, viz.:
(1) sending of statement of accounts; (2) sending
of collection letters; (3) giving the account to a
lawyer for collection; and (4) filing a collection
case in court.

Respondent Commissioner issued a warrant of

garnishment against the deposits of petitioner at
a branch of City Trust Bank, in Makati, Metro
Manila, which action the latter considered as a
denial of its protest.
Petitioner filed a petition for review with the CTA
on the same assignment of error, that is, that the
bad debts and interest expense are legal and
allowable deductions. In its decision, the CTA
modified the findings of the Commissioner by
reducing the deficiency income tax assessment to
P237,381.26, with surcharge and interest incident
to delinquency. In said decision, the Tax Court
reversed and set aside the Commissioners
disallowance of the supposed interest expense
but maintained the disallowance of the bad debts
of thirteen (13) debtors.

On the foregoing considerations, CA held that

petitioner did not satisfy the requirements of
worthlessness of a debt as to the thirteen (13)
accounts disallowed as deductions.

Petitioner elevated the case to respondent CA

which denied petition for review and dismissed
the same. Out of the sixteen (16) accounts alleged
as bad debts, CA find that only three (3) accounts
have met the requirements of the worthlessness
of the accounts, hence were properly written off
as bad debts.

It appears that the only evidentiary support given

by PRC for its aforesaid claimed deductions was
the explanation or justification posited by its
financial adviser or accountant. Guia D.
Masagana. Her allegations were not supported by
any documentary evidence, hence, both the CA
and the CTA ruled that said contentions per se
cannot prove that the debts were indeed
uncollectible and can be considered as bad debts
as to make them deductible. The SC said that
PRC failed to exercise due diligence in order to
ascertain that these debts were uncollectible. In
fact, PRC did not even show the demand letters
they allegedly gave to some of their debtors.

Mere testimony of the Financial Accountant of

the petitioner explaining the worthlessness of
said debts is seen by this Court as nothing more
than a self-serving exercise which lacks probative
value. There was no iota of documentary evidence
to give support to the testimony of an employee
of the petitioner. Mere allegations cannot prove
the worthlessness of such debts in 1985. Hence,
the claim for deduction of these thirteen (13)
debts should be rejected.

The petition at bar is DENIED and the judgment

of respondent Court of Appeals is hereby
AFFIRMED, with treble costs against petitioner.

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Issues:
Whether or not the allowance or disallowance of
losses were proper?

Fernandez vs CIR
Petitioner, Fernandez HermanosInc, a domestic
corporation engaged in the business of
investment and has a main office in Manila, was
assessed the sums of 13,414, 19,613 11, 698 6,887
and 14, 451 as alleged deficiency income tax for
the years 1950, 1951, 1952, 1953, 1954
respectively. Said Discrepancies were a result of
the examination of the ITR submitted for the said
year.
The tax Court sustained the CIR
disallowance of the losses declared in Palawan
Manganese Mines and Hacienda Samal but
overruled the CIR disallowance of losses in the
other items. As summarized by the CIR the
following are its tax returns:

Ruling:
The court held that the disallowance of the losses
in Mati Lumber was proper. There was adequate
basis for the writing off of the stock as worthless
securities. Assuming that the Company would
later somehow realize some proceeds from its
sawmill and equipment, which were still existing
as claimed by the Commissioner, and that such
proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so
received by the taxpayer would then properly be
reportable as income of the taxpayer in the year it
is received.

1. Losses
e. Losses in Mati Lumber Co. (1950)
P 8,050.00
a. Losses in or bad debts of Palawan
Manganese Mines, Inc.
(1951)
353,134.25
b. Losses in Balamban Coal Mines
1950 8,989.76
1951
27,732.66
c. Losses in Hacienda Dalupiri
1950 17,418.95
1951
29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56
d. Losses in Hacienda Samal
1951
8,380.25
1952
7,621.73
2. Excessive depreciation of Houses
1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98
3. Taxable increase in net worth
1950 P 30,050.00
1951 1,382.85
4. Gain realized from sale of real property in
1950
P 11,147.2611

The Court held that in the case of the Palawan

Manganese Mining the losses declared cannot be
allowed because the corporate fiction of
petitioner and Palawan could be pierced, under
the doctrine of piercing the corporate veil. It held
that the advances made by the taxpayer to its
100% subsidiary, Palawan Manganese Mines,
Inc. amounting to P587,308,07 as of 1951 were
investments and not loans. 5 The evidence on
record shows that the board of directors of the
two companies since August, 1945, were identical
and that the only capital of Palawan Manganese
Mines, Inc. is the amount of P100,000.00
entered in the taxpayer's balance sheet as its
investment in its subsidiary company.
The court upheld the disallowance of the loss in
Balamban Coal. It held that Some definite event
must fix the time when the loss is sustained, and
here it was the event of actual abandonment of
the mines in 1952. The Tax Court held that the
losses, totalling P36,722.42 were properly
deductible in 1952, but the appealed judgment
does not show that the taxpayer was credited
therefor in the determination of its tax liability
for said year. This additional deduction of
P36,722.42 from the taxpayer's taxable income in
1952 would result in the elimination of the
deficiency tax liability for said year in the sum of
P3,600.00 as determined by the Tax Court in the
appealed judgment
The Court upheld the deductions in Hacienda
Dalipari. It was convinced that the farm was used
for business and not for pleasure and as such it
was entitled to deduct expenses and losses in
connection with the operation of said farm.

Both parties appealed the decision of the CTA to

the SC, hence this appeal.

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[DEDUCTIONS]
(b) declining balance method:

Whether or not capital investments may be

deducted

cost - accumulated depreciation X rate

estimated life

The court held in the negative. The alleged

"capital investment" method invoked by the
taxpayer is not a method of depletion, but the Tax
Code provision, prior to its amendment by
Section 1, of Republic Act No. 2698, which took
effect on June 18, 1960, expressly provided that
"when the allowances shall equal the capital
invested ... no further allowances shall be made

(c) sum of years digits method:

nth period x (cost - salvage value)
sum of the years digits
2) Special Types of Depreciation
(a) Petroleum operations
i. Depreciation of all properties directly
related to production of petroleum
shall be allowed under straight-line or
declining-balance (DB) method
ii. May shift from DB method to SL
method
iii. Useful life: 10 yrs. or shorter life as
may be permitted by Commissioner
iv. Useful life of prop. not used directly:
5 yrs. under straight-line method

WHEREFORE appealed Decision is MODIFIED

RR 5-99
(F) Depreciation. gradual diminution in the
service or useful value of tangible property due
from exhaustion, wear and tear and normal
obsolescence.
also applies to amortization of intangible
assets, the use of which in trade or business is
of limited duration.

(b) Mining operations

i. depreciation on all properties in
mining
operations
other
than
petroleum operations at the normal
rate if expected life is 10 yrs or less.
ii. if expected life is > 10 yrs., depreciate
over any no. of yrs. bet. 5 yrs. & the
expected life

A reasonable allowance for the exhaustion, wear

& tear of property used in the trade or business;
to cause plant elements or the plant as a whole to
suffer diminution in value
(a) In case of property held by one person for life
w/ remainder to another person, deduction is
computed as if the life tenant were the
absolute owner of the property & allowed to
life tenant
(b) In case of property held in trust, deduction
apportioned
between
the
income
beneficiaries & trustees

Depreciation deductible by nonresident

aliens
engaged
in
trade/business
or
non-resident
corporation only when such property
is located in the Philippines
The BIR and the taxpayer may agree
in writing on the useful life of the
property to be depreciated. The
agreed rate may be modified if
justified by facts or circumstances.
The change shall not be effective
before the taxable year on which
notice in writing by certified mail or
registered mail is served by the party
initiating.

REQUISITES FOR DEDUCTIBILITY:

a. The allowance for depreciation must be
reasonable.
b. It must be for property used for employment
in trade or business or out of its not being
used temporarily during the year.
c. The allowance must be charged off.
d. Schedule on the allowance must be attached
to the return.
1) Methods of Depreciation
(a) straight-line method:
cost - salvage value
estimated life
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advanced as indicative of the fact that receipt of
the notice was after March 24, 1959, the last date
of the five-year period within which to assess
deficiency tax, since the original returns were
filed on March 24, 1954.

Basilan vs. CIR

A Philippine corporation engaged in the coconut
industry, Basilan Estates, Inc., with principal
offices in Basilan City, filed on March 24, 1954 its
income tax returns for 1953 and paid an income
tax of P8,028. On February 26, 1959, the
Commissioner of Internal Revenue, per
examiners' report of February 19, 1959, assessed
Basilan Estates, Inc., a deficiency income tax of
P3,912 for 1953 and P86,876.85 as 25% surtax on
unreasonably accumulated profits as of 1953
pursuant to Section 25 of the Tax Code. On nonpayment of the assessed amount, a warrant of
distraint and levy was issued but the same was
not executed because Basilan Estates, Inc.
succeeded in getting the Deputy Commissioner of
Internal Revenue to order the Director of the
district in Zamboanga City to hold execution and
maintain constructive embargo instead. Because
of its refusal to waive the period of prescription,
the corporation's request for reinvestigation was
not given due course, and on December 2, 1960,
notice was served the corporation that the
warrant of distraint and levy would be executed.

Although the evidence is not clear on this point,

We cannot accept this interpretation of the
petitioner, considering the presence of
circumstances that lead Us to presume regularity
in the performance of official functions. The
notice of assessment shows the assessment to
have been made on February 26, 1959, well
within the five-year period. On the right side of
the notice is also stamped "Feb. 26, 1959"
denoting the date of release, according to Bureau
of Internal Revenue practice. The Commissioner
himself in his letter (Exh. H, p. 84 of BIR
records) answering petitioner's request to lift, the
warrant of distraint and levy, asserts that notice
had been sent to petitioner. In the letter of the
Regional Director forwarding the case to the
Chief of the Investigation Division which the
latter received on March 10, 1959 (p. 71 of the
BIR records), notice of assessment was said to
have been sent to petitioner. Subsequently, the
Chief of the Investigation Division indorsed on
March 18, 1959 (p. 24 of the BIR records) the
case to the Chief of the Law Division. There it was
alleged that notice was already sent to petitioner
on February 26, 1959. These circumstances
pointing to official performance of duty must
necessarily prevail over petitioner's contrary
interpretation. Besides, even granting that notice
had been received by the petitioner late, as
alleged, under Section 331 of the Tax Code
requiring five years within which to assess
deficiency taxes, the assessment is deemed made
when notice to this effect is released, mailed or
sent by the Collector to the taxpayer and it is not
required that the notice be received by the
taxpayer within the aforementioned five-year
period.

On December 20, 1960, Basilan Estates, Inc. filed

before the Court of Tax Appeals a petition for
review of the Commissioner's assessment,
alleging prescription of the period for assessment
and collection; error in disallowing claimed
depreciations, travelling and miscellaneous
expenses; and error in finding the existence of
unreasonably accumulated profits and the
imposition of 25% surtax thereon. On October 31,
1963, the Court of Tax Appeals found that there
was no prescription and affirmed the deficiency
assessment in toto.
Issues:
1. Has the Commissioner's right to collect
deficiency income tax prescribed
2. Was the disallowance of items claimed as
deductible proper?

DEDUCTIONS
A. Depreciation. Basilan Estates, Inc.
claimed deductions for the depreciation of its
assets up to 1949 on the basis of their acquisition
cost. As of January 1, 1950 it changed the
depreciable value of said assets by increasing it to
conform with the increase in cost for their
replacement. Accordingly, from 1950 to 1953 it
deducted from gross income the value of
depreciation computed on the reappraised value.

Ruling:
PRESCRIPTION
There is no dispute that the assessment of the
deficiency tax was made on February 26, 1959;
but the petitioner claims that it never received
notice of such assessment or if it did, it received
the notice beyond the five-year prescriptive
period. To show prescription, the annotation on
the notice (Exhibit 10, No. 52, ACR, p. 54-A of the
BIR records) "No accompanying letter 11/25/" is
16

TAXATION.rbg

[DEDUCTIONS]

In 1953, the year involved in this case, taxpayer

claimed the following depreciation deduction:
Reappraised assets
New assets consisting
of hospital building and
equipment
Total depreciation

out of its not being used: Provided, That

when the allowance authorized under this
subsection shall equal the capital invested by
the taxpayer . . . no further allowance shall be
made. . . .

P47,342.53
3,910.45
P51,252.98

allows a deduction from gross income for

depreciation but limits the recovery to the capital
invested in the asset being depreciated.

Upon investigation and examination of taxpayer's

books and papers, the Commissioner of Internal
Revenue found that the reappraised assets
depreciated in 1953 were the same ones upon
which depreciation was claimed in 1952. And for
the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the
depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost
at rates fixed by the taxpayer. Hence, the
Commissioner
pegged
the
deductible
depreciation for 1953 on the same old assets at
P36,842.04 and disallowed the excess thereof in
the amount of P10,500.49.

The income tax law does not authorize the

depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such
cost cannot be claimed and allowed. The reason
is that deductions from gross income are
privileges,5 not matters of right.6 They are not
created by implication but upon clear expression
in the law.
Moreover, the recovery, free of income tax, of an
amount more than the invested capital in an asset
will transgress the underlying purpose of a
depreciation allowance. For then what the
taxpayer would recover will be, not only the
acquisition cost, but also some profit. Recovery in
due time thru 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.

The question for resolution therefore is whether

depreciation shall be determined on the
acquisition cost or on the reappraised value of the
assets.
Depreciation is the gradual diminution in the
useful value of tangible property resulting from
wear and tear and normal obsolescense. The term
is also applied to amortization of the value of
intangible assets, the use of which in the trade or
business is definitely limited in duration.2
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 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. It
is not only the right of a company to make such a
provision, but it is its duty to its bond and
stockholders, and, in the case of a public service
corporation, at least, its plain duty to the public.3
Accordingly, the law permits the taxpayer to
recover gradually his capital investment in
wasting assets free from income tax.4 Precisely,
Section 30 (f) (1) which states:

Accordingly, the claim for depreciation beyond

P36,842.04 or in the amount of P10,500.49 has
no justification in the law. The determination,
therefore, of the Commissioner of Internal
Revenue disallowing said amount, affirmed by
the Court of Tax Appeals, is sustained.
B. Expenses. The next item involves
disallowed expenses incurred in 1953, broken as
follows:
Miscellaneous expenses
Officer's travelling expenses
Total

P6,759.17
2,300.40
P9,059.57

These were disallowed on the ground that the

nature of these expenses could not be
satisfactorily explained nor could the same be
supported by appropriate papers.

(1)In general. A reasonable allowance for

deterioration of property arising out of its use
or employment in the business or trade, or
17

TAXATION.rbg

[DEDUCTIONS]
income for 1957, or any part thereof, explaining
that part of said amount totalling P31,380.00 was
not declared as income in its 1957 tax return
because its president, Isabelo P. Lim, who
collected and received P13,500.00 from certain
tenants, did not turn the same over to petitioner
corporation in said year but did so only in 1959;
that a certain tenant (Go Tong) deposited in court
his rentals amounting to P10,800.00, over which
the corporation had no actual or constructive
control; and that a sub-tenant paid P4,200.00
which ought not be declared as rental income.

LIMPAN INVESTMENT CORPORATION

vs. COMMISSIONER OF INTERNAL
REVENUE, ET AL.
FACTS:
Petitioner Limpan Investment Corporation, a
domestic corporation, is engaged in the business
of leasing real properties. Its principal
stockholders are the spouses Isabelo P. Lim and
Purificacion Ceiza de Lim, who own and control
ninety-nine per cent (99%) of its total paid-up
capital. Its president and chairman of the board
is the same Isabelo P. Lim.

With regard to the depreciation which

respondent disallowed and deducted from the
returns filed by petitioner, the same witness tried
to establish that some of its buildings are old and
out of style; hence, they are entitled to higher
rates of depreciation than those adopted by
respondent in his assessment.

Its real properties consist of several lots and

buildings, mostly situated in Manila and in Pasay
City, all of which were acquired from said Isabelo
P. Lim and his mother, Vicente Pantangco Vda.
de Lim.
Petitioner corporation duly filed its 1956 and
1957 income tax returns, reporting therein net
incomes
of
P3,287.81
and
P11,098.36,
respectively, for which it paid the corresponding
taxes therefor in the sums of P657.00 and
P2,220.00.

On the other hand, Plaridel M. Mingoa, one of

the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax
returns of petitioner corporation, testified for the
respondent that he personally interviewed the
tenants of petitioner and found that these tenants
had been regularly paying their rentals to the
collectors of either petitioner or its president,
Isabelo P. Lim, but these payments were not
declared in the corresponding returns.

Sometime in 1958 and 1959, the examiners of the

Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957
income tax returns and, in the course thereof,
they discovered and ascertained that petitioner
had underdeclared its rental incomes by
P20,199.00 and P81,690.00 during these taxable
years and had claimed excessive depreciation of
its buildings in the sums of P4,260.00 and
P16,336.00 covering the same period. On the
basis of these findings, respondent Commissioner
of Internal Revenue issued its letter-assessment
and demand for payment of deficiency income
tax and surcharge against petitioner corporation.

The
Tax
Court
upheld
respondent
Commissioner's assessment and demand for
deficiency income tax which, as above stated in
the beginning of this opinion, petitioner has
appealed to this Court.
ISSUE:
Whether or not the respondent Court erred in
holding that the petitioner had an unreported
rental income of P20,199.00 for the year 1956,
and that it erred in holding that the petitioner
had an unreported rental income of P81,690.00
for the year 1957, and in holding that the
depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and 1957
was excessive.

Petitioner corporation requested respondent

Commissioner of Internal Revenue to reconsider
the assessment but the latter denied said request
and reiterated its original assessment and
demand. Hence, the corporation filed its petition
for review before the Tax Appeals court,
questioning the correctness and validity of the
above assessment of respondent Commissioner
of Internal Revenue. It disclaimed having
received or collected the amount of P20,199.00,
as unreported rental income for 1956, or any part
thereof and denied having received or collected
the amount of P81,690.00, as unreported rental

RULING:
The decision appealed from is affirmed. This
appeal is manifestly unmeritorious.
With respect to the balance, which petitioner
denied having unreported in the disputed tax
18

TAXATION.rbg

[DEDUCTIONS]

returns, the excuse that Isabelo P. Lim and

Vicenta Pantangco Vda. de Lim retained
ownership of the lands and only later transferred
or disposed of the ownership of the buildings
existing thereon to petitioner corporation, so as
to justify the alleged verbal agreement whereby
they would turn over to petitioner corporation six
percent (6%) of the value of its properties to be
applied to the rentals of the land and in exchange
for whatever rentals they may collect from the
tenants who refused to recognize the new owner
or vendee of the buildings, is not only unusual
but uncorroborated by the alleged transferors, or
by any document or unbiased evidence.
Petitioner's denial and explanation of the nonreceipt of the remaining unreported income for
1957 is not substantiated by satisfactory
corroboration. As above noted, Isabelo P. Lim
was not presented as witness to confirm
accountant Solis nor was his 1957 personal
income tax return submitted in court to establish
that the rental income which he allegedly
collected and received in 1957 were reported
therein.

(G) Depletion of Oil and Gas Wells and

Mines. The reduction of cost or value of natural
resources such as oil & gas wells, & mines as the
resources are converted into inventories.
No further allowance is granted if the
allowance for depletion = the capital invested
(1) Intangible exploration & development
drilling costs:
a) deduct in the yr. incurred if incurred for
non-producing wells & mines
b) deduct in full OR capitalize & amortize of
incurred for producing wells & mines in
same contract area
(2) Intangible costs in petroleum operations: no
salvage value & incidental to & necessary for
dwelling of wells & preparation of wells for
the production of petroleum
(3) Election
to
deduct
exploration
&
development expenditures for mining corps.
(a) deduct as cost
(b) deduct as adjusted basis provided, total
amt. deductible shall not exceed 25% of
NI

The withdrawal in 1958 of the deposits in court

pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of
said income in 1957, since the deposit was
resorted to due to the refusal of petitioner to
accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have
constructively received such rentals in 1957. The
payment by the sub-tenant in 1957 should have
been reported as rental income in said year, since
it is income just the same regardless of its
source.

actual
exploration
&
development
expenditures net of 25% of NI shall be carried
forward to succeeding yrs. until fully
deducted
exploration expenditures = pd/incurred
for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of
ore/other mineral & pd/incurred before the
beginning of the development stage of the
mine/deposit

It appearing that the Tax Court applied rates of

depreciation in accordance with Bulletin "F" of
the U.S. Federal Internal Revenue Service, which
this Court pronounced as having strong
persuasive effect in this jurisdiction, for having
been the result of scientific studies and
observation for a long period in the United
States, after whose Income Tax Law ours is
patterned, the depreciation in the amount of
P20,598.00 claimed by petitioner for the years
1956 and 1957 was not excessive.

development
expenditures
=
paid/incurred during development stage of
the mine or other natural deposits
(4) Depletion of Oil and Gas wells and mines
deductible by a non-resident alien or foreign
corporation only in respect of oil and gas
wells or mines located in the Phils.

RR 12-2012

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TAXATION.rbg

[DEDUCTIONS]
ISSUE
Whether the CTA erred with respect to the rate of
mine depletion

Consolidated Mines, Inc. vs CIR

FACTS
The company, a domestic corporation engaged in
mining, had filed its income tax returns for 1951,
1952, 1953, and 1956. In 1957 examiners of BIR
investigated the income tax return filed by the
company because its auditor, Felipe Ollada,
claimed the refund of the sum of P107,472.00
representing alleged overpayments of income
taxes for the year 1951. After the investigation the
examiners reported that (A) for the years 1951 to
1954, (1) the company had not accrued as an
expense the share in the company profits of
Benguet Consolidated Mines as operator of the
Company's mines, although for income tax
purposes for the Company had reported income
and expenses on the accrual basis; (2) depletion
and depreciation expenses had been overcharged;
and (3) the claims for audit and legal fees and
miscellaneous expenses for 1953 and 1954 had
not been properly substantiated; and that (B) for
the year 1956 (1) the Company had overstated its
claim for depletion, and (2) certain claims for
miscellaneous expenses were not duly supported
by evidence.

RULING
The Tax Code provides that in computing net
income, there shall be allowed as deduction, in
the case of mines, a reasonable allowance for
depletion thereof not to exceed the market value
in the mine of the product thereof which has been
mined and sold during the year for which the
return is made.
The formula for computing the rate of depletion
is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit
Estimated ore Deposit of Product Mined and sold
The Commissioner and the Company do not
agree as to the figures corresponding to either
factor that affects the rate of depletion per unit.
The figures according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------= depletion per ton)
4,471,892 tons (estimated ore deposit)

In view of said reports the CIR sent the Company

a letter of demand requiring it to pay certain
deficiency income taxes for the years 1951 - 1954,
inclusive, and for the year 1956. Deficiency
income tax assessment notices for said years
were also sent to the Company. The Company
requested a reconsideration of the assessment
but the Commissioner refused to reconsider,
hence the Company appealed to the CTA.

while the Company insists they are:

P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- = depletion per ton)
4,156,888 tons (estimated ore deposit)
They agree, however, that the "cost of mine
property" consist of (1) mine cost, and (2)
expenses of development before production.

On May 6, 1961 the Tax Court rendered judgment

ordering the Company to pay the amounts of
P107,846.56, P134,033.01, and P71,392.82 as
deficiency income taxes for the years 1953, 1954,
and 1956, respectively.

As an income tax concept, depletion is wholly a

creation of the statute -- "solely a matter of
legislative grace." Hence, the taxpayer has the
burden of justifying the allowance if any
deduction claimed. As in the connection with all
other controversies, the burden of proof to show
that a disallowance of depletion by the
Commissioner is incorrect or that an allowance
made is inadequate is upon the taxpayer, and this
is true with respect to the value of the property
constituting the basis of the deduction. This
burden of proof rule has been frequently applied
and a value claimed has been disallowed for lack
of evidence .

However on Aug 7, 1961, upon motion of the

Company, the tax Court reconsidered its decision
and further reduced the deficiency income tax
liabilities of the Company to P79,812.93,
P51,528.24, and P71,382.82 for the years 1953,
1954, and 1956, respectively.
Both the Company and the Commissioner
appealed to this Court. The Company questions
the rate of mine depletion adapted by the Court
of Tax Appeals and the disallowance of
depreciation charges and certain miscellaneous.
20

TAXATION.rbg

[DEDUCTIONS]

The Company's balance sheet for Dec 31, 1947

lists the "mine cost" of P2,500,00.00 as
"development cost" and the amount of
P1,738,974.37 as suspense account (meaning
properties subject to war losses). "The Company
claims that its accountant, Mr. Calpo, made these
errors because he was then new at the job.
Granting that was what had happened, it does
not affect the fact that the, evidence on hand is
insufficient to prove the cost of development
alleged by the Company. Nor, can we rely on the
statements of Eligio Garcia, who was the
Company's treasurer and assistant secretary at
the time he testified on Aug 14, 1959. He
admitted that he did not know how the figure
P4,238,974.57 was arrived at, explaining "I only
know that it is the figure appearing on the
balance sheet as of Dec 31, 1946 as certified by
the Company's auditors; and this we made as the
basis of the valuation of the depletable value of
the mine."

iv. no part of NI inures to the benefit of any

private stockholder or individual
for individual: not > 10% of taxable income
before
deducting
the
charitable
contributions
for corporation: not > 5 % of taxable income
before
deducting
the
charitable
contributions
(b) Contributions deductible in full
i.

We therefore, have to rely on the Commissioner's

assertion that the "development cost" was
P131,871.44, broken down as follows: assessment,
P34,092.12;
development,
P61,484.63;
exploration P13,966.62; and diamond drilling,
P22,355.07.

Donations to the govt. to finance, to

provide for, or to be used in undertaking
priority activities in education, health,
youth & sports development, human
settlements, science & culture & in
economic development according to
National Priority Plan determined by
NEDA
If not in accordance w/ annual
priority plan, donation is subject to
limitations in (1) above

ii. Donations to certain foreign institutions

or international organizations - in
pursuance
or
compliance
with
agreements, treaties, or commitments
entered into by Phil. govt. & foreign
institutions/international organizations

The question as to which figure should properly

correspond to "mine cost" is one of the fact. The
findings of the fact of the Tax Court, where
reasonably supported by evidence, are conclusive
upon the Supreme Court.

iii. Donations to accredited NGOs

(H) Charitable and Other Contributions. -

Organized & operated exclusively for

scientific, educational, characterbuilding
&
youth
&
sports
development, health, social welfare,
cultural or charitable purposes or
combination thereof (no part of NI
inures to the benefit of any private
individual)
W/in 15th of the 3rd month after the
close of the taxable yr., makes
utilization directly for the active
conduct of activities constituting the
purpose/function of the org., unless
pd. is extended
Administrative expense should not be
>30% of total expenses
Upon dissolution, assets would be
distributed to another nonprofit
domestic corp. organized for similar
purpose or to the state for public

(a) Contributions subject to limitations

i. Contributions or gifts actually paid or
made w/in the taxable yr.:
ii. to or for the use of the govt. or its
agencies or any political subdivision,
exclusively for public purpose
iii. or,
to
accredited
domestic
corps./associations organized & operated
exclusively for:
(1) religious
(2) charitable
(3) scientific
(4) youth & sports development
(5) cultural or educational purposes
(6) for the rehabilitation of veterans
(7) to social welfare institutions
(8) to NGOs

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TAXATION.rbg

[DEDUCTIONS]

purpose or to another org. to be used

in same purpose as the dissolved
corp.

ore or other mineral, including oil or gas

(exploration exp.)
3M Philippines v C.I.R.

REQUISITES FOR DEDUCTIBILITY:

a. the contribution or gift must be actually paid.
b. it must be given to the organizations specified
in the code.
c. the net income of the institution must not
inure to the benefit of any private stockholder
or individual.

Facts:
3M Philippines, Inc. is a subsidiary of the
Minnesota Mining and Manufacturing Company
(or "3M-St. Paul") a non-resident foreign
corporation with principal office in St. Paul,
Minnesota, U.S.A. It is the exclusive importer,
manufacturer, wholesaler, and distributor in the
Philippines of all products of 3M-St. Paul. To
enable it to manufacture, package, promote,
market, sell and install the highly specialized
products of its parent company, and render the
necessary post-sales service and maintenance to
its customers, 3M Phils. entered into a "Service
Information
and
Technical
Assistance
Agreement" and a "Patent and Trademark
License Agreement" with the latter under which
the 3m Phils. agreed to pay to 3M-St. Paul a
technical service fee of 3% and a royalty of 2% of
its net sales. Both agreements were submitted to,
and approved by, the Central Bank of the
Philippines. the petitioner claimed the following
deductions as business expenses:

(c) VALUATION of property donated other

than money: acquisition cost
BIR Ruling 19-01 (May 10, 2001)
(I) Research and Development.Paid or incurred by a taxpayer during the taxable
yr. in connection w/ his trade, business or
profession as ordinary & necessary expenses w/c
are not chargeable to capital account; allowed as
deduction during the taxable yr. when
pd./incurred
REQUISITES FOR DEDUCTIBILITY AS
EXPENSE:
a. paid or incurred during the taxable year
b. ordinary and necessary expenses in
connection with trade business or profession
c. not chargeable to capital account

a) royalties and technical service fees of P

3,050,646.00; and
a) pre-operational cost of tape coater of
P97,485.08.

Requisites for amortization of certain

R&D expenditures (treated as deferred
expenses):
(1) paid/incurred by the taxpayer in connection
w/ his trade/business
(2) not treated as expense
(3) chargeable to capital acct. but not chargeable
to property of a character w/c is subject to
depreciation/depletion
(4) amortized over a period of not < 60 months
as may be elected by the taxpayer

On the first item, the Commissioner of Internal

Revenue allowed a deduction of P797,046.09
only as technical service fee and royalty for
locally manufactured products, but disallowed
the sum of P2,323,599.02 alleged to have been
paid by the petitioner to 3M-St. Paul as technical
service fee and royalty on P46,471,998.00 worth
of finished products imported by the petitioner
from the parent company, on the ground that the
fee and royalty should be based only on locally
manufactured goods.

LIMITATIONS ON DEDUCTIONS not

applicable to, EXCLUSIONS:

On the second item, the CIR only allowed

P19,544.77 or one-fifth (1/5) of 3M Phils. capital
expenditure of P97,046.09 for its tape coater
which was installed in 1973 because such
expenditure should be amortized for a period of
five (5) years, hence, payment of the disallowed
balance of P77,740.38 should be spread over the
next four (4) years. The CIR ordered 3M Phil. to
pay P840,540 as deficiency income tax on its
1974 return, plus P353,026.80 as 14% interest

(1) Any expenditure for the acquisition or

improvement of land, or for the important of
prop. to be used in connection w/ R&D of a
character subject to depreciation & depletion
(2) Any expenditure paid/ incurred for the
purpose of ascertaining the existence,
location, extent, or quality of any deposit of
22

TAXATION.rbg

[DEDUCTIONS]

per annum from February 15, 1975 to February

15, 1976, or a total of P1,193,566.80.

Section 29(a)(1) of the Tax Code which provides:

(a) Expenses. (1) Business expenses. (A) In
general.

3M Phils. protested the CIRs assessment but it

did not answer the protest, instead he issued a
warrant of levy. The CTA affirmed the assessment
on appeal.

All ordinary and necessary expenses paid or

incurred during the taxable year in carrying on
any trade or business, including a reasonable
allowance for salaries or other compensation for
personal services actually rendered; travelling
expenses while away from home in the pursuit of
a trade, profession or business, rentals or other
payments required to be made as a condition to
the continued use or possession, for the purpose
of the trade, profession or business, for property
to which the taxpayer has not taken or is not
taking title or in which he has no equity.

Issue:
Whether or not 3M Phils. is entitled for the
deductions, due to royalties?
Ruling:
No. CB Circular No. 393 (Regulations Governing
Royalties/Rentals) was promulgated by the
Central Bank as an exchange control regulation
to conserve foreign exchange and avoid
unnecessary drain on the country's international
reserves. Section 3-C of the circular provides that
royalties shall be paid only on commodities
manufactured by the licensee under the royalty
agreement:

Petitioner points out that the Central bank "has

no say in the assessment and collection of
internal revenue taxes as such power is lodged in
the Bureau of Internal Revenue," that the Tax
Code "never mentions Circular 393 and there is
no law or regulation governing deduction of
business expenses that refers to said circular The
argument is specious, for, although the Tax Code
allows payments of royalty to be deducted from
gross income as business expenses, it is CB
Circular No. 393 that defines what royalty
payments are proper. Hence, improper payments
of royalty are not deductible as legitimate
business expenses.

Section 3. Requirements for Approval and

Registration. The requirements for
approval and registration as provided for in
Section 2 above include, but are not limited
to the following:
c. The royalty/rental contracts involving
manufacturing' royalty, e.g., actual
transfers of technological services such as
secret
formula/processes,
technical
know-how and the like shall not exceed
five (5) per cent of the wholesale price of
the commodity/ties manufactured under
the royalty agreement. For contracts
involving 'marketing' services such as the
use of foreign brands or trade names or
trademarks, the royalty/rental rate shall
not exceed two (2) per cent of the
wholesale price of the commodity/ties
manufactured
under
the
royalty
agreement. The producer's or foreign
licensor's share in the proceeds from the
distribution/exhibition of the films shall
not exceed sixty (60) per cent of the net
proceeds (gross proceeds less local
expenses)
from
the
exhibition/distribution of the films. ...

WHEREFORE, finding no reversible error in the

decision of the Court of Tax Appeals, the petition
for review is denied. Costs against the petitioner.
(J) Pension Trusts (Past Service Cost)
Pension Trust Contributions a deduction
applicable only to the employer on account of its
contribution to a private pension plan for the
benefit of its employee.
This deduction is purely business in character.
Established or maintained by employer to
provide for the payment of reasonable pensions
to his employees.
Normal Cost the contributions during the
taxable year to cover the pension liability
accruing during the taxable year. Allowed as a
deduction under Sec. 34(A)(1) as expenses in
general.

Clearly, no royalty is payable on the wholesale

price of finished products imported by the
licensee from the licensor. However, petitioner
argues that the law applicable to its case is only
23

TAXATION.rbg

[DEDUCTIONS]

Past Service Cost amount in excess of the

above contribution (covering pension liability
pertaining to old employees which accrued
during the years previous to the establishment
of the pension trust); allowed as deduction
only if:

(K)
Additional
Requirements
for
Deductibility of Certain Payments.- 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
under this Section, 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 Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this
Code.

(a) such amount not been allowed as a

deduction
(b) apportioned in equal parts over 10
consecutive years beginning w/ the yr. in
w/c the transfer/payment is made (Sec.
34[J])

RMO 38-83 (November 14, 1983)

RR 12-2013 (July 11, 2013)
RMC 63-2013 (September 26, 2013)

REQUISITES FOR DEDUCTIBILITY:

a. The employer must have established a
pension or retirement plan to provide for the
payment of reasonable pensions to his
employees;
b. The pension plan is reasonable and
actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must be no longer
subject to the control and disposition of the
employer;
e. The payment has not yet been allowed as a
deduction; and
f. The deduction is apportioned in equal parts
over a period of 10 consecutive years
beginning with the year in which the transfer
of payment is made.

(L) Optional Standard Deduction. - In lieu

of the deductions allowed under the preceding
Subsections, an individual subject to tax under
Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not
exceeding ten percent (10%) of his gross income.
Unless the taxpayer signifies in his return his
intention to elect the optional standard
deduction, he shall be considered as having
availed himself of the deductions allowed in the
preceding Subsections. Such election when made
in the return shall be irrevocable for the taxable
year for which the return is made: Provided, That
an individual who is entitled to and claimed for
the optional standard deduction shall not be
required to submit with his tax return such
financial statements otherwise required under
this Code: Provided, further, That except when
the Commissioner otherwise permits, the said
individual shall keep such records pertaining to
his gross income during the taxable year, as may
be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

Summary rules on Retirement Benefits

Plan/Pension Trust
1. EXEMPT FROM INCOME TAX employees
trust under Sec. 60(B)
2. EXCLUSION FROM GROSS INCOME
amount received by the employee from the
fund upon compliance of certain conditions
under Sec. 32(B)(6)
3. DEDUCTION FROM GROSS INCOME
a. amounts contributed by the employer
during the taxable year into the pension
plan to cover the pension liability
accruing during the year considered as
ordinary and necessary expenses under
Sec. 34(A)(1).
b. 1/10 of the reasonable amount paid by
the employer to cover pension liability
applicable to the years prior to the
taxable year, or so paid to place the trust
in a sound financial basis deductible
under Sec. 34 (J).

Republic Act No. 9504

June 17, 2008
Amending RA 8424
AN ACT AMENDING SECTION 22, 24, 34,
35, 51, AND 79 OF REPUBLIC ACT NO.
8424,
AS
AMENDED
OTHERWISE
KNOWN AS THE NATIONAL INTERNAL
REVENUE OF 1997
SEC. 3. Section 34(L) of Republic Act No. 8424,
as amended, otherwise known as the National
Internal Revenue Code of 1997, is hereby
amended to read as follows:
24

TAXATION.rbg

[DEDUCTIONS]
"x x x."

"SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation
income arising from personal services
rendered under an employer-employee
relationship where no deductions shall be
allowed under this Section other than under
Subsection (M)hereof, in computing taxable
income subject to income tax under Sections
24(A); 25(A); 26; 27(A), (B), (C); and
28(A)(1), there shall be allowed the following
deductions from the gross income:

RR 2-2010 (February 18, 2010)

RR 16-2008 (Nov. 26, 2008
(M) Premium Payments on Health and/or
Hospitalization
Insurance
of
an
Individual Taxpayer. The amount of premiums not to exceed Two
thousand four hundred pesos (P2,400) per family
or Two hundred pesos (P200) a month paid
during the taxable year for health and/or
hospitalization insurance taken by the taxpayer
for himself, including his family, shall be allowed
as a deduction from his gross income: Provided,
That said family has a gross income of not more
than Two hundred fifty thousand pesos
(P250,000) for the taxable year: Provided,
finally, That in the case of married taxpayers,
only the spouse claiming the additional
exemption for dependents shall be entitled to this
deduction.

"(A) Expenses. "x x x.

"(L) Optional Standard Deduction. - In lieu
of the deductions allowed under the
preceding Subsections, an individual subject
to tax under Section 24, other than a
nonresident alien, may elect a standard
deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross
receipts, as the case may be. In the case of a
corporation subject to tax under section
27(A) and 28(A)(1), it may elect a standard
deduction in an amount not exceeding forty
percent (40%) of it gross income as defined in
Section 32 of this Code. Unless the taxpayer
signifies in his return his intention to elect
the optional standard deduction, he shall be
considered as having availed himself of the
deductions allowed in the preceding
Subsections. Such election when made in the
return shall be irrevocable for the taxable
year for which the return is made: Provided,
That an individual who is entitled to and
claimed for the optional standard shall not be
required to submit with his tax return such
financial statements otherwise required
under this Code: Provided, further, That
except when the Commissioner otherwise
permits, the said individual shall keep such
records pertaining to his gross sales or gross
receipts, or the said corporation shall keep
such records pertaining to his gross income
as defined in Section 32 of this Code during
the taxable year, as may be required by the
rules and regulations promulgated by the
Secretary of Finance, upon recommendation
of the Commissioner.

Notwithstanding the provision of the preceding

Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a
public hearing shall have been held for this
purpose, may prescribe by rules and regulations,
limitations or ceilings for any of the itemized
deductions under Subsections (A) to (J) of this
Section: Provided, That for purposes of
determining such ceilings or limitations, the
Secretary of Finance shall consider the following
factors: (1) adequacy of the prescribed limits on
the actual expenditure requirements of each
particular industry; and (2) effects of inflation on
expenditure levels: Provided, further, That no
ceilings shall further be imposed on items of
expense already subject to ceilings under present
law.
Non-Deductible Expenses:
SEC. 36.Items Not Deductible.(A) General Rule. - In computing net income,
no deduction shall in any case be allowed in
respect to
1) Personal, living or family expenses;
2) Any amount paid out for new buildings or
for
permanent
improvements,
or
betterments made to increase the value of
any property or estate;

"(M) x x x."

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TAXATION.rbg

[DEDUCTIONS]

This Subsection shall not apply to

intangible drilling and development costs
incurred inpetroleum operations which
are deductible under Subsection (G) (1) of
Section 34 of this Code.
3) Any amount expended in restoring
property or in making good the
exhaustionthereof for which an allowance
is or has been made; or
4) Premiums paid on any life insurance
policy covering the life of any officer
oremployee, or of any person financially
interested in any trade or business
carried on bythe taxpayer, individual or
corporate, when the taxpayer is directly
or indirectly a beneficiary under such
policy.

(6) Between a fiduciary of a trust and

beneficiary of such trust.
A person is said to be financially interested
in the taxpayers business if he is a stockholder
thereof or he is to receive as his compensation
a share of the profits of the business.
ESSO Standard Eastern Inc vs CIR
Facts:
Esso deducted from its 1959 income the amount
it had spent for drilling and exploration of its
petroleum concessions, as part of its ordinary
and necessary expenses. This was disallowed by
CIR, contending that said amount shall be a loss
only if a dryhole results in their operations. ESSO
then filed an amended return, claiming for
refund by reason of abandonment of several of its
oil wells due to dry holes, and claimed ordinary
and necessary expenses, representing the margin
fees it had paid to Central Bank on its profit
remittances to its NY head office. CIR allowed a
tax credit in the amount of P221,033 but
disallowed the claimed deduction for margin fees.

(B) Losses from Sales or Exchanges of

Property. - In computing net income, no
deductions shall inany case be allowed in
respect of losses from sales or exchanges of
property directly or indirectly
(1) Between members of a family. For
purposes of this paragraph, the family of
an individual shall include only his
brothers and sisters (whether by the
whole or halfblood), spouse, ancestors,
and lineal descendants; or
(2) Except in the case of distributions in
liquidation, between an individual and
corporation more than fifty percent
(50%) in value of the outstanding stock of
which is owned, directly or indirectly, by
or for such individual; or
(3) Except in the case of distributions in
liquidation, between two corporations
more than fifty percent (50%) in value of
the outstanding stock of which is owned,
directly or indirectly, by or for the same
individual if either one of such
corporations, with respect to the taxable
year of the corporation preceding the date
of the sale of exchange was under the law
applicable to such taxable year, a
personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary of
any trust; or
(5) Between the fiduciary of and the fiduciary
of a trust and the fiduciary of another
trust if the same person is a grantor with
respect to each trust; or

CIR assessed ESSO for deficiency income tax for

the year 1960, plus 18% interest arising from the
disallowance of the margin fees ESSO paid to
Central Bank on its profit remittances to its NY
head office. ESSO settled the assessment by
applying the tax credit of P221,033, representing
the overpayment of its income tax on 1959 by
reason of its abandonment, and paid under
protest the remaining amount. ESSO argues that
margin fees are deductible from gross income
either as a tax or as an ordinary and necessary
business expense. It is a necessary business
expense because the margin fees were paid for
the remittance by ESSO part of its profits to the
NY head office, therefore, such remittance was
necessary and proper for the conduct of its
corporate affairs.
Issue:
Whether or not margin fees are deductible from
gross income
Held:
No, margin fees are not deductible either as a tax
or as an ordinary and necessary business
expense.
Margin fees are not taxes, but an exaction
designed to curb the excessive demands upon
26

TAXATION.rbg

[DEDUCTIONS]

international reserve. It is a margin levy in the

form of exchange control or restriction designed
to discourage imports and encourage exports to
stabilize currency. Tax is levied to provide
revenue for government operations, while margin
fees are applied to strengthen our countries
international reserves. Margin fees are imposed
by the State in the exercise of its police power and
not the power of taxation.

expenditure itself, which in turn depends on the

extent and permanency of the work accomplished
by the expenditure.
Margin fees are not deductible as necessary and
ordinary business expense because ESSO has not
shown that the remittance to the head office of
part of its profits was made in furtherance of its
own trade or business. ESSO merely presumed
that all corporate expenses are necessary and
appropriate in the absence of a showing that they
are illegal or ultra vires. The CIR is correct when
it stated that: 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,
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. If at all, the margin fees
were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the
Philippines.

It is also not an ordinary and necessary business

expense. In the case of Atlas Consolidated Mining
vs CIR, the court laid down the rules on
deductability of business expenses, thus: The
principle is recognized that when a taxpayer
claims a deduction, he must point to some
specific provision of the statute in which that
deduction is authorized and must be able to
prove that he is entitled to the deduction which
the law allows. The statutory test of deductibility
where it is axiomatic that to be deductible as a
business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within
the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the
business test, he must substantially prove by
evidence or records the deductions claimed under
the law,otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item
of expense is ordinary and necessary does not
justify its deduction. Ordinarily, an expense will
be considered 'necessary' where the expenditure
is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it
connotes a payment which is normal in relation
to the business of the taxpayer and the
surrounding circumstances. The term 'ordinary'
does not require that the payments be habitual or
normal in the sense that the same taxpayer will
have to make them often; the payment may be
unique or non-recurring to the particular
taxpayer affected. There is no hard and fast rule
on the matter. The right to a deduction depends
in each case on the particular facts and the
relation of the payment to the type of business in
which the taxpayer is engaged. The intention of
the taxpayer often may be the controlling fact in
making the determination. Assuming that the
expenditure is ordinary and necessary in the
operation of the taxpayer's business, the answer
to the question as to whether the expenditure is
an allowable deduction as a business expense
must be determined from the nature of the

REVENUE REGULATIONS NO. 02-40

SECTION 119.Personal, living, and family
expenses. Personal,living, and family expenses
are not deductible. Insurance paid on a dwelling
owned and occupied by a taxpayer is a personal
expense and not deductible.
Premiums paid for life insurance by the insured
are not deductible. In the case of a professional
man who rents a property for residential
purposes, but incidentally receives his clients,
patients, or callers in connection with his
professional work (his place of business being
elsewhere), no part of the rent is deductible as a
business expense. If however, he uses part of the
house for his office, such portion of the rent as is
properly attributable to such office is deductible.
Where the father is legally entitled to the services
of his minor children, any allowances which he
gives them, whether said to be in consideration of
services or otherwise, are not allowable
deductions in his return of income. Alimony, and
an allowance paid under a separation agreement
are not deductible from gross income.
27

TAXATION.rbg

[DEDUCTIONS]
officer or employee or of any person financially
interested in the business of the taxpayer when
the taxpayer is directly or indirectly a beneficiary
under such policy are not deductible.

SECTION 120.Capital expenditures. No

deduction from gross income may be made for
any amounts paid out for new buildings or for
permanent improvements or betterments made
to increase the value of the taxpayer's property,
or for any amount expended in restoring property
or in making good the exhaustion thereof for
which an allowance for depreciation or depletion
or other allowance is or has been made. Amounts
expended for securing a copyright and plates,
which remain the property of the person making
the payments, are investments of capital. The
cost of defending or perfecting title to property
constitutes a part of the cost of the property and
is not a deductible expense. The amount
expended for architect's services is part of the
cost of the building.

SECTION 122.Losses from sales or exchanges

of property. No deduction is allowed in respect
of losses from sales or exchanges of property,
directly or indirectly
(c) Between members of a family. As used in
Section 31, the family of an individual
shall include only his brothers and sisters
(whether by the whole or halfblood),
spouse,
ancestors,
and
lineal
descendants;
(d) Except in the case of distributions in
liquidation, between an individual and a
corporation more than fifty per centum in
value of the outstanding stock of which is
owned, directly or indirectly, by or for
such individual;
(e) Except in the case of distributions in
liquidation, between two corporations
more than 50 per cent in value of the
outstanding stock of each ofwhich is
owned, directly or indirectly, by or for the
same individual, if either one of such
corporations with respect to the taxable
year of the corporation preceding the date
of the sale or exchange was, under the law
applicable to such taxable year, a
personal holding company or a foreign
personal holding company;
(f) Between a grantor and a fiduciary of any
trust;
(g) Between the fiduciary of a trust and the
fiduciary of another trust, if the same
person is a grantor with respect to each
trust; or
(h) Between a fiduciary of a trust and a
beneficiary of such trust.

Commissions paid in purchasing securities are a

part of the cost of such securities.
Commissions paid in selling securities are an
offset against the selling price.
Expenses of the administration of an estate, such
as court costs, attorney's fees, and executor's
commissions, are chargeable against the "corpus"
of the estate and are not allowable deductions.
Amounts to be assessed and paid under an
agreement between bondholders or shareholders
of a corporation, to be used in a reorganization of
the corporation, are investments of capital and
not deductible for any purpose in return of
income.
In the case of a corporation, expenses for
organization, such as incorporation fees,
attorney's fees and accountants' charges, are
ordinarily capital expenditures; but where such
expenditures are limited to purely incidental
expenses, a taxpayer may charge such items
against income in the year in which they are
incurred. A holding company which guarantees
dividends at a specified rate on the stock of a
subsidiary corporation for the purpose of
securing new capital for the subsidiary and
increasing the value of its stockholdings in the
subsidiary may not deduct amounts paid in
carrying out this guaranty in computing its net
income, but such payments may be added to the
cost of its stock in the subsidiary.
SECTION 121.Premiums on life insurance of
employees. Any amounts paid for premiums
on any life insurance policy covering the life of an
28

TAXATION.rbg

[DEDUCTIONS]

INDIVIDUALS

between the spouses for the purpose of

determining their respective taxable income.

(RA 9504) SEC. 2. Section 24(A) of Republic

Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is
hereby further amended to read as follows:

"Provided, That minimum wage earners as

defined in Section 22 (HH) of this Code shall
be exempt from the payment of income tax
on their taxable income: Provided, further,
That the holiday pay, overtime pay, night
shift differential pay and hazard pay received
by such minimum wage earners shall likewise
be exempt from income tax.

"SEC. 24. Income Tax Rates.

"(A) Rates of Income Tax on Individual
Citizen and Individual Resident Alien of the
Philippines. -

"x x x."

"(1) x x x:
"x x x; and
"(c) On the taxable income defined in Section
31 of this code, other than income subject to
tax under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all
sources within the Philippines by an
individual alien who is a resident of the
Philippines.

(Tax Code) Section 25. Tax on Nonresident

Alien Individual.
(A) Nonresident Alien Engaged in trade
or Business Within the Philippines.
(1) In General. - A nonresident alien
individual engaged in trade or business in
the Philippines shall be subject to an
income tax in the same manner as an
individual citizen and a resident alien
individual, on taxable income received
from all sources within the Philippines. A
nonresident alien individual who shall
come to the Philippines and stay therein
for an aggregate period of more than one
hundred eighty (180) days during any
calendar year shall be deemed a
'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code
notwithstanding.

"(2) Rates of Tax on Taxable Income of

Individuals. - The tax shall be computed in
accordance with and at the rates established
in the following schedule:
"Not over P10,000

........

5%

"Over P10,000 but not over

P30,000

........

P500+10% of
the excess over
P10,000

"Over P30,000 but not over

P70,000

........

P2,500+15% of
the excess over
P30,000

"Over P70,000 but not over

P140,000

........

P8,500+20%
of the excess
over P70,000

"Over P140,000 but not over

P250,000

........

P22,500+25%
of the excess
over P140,000

"Over P250,000 but not over

P500,000

........

P50,000+30%
of the excess
over P250,000

"Over P5000,000

........

P125,000+32%
of the excess
over P500,000

(2) Cash and/or Property Dividends

from a Domestic Corporation or Joint
Stock Company, or Insurance or Mutual
Fund Company or Regional Operating
Headquarter or Multinational Company,
or Share in the Distributable Net Income
of a Partnership (Except a General
Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation
or Association., Interests, Royalties,
Prizes, and Other Winnings. - Cash
and/or property dividends from a
domestic corporation, or from a joint
stock company, or from an insurance or
mutual fund company or from a regional
operating headquarter of multinational
company, or the share of a nonresident
alien individual in the distributable net
income after tax of a partnership (except

"For married individuals, the husband and

wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their
individual income tax based on their
respective total taxable income: Provided,
that if any income cannot be definitely
attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
29

TAXATION.rbg

[DEDUCTIONS]

a general professional partnership) of

which he is a partner, or the share of a
nonresident alien individual in the net
income after tax of an association, a joint
account, or a joint venture taxable as a
corporation of which he is a member or a
co-venturer; interests; royalties (in any
form); and prizes (except prizes
amounting to Ten thousand pesos
(P10,000) or less which shall be subject
to tax under Subsection (B)(1) of Section
24) and other winnings (except
Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income
tax of twenty percent (20%) on the total
amount thereof: Provided, however, that
royalties on books as well as other literary
works, and royalties on musical
compositions shall be subject to a final
tax of ten percent (10%) on the total
amount thereof: Provided, further, That
cinematographic films and similar works
shall be subject to the tax provided under
Section 28 of this Code: Provided,
furthermore, That interest income from
long-term deposit or investment in the
form of savings, common or individual
trust
funds,
deposit
substitutes,
investment management accounts and
other
investments
evidenced
by
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under
this Subsection: Provided, finally, that
should the holder of the certificate preterminate the deposit or investment
before the fifth (5th) year, a final tax shall
be imposed on the entire income and
shall be deducted and withheld by the
depository bank from the proceeds of the
long-term
deposit
or
investment
certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5)
years -

5%;

Three (3) years to less than four

(4) years -

12%; and

Less than three (3) years -

prescribed under Subsections (C) and (D)

of Section 24.
(B) Nonresident Alien Individual Not
Engaged in Trade or Business
Within the Philippines. - There shall
be levied, collected and paid for each
taxable year upon the entire income
received from all sources within the
Philippines by every nonresident alien
individual not engaged in trade or
business within the Philippines as
interest, cash and/or property dividends,
rents,
salaries,
wages,
premiums,
annuities, compensation, remuneration,
emoluments,
or
other
fixed
or
determinable annual or periodic or casual
gains, profits, and income, and capital
gains, a tax equal to twenty-five percent
(25%) of such income. Capital gains
realized by a nonresident alien individual
not engaged in trade or business in the
Philippines from the sale of shares of
stock in any domestic corporation and
real property shall be subject to the
income tax prescribed under Subsections
(C) and (D) of Section 24.
(C) Alien Individual Employed by
Regional or Area Headquarters and
Regional Operating Headquarters
of Multinational Companies. - There
shall be levied, collected and paid for
each taxable year upon the gross income
received by every alien individual
employed
by
regional
or
area
headquarters and regional operating
headquarters
established
in
the
Philippines by multinational companies
as
salaries,
wages,
annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances, from such regional or area
headquarters and regional operating
headquarters, a tax equal to fifteen
percent (15%) of such gross income:
Provided, however, That the same tax
treatment shall apply to Filipinos
employed and occupying the same
position as those of aliens employed by
these multinational companies. For
purposes of this Chapter, the term
'multinational company' means a foreign
firm or entity engaged in international
trade with affiliates or subsidiaries or

20%.

(3) Capital Gains. - Capital gains realized

from sale, barter or exchange of shares of
stock in domestic corporations not traded
through the local stock exchange, and real
properties shall be subject to the tax
30

TAXATION.rbg

[DEDUCTIONS]

branch offices in the Asia-Pacific Region

and other foreign markets.

PERSONAL EXEMPTION AND OPTIONAL

STANDARD DEDUCTION (OSD)
Personal Exemption

(D) Alien Individual Employed by

Offshore Banking Units. - There shall
be levied, collected and paid for each
taxable year upon the gross income
received by every alien individual
employed by offshore banking units
established in the Philippines as salaries,
wages,
annuities,
compensation,
remuneration and other emoluments,
such as honoraria and allowances, from
such off-shore banking units, a tax equal
to fifteen percent (15%) of such gross
income: Provided, however, That the
same tax treatment shall apply to
Filipinos employed and occupying the
same positions as those of aliens
employed by these offshore banking
units.

Single Married Individual (or

judicially declared as legally
separated without any
dependent)
Head of Family (unmarried
or legally separated with
qualified dependent/s)
Each married individual
Each dependent (not
exceeding 4)

P20,000

25,000
32,000
8,000

Head of Family
1) an unmarried/legally separated man/woman
with:
(a) One or both parent
(b) One or more brothers or sister
(c) One or more legitimate, recognized
natural/legally adopted children
2) Who are living with & dependent upon him
for their chief support
3) Where such brothers/sisters/children are:
(a) Not more than 21 years old
(b) Unmarried, and
(c) Not gainfully employed
(d) Or, where such children, brothers/sister,
regardless of age, are incapable of self
support because of mental or physical
defect
An illegitimate child is within the meaning of a
recognized natural child.
Under the provision on additional exemption
for dependents, illegitimate children are
specifically
included
under
the
term
dependents.
A senior citizen, whether relative or not, living
with the taxpayer or not, can be classified as a
dependent to make a taxpayer a head of a
family not exceeding 4 (RA 7432)
In case of married individuals, where only 1 of
the spouses is deriving gross income, only such
spouse shall be allowed additional exemption.
Chief support means more than one half of the
requirements for support.
Parents, brothers, and sisters, who are qualified
dependents may entitle the taxpayer to the
personal exemption of P25,000 as head of the
family but not to the additional exemption of
P8,000.

(E) Alien Individual Employed by

Petroleum Service Contractor and
Subcontractor. - An Alien individual
who is a permanent resident of a foreign
country but who is employed and
assigned in the Philippines by a foreign
service contractor or by a foreign service
subcontractor engaged in petroleum
operations in the Philippines shall be
liable to a tax of fifteen percent (15%) of
the
salaries,
wages,
annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances,
received
from
such
contractor or subcontractor: Provided,
however, That the same tax treatment
shall apply to a Filipino employed and
occupying the same position as an alien
employed
by
petroleum
service
contractor and subcontractor.
Any income earned from all other sources within
the Philippines by the alien employees referred to
under Subsections (C), (D) and (E) hereof shall
be subject to the pertinent income tax, as the case
may be, imposed under this Code.

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TAXATION.rbg

[DEDUCTIONS]

Note: Personal and additional exemptions are

available only to business income and
compensation income earners.

not residing therein, and shall not exceed the

aforementioned amounts.
NRANETB cannot claim any personal or
additional exemption.

Non-resident aliens engaged in trade or

business (NRAETB) may be entitled to personal
exemptions subject to reciprocity:

a. Dependent = legitimate/illegitimate/legally
adopted child chiefly dependent upon &
living with the taxpayer if such dependent is
not > 21 years old, unmarried & not gainfully
employed OR if such dependent regardless of
age is incapable of self-support because of
mental/physical defect

1.

country from which he is a citizen has an

income tax law; and
2. the income tax law of his country allows
personal exemption to citizens of the
Philippines not residing therein but deriving
income therefrom and not to exceed the
amount allowed in NIRC.
3. the personal exemption shall be equal to that
allowed by the income tax law of the country
to a citizen of the Philippines not residing
therein, or the amount provided in the NIRC,
whichever is LOWER.

i.

For married individuals, claimed by only

1 of the spouses
ii. For legally separated spouses, claimed
only by the spouse who has custody of the
children; may be claimed by both as long
as they have custody of the children but
total amount claimed by both shall not
exceed the maximum allowed

ADDITIONAL EXEMPTION: P8,000 for

EACH of the qualified dependent children not
exceeding 4 in number.

b. Change of Status

Qualified dependent children legitimate,

recognized natural, illegitimate and legally
adopted.

i.

The death of the taxpayer during the

taxable year shall not affect the amount of
personal and additional exemptions his
estate can claim, as if he died at the end
of such year
ii. If the taxpayer got married or should
have additional dependent (child born
within the year) during the taxable year,
he may claim the corresponding personal
exemptions in full for such year
iii. If the spouse should die or any of the
dependents become twenty one years of
age, or become gainfully employed during
the taxable year, the taxpayer may still
claim the same exemptions as if he/she
died, or became twenty one years old or
became gainfully employed at the close of
such year.

The proper claimant of the additional exemption

would be the husband, being the head of the
family except under the following cases:
1. husband is unemployed
2. husband is working abroad like an OFW or a
seaman
3. husband explicitly waived his right of the
exemption in favor of his wife in the
withholding exemption certificate.
Senior Citizen is:
1. any resident citizen of the Philippines
2. at least sixty 60 years old, including those
who have retired from both government
offices and private enterprises, and
3. has an income of not more than sixty
thousand pesos per annum subject to the
review
of
the
National
Economic
Development Authority(NEDA) every three
years.

NOTE:
Individuals not entitled to personal and
additional exemptions:
a. Non-resident alien NOT engaged in trade or
business
b. Alien individual employed by Regional or
Area
Headquarters
of
Multinational
Companies
c. Alien Individual employed by Offshore
Banking Units

NRAETB may deduct personal exemption

(but NOT additional exemption), but only to
the extent allowed by his country to Filipinos

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TAXATION.rbg

[DEDUCTIONS]

d. Alien Individual employed by Petroleum

Service Contractor and Subcontractor

extrajudicially foreclosed the collateral and the

property was sold to the bank as the highest
bidder in the public auction conducted by the
Office of the Provincial Sheriff of Lucena City. A
Certificate of Sale was issued in favor of the bank
and the same was registered on October 1, 1996.
Before the expiration of the one-year redemption
period, the mortgagors notified the bank of its
intention to redeem the property.

Deduction for Estate or Trust - P20,000

SPECIAL
RULES
COMPANIES

ON

INSURANCE

1. Income & Deductions of Insurance

Companies

Balance of Principal Add:

Interest Due Late Payment Charges MRI Fire
Insurance Foreclosure Expenses P 9,551,827.64
1,417,761.24 155,546.25 0.00 0.00 155,817.23
Sub-total
Less: Unapplied Payment P 11,280,952.36
908,241.01
Total Amount Due As Of 08/07/96 (Auction
Date) 10,372,711.35
Add: Attorneys Fees (15%) 1,555,906.70
Liquidated Damages (15%) 1,555,906.70
Interest on P 10,372,711.35 from 08/07/96 to
04/07/97 (243 days) at 17.25% p.a. 1,207,772.58
xxxx

a. Special deductions: net additions

required by law to reserve funds & the
sums other than dividends paid w/in the
yr. on policy & annuity contracts;
released reserve treated as income for the
yr. of release
b. Mutual Insurance Companies
Shall not report as income premium
deposits returned to policyholder
Report income received from all other
sources plus such portion of premium
deposits retained by the companies
for purposes other than payment of
losses & expenses & reinsurance
reserves

Asset Acquired Expenses:

Documentary Stamps 155,595.00
Capital Gains Tax 518,635.57
Foreclosure Fee 207,534.23
Registration and Filing Fee 23,718.00
Addl. Registration & Filing Fee 660.00
906,142.79
Interest on P 906,142.79 from 08/07/96 to
04/07/97 (243 days) at 17.25% p.a. 105,509.00
Cancellation Fee 300.00
Total Amount Due As Of 04/07/97
(Subject to Audit) P 15,704,249.12

c. Mutual
Marine
Insurance
Companies
Include in gross income, gross
premiums collected & received by
them less amounts paid for
reinsurance; include as deductions
amounts repaid to policyholders on
account of premiums previously paid
by them & interest paid upon those
amounts between the ascertainment
& payment thereof

Under the mortgage loan agreement, the

mortgagors requested for the elimination of
liquidated damages and reduction of attorneys
fees and interest (1% per month) but the bank
refused. On May 21, 1997, the mortgagors
redeemed the property by paying the sum of
P15,704,249.12. and Certificate of Redemption
was issued by the bank.

d. Assessment Insurance Companies

Deduct from gross income the actual
deposit of sums w/ the officers of the
Phil. government as additions to
guarantee or reserve funds
SUPREME TRANSLINER v. BPI

The mortgagors filed a complaint against the

bank to recover the allegedly unlawful and
excessive charges totaling P5,331,237.77, with
prayer for damages and attorneys fees before
RTC of Lucena City, Branch 57. The bank
asserted that the redemption price reflecting the
stipulated interest, charges and/or expenses, is
valid, legal and in accordance with documents

FACTS:
Supreme Transliner, Inc. represented by its
Managing Director, Moises C. Alvarez, and
Paulita S. Alvarez, obtained a loan in the amount
of P9,853,000.00 from BPI Family Savings Bank
with a 714-square meter lot as collateral. Plaintiff
was unable to pay the same. The respondent bank
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TAXATION.rbg

[DEDUCTIONS]

duly signed by the mortgagors. The claims are

deemed waived and the mortgagors are already
estopped from questioning the terms and
conditions of their contract.

Deeds on the certificate of title. It is therefore

clear that in foreclosure sale, there is no actual
transfer of the mortgaged real property until after
the expiration of the one-year redemption period
as provided in Act No. 3135, or An Act or
Regulate the Sale of Property Under Special
Powers Inserted In or Annexed to Real Estate
Mortgages, and title thereto is consolidated in the
name of the mortgagee in case of nonredemption. In the interim, the mortgagor is
given the option whether or not to redeem the
real property. The issuance of the Certificate of
Sale does not by itself transfer ownership. RR No.
4-99 (March 16, 1999), further amends RMO No.
6-92 relative to the payment of capital gains tax
and documentary stamp tax on extrajudicial
foreclosure sale of capital assets initiated by
banks, finance and insurance companies. Under
this RMO, in case the mortgagor exercises his
right of redemption within one year from the
issuance of the certificate of sale, no capital gains
tax shall be imposed because no capital gain has
been derived by the mortgagor and no sale or
transfer of real property was realized. Moreover,
the transaction will be subject to documentary
stamp tax of only PhP 15 because no land or
realty was sold or transferred for a consideration.
BPI Family Savings Bank, Inc. is hereby ordered
to RETURN the amounts representing capital
gains and documentary stamp taxes to
petitioners Supreme Transliner, Inc., Moises C.
Alvarez and Paulita Alvarez, and to retain only
the sum provided in RR No. 4-99 as documentary
stamps tax due on the foreclosure sale. BPI
Family Savings Bank, Inc. is hereby declared
entitled to the attorneys fees and liquidated
damages included in the total redemption price
paid by Supreme Transliner, Inc.

The trial court rendered its decision dismissing

the complaint and the banks counterclaims. The
trial court held that plaintiffs-mortgagors are
bound by the terms of the mortgage loan
documents. The mortgagors appealed to the CA
which reversed the trial courts decision.
ISSUE:
Whether the mortgagee-bank is liable to pay the
capital gains tax upon the execution of the
certificate of sale and before the expiry of the
redemption period?
HELD:
NO. It is clear that 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
because before the period expires there is yet no
transfer of title and no profit or gain is realized by
the mortgagor.
Under Revenue Regulations No. 13-85
(December 12, 1985), every sale or exchange or
other disposition of real property classified as
capital asset under the National Internal Revenue
Code (NIRC) shall be subject to final capital gains
tax. The term sale includes pacto de retro and
other forms of conditional sale. Section 2.2 of
(RMO) No. 29-86, as amended by RMO Nos. 1688, 27-89 and 6-92, states that these conditional
sales necessarily includes mortgage foreclosure
sales (judicial and extrajudicial foreclosure
sales).

M.E Holdings vs CIR

Further, for real property foreclosed by a bank on

or after September 3, 1986, the capital gains tax
and documentary stamp tax must be paid before
title to the property can be consolidated in favor
of the bank. Under Section 63 of P. D. No. 1529,
or the Property Registration Decree, if no right of
redemption exists, the certificate of title of the
mortgagor shall be cancelled, and a new
certificate issued in the name of the purchaser.
But where the right of redemption exists, the
certificate of title of the mortgagor shall not be
cancelled, but the certificate of sale and the order
confirming the sale shall be registered by brief
memorandum thereof made by the Register of

Facts:
On April 15, 1996, petitioner M.E. Holding
Corporation (M.E.) filed its 1995 Corporate
Annual Income Tax Return, claiming the 20%
sales discount it granted to qualified senior
citizens. M.E. treated the discount as deductions
from its gross income purportedly in accordance
with Revenue Regulation No. (RR) 2-94, Section
2(i) of the Bureau of Internal Revenue (BIR)
issued on August 23, 1993. Sec. 2(i)
The deductions M.E. claimed amounted to PhP
603,424. However, it filed the return under
protest, arguing that the discount to senior
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TAXATION.rbg

[DEDUCTIONS]

citizens should be treated as tax credit under Sec.

4(a) of RA 7432, and not as mere deductions
from M.E.'s gross income as provided under RR
2-94.Subsequently, on December 27, 1996, M.E.
sent BIR a letter-claim dated December 6, 1996,
stating that it overpaid its income tax owing to
the BIR's erroneous interpretation of Sec. 4(a) of
RA 7432.

INADVERTENTLY DID NOT TURN OVER TO

THE PETITIONER'S COUNSEL.
WHETHER OR NOT THE TERM "COST"
UNDER PARAGRAPH (A) SECTION 4 OF
REPUBLIC ACT 7432 IS EQUIVALENT ONLY
TO ACQUISITION COST:
Ruling:
The petition is partly meritorious.

Due to the inaction of the BIR, and to toll the

running of the two-year prescriptive period in
filing a claim for refund, M.E. filed an appeal
before the Court of Tax Appeals (CTA),
reiterating its position that the sales discount
should be treated as tax credit, and that RR 2-94,
particularly Section 2(i), was without effect for
being inconsistent with RA 7432.

1. M.E. fails to persuade. The determination of

the exact amount M.E. claims as the 20% sales
discount it granted to the senior citizens calls for
an evaluation of factual matters. The unyielding
rule is that the findings of fact of the trial court,
particularly when affirmed by the CA, are binding
upon this Court, save when the lower courts had
overlooked, misunderstood, or misinterpreted
certain facts or circumstances of weight, which, if
properly considered, would affect the result of the
case and warrant a reversal of the decision. The
instant case does not fall under the exception;
hence, we do not find any justification to review
all over again the evidence presented before the
CTA, and the factual conclusions deduced
therefrom.

The CTA ruled that the 20% sales discount

granted to qualified senior citizens should be
treated as tax credit and not as item deduction
from the gross income or sales, Unfortunately,
M.E. failed to properly support the claimed
discount with corresponding cash slips. Thus, the
CTA reduced M.E.'s claim for PhP 603,923.46
sales discount to PhP 362,574.57 after the CTA
disallowed PhP 241,348.89 unsupported claims,
and consequently lowered the refundable amount
to PhP 122,195.74.

Lest it be overlooked, the Rules of Court is of

suppletory
application
in
quasi-judicial
proceedings. Be this as it may, the CTA was
correct in disallowing and not considering the
belatedly-submitted cash slips to be part of the
20% sales discount for M.E.'s taxable year 1995.
This is as it should be in the light of Sec. 34 of
Rule 132 prescribing that no evidence shall be
considered unless formally offered with a
statement of the purpose why it is being offered.
In addition, the rule is that the best evidence
under the circumstance must be adduced to
prove the allegations in a complaint, petition, or
protest. Only when the best evidence cannot be
submitted
may
secondary
evidence
be
considered. But, in the instant case, the
disallowed cash slips, the best evidence at that
time, were not part of M.E.'s offer of evidence.
While it may be true that the authenticated
special record books yield the same data found in
the cash slips, they cannot plausibly be
considered by the courts a quo and made to
corroborate pieces of evidence that have, in the
first place, been disallowed. Recall also that M.E.
offered the disallowed cash slips as evidence only
after the CTA had rendered its assailed decision.
Thus, we cannot accept the excuse of

Aggrieved, M.E. went to the CA on a petition for

review, the CA dismissed the petition.
Hence this petition
Issues:
WHETHER OR NOT THE HONORABLE COURT
OF APPEALS GRAVELY ERRED AND HAS
DEVIATED FROM APPLICABLE LAWS AND
JURISPRUDENCE IN NOT APPRECIATING
OTHER COMPETENT EVIDENCE PROVING
THE AMOUNT OF DISCOUNTS GRANTED TO
SENIOR CITIZENS AND MERELY RELYING
SOLELY ON THE CASH SLIPS.
WHETHER OR NOT THE HONORABLE COURT
OF APPEALS GRAVELY ERRED AND HAS
COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR IN EXCESS OF
JURISDICTION IN AFFIRMING THE COURT
OF TAX APPEALS' DENIAL OF PETITIONER'S
MOTION TO ORDER AND SUBMIT AS
DOCUMENTARY [EVIDENCE] THE CASH
SLIPS
WHICH
THE
INDEPENDENT
CERTIFIED
PUBLIC
ACCOUNTANT
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TAXATION.rbg

[DEDUCTIONS]

inadvertence of the independent auditor as

excusable negligence. As aptly put by the CA, the
belatedly-submitted cash slips do not constitute
newly-found evidence that may be submitted as
basis for a new trial or reconsideration of the
decision.

credit, the amount due as tax credit in favor of

M.E. is PhP 151,201.71.
Parenthetically, we note that M.E. originally
prayed for a tax refund for its tax overpayment
for CY 1995. The CTA and the CA granted the
desired refund, albeit at a lower amount due to
their interpretation, erroneous as it turned out to
be, of the term "cost." However, we cannot agree
with the courts a quo on what M.E. is entitled to.
RA 7432 expressly provides that the sales
discount may be claimed as tax credit, not as tax
refund.

We reiterate at this juncture that claims for tax

refund/credit, as in the instant case, are in the
nature of claims for exemption. Accordingly, the
law relied upon is not only construed in
strictissimi juris against the taxpayer, but also the
proofs presented entitling a taxpayer to an
exemption are strictissimi scrutinized.

It ought to be noted, however, that on February

26, 2004, RA 9257, or The Expanded Senior
Citizens Act of 2003, amending RA 7432, was
signed into law, ushering in, upon its effectivity
on March 21, 2004, a new tax treatment for sales
discount purchases of qualified senior citizens of
medicines. Sec. 4(a) of RA 9257

2. We do not agree with M.E. Grave abuse of

discretion connotes capricious, whimsical,
arbitrary, or despotic exercise of jurisdiction. The
CA surely cannot be guilty of gravely abusing its
discretion when it refused to consider, in lieu of
the unsubmitted additional cash slips, the special
record books which are only secondary evidence.
The cash slips were the best evidence. Also, the
CA noted that the belatedly-offered cash slips
were presented only after the CTA had rendered
its decision. All these factors argue against the
notion that the CA had, in sustaining the CTA,
whimsically and capriciously exercised its
discretion.

Conformably, starting taxable year 2004, the

20% sales discount granted by establishments to
qualified senior citizens is to be treated as tax
deduction, no longer as tax credit
CARMELINO F. PANSACOLA vs.
COMMISSIONER OF INTERNAL
REVENUE

3. M.E.'s contention is correct. In Bicolandia

Drug Corporation (formerly Elmas Drug
Corporation) v. Commissioner of Internal
Revenue, we interpreted the term "cost" found in
Sec. 4(a) of RA 7432 as referring to the amount of
the 20% discount extended by a private
establishment to senior citizens in their purchase
of medicines. There we categorically said that it is
the Government that should fully shoulder the
cost of the sales discount granted to senior
citizens. Thus, we reversed and set aside the CA's
Decision in CA-G.R. SP No. 49946, which
construed the same word "cost" to mean the
theoretical acquisition cost of the medicines
purchased
by qualified
senior citizens.
Accordingly, M.E. is entitled to a tax credit
equivalent to the actual 20% sales discount it
granted to qualified senior citizens.

FACTS:
On April 13, 1998, petitioner Carmelino F.
Pansacola filed his income tax return for the
taxable year 1997 that reflected an overpayment
of P5,950. He claimed the increased amounts of
personal and additional exemptions under
Section 35 of the NIRC and thus prayed for a
refund with the Bureau of Internal Revenue,
which was denied. Later, the Court of Tax
Appeals also denied his claim because according
to the tax court, "it would be absurd for the law to
allow the deduction from a taxpayers gross
income earned on a certain year of exemptions
availing on a different taxable year" Petitioner
sought reconsideration, but the same was denied.
On appeal, the Court of Appeals denied his
petition for lack of merit.

With the disallowance of PhP 241,348.89 for

being unsupported, and the net amount of PhP
362,574.57 for the actual 20% sales discount
granted to qualified senior citizens properly
allowed by the CTA and fully appreciated as tax

Petitioner, on the other hand, insists that the

increased exemptions were already available on
April 15, 1998, the deadline for filing income tax
returns for taxable year 1997, because the NIRC
was already effective. He reasons that by making
the said law effective on the 1998 tax period
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TAXATION.rbg

[DEDUCTIONS]

would postpone the availability of the increased

exemptions and literally defer the effectivity of
the NIRC to January 1, 1999.

covers his income for the calendar year 1997. The

law cannot be given retroactive effect. It is
established that tax laws are prospective in
application, unless it is expressly provided to
apply retroactively. In the NIRC, we note, there is
no specific mention that the increased amounts
of personal and additional exemptions under
Section 35 shall be given retroactive effect.
Conformably too, personal and additional
exemptions are considered as deductions from
gross income. Deductions for income tax
purposes partake of the nature of tax exemptions,
hence strictly construed against the taxpayer and
cannot be allowed unless granted in the most
explicit and categorical language too plain to be
mistaken. They cannot be extended by mere
implication or inference. And, where a provision
of law speaks categorically, the need for
interpretation is obviated, no plausible pretense
being entertained to justify non-compliance. All
that has to be done is to apply it in every case that
falls within its terms.

ISSUE:
WON the exemptions under Section 35 of the
NIRC, which took effect on January 1, 1998, be
availed of for the taxable year 1997.
HELD:
NO. Section 31 defines "taxable income" as the
pertinent items of gross income specified in the
NIRC, less the deductions and/or personal and
additional exemptions, if any, authorized for such
types of income by the NIRC or other special
laws. As defined in Section 22 (P), "taxable year"
means the calendar year, upon the basis of which
the net income is computed under Title II of the
NIRC. Section 43 also supports the rule that the
taxable income of an individual shall be
computed on the basis of the calendar year. In
addition, Section 45 provides that the deductions
provided for under Title II of the NIRC shall be
taken for the taxable year in which they are "paid
or accrued" or "paid or incurred."

Accordingly, the Court of Appeals and the Court

of Tax Appeals were correct in denying
petitioners claim for refund.

Clearly from the above quoted provisions, what

the law should consider for the purpose of
determining the tax due from an individual
taxpayer is his status and qualified dependents at
the close of the taxable year and not at the time
the return is filed and the tax due thereon is paid.
In the case of petitioner, the availability of the
aforementioned deductions if he is thus entitled,
would be reflected on his tax return filed on or
before the 15th day of April 1999 as mandated by
Section 51 (C) (1). Since the NIRC took effect on
January 1, 1998, the increased amounts of
personal and additional exemptions under
Section 35, can only be allowed as deductions
from the individual taxpayers gross or net
income, as the case maybe, for the taxable year
1998 to be filed in 1999. The NIRC made no
reference that the personal and additional
exemptions shall apply on income earned before
January 1, 1998.
There is nothing in the law which shows that any
intent to give retroactive effect to Section 35. At
the time petitioner filed his 1997 return and paid
the tax due thereon in April 1998, the increased
amounts of personal and additional exemptions
in Section 35 were not yet available. It has not yet
accrued as of December 31, 1997, the last day of
his taxable year. Petitioners taxable income
37