TAXATION

(Tax 1 exercises)

1.
What is the difference between the tax treatment of a Proprietary Private
Educational institution and a Non-stock, Non-profit Private Educational Institution?
Answer: Proprietary Educational Institution is imposed with 10% special tax rate on its net income, giving it tax
exemption up to the extent of 90% but subject to Predominance test, while Non-stock Non-profit Educational
Institution is exempt from taxes.

Sec. 27 (B), NIRC

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income.

Proprietary Private Educational Institutions

Tax Rate and Base 10% on net income (except on income subject to capital gains
tax and passive income subject to final tax) within and without the Philippines
CAVEAT: If gross income from unrelated trade or business or other activity exceeds 50% of total gross income
derived from all sources, the tax rate of 30% shall be imposed on the entire taxable income (Predominance Test)
- Unrelated trade, business or other activity any trade, business or other
activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution.
- Proprietary educational institution any private school maintained and administered by private individuals or
groups with an issued permit to operate from the DECS, CHED or TESDA.

Sec. 4 (3), Art. XIV of the 1987 Phil. Constitution

XXX
XXX
XXX
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties.

Note: Incomes which are unrelated to school operations are taxable.

Q: Under Article XIV, Section 4(3) of the 1987 Constitution, all revenues and assets of non-stock, nonprofit educational institutions, used actually, directly and exclusively for educational purposes, are
exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as
interest income on bank deposits and yields from deposit substitutes automatically exempt from
taxation?
A: No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt
from taxation. There must be a showing that the incomes are used actually, directly, and exclusively for
educational purposes.
The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation.
There is still a requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to
be noted that the 1987 Constitution does not distinguish with respect to the source or origin of the income. The
distinction is with respect to the use which should be actual, direct and exclusive for educational purposes.
Consequently, the provision of Section 30 of the NIRC of 1997, that a non-stock and non-profit educational
institution is exempt from taxation only in respect to income received by them as such could not affect the
constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax
Code should not make distinctions. (2000 Bar Question)

2.

What are the Corporations not subject to the Minimum Corporate Income Tax?
ANSWER:

The following are NOT subject to MCIT:

1. Domestic Corporation operating as Proprietary educational institutions
2. Domestic corporations engaged in non-profit hospital operation as they are
subject to 10% of their taxable income.
3. Foreign Currency Deposit unit as their income from foreign currency
transactions with foreign commercial and local banks and their interest income
from foreign currency loans granted to residents of the Philippines are subject
to 10% tax on their income.
4. Firms that are taxed under a special income tax regime.
5. Resident foreign corporation engaged in the business of International carrier as
they are subject to 2 % of their Gross Philippine Billing.
6. Resident Foreign Corporation engaged in Offshore Banking Units (OBUs) as
their income from foreign currency transactions with local commercial bank and
foreign banks and interest income from currency loans granted to residents of
the Philippines are subject to a final income tax of ten percent (10%) of gross
income
7. Regional operating headquarters since they are subject to a ten- percent (10%)
of their taxable income
8. (E) Minimum Corporate Income Tax on Domestic Corporations. 9. (1) Imposition of Tax - A minimum corporate income tax of two percent (2%0 of
the gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such corporation

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10.

11.

12.

13.

14.

15.

16.

commenced its business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section for the taxable
year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. The Secretary of Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined - For purposes of applying the minimum corporate
income tax provided under Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and allowances and cost of
goods sold "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and
use.
For a trading or merchandising concern, "cost of goods sold' shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold including insurance while
the goods are in transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall
include all costs of production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services
"Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and
cost of supplies: Provided, however, That in the case of banks, "cost of
services" shall include interest expense.

18. b. Those engaged in hospital operations which are non-profit subject to tax at
10% on their taxable income;
19. c. Those engaged in business as depositary banks under the expanded foreign
currency deposit system subject to final income tax at 10% of such income;
20. d. Firms that are taxed under a special income tax regime such as those in
accordance with RA 7916 and 7227 (the PEZA Law and the Bases Conversion
Development Act, respectively) (Sec. 2.27 E [8], RR 9-98)
On Foreign Corporations:
a. Those engaged in business as international carrier subject to tax at 2%
of their Gross Philippine Billings;
21. b. Those engaged in business as offshore banking unit;
22. c. Those engaged in business as regional operating headquarters subject to
tax at 10% of their taxable income;
23. d. Firms that are taxed under a special income tax regime such as those in
accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion
Development Act, respectively).
24. Note: MCIT does not apply to the foregoing since they are not subject to
the NCIT.

3.

ANSWER:
No. PHIC is not subject to income tax. Sec. 27 (c) of NIRC states that: The
provisions of existing special or general laws to the contrary not withstanding, all corporations, agencies,
or instrumentalities owned or controlled by the government, EXCEPT GSIS, SSS, PHIC and PCSO shall
pay such rate of tax upon their taxable income as are imposed by this section upon corporations or
associations engaged in a similar business, industry or activity.
NO. Under Sec. 27 (c) of the NIRC the following corporations have been granted
exemptions:
1. Government Service Insurance System
2. Social Security System
3. Philippine Health Insurance Corporation
4. Philippines Charity Sweepstakes Office
5. Local Water Districts (RA 10026)

4.
On Domestic Corporations:
17. a. Those operating as proprietary educational institutions subject to tax at 10%
on their taxable income;

Is the Philippine Health Insurance Corporation subject to Income Tax?

What is the meaning of De Minimis Benefits?

ANSWER:
Under the BIR regulation 8-2012 De minimis benefit is defined as facilities or
privileges furnished or offered by an employer to his employees that are of relatively small value and are
offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment,
or efficiency of his employees.

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These are facilities or privileges furnished or offered by an employer to his employees that are of
relatively small value and are offered or furnished by the employer merely as a means of promoting the
health, goodwill, contentment and efficiency of his employees.
Q: What are included as de minimis fringe benefits and give their respective ceiling amounts?
A: As per RR 52008, de minimis
benefits include:
Monetized unused
vacation
leave
credits
of
employees

Medical
allowance
dependents
employees

cash
to
of

Rice subsidy

Uniforms
and
clothing allowances
Actual
benefits

medical

Qualify:
1. Private employees:
a. Vacation leave exempt up to 10 days
b. Sick leave
always taxable
2.
Government
employees:
Vacation and sick
leave are always tax
exempt regardless of
the no. of days.
Not exceeding P750
per semester or P125
per month

P1,500 or one sack

of 50-kg rice per
month amounting to
not more than P1,500

Not
exceeding
P4,000 per annum
Not
exceeding
P10,000 per annum

Laundry allowance

Not exceeding P300

per month

Employee
achievement
awards
e.g. for length of
service or safety
achievement

In the form of tangible

personal
property
other than cash or gift
certificate with an
annual
monetary
value not exceeding
P10,000

Gifts given during

Christmas
and
major anniversary
celebrations

Not
exceeding
P5,000 per employee
per annum

Flowers, fruits and

books or similar
items given to
employees under
certain
circumstances

Reasonable value
depending on the
employers capacity

Daily
meal
allowance
for
overtime work

Not exceeding 25%

of the basic minimum
wage

Q: What is the treatment in case of excess of the de minimis benefits over their respective ceilings
prescribed by the revenue regulation?
A: It shall be considered as part of other benefits under Sec. 32 B [7] e of the NIRC.
Note: Under Sec. 32 B [7] e of the NIRC, 13th month pay and other benefits are excluded from gross income
provided that they do not exceed P30,000. Any excess thereof is considered part of the compensation income of
an individual.
Q: How de minimis benefits are taxed?
GR: De minimis benefits are not taxable.
XPN: If the total amount of de minimis benefits exceed the P30,000 limit, the excess shall be considered
as part of the compensation income.

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5.

Are stock dividends subject to income tax?

Answer: Sec. 73 (b). A stock dividend representing the transfer of surplus to capital account shall not
be subject to tax. However if a corporation cancels or redeems stock issued as dividend at such time
and in such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earning profit.
Q: Is the receipt of stock dividend taxable?
A:
GR: No, stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not subject to income tax as they are nothing but
enrichment through increase in value of capital investment.
XPNs:
1. These shares are later redeemed for consideration by the corporation or otherwise conveyed by the
stockholder to the extent of such corporation.
2. The recipient is other than the shareholder.
3. If the stock dividend issuance resulted in a change in the shareholders equity.
4. Stock dividends equivalent to cash or property resulting in a change of ownership and interest of the
shareholders. (Sec. 24 B [2]; 25 A, B; 28 B [5] b, NIRC)

6.
The requisites for prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic achievement?
ANSWER:
Sec 32 para. 7(c) NIRC. Prizes and awards made primarily in recognition of
religious, charitable, scientific, artistic, literary, or civic achievement but only if:
1. The recipient was selected without any action on his part to enter the contest or
proceeding; and
2. The recipient is not required to render substantial future services as condition to
receiving the prizes or award.

7.
May a taxpayer deduct from his gross income allowance for obsolescence of his
inventory of good for sale?
ANSWER:
Yes. Sec. 34 (F). (F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of
property used in the trade or business. In the case of property held by one person for life with remainder
to another person, the deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of property held in trust, the allowable
deduction shall be apportioned between the income beneficiaries and the trustees in accordance with

the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the
basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the
preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would have
been used had the annual allowance been computed under the method described in
Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under
rules and regulations prescribed by the Secretary of Finance upon recommendation of the
Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon
shall be binding on both the taxpayer and the national Government in the absence of facts and
circumstances not taken into consideration during the adoption of such agreement. The responsibility of
establishing the existence of such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the depreciable property as specified in
the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing
by certified mail or registered mail is served by the party initiating such change to the other party to the
agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any
depreciable and claimed the depreciation expenses as deduction from his gross income, without any
written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid
useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be
considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for
depreciation in respect of all properties directly related to production of petroleum initially placed in
service in a taxable year shall be allowed under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may at any subsequent
date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten (10) years of such
shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under the straight-line
method on the basis of an estimated useful life of five (5) years.

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(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation

in respect of all properties used in mining operations other than petroleum operations, shall be
computed as follows:

a. For individuals - 10% of taxable income before contributions;

b. For corporations - 5% of taxable income before contributions. (Sec. 34 H [1], NIRC)
2. No part of net income of donee inures to the benefit of any private stockholders or individual.

(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected life if the
latter is more than ten (10) years, and the depreciation thereon allowed as deduction from
taxable income: Provided, That the contractor notifies the Commissioner at the beginning of
the depreciation period which depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or
Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or
business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising
out of its use or employment or its non-use in the business trade or profession shall be permitted only
when such property is located in the Philippines.

8.
The limitation for contributions to the government or accredited donee
institutions as deduction from the gross income if the donor is a corporation.
ANSWER:

Sec.34 para. H NIRC.

1. The contribution must be actually paid or made to the Philippine Government
or political subdivision thereof or to any domestic corporation or association
specified by the Tax Code.
2. It must be made within taxable year.
3. It must not exceed 5% of the corporations taxable income before deducting the
contribution.
4. It must be supported by adequate records or receipts.

ANSWER:

Sec 34 H, NIRC
(H) Charitable and Other Contributions. - (1) In General. - Contributions or gifts actually
paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic
corporation or associations organized and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or
to social welfare institutions, or to non-government organizations, in accordance with rules and
regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no
part of the net income of which inures to the benefit of any private stockholder or individual in an
amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the
case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit of this and the following subparagraphs.
Q: What are the limitations for charitable and other contributions as deduction?
A:
1. Amount deductible shall not exceed:

*It must not EXCEED 10% (individual) or 5% (corporation) of the taxpayers taxable income before
charitable contributions.

9.
May a taxpayer who pays interest incurred to acquire property used in his trade
or business be allowed to treat such interest as outright deduction or as a capital
expenditure at his option?
ANSWER:

YES. The option of a taxpayer as provided under Sec. 34 (B) of the NIRC.

YES, at the option of the taxpayer as provided under Sec. 34 B (3) of the NIRC.

XXX
XXX
XXX
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to
acquire property used in trade business or exercise of a profession may be allowed as a deduction or
treated as a capital expenditure.
Q: What is the optional treatment of interest expense on capital expenditure?
A: Interest incurred to acquire property used in trade, business or profession may be allowed either:
1. Treated as capital expenditure, i.e., it forms part of the cost of the asset; or
2. As a deduction. (Sec. 34 B [2], NIRC)
Note: Interest paid in advance, interest periodically amortized and interest incurred to acquire property
used in trade or business is also treated the same, the taxpayer can deduct it as an outright deduction
or capital expenditure.
ILLUSTRATION:
Mr. A wanted to acquire a delivery van worth P1,000,000 for his business. To finance this, he borrowed
P1,000,000 from ABC Bank on January 1, 2005. The loan bears interest of 10%, and both the interest
and principal are payable on December 31, 2005. For income tax purposes, how should Mr. A account
for his interest expense in 2005?
ANSWER: Mr. A has two options. First, he may choose to treat the P100,000 (10% of P1,000,000)
interest expense As amended by RA 9337 as an outright deduction from his gross income in 2005
(which deduction shall be subject to the limitation that it be reduced by an amount equal to 42% of the
taxpayers interest income subjected to final tax). Alternatively, he may choose to capitalize the interest
expense by incorporating its amount to the cost of the vehicle obtained for his business. In this case, the
vehicle will be recorded in his books at a cost of P1,100,000 (purchase price of P1,000,000 plus the
interest expense of P100,000). The total cost of the vehicle will then be gradually allowed as deduction
from the gross income of the succeeding taxable years as depreciation expense.

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10.
Are debts cancelled by the creditor subject to income tax on the part of the
debtor?
ANSWER:
IT DEPENDS.
Condonation/remission of debt
If the creditor condones the indebtedness of the debtor the following rules apply:
1. On account of debtors services to the creditor the same is in taxable income to the debtor.
2. If no services were rendered but the creditor simply condones the debt,
it is taxable
gift and not a taxable income.

11.

taxes is provided under Art. III Sec. 20 of the 1987 Constitution wherein it states that No person shall
be imprisoned for non-payment of a poll tax.
YES, except for non-payment of Poll Tax.
Sec. 254, NIRC
SEC. 254. Attempt to Evade or Defeat Tax. - Any person who willfully
attempts in any manner
to evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by a fine not less
than Thirty thousand
(P30,000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment of not
less than two (2) years
but not more than four (4) years:
Provided, That the conviction or
acquittal obtained under this Section shall not be a bar to the
filing of a civil suit for the
collection of taxes.

Are bad debts written off but subsequently recovered subject to income tax?
ANSWER:
Sec. 34 (E). The recovery of bad debts previously allowed as deduction in the
preceding years shall be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
When a debt which has been written off is subsequently paid, should be reported
as taxable income in the year of recovery. Inasmuch as the taxpayer was benefited in the year the bad
debt was written off by paying a lower income tax, he should now pay income tax on the amount which
he had collected.

Q: May a person be imprisoned for non-payment of tax?

A:
GR: A person may be imprisoned for non-payment of internal revenue taxes, such as income tax as well
as other taxes that are not poll taxes if expressly provided by law.
XPN: A person cannot be sent to prison for failure to pay the community tax.
Q: What is a poll tax?
A: It is a fixed amount upon all persons, or upon all persons of a certain class, residents within
a specified territory, without regard to their property or occupation. It is a tax imposed on a per
head basis. The present poll tax is the community tax.

YES, up to the extent it reduced the income tax liability of the taxpayer or up to the amount he has
benefitted.
Bad Debt Recovery
Tax Benefit Rule Bad debts claimed as a deduction in the preceding year(s) but subsequently
recovered shall be included as part of the taxpayers gross income in the year of such recovery to the
extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of
the bad debt in the prior year resulted in lesser income and hence tax savings for the company. (Sec. 4,
RR 5- 99)

14.

Is interest paid for late payment of taxes deductible from gross income?
ANSWER:

13.

YES, since interest is not a penalty it is deductible from gross income.

May a person be imprisoned for non-payment of taxes?

ANSWER:
yes. A person may be imprisoned for non-payment of internal revenue taxes, such
as income tax, as well as other taxes. However prohibition against imprisonment for non-payment of poll

What are the powers and duties of the Bureau of Internal Revenue?
ANSWER:

Q: What is the tax benefit rule as applied to bad debts recovered?

A: This states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad
debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the
bad debts were written off and claimed as deduction from gross income.

12.

Sec.20, Art.III, 1987 Constitution

No person shall be imprisoned for debt or non-payment of a poll tax.

15.

Sec. 2 NIRC. The power and duties of the BIR are:

1. Assessment and collection of the national internal revenue taxes, fees and
charges.
2. The enforcement of all forfeitures, penalties, and fines connected therewith,
including the execution of judgment in all cases decided in its favor by the
Court of Tax Appeals and ordinary courts.
3. Bureau shall give effect to and administer the supervisory and police powers
conferred to it by NIRC or other laws.

Is the power to tax of the Local Government Unit considered inherent power?

ANSWER:
No, the power to tax of LGUs are not inherent. Municipal Corporations unlike
sovereign state, are clothed with no inherent power to tax.
No, it is only a delegated power from the legislative department. It is not inherent because the power to tax is an
attribute of sovereignty and sovereignty is enjoyed only by the state and not by the local government unit.

16.

Can the President of the Philippines grant Tax amnesty?

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ANSWER:
No. President cannot grant tax amnesty. Only the Congress could grant tax
amnesty. Under the 1987 Constitution, there could be no tax amnesty granted by the President of the
Philippines because the same is in the nature of a tax exemption which could be granted only by
concurrence of the majority of all the members of the Congress. Art. VI Sec. 28(4)

20.
When may the non-impairment clause apply as a limitation to taxation power of
the government?
ANSWER:
The Constitutional limitation in the non impairment of contracts and obligation will
apply to the power of taxation when the government itself is a party to the contract.
The exemption arise when the contractual relationship is in consideration and one of the
parties is the government.

No because the power to tax is legislative in character and that the power to tax carries with it,
the power to grant exemption and tax amnesty partakes of the nature of tax exemption.

21.

ANSWER:
were performed.

17.
Why is taxation covered by the constitutional provision on the due process
clause?
ANSWER:
The Constitution so provides that no person shall be deprive of life liberty or
property without due process of law. In the application of power of taxation due process must be
observed. Subject of taxation is considered as property of a person hence it cannot be taken by State
without observance of due process. Deprivation of liberty or property as a result of exercise of the power
of taxation, require the compliance of due process.
Article 3, Sec. 1 of the Constitution states that No Person shall be deprived of life, liberty or
property without due process of law.

22.

23.

When may 15% of tax dividends apply?

Are foreign corporations subject to Minimum Corporate Income Tax?

ANSWER:
Yes. A Minimum corporate income tax of 2% of gross income shall be imposed,
under the same condition on a resident foreign corporation. Sec. 28 (A) NIRC

18.
What is the tax treatment if the resident citizen sells a real property classified as
capital asset located abroad?

ANSWER:
No. the Congress cannot prohibit LGUs from doing the same. Under Art. X Sec. 5 of
the 1987 Constitution Each local government unit shall have the power to create its own sources of
revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Clearly under the said provision the
Congress can only set guidelines and limitations pertaining to the exercise of power of the LGUs but
they cannot prohibit the same.

Are pensions subject to income tax?

ANSWER:
Sec. 28. Intercorporate Dividends. A final withholding tax at the rate of 15% is
hereby imposed on the amount of cash from a domestic corporations, subject to the conditions that the
country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent
to 15% effective Jan. 1, 2009.

24.

19.
Can the Philippine Congress prohibit the Local Government Units from
imposing or levying any tax?

The situs of taxation derived from services is the place where the labor or services

ANSWER:
Yes. It is among the items enumerated in Sec. 32 A in the items of gross income.
As a general rule it is subject to income tax except when it falls in the exception as in case of retirement
or age.

Due Process clause mandates that no one shall be deprived of life, liberty without due
process. The implication is that one maybe deprived of property as long as the requirement of due
process notice and hearing have been complied with. However, violation of due process will result to
the arbitrary deprivation of property.

ANSWER:
Since a resident citizen is taxable from all sources of income within and without the
Philippines, the sale of real property classified as capital asset is taxable although located abroad. It will
be subject to the schedular tax rate and not capital gains tax, which does not find application in this case
because the property is located abroad. For property located abroad, it will still be subject to income tax
and necessarily covered by Sec. 24-A that is the normal income tax rate.

What is the situs of taxation for income derived from the rendition of service?

25.

Is the interest on foreign currency deposit of an Overseas Filipino Worker under the foreign
currency deposit or banking system subject to income tax? How about if the deposit is under a joint
account of the OFW and his or her spouse who is a resident Filipino citizen, what will be the tax
treatment of the interest income therefrom?
ANSWER:
1.) Interest income received from a depositary bank under the expanded foreign
currency deposit system which is subject to final income tax of 7 % shall be applicable to individual
tax payer EXCEPT a non resident individual.
2.) If a bank account is jointly in the name of a non-resident citizen such as
Overseas Contract worker and a spouse who is a resident in the Philippines, 50% of the interest income
from such bank shall be treated as exempt while the other 50% shall be subject to final withholding tax
of 7.5%.

26.
What is the income tax consequence of a fringe benefit received by a nonresident alien not engaged in trade or business in the Philippines?
ANSWER:
Sec. 33 (A). Fringe benefits furnished to employees and taxable under subsection B
of section 25 (Non-resident alien individual not engaged in trade or business within the Philippines) shall

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be taxed at the applicable rates imposed thereat: Provided further that the grossed up value of the fringe
benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference
between 100% and the applicable rate of income tax (25%) under sub section B.
Under Sec.2.33(A)(3)2 of RR 3-98: Taxation of fringe benefit received by a non-resident alien
individual who is not engaged in trade or business in the Philippines A fringe benefit tax of twenty-five
percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax
base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent
(75%).

27.
May a corporation change its accounting period from fiscal year to calendar
year?
ANSWER:
yes. If a taxpayer, other than an individual, changes his accounting period from
fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net
income shall, be computed on the basis of such new accounting period subject to provision of section
47(Sec.46). Under this provision a corporation is allowed to change its accounting period provided that it
complies with the provision of sec. 47 which requires for the making of a separate final or adjustment
return.

28.

What are the conditions for other benefits to be excluded form gross income?
ANSWER:

two conditions in order that employee benefits may be granted tax exemption.
1. The employee is separated from the service by the employer due to death,
sickness, or other physical disability or for cause beyond the control of the
official or employee.
2. The employer pays the benefit as a consequence of such separation.
Retirement benefits to be received:
1. The official or employee has been in the continuous service of the same
employee for at least 10 years and is not less tan 50 yrs at the time of
retirement.
2. The benefit granted shall be availed by the official or employee only once.

1. If it is required or necessary to the business of the employer; or

2. If it is for the convenience or advantage of the employer.
Convenience of the Employer Rule grants exemption to the benefits which are given for the exclusive benefit or
convenience of the employer.

29.

Are housing allowances subject to income tax?

ANSWER:
No. it is not subject to income tax. Housing allowances are considered fringe
benefit. Fringe benefit which is subject to 32% is payable by the employer which shall be paid in the
manner provided under Sec. 57(A) Withholding of Final Tax.
(RR 3-98)

General Rule: Housing benefits as a rule is subject to fringe benefits tax if the recipient is a non rankand-file employee
Exceptions: (Employers benefit rule)
1. If the housing allowance or benefit is for the convenience of the employer. Example, if youre a
doctor and your work is 24hrs. call of duty. You hired a driver which you housed, you dont want him to
stay inside your house. You simply rented out the place beside your house. Is that for the convenience
of the employer? Yes. But the driver is not a rank-and-file but it is just for illustration.
2. When your place rented out is within 50meters from company premises. Now, if your place of
stay is within 50meters from company premises, then it is exempt from fringe benefits tax. So, if ever
you get to be an employer years from now and you want to give housing allowances or housing benefits
of your staff or manager, make sure that you get something that is near.
If its 50meters whether it is for convenience or not. For the convenience, no meters required or no
standards. But the 50meter whether or not for the convenience but bottom line its usually for the
convenience why he is required to stay near the premises.
But there is an exemption to that by virtue of the BIR Ruling the taxpayer requested an exemption
from fringe benefits tax despite the distance longer than 50meters is when the place is hazardous to
health of the employees, so it can be 100meters.
3. Youre on travel and you are allowed or given housing benefit for 3 months or less in the area
wherein you are assigned.

30.
Are major improvements of a building used in the business of a taxpayer
deductible from gross income?
ANSWER:
(sec 36 A 2)

NO, it has to be capitalized. Spread the cost of the asset for the remaining life.

SEC. 36. Items Not Deductible. (A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to (1) XXX XXX
XXX
(2) Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate; This Subsection shall not apply to intangible
drilling and development costs incurred in petroleum operations which are deductible under Subsection
(G) (1) of Section 34 of this Code.
(3) XXX XXX
XXX
Q: What items are not deductible?
A: In computing net income, no deduction shall in any case be allowed in respect to:
XXX
XXX
XXX
2. Any amount paid out for new buildings of for permanent improvements, or betterments made to
increase the value of any property or estate these are capital expenditures added to the cost of the
property and the periodic depreciation is the amount that is considered as deductible expense

31.
What is the required number of votes for congress to pass a law granting tax
exemptions?
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ANSWER:
Article VI section 28(4) 1987 Constitution. No law granting tax exemption shall be
passed without the concurrence of a majority of all the members of the Congress

32.
Who is the proper claimant of the additional tax exemption between husband
and wife? Any exception?

Q: If you are 21 years of age, is there by any chance you can be considered as a qualified dependent?
A:YES if you are incapable of self-support because of mental or physical defect.

34.
What is the Capital Gains Tax rate if the seller of a property classified as capital
asset is a resident foreign corporation?

ANSWER:
Sec. 35(b) NIRC. The additional exemption for dependents shall be claimed by only
one of the spouses in the case of married individuals.
Exception: In the case of legally separated spouses, additional exemption may be
claimed only by the spouse who has custody of the child or children.
Sec. 79 (f) NIRC. When a husband and wife are recipient of wages, whether from
the same or different employer, taxes are to be withheld shall be determined on the following basis:
1. The husband shall be deemed the head of the family and proper claimant of additional
exemption in respect to any dependent children, unless he explicitly waves his right in favor of his wife
in the withholding exemption certificate.
Generally: the proper claimant is the husband
Exception: if the husband is:
1) unemployed;
2) working abroad (OFW or seaman);
3) husband waived his right to the exemption
For legally separated spouses, additional exemption may be claimed only by the spouse who has
custody of the child. However, the total amount of additional exemption that may be claimed by both
shall not exceed 4.

ANSWER:

Sec. 28(c)NIRC
A final tax of 5% for the amount not exceeding 100,000 and 10% for the amount in
in excess of 100,000 shall be imposed upon the net capital gain realized through sell of property not
sold through the stock exchange by a resident foreign corporation.
Whether real or personal will be subjected ENTIRELY to the rate of 30%.
Sec. 28 A of the NIRC does not mention any reference to the 6% capital gains tax. Therefore, any sale
of a real property classified as a capital asset will ALWAYS be subject to the 30% net income tax in the
hand of a RFC.

35.
Give the duties or obligation of any person or person duly constituted as
withholding agent?
-withheld tax, remit to the taxing authority and file corresponding report/statement.

36.

ANSWER:
- Sec.27(E)(3) of NIRC
MCIT imposition may be suspended if substantial losses are sustained due to any of the following:
1. Prolonged labor dispute (exceeds 6 months within that year)
2. Force Majeure
3. Legitimate business reverses (ex: dropping of foreign currency)

33.
When may one qualify as a dependent for the purpose of claiming additional
exemption?
ANSWER:

When may Minimum Corporate Income Tax be suspended?

Sec. 35 (b) NIRC.

For a person to be qualified as a dependent he/she must be a legitimate, illegitimate
or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not
more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of
age is incapable of self-support because of mental or physical defect.

37.

One may qualify as dependent for the purpose of claiming additional exemption when such
dependent/child (legitimate, illegitimate or legally adopted) is:
1. Living with the taxpayer
2. Chiefly dependent upon the taxpayer for support (Chief support means principal or main
support. It is more than one half of the support required by the dependent. Partial support not
amounting to chief support will not entitle the taxpayer to claim exemption as a head of a
family).
3. Not more than 21 years of age (21 above still covered---til you reach 22)
4. Not married
5. not gainfully employed or, even though over 21 years old, incapable of self support because of
mental or physical defect

38.

What are the methods of income taxation?

ANSWER:
The two methods of income taxation are:
1. NET INCOME TAXATION -Wherein deductions are allowed, based on net income.
2. GROSS INCOME TAXATION -Deductions are not allowed, based on gross income.

What are the systems of taxation?

ANSWER:

Schedular System and Global System.

Under a SCHEDULER SYSTEM, the various types/items of income (compensation;

business/professional income) are classified accordingly and are accorded different tax treatments, in
accordance with schedules characterized by graduated tax rates. Since these types of income are
treated separately, the allowable deductions shall likewise vary for each type of income.
Under the GLOBAL SYSTEM, all income received by the taxpayer are grouped together,
without any distinction as to the type or nature of the income, and after deducting therefrom expenses
and other allowable deductions, are subjected to tax at a fixed rate.

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39.
May a person be subject to income tax and value added tax at the same time
pertaining to one and the same transaction?
ANSWER:
YES. Value-Added Tax is an indirect tax, which may be shifted or passed on to the
buyer, transferee or lessee of goods, properties or services while an income tax is a direct tax while
income tax is a direct tax that is burdened upon the taxpayer himself. Both kind of taxes cannot
constitute double taxation since taxes imposed are not of the same kind or character. VAT is imposed on
the value of goods and services in every sale/purchase transaction while Income tax is imposed upon
the taxable income of the taxpayer.
**direct duplicate taxation means that the two taxes must be imposed on the same subject matter, for
the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing
period; and the taxes must be of the same kind or character.**

40.
When may premium payment for hospitalization insurance be deductible from
gross income?
ANSWER:
Sec. 35(M)
An amount of premium on health and or hospitalization paid by an individual taxpayer (head of family or
married), for himself and members of his family during the taxable year.
REQUISITES FOR DEDUCTIBILITY:
a. Insurance must have actually been taken;
b. The amount of premium deductible from gross income does not exceed P2,400 per family
or P200 per month during the taxable year;
c. That said family had a gross income of not more than P250,000 for the taxable year;
d. In case of married individuals, only the spouse claiming additional exemption shall be
entitled to this deduction.

41.

Is the transfer of property to merger plan subject to income tax?

ANSWER:

NO. Following the rules on exchange of property. (Sec. 40 C)

a. GENERAL RULE: the entire amount of the gain or loss shall be recognized upon the sale or
exchange of property b. EXCEPTION: no gain or loss is recognized (tax-free exchanges) i. If in
pursuance to a plan of merger or consolidation:
(a) A corporation exchanges property solely for stocks in a corp. (both parties to
merger/consolidation)
(b) Shareholder exchanges stock in a corp. for the stock of another corp. (both corps. are
parties to the merger/consolidation)
(c) Security holder of a corp. exchanges his securities in such corp. solely for stock or
securities in another corp. (both corps. are parties to the merger/consolidation)

42.

Give the inherent limitation of taxation.

ANSWER:
1. Inherent limitations proceeds from the very nature of the taxing power itself.
They are otherwise known as elements or characteristics of taxation
a. Situs or territoriality
It is the place or authority that has the right to impose and collect taxes. Power to tax is limited
to the territorial jurisdiction of the taxing state except where privity of relationship exists, the State can
exercise its taxing powers over its citizen outside its territory.
Reasons:
1. Taxation is an act of sovereignty which could only be exercised within a countrys territorial
limits.
2. This is based on the theory that taxes are paid for the protection and services provided by
the taxing authority which could not be provided outside the territorial boundaries of the taxing
State.
Exceptions:
1. Where tax laws operate outside territorial jurisdiction i.e. Taxation of resident citizens on
their incomes derived abroad.
2. Where tax laws do not operate within the territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.
What are the factors that determine the situs of taxation?
1. Residence of the taxpayer
2. Citizenship of the taxpayer
3. Nature of the tax
4. Subject matter of the tax
5. Source of income.
b. Public purpose
It is for Public Purpose when:
1. is for the welfare of the nation and/or for greater portion of the population;
2. affects the area as a community rather than as individuals;
3. is designed to support the services of the government for some of its recognized
objects.
What are the tests in determining public purpose?
Duty test - Whether the thing to be furthered by the appropriation of public revenue is
something which is the duty of the State as a government to provide.
Note: The term public purpose is not defined. It is an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that public purpose should be given a broad interpretation. It
does not only pertain to those purposes which are traditionally viewed as essentially government

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functions, such as building roads and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban agrarian reform (Planters Products, Inc. v. Fertiphil Corporation,
G.R. No. 166006, Mar. 14, 2008)
2. Promotion of general welfare test - Whether the proceeds of the tax will directly promote the welfare
of the community in equal measure.
Who determines the public purpose for which a tax law is enacted?
Congress. However, this will not prevent the court from questioning the propriety of such
statute on the ground that the law enacted is not for a public purpose; but once it is settled that the law
is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such
tax measure.
Note: If the tax measure is not for public purpose, the act amounts to confiscation of property.
c. International comity
It refers to the respect accorded by nations to each other because they are sovereign equals.
Thus, the property or income of a foreign state may not be the subject of taxation by another state. The
Philippine Constitution expressly adopted the generally accepted principles of international law as part
of the law of the land. (Sec. 2, Art. II, 1987 Constitution) Thus, a State must recognize such generally
accepted tenets of International Law that limit the authority of the government to effectively impose
taxes upon a sovereign State and its instrumentalities.
Art.2 Declaration Of Principles And State Policies Principles
Section 1. - Section 2. The Philippines renounces war as an instrument of national policy, adopts the
generally accepted principles of international law as part of the law of the land and adheres to
the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.
Section 3. - Section 4. - Section 5.- Section 6. - Reasons:
1. In par in parem non habet imperium. As between equals there is no sovereign. (Doctrine of
Sovereign Equality)
2. The concept that when a foreign sovereign enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the other.
3. The rule of international law that a foreign government may not be sued without its consent
so that it is useless to
d. Non-delegability of the taxing power itself

GR: The power to tax is exclusively vested in the legislative body; hence, it may not be delegated.
(Delegata potestas non potest delegari)
Exceptions:
1. Delegation to Local Government Refers to the power of local government units to create its own
sources of revenue and to levy taxes, fees and charges. (Art. X, Sec. 5, 1987 Constitution)
**Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.**
2. Delegation to the President The authority of the President to fix tariff rates, import or export quotas,
tonnage and wharfage dues or other duties and imposts. (Art. VI, Sec. 28(2), 1987 Constitution)
**Section 28.
1. - - 2. The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government.
3. - - 4. - - 3. Delegation to administrative agencies When the delegation relates merely to administrative
implementation that calls for some degree of discretionary powers under sufficient standards expressed
by law or implied from the policy and purposes of the Act.
a. Authority of the Secretary of Finance to promulgate the necessary rules and regulations for the
effective enforcement of the provisions of the law. (Sec. 244, R.A.8424)
b. The Secretary of Finance may, upon the recommendation of the Commissioner, require the
withholding of a tax on the items of income payable. (Sec. 57, R.A. 8424)
What are the non-delegable legislative powers?
1. Selection of Subject to be taxed
2. Determination of Purposes for which taxes shall be levied
3. Fixing of the Rate/amount of taxation
4. Situs of tax
5. Kind of Tax
e. Exemption of the Government
May the Government tax itself?
Yes. One of the inherent limitations on the power of taxation is recognition of tax exemptions in favor of
the government. This is premised on the concept that with respect to the government, exemption is the
rule and taxation is the exception in order to reduce administrative costs. But since sovereignty is

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absolute and taxation is an act of high sovereignty, the state if so minded could tax itself, including its
political subdivisions. (Maceda v. Macaraeg, G.R. No. 88291, June 8, 1993).

ANSWER:

(when used in business)

On the basis of REVENUE REGULATIONS NO. 7-2003:

43.

Give the basic principle of sound tax system.

ANSWER:
1. Fiscal adequacy - Revenue raised must be sufficient to meet government/public
expenditures and other public needs. (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990)
2. Administrative feasibility - Tax laws must be clear and concise,capable of effective and efficient
enforcement and convenient as to time and manner of payment; must not obstruct business growth and
economic development.
3. Theoretical justice - Must take into consideration the taxpayers ability to pay (Ability to Pay Theory).

44.

Give the aspects of taxation.

ANSWER:
1. Tax Legislation (Levy or Imposition) This refers to the enactment of a law by
Congress authorizing the imposition of tax. It further contemplates the determination of the subject of
taxation, purpose for which the tax shall be levied, fixing the rate of taxation and the rules of taxation in
general.
2. Tax Administration (Assessment and Collection) This is the act of administration and
implementation of the tax law by executive through its administrative agencies. The act of assessing
and collecting taxes is administrative in character, and therefore can be delegated.
3. Payment The act of compliance by the taxpayer, including such options, schemes or remedies as
may be legally available.

45.

Who is the statutory taxpayer in a foreclosure sale?

ANSWER:

46.

CREDITOR, the seller in behalf of the owner in the foreclosure sale. (RR 4-99)

Is the property dividend subject to income tax?

ANSWER:
(Sec. 24 B 2)
YES. The cash or property dividend received by an individual from a DC is subject to a final tax of 10%
What are property dividends?
Property dividends are those paid in corporate property such as bonds, securities or stock investments
held by the corporation. They are taxable to the extent of the fair market value of the property received
at the time of distribution.

47.
What is the tax treatment of the income given to a partner as profit share form
the general partnership?
ANSWER:

48.

Partners income will be treated as DIVIDENDS, subject to 10% final tax.

When may a property be considered as an ordinary asset?

Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec. 34(F) of
the Code; or
4. Real property used in trade or business of the taxpayer.
What are examples of ordinary assets?
1. The condominium building owned by a realty company, the units of which are for rent or for
sale
2. Machinery and equipment of a manufacturing concern subject to depreciation
3. The motor vehicles of a person engaged in transportation business
For Reference:
Section 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a character which is
subject to the allowance for depreciation provided in Subsection (F) of Section 34;
or real property used in trade or business of the taxpayer.

49.
May the exchange of real property classified as capital assets between two
persons be subject to capital gain tax?
ANSWER:
Yes. The Code provides that even exchanges on capital assets located in the
Philippines can be subject to Capital Gains Tax.
Section 24. Income Tax Rates.
(D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is

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hereby imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided, That the tax
liability, if any, on gains from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or to government-owned
or controlled corporations shall be determined either under Section 24 (A) or under
this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost
or adjusted basis of the real property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30) days from the date of
sale or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the unutilized amount
bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon

percent (6%) capital gains tax under Sec. 24(D)(1)/ 25(A)(3) or the graduated tax rates under Sec.
24(A)(1)(c) or 25 (A)(1), all of the Code.

50.
What is the treatment of the property for tax purposes if the buyer is the
government?
ANSWER:
Revenue Regulation 7-2003
SEC. 4. Applicable Taxes On Sale, Exchange Or Other Disposition Of Real Property . Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets.
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines.
(i) Capital gains presumed to have been realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets, shall be subject to the six percent (6%)
capital gains tax imposed under Sec. 24(D)(1) or 25(A)(3) of the Code, as the case may be, based on
the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the
Code, whichever is higher, provided, that if the buyer is the Government or any of its political
subdivisions or agencies or a government owned-or-controlled corporation, the tax liability shall, at the
option of the individual seller (including estate or trust), be computed on the basis of either the six

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