Benefits
Received
No
special
or
direct
benefit
is
No
direct
benefit
is
received,
but
a
healthy
A
direct
benefit
results
in
the
form
received
by
the
taxpayer;
general
economic
standard
of
society
is
attained
of
just
compensation
to
the
owner
benefit
-received
solely
by
the
owner
of
the
property
Non-Impairment
of
Contracts
Contracts
may
not
be
impaired
Contracts
may
be
impaired
Contracts
may
be
impaired
-subservient
or
inferior
to
the
non
-superior
to
non
impairment
clause
impairment
clause
Transfer
of
Property
Rights
Taxes
paid
become
part
of
public
No
Transfer
but
only
restraint
in
use
Transfer
is
effected
in
favour
of
funds
State
Scope
All
persons,
property
and
excises
All
persons,
property,
liberty
rights
and
Only
upon
a
particular
property
privileges
Who
Exercises
Govt
Govt
May
be
granted
to
Public
utilities
Surrender
The
can
be
bargaining
(subject
to
Cant
be
bargained
compromise)
E.
PURPOSE
OF
TAXATION
1. Primary
o To
raise
revenue
2. Secondary
or
sumptuary
purpose
(Non-revenue
or
regulatory
purpose)
o For
regulation
(e.g.
sin
tax
primarily
imposed
to
raise
revenue
but
incidentally
to
curtail
the
consumption
of
alcohol
and
cigarettes.)
o For
the
rehabilitation
and
stabilization
of
a
threatened
industry
o To
reduce
social
inequality
o Implemented
through
eminent
domain
o Compensatory
F.
PRINCIPLES
OF
SOUND
TAX
SYSTEM
1.
Fiscal
adequacy
2.
Administrative
feasibility
3.
Theoretical
justice
G.
THEORY
AND
BASIS
OF
TAXATION
(taken
from
TIU
Notes)
1.
Lifeblood
theory/Necessity
Theory
underlying
theory
of
taxation
-
The
power
of
taxation
proceeds
upon
the
theory
that
the
existence
of
government
is
a
necessity;
that
it
cannot
continue
without
means
to
pay
its
expenses;
and
that
for
these
means
it
has
a
right
to
compel
all
its
citizens
and
property
within
its
limits
to
contribute.
(71
Am.
Jur.
2d
346)
2.
Benefits-protection
theory/Symbiotic
relationship
Theory/Compensation
Theory
basis
of
taxation
-
According
to
this
theory,
the
State
demands
and
receive
taxes
from
the
subjects
of
taxation
within
its
jurisdiction
so
that
it
may
be
enabled
to
carry
its
mandate
into
effect
and
perform
the
functions
of
the
government,
and
the
citizen
pays
from
his
property
the
portion
demanded
in
order
that
he
may,
by
means
thereof,
be
secured
in
the
enjoyment
of
the
benefits
of
organized
society.
(51
Am
Jur.
42-43)
-
Taxes
are
what
we
pay
for
civilized
society.
Without
taxes,
the
government
would
be
paralyzed
for
the
lack
of
the
motive
power
to
activate
and
operate
it.
Hence,
despite
the
natural
reluctance
to
surrender
part
of
their
hard
earned
income
to
the
government,
every
person
who
is
able
to
must
contribute
his
share
in
the
running
of
the
government.
The
government,
for
its
part,
is
expected
to
respond
in
the
form
of
tangible
and
intangible
benefits
intended
to
improve
the
lives
of
the
people
and
enhance
their
moral
and
material
values.
This
symbiotic
relationship
is
the
rationale
of
taxation
and
should
dispel
the
erroneous
notion
that
it
is
an
arbitrary
method
of
exaction
by
those
in
the
seat
of
power.
(CIR
v.
Algue)
The
legislature,
in
adopting
such
measures
in
our
tax
laws,
only
wanted
to
be
assured
that
taxes
are
paid
and
collected
without
delay.
For
taxes
are
the
lifeblood
of
government.
Also
such
measures
tend
to
prevent
collusion
between
the
taxpayer
and
the
tax
collector.
By
questioning
a
taxs
legality
without
first
paying
it,
a
taxpayer,
in
collusion
with
Bureau
of
Internal
Revenue
officials,
can
unduly
delay,
if
not
totally
evade,
the
payment
of
such
tax.
(Phil
Guaranty
Co.
v.
CIR)
The
power
to
tax
is
the
most
potent
instrument
to
raise
the
needed
revenues
to
finance
and
support
myriad
activities
of
the
local
government
units
for
the
delivery
of
basic
services
essential
to
the
promotion
of
the
general
welfare
and
the
enhancement
of
peace,
progress,
and
prosperity
of
the
people.
(FELS
Energy,
Inc.
v.
Province
of
Batangas)
3.
Jurisdiction
over
subject
and
objects
H.
DOCTRINES
IN
TAXATION
1.
Prospectivity
of
tax
laws
GR:
tax
laws
are
applicable
only
to
present
and
future
circumstances.
It
should
not
be
applied
to
past
transaction.
Otherwise,
it
is
a
violation
of
the
due
process
clause
Exc:
tax
laws
may
be
applied
retroactively
provided
it
is
expressly
declared
clearly
by
legislative
intent
2.
Imprescriptibility
GR:
power
to
tax
is
imprescriptible
as
it
is
inherent
in
character,
being
inherent
it
therefore
exists
with
the
existence
of
the
State
and
will
only
cease
upon
the
death
of
the
State
(power
to
tax
itself
can
never
prescribe)
Exc:
but
the
administrative
aspect
will
prescribe
(collection,
assessment,
right
to
refund
will
prescribe)
3.
Double
taxation
-
Means
taxing
twice
for
the
same
tax
period
the
same
thing
or
activity,
when
it
should
be
taxed
but
once,
for
the
same
purpose
and
with
the
same
kind
of
character
of
tax.
-
Sir:
So
there
are
two
tax
laws
imposing
dual
burden
on
the
same
subject.
Strict
Sense
(Direct
Double
Taxation)
1) the
same
property
must
be
taxed
twice
when
it
should
be
taxed
once;
2) both
taxes
must
be
imposed
on
the
same
property
or
subject
matter;
3) for
the
same
purpose;
4) by
the
same
State,
Government,
or
taxing
authority;
5) within
the
same
territory,
jurisdiction
or
taxing
district;
6) during
the
same
taxing
period;
and
7) of
the
same
kind
or
character
of
tax.
Broad
Sense
(Indirect
Double
Taxation)
There
is
double
taxation
in
the
broad
sense
or
there
is
indirect
duplicate
taxation
if
any
of
the
elements
for
direct
duplicate
taxation
is
absent.
Q:
What
should
always
exist,
for
there
to
be
double
taxation?
A:
That
there
should
be
the
same
subject
or
object
which
was
taxed
twice
for
there
to
be
broad
sense,
it
is
just
that
all
the
other
aspects
are
not
present.
Q:
Is
double
taxation
a
ground
for
invalidating
a
tax
law?
A:
no
Q:
What
then
can
you
use
as
basis
when
you
would
like
to
declare
a
tax
law
as
void?
A:
Violation
of
the
equal
protection
clause.
It
violates
the
constitutional
limitations
of
the
power
to
tax
Modes
of
Eliminating
Double
Taxation
Mostly
applicable
in
eliminating
international
double
taxation
One
nation
taxing
one
party
who
is
a
resident
of
another
country
which
also
imposes
a
tax
on
all
income
of
the
resident
o In
Phils,
all
RC
are
taxed
on
income
within
and
without.
1) Allowing
reciprocal
exemption
either
by
law
or
by
treaty;
-
By
entering
into
treaties
-
RP-US,
RP-GERMANY,
RP-SINGAPORE
-
This
is
not
automatic
Really:
The
lowest
rate
of
the
Philippine
tax
at
10%
may
be
imposed
on
royalties
derived
by
a
resident
of
the
United
States
from
sources
within
the
Philippines
only
if
the
circumstances
of
the
resident
of
the
United
States
are
similar
to
those
of
the
resident
of
West
Germany.
Since
the
RP-US
Tax
Treaty
contains
no
matching
credit
provision
as
that
provided
under
Article
24
of
the
RP-WEST
GERMANY
Tax
Treaty,
the
tax
on
royalties
under
the
RP-US
Tax
Treaty
is
not
paid
under
similar
circumstances
as
those
obtaining
in
the
RP-WEST
GERMANY
Tax
Treaty.
Allowance
of
tax
credit
for
foreign
taxes
paid
-
That
taxes
you
paid
abroad
are
allowed
as
deductions
from
the
local
taxes
that
are
due
to
be
paid
Example:
Philippines
taxes
Total
taxes
paid
on
all
income
100,000
You
paid
a
total
tax
in
the
US
10,000
100,000
(10,000)
90,000
In
effect
the
taxes
that
you
actually
pay
here
are
reduced
Allowance
of
deduction
for
foreign
taxes
paid
-
Instead
of
looking
at
the
taxes
due
and
payable,
you
go
back
first
to
the
taxable
income.
From
the
taxable
income,
you
can
deduct
there
the
taxes
that
you
paid.
Example:
Total
income
300,000
Amount
of
tax
paid
in
the
US
-10,000
300,000
(10,000)
290,000
290,000
x
30%
=87,000
Is
the
amount
of
tax
that
you
will
have
to
pay
Q:
Which
is
usually
better,
tax
credit
or
tax
deduction?
A:
Tax
credit,
because
the
deduction
is
from
the
tax
due
and
payable
itself.
It
could
be
that
if
you
use
tax
credit,
which
is
a
deduction
of
the
taxable
income,
in
effect
the
amount
that
you
can
actually
just
use
as
deduction
only
amounts
to
70%,
because
g
subject
paman
siya
sa
tax
rate
na
30%.
In
almost
all
cases,
it
is
always
better
to
make
use
of
tax
credit
than
tax
deduction.
Reduction
of
Philippine
tax
rate
-
It
is
already
imbedded
in
the
tax
law
-
Example:
Tax
sparring
rule:
o That
instead
of
paying
30%,
you
will
only
have
to
pay
15%
for
dividend
income.
o It
is
15%
so
that
it
will
be
equal
with
the
branch
remittance.
Otherwise,
it
would
be
more
favourable
for
one
to
just
set
up
a
branch,
if
15%
is
not
used
as
basis
for
the
tax
sparring
rule.
o Why
15%?
o Kay
if
you
are
a
subsidiary
of
a
corporation
in
the
Philippines,
meaning
your
parent
company
owns
shares
of
the
corporation
here
in
the
Philippines,
so
if
you
would
like
give
out
money
to
your
parent
company,
you
will
not
do
branch
remittance,
because
when
you
say
branch,
it
refers
to
one
entity.
There
are
no
shares
to
mention
here,
you
dont
base
it
on
shares.
So
what
you
do
is
you
declare
dividends
so
you
can
transfer
income
to
the
parent
company.
If
the
parent
company
is
a
non
resident
foreign
corporation,
it
will
be
subject
to
final
tax
on
dividends,
which
supposedly
is
30%,
but
because
of
this
sparring
rule,
it
is
now
subject
only
to
15%.
If
you
are
a
branch,
since
you
dont
have
a
separate
entity
from
your
home
office,
the
home
office
continues
to
own
you
in
total,
there
will
only
be
one
reporting
entity
there.
So
how
do
you
transfer
income
from
the
branch
to
the
home
office,
you
dont
declare
dividends
because
there
are
no
shares
to
mention
there,
so
what
you
do
is
to
give
remittance,
as
it
is
termed
as
branch
remittance.
When
you
give
money
to
your
home
office,
the
tax
rate
would
be
same,
at
15%,
para
similar
ang
treatment
if
there
is
parent-subsidiary
relation
or
there
is
home
office-branch
relationship
2)
3)
4)
4.
Escape
from
taxation
a) Tax
avoidance
-
It
has
to
be
legally
permissible
alternative
or
methods.
It
is
the
exploitation
by
the
taxpayer
of
legally
permissible
alternative
tax
rates
or
methods
of
assessing
taxable
property
or
income
in
order
to
avoid
or
reduce
tax
liability.
It
is
politely
called
tax
minimization
and
is
not
punishable
by
law.
b)
Tax
evasion
-
This
connotes
fraud,
by
using
pretences
or
forbidden
devises
to
lessen
or
defeat
taxes
-
It
is
the
use
by
the
taxpayer
of
illegal
or
fraudulent
means
to
defeat
or
lessen
the
payment
of
a
tax.
-
It
is
also
known
as
tax
dodging.
-
It
is
punishable
by
law.
-
Estate
of
Benigno
Toda:
Elements:
(1) ends
to
be
achieved
which
it
to
pay
lesser
than
that
which
you
should
know
should
be
paid,
or
not
paying
taxes
when
you
know
that
you
should
pay
taxes.
(2) accompanying
state
of
mind
which
is
evil
which
is
deliberate
or
evil
or
with
bad
faith
or
malice.
(3) course
of
action/failure
of
action
which
is
unlawful
filling
up
of
tax
returns
with
higher
amounts
of
expenses
or
deductions
or
when
you
dont
file
a
return
at
all.
-
Example
of
evasion:
substantial
understatement
of
income,
overstatement
of
deductions.
If
you
claim
that
you
actually
giving
birth
to
twins
instead
of
just
one
child.
-
To
prove
state
of
mind
which
is
evil,
there
are
presumptions:
o If
you
under
declare
your
sales
by
more
than
30%,
there
is
said
to
be
fraud.
c) Tax
shifting
-
The
transfer
of
the
burden
of
a
tax
by
the
original
payer
or
the
one
on
whom
the
tax
was
assessed
or
imposed
to
someone
else.
What
is
transferred
is
not
the
payment
of
the
tax
but
the
burden
of
the
tax.
All
indirect
taxes
may
be
shifted;
direct
taxes
cannot
be
shifted.
-
It
is
the
passing
of
the
burden
by
the
person
statutorily
liable
to
pay
the
taxes
to
someone
else.
Only
the
incidence
is
transferred.
The
best
example
is
the
VAT.
Who
is
statutorily
liable?
Seller.
But
they
may
shift
the
burden
to
the
consumers
such
that
the
end
user
is
the
one
who
pays.
Added
to
the
cost/price
of
the
goods.
It
is
still
the
seller
who
is
still
required
to
remit.
Take
note
that
it
is
only
the
burden
which
is
shifted.
Tax
incidence
-
is
that
point
on
which
the
tax
burden
finally
rests
or
settles
down.
-
It
takes
place
when
shifting
has
been
effected
from
the
statutory
taxpayer
to
another.
-
one
who
has
the
burden
to
pay
the
tax
(Seller)
Tax
impact
-
is
the
point
on
which
a
tax
is
originally
imposed.
-
In
so
far
as
the
law
is
concerned,
the
statutory
taxpayer,
the
subject
of
tax,
is
the
person
who
must
pay
the
tax
to
the
government.
-
one
liable
to
pay
Kinds
of
Tax
Shifting
1. Forward
from
seller
to
buyer
Example:
VAT,
from
the
manufacturer
to
the
retailer,
then
to
the
consumer
From
the
manufacturer,
lets
say
100,
because
it
is
subjected
to
VAT,
and
since
it
does
not
want
to
pay
tax,
so
it
will
add
12%
to
the
100,
ang
bill
to
the
retailer
112
na.
The
impact
of
taxation
is
on
the
manufacturer.
And
the
retailer
does
not
want
to
pay
VAT;
it
will
add
again
VAT
to
the
consumer,
so
the
consumer
will
have
to
pay
it.
2. Backward
from
buyer
to
seller
The
buyer
will
buy
lesser
units
of
the
products
if
you
will
shift
all
your
taxes
to
me.
Meaning,
the
one
who
will
bear
the
burden
of
the
tax,
the
retailer,
but
if
si
retailer
mo
ingon
pud
nga
d
ko
mo
palit
nimo
if
imo
ko
pabayron
og
tax,
so
g
balik
nasad
nimo
sa
manufacturer
3. Inward
combination
of
forward
and
backward
4. Transformation
Examples
of
Tax
that
can
be
shifted:
Documentary
stamp
taxes,
percentage
taxes,
and
VAT
5.
Exemption
from
taxation
a)
Meaning
of
exemption
from
taxation
Broad
Sense
tax
does
not
apply
to
all
persons
in
the
jurisdiction
of
the
taxing
authority
Ex.
Exemption
of
minors
from
taxation,
exemption
from
real
property
taxes:
churches,
parsonages
and
mosques
and
all
appurtenances
thereto
--While
all
are
other
subject
to
real
property
tax,
there
is
one
which
exempt
from
real
property
tax
Narrow
Sense
the
grant
of
immunity,
express
or
implied,
to
a
particular
person
or
entity,
from
a
tax
on
property
or
excise
tax
which
persons/entity
are
generally
obliged
to
pay
--This
refers
to
a
particular
class
or
persons
or
entity,
which
is
exempted
from
tax.
Ex.
Charitable
institutions
which
are
exempted
from
real
property
taxes
when
used
actually,
directly,
and
exclusively
used
for
charitable
purposes.
Non
stock,
non
profit
organization
is
exempted
from
all
taxes
like
income
tax,
real
property
tax,
customs
tax
b)
Nature
of
tax
exemption
Exemption
is
an
act
of
the
state
in
divesting
itself
of
its
prerogative
to
collect
taxes
upon
certain
subjects
or
objects.
It
is
granted
to
particular
persons
so
it
becomes
personal
to
him,
it
only
attaches
to
him,
and
so
he
cannot
transfer
it
to
someone
else
even
by
mere
agreement.
Therefore,
it
should
be
construed
strictly
against
the
taxpayer
if
talking
about
exemption
because
it
is
a
necessity
of
the
government
to
collect
taxes.
Q:
How
do
you
interpret
tax
laws?
A:
liberally
in
favour
of
the
tax
payer
and
against
the
government
Q:
tax
exemption
interpretation
A:
strictly
construed
against
the
tax
payer
and
in
favour
of
the
government
c)
Kinds
of
tax
exemption
(i)
Express
specific
identification
of
subject
and
objection
not
taxed
Examples:
SSS,
GSIS,
PHILHEALTH
(ii)
Implied
there
is
failure
of
the
law
to
specify
that
such
persons/objects
are
exempt.
Student
allowance
is
an
income
but
is
not
subject
to
tax
because
it
is
not
provided
by
the
tax
code.
Clothes
worn
is
property
but
not
subject
to
tax
because
it
is
not
provided
by
the
tax
code
-
Construed
liberally
in
favor
of
the
taxpayer
and
strictly
against
the
taxing
authority
(iii)
Contractual
there
must
be
a
contract
Government
bonds,
provided
in
the
tax
code
PEZA
entities,
they
enter
into
registration
agreements.
Though
there
is
a
general
exemption
in
the
PEZA
law,
there
is
always
a
specific
agreement
entered
into
between
PEZA
and
the
PEZA-registered
entity
and
it
is
provided
there,
the
conditions
for
the
exemptions
of
a
particular
PEZA
enterprise
called
locators.
Example:
tax
holiday
can
either
3
years
or
4
years
depending
on
their
agreement.
3
years
if
it
is
an
expansion
or
additional
project.
v Lets
say
youre
a
call
center
entity.
Youre
exempted
for
your
operations
with
clients
from
US
or
Europe.
Now,
you
are
able
to
find
clients
in
Australia.
Instead
of
including
it
in
your
business,
you
created
another
entity
and
registered
it
with
PEZA.
PEZA
locators
are
ordinarily
enjoying
tax
holiday
for
4
years
but
because
this
new
entity
is
still
owned
by
you
and
still
holding
shares.
This
can
be
considered
as
an
expansion
or
additional
project.
It
will
only
be
exempted
good
for
3
years.
Q:
Isnt
contractual
considered
express
as
well?
A:
thats
correct.
It
is
an
express
exemption
because
it
is
specific
and
provided
in
writing.
d)
Rationale/grounds
for
exemption
-
Similar
to
the
sumptuary
purposes
of
taxation.
Non-revenue
raising
or
special
purposes
is
the
reason
for
exemption
e)
Revocation
of
tax
exemption
GR:
it
can
be
revoked
EXCEPTIONS
1.
When
it
violates
the
non-impairment
clause
of
the
Constitution
tax
exemption
is
covered
by
a
material
consideration
Example:
Big
investments
in
the
economic
zone
(PEZA).
You
cannot
immediately
revoke
the
exemption
of
PEZA
locators
because
they
invested
money
in
the
Philippines
and
one
of
the
incentives
given
is
the
tax
exemption
covered
by
the
Registration
agreement.
Another:
airline
companies
are
exempted
from
paying
certain
taxes
in
return
for
them
to
carry
mails
for
the
government.
This
is
a
US
scenario.
2.
6.
Compensation
and
set-off
v Compensation
by
operation
of
law:
they
must
be
principal
creditors
and
debtors
of
each
other.
this
is
the
primary
consideration
for
there
to
be
compensation
v In
taxation,
the
taxpayer
and
the
government
are
NOT
principal
creditors
and
debtors
of
each
other
because
taxes
are
DIFFERENT
from
debts.
o Thus,
GR:
NO
compensation
o EX:
that
your
claim
from
the
government
and
the
taxes
that
are
due
to
the
government
are
both
DUE
AND
DEMANDABLE
and
that
it
must
be
FULLY
LIQUIDATED
Q:
Do
we
adhere
to
the
DOCTRINE
OF
EQUITABLE
RECOUPMENT?
A:
NO
except
in
one
case
(School
case,
not
UST
please
find
this
case)
Doctrine
of
Equitable
Recoupment:
a
refund
of
a
tax
illegally
or
erroneously
collected
or
overpaid
by
the
taxpayer
is
barred
by
prescription.
A
tax
presently
being
assessed
against
a
taxpayer
may
be
set-off
against
such
tax
refund.
7.
Compromise
a
contract,
whereby
the
parties,
by
making
reciprocal
concessions,
avoid
litigation
or
put
an
end
to
one
that
was
already
commenced
In
tax,
instead
of
pursuing
tax
evasion
cases,
you
pay
the
taxes
by
way
of
compromise.
8.
Tax
amnesty
a)
Definition:
is
a
general
pardon
to
tax
payers
or
an
intentional
overlooking
by
the
State
of
its
authority
to
impose
penalties
to
persons
otherwise
guilty
of
evasion
or
violation
of
a
revenue
or
tax
law.
In
other
words,
it
is
merely
the
waiver
of
the
government
to
collect
the
tax
already
imposed
WHO
CAN
GRANT?
Only
CONGRESS
can
grant
tax
amnesties
b)
Distinguished
from
tax
exemption:
Tax
amnesty
is
NOT
similar
to
tax
exemptions
In
tax
exemption,
there
is
NO
TAX
imposed
at
all.
In
tax
amnesty,
there
is
tax
imposed
but
the
government
will
not
collect
it
Tax
exemptions
waives
CIVIL
liability.
In
tax
amnesty,
you
are
immune
from
CIVIL,
CRIMINAL
and
ADMINISTRATIVE
liabilities.
Tax
exemption
is
PROSPECTIVE
in
application.
Whereas,
tax
amnesty
applies
only
to
past
tax
periods,
hence,
RETROACTIVE
in
application.
9.
Construction
and
interpretation
of:
a)
Tax
laws:
strictly
against
the
STATE,
and
liberally
in
favor
of
the
tax
payer
(i)
General
rule
-
Philippine-American
Accident
Insurance
Company
Case:
taxes
as
burdens
which
must
be
endured
by
the
taxpayer
must
not
be
presumed
to
go
beyond
what
the
law
expressly
and
clearly
declares.
(ii)
Exception
-
Principle
of
Separability
and
Presumption
of
Validity
of
Tax
Laws
o Principle
of
Separability:
that
a
tax
law
is
not
rendered
invalid
by
one
provision
when
there
are
other
provisions
which
can
be
imposed
(Domondon)
b)
Tax
exemption
and
exclusion
(i)
General
rule
-
strictissimi
juris
against
the
tax
payer
and
liberally
in
favour
of
the
taxing
authority
o must
be
able
to
point
out
a
specific
provision
of
the
law
exempting
a
taxpayer
from
the
common
burden
(ii)
Exception
-
When
the
statute
provides
for
a
liberal
construction
-
When
special
taxes
relating
to
special
cases
and/or
taxpayers
-
Exemption
of
public
properties
-
Exemption
to
charitable
and
education
institution
or
their
property
-
Exemption
in
favour
of
government
political
subdivisions
or
instrumentality
-
A
tax
refund
based
on
solutio
indebiti
c)
Tax
rules
and
regulations:
a
reversal
of
a
BIR
ruling
favorable
to
a
taxpayer
would
not
necessarily
create
a
perpetual
exemption
in
his
favour
for
afterall,
the
government
is
never
estopped
from
collecting
taxes
because
of
the
mistakes
or
errors
on
the
part
of
its
agents.
o a
commissioner
is
not
bound
by
the
decisions
of
the
previous
commissioners
examples:
disposal
of
idle
lands
are
now
subject
to
VAT
being
incidental
to
corporate
operations;
exemptions
of
exchange
of
properties
without
consideration
i.e
encroaching
properties
changing
boundaries,
not
anymore
exempted
d)
Penal
provisions
of
tax
laws:
strictly
against
the
government
o Always
in
favor
of
the
accused
e)
Non-retroactive
application
to
taxpayers
(i)
General
Rule:
CANNOT
be
applied
retroactively
(ii)
Exceptions:
provided
it
is
expressly
declared
or
is
clearly
the
legislative
intent
Rules
and
regulations
should
be
applied
prospectively
unless
legislative
intention
provides
otherwise
GROUNDS
FOR
THE
RETROACTIVE
APPLICATION
OF
A
REVENUE
RULING:
Sec.
246
NIRC
Where
the
taxpayer
deliberately
misstates
or
omits
material
facts
from
his
return
or
any
document
required
of
him
by
the
BIR
Where
the
facts
subsequently
gathered
by
the
BIR
are
materially
different
from
the
facts
in
which
the
rulings
is
based
or
Where
the
taxpayer
acted
in
bad
faith
I.
SCOPE
AND
LIMITATION
OF
TAXATION
1.
Inherent
limitations
(P-E-N-I-T)
a)
Public
purpose
If
it
is
for
the
promotion
of
a
public
welfare,
although
incidentally
may
result
in
that
of
a
private
interest,
the
expenditure
is
essentially
considered
public
used
as
basis
for
the
exemption
for
the
Sugar
Industry
Now,
public
purpose
is
synonymous
with
public
interest,
public
benefit,
public
welfare
and
public
convenience.
It
has
become
an
elastic
concept
that
can
be
hammered
to
fit
modern
standards
and
norms
and
includes
those
purposes
designed
to
promote
social
justice.
WHEN
are
you
supposed
to
DETERMINE
PUBLIC
PURPOSE?
At
the
time
of
the
ENACTMENT
of
the
tax
law
b)
Inherently
legislative
LEGISLATIVE
IN
CHARACTER
GR:
the
legislative
authority
to
tax
CANNOT
be
delegated
Congress
CANNOT
delegate
the
determination
of
the:
Purpose
Extent/amount
of
tax
Situs
Kind
of
tax
to
be
imposed
Subject/
coverage
of
the
tax
imposition
REVIEW:
SOURCES
OF
TAX
LAWS
Constitution
NIRC/Tax
Code
Local
government
code
Local
tax
laws
Miscellaneous
laws
and
regulation
Nature
of
the
legislative
power
is
NOT
political
in
character.
It
is
civil
in
nature,
not
subject
to
ex
post
facto
law
prohibition
EX
POST
FACTO
LAW
imposing
a
penalty
against
a
previous
act
c)
Territorial
This
is
where
the
situs
of
taxation
becomes
very
important
because
of
the
territoriality
limitation
SITUS
OF
TAXATION
place/authority
that
has
the
right
to
impose/collect
the
taxes
FACTORS
CONSIDERED
IN
THE
SITUS
under
Philippine
Taxation:
Domiciliary
theory
refers
to
the
residence
of
the
income
earner
Nationality
theory
citizenship
of
the
income
earner
Source
as
basis
for
the
situs
of
taxation
CIR
vs.
Baier-Nickel
(nexus)
read
case
SITUS
OF
INCOME
TAX:
Interest
income
residence
of
the
DEBTOR
Dividends
depends
whether
Domestic
or
Foreign
Domestic
within
the
Philippines
Foreign
look
at
the
3-year
income
of
the
said
foreign
Corporation
and
if
50%
of
the
income
is
derived
from
the
Philippines,
it
is
considered
within
the
Philippines
(Tax
Code)
Expanded
version
is
more
than
85%
within
the
Philippines
More
than
50%
to
85%
partly
within,
partly
without
50%
below
without
the
Philippines
Income
from
services
taxable
where
the
Services
is
rendered
Rentals
where
the
property
being
rented
is
used
Royalties
where
the
royalty
is
used
Property
taxes
Real
property
lex
rei
sitae
Personal
property
mobilia
sequitor
personam
Excise
tax
where
the
privilege
is
exercised
Domestic
products
or
minerals
where
they
are
mined
or
extracted
10
Imported
article
place
of
importation
or
place
of
release
or
where
the
customs
house
is
Franchise
where
the
privilege
is
exercised
Estate
tax
nationality
of
the
decedent,
residence
of
the
decedent
and
location
of
the
estate
left
by
the
decedent
Resident
citizen
within
and
without
Non-resident
citizen
within
and
without
Opposite
of
Income
tax,
everything
is
within
and
without
except
non-resident
alien
Non-resident
alien
without
Donors
tax
nationality
of
the
donor,
residence
of
the
donor
and
location
of
the
property
donated
where
the
donation
was
made
Business
tax
Sale
of
real
property
where
the
real
property
is
located
Sale
Personal
property
where
the
place
of
purchase
or
sale
is
VAT
where
the
services
are
rendered
or
where
the
goods
are
destined
(Destination
Principle)
d)
International
comity
Its
based
on
respect
accorded
by
nations
to
each
other
because
they
are
sovereign
equals
e)
Exemption
of
government
entities,
agencies,
and
instrumentalities
2.
Constitutional
limitations
a)
Provisions
directly
affecting
taxation
(1) Prohibition
against
imprisonment
for
non-payment
of
poll
tax
-
Poll
tax
=
cedula
-
Can
be
imprisoned
in
relation
to
cedula
WHEN
you
falsify
the
information
in
your
cedula
(2) Uniformity
and
equality
of
taxation
-
Uniformity
taxed
uniformly
-
Equality
capacity
to
pay
(3) Origin
of
Tax
Laws
should
come
from
the
House
of
Representatives
but
Senate
can
amend
or
modify
appropriation,
revenue
or
tariff
bills
(A.R.T.)
(4) Prohibition
against
taxation
of
religious,
charitable
entities,
and
educational
entities
with
respect
to
their
properties
-
Only
on
REAL
PROPERTY
TAX
-
Two
cases:
Lung
Center
of
the
Philippines
Case
and
St.
Lukes
Medical
Center
Case
(5) Prohibition
against
taxation
of
non-stock,
non-profit
institutions
-
Exempted
from
taxes
and
duties
on
all
assets
and
revenues
of
such
entity
(6) Majority
vote
of
Congress
for
grant
of
tax
exemption
(7) Prohibition
on
use
of
tax
levied
for
special
purpose
-
Shall
be
treated
as
a
special
fund
and
shall
be
used
for
such
purpose
only
-
Should
there
be
excess
of
such
special
fund,
it
will
be
transferred
to
the
general
funds
of
the
government
-
Example
of
special
funds:
Sugar
Tax
Act,
Fertilizer
(8) Presidents
veto
power
on
appropriation,
revenue,
tariff
bills
-
Any
particular
item
or
items
referring
to
the
subject
of
the
tax
and
the
tax
rate
(9) Non-impairment
of
jurisdiction
of
the
Supreme
Court
(10) Grant
of
power
to
the
local
government
units
to
create
its
own
sources
of
revenue
-
Local
Government
Code
to
impose
local
taxes
and
real
property
taxes
(11) Flexible
tariff
clause
(12) Exemption
from
real
property
taxes
(13) No
appropriation
or
use
of
public
money
for
religious
purposes
(14) Progressive
system
of
Taxation
-
To
evolve
not
mandatory
-
Minimal
indirect
taxes
b)
Provisions
indirectly
affecting
taxation
(i)
Due
process
-
No
person
shall
be
deprived
of
life,
liberty
or
property
without
due
process
-
Example:
you
cannot
impose
excessive
taxes
11
J.
STAGES
OF
TAXATION
1.
Levy
-
the
imposition
of
the
tax
which
involves
the
determination
by
Congress
of
the
subject,
object
and
rate
of
taxation
in
the
form
of
a
law.
2.
Assessment
and
collection
-
Assessment:
the
determination
of
the
amount
of
tax
due.
o Ordinarily
done
by
the
BIR
or
self-assessment/self-help
-
Collection:
the
means,
process
and
method
of
implementing
the
tax
law
for
the
purpose
satisfying
the
tax
oblgation
3.
Payment
-
Compliance
with
the
tax
laws
including
the
exercise
of
remedies
4.
Refund
-
The
return
to
the
taxpayer
of
the
previously
erroneous,
excessive
or
illegally
collected
taxes
K.
DEFINITION,
NATURE,
AND
CHARACTERISTICS
OF
TAXES
Definition
of
Tax
enforced
proportional
contributions
from
persons
and
property
levied
by
the
lawmaking
body
of
the
State
by
virtue
of
its
sovereignty
for
the
support
of
the
State
and
for
all
public
needs
12
13
Exemption
4.
Special
assessment
Definition
Basis
Subject
Scope
Person
Liable
Surrender
Tax
Special
Assessment
Enforced
proportional
contributions
An
enforced
proportional
contribution
from
from
persons
and
property
owners
of
lands
especially
benefited
by
public
improvements
Based
on
necessity
Based
wholly
on
benefits
Levied
on:
Levied
only
on
land
(a) Persons;
(b) Property;
or
(c) Acts.
Has
general
application
It
is
exceptional
both
to
the
time
and
place
of
imposition
It
is
a
personal
liability
of
the
Not
a
personal
liability
of
the
person
assessed;
taxpayer
his
liability
is
limited
only
to
the
land
involved
Cannot
be
surrendered
without
Can
be
surrendered
compensation
5.
Debt
Basis
Effect
of
non-
payment
Mode
of
payment
Assignability
Interest
Authority
Prescription
Tax
Based
on
law
Taxpayer
may
be
imprisoned
for
his
failure
to
pay
the
tax
(except
poll
tax)
Generally
payable
in
money
Not
assignable
Debt
Based
on
contract
or
judgement
No
imprisonment
for
failure
to
pay
a
debt
N.
KINDS
OF
TAXES
1.
As
to
object
a)
Personal,
capitation,
or
poll
tax
-
Example:
Poll
tax;
Community
Tax
b)
Property
tax
-
Example:
real
property
tax
c)
Privilege
tax
-
Example:
income
tax
2.
As
to
burden
or
incidence
a)
Direct
-
The
burden
and
incidence
is
on
one
person
-
Example:
income
tax
b)
Indirect
-
The
burden
is
on
one
person
while
the
impact
and
incidence
is
shifted
to
another
person
-
Example:
VAT
3.
As
to
tax
rates
a)
Specific
-
tax
of
a
fixed
amount
imposed
by
the
head
or
number,
or
by
some
standard
of
weight
or
measurement
14
so
long
as
the
item
falls
within
the
classification
being
taxed
then
it
is
subject
to
that
particular
tax;
no
need
for
an
appraisal
b)
Ad
valorem
-
tax
of
a
fixed
proportion
of
the
value
of
the
property
with
respect
to
which
the
tax
is
assessed
-
since
this
involves
the
value
of
the
property,
it
needs
an
appraisal
by
appraisers
c)
Mixed
-
partly
specific
and/or
party
ad
valorem
-
applicable
to
custom
duties
4.
As
to
purposes
a)
General
or
fiscal
b)
Special,
regulatory,
or
sumptuary
5.
As
to
scope
or
authority
to
impose
a)
National
internal
revenue
taxes
b)
Local
real
property
tax,
municipal
tax
6.
As
to
graduation
a)
Progressive
-
the
tax
rate
increases
as
the
tax
base
increases
b)
Regressive
-
the
tax
rate
increases
as
the
tax
base
decreases
c)
Proportionate
-
it
has
a
fixed
percentage
GENERAL
PRINCIPLES
(CASE
DOCTRINES)
as
mentioned
by
Atty.
A
MCIAA
vs
Marcos
As
a
general
rule,
the
power
to
tax
is
an
incident
of
sovereignty
and
is
unlimited
in
its
range,
acknowledging
in
its
very
nature
no
limits,
so
that
security
against
its
abuse
is
to
be
found
only
in
the
responsibility
of
the
legislature
which
imposes
the
tax
on
the
constituency
who
are
to
pay
it.
Nevertheless,
effective
limitations
thereon
may
be
imposed
by
the
people
through
their
Constitutions.
Our
Constitution,
for
instance,
provides
that
the
rule
of
taxation
shall
be
uniform
and
equitable
and
Congress
shall
evolve
a
progressive
system
of
taxation.
Since
the
last
paragraph
of
Section
234
unequivocally
withdrew,
upon
the
effectivity
of
the
LGC,
exemptions
from
real
property
taxes
granted
to
natural
or
juridical
persons,
including
government-owned
or
controlled
corporations,
except
as
provided
in
the
said
section,
and
the
petitioner
is,
undoubtedly,
a
government-owned
corporation,
it
necessarily
follows
that
its
exemption
from
such
tax
granted
it
in
Section
14
of
its
charter,
R.A.
No.
6958,
has
been
withdrawn.
Any
claim
to
the
contrary
can
only
be
justified
if
the
petitioner
can
seek
refuge
under
any
of
the
exceptions
provided
in
Section
234,
but
not
under
Section
133,
as
it
now
asserts,
since,
as
shown
above,
the
said
section
is
qualified
by
Section
232
and
234.
CREBA
vs
Romulo
MCIT
Is
Not
Violative
of
Due
Process
Petitioner
claims
that
the
MCIT
under
Section
27(E)
of
RA
8424
is
unconstitutional
because
it
is
highly
oppressive,
arbitrary
and
confiscatory
which
amounts
to
deprivation
of
property
without
due
process
of
law.
It
explains
that
gross
income
as
defined
under
said
provision
only
considers
the
cost
of
goods
sold
and
other
direct
expenses;
other
major
expenditures,
such
as
administrative
and
interest
expenses
which
are
equally
necessary
to
produce
gross
income,
were
not
taken
into
account.31
Thus,
pegging
the
tax
base
of
the
MCIT
to
a
corporations
gross
income
is
tantamount
to
a
confiscation
of
capital
because
gross
income,
unlike
net
income,
is
not
"realized
gain."32
SC
disagrees.
Taxes
are
the
lifeblood
of
the
government.
Without
taxes,
the
government
can
neither
exist
nor
endure.
The
exercise
of
taxing
power
derives
its
source
from
the
very
existence
of
the
State
whose
social
contract
with
its
citizens
obliges
it
to
promote
public
interest
and
the
common
good.33
Taxation
is
an
inherent
attribute
of
sovereignty.34
It
is
a
power
that
is
purely
legislative.35
Essentially,
this
means
that
in
the
legislature
primarily
lies
the
discretion
to
determine
the
nature
(kind),
object
(purpose),
extent
(rate),
coverage
(subjects)
and
situs
(place)
of
taxation.36
It
has
the
authority
to
prescribe
a
certain
tax
at
a
specific
rate
for
a
particular
public
purpose
on
persons
or
things
within
its
jurisdiction.
In
other
words,
the
legislature
wields
the
power
to
define
what
tax
shall
be
imposed,
why
it
should
be
imposed,
how
much
tax
shall
be
imposed,
against
whom
(or
what)
it
shall
be
imposed
and
where
it
shall
be
imposed.
[SCOPE
OF
THE
POWER
OF
CONGRESS]
15
As
a
general
rule,
the
power
to
tax
is
plenary
and
unlimited
in
its
range,
acknowledging
in
its
very
nature
no
limits,
so
that
the
principal
check
against
its
abuse
is
to
be
found
only
in
the
responsibility
of
the
legislature
(which
imposes
the
tax)
to
its
constituency
who
are
to
pay
it.37
Nevertheless,
it
is
circumscribed
by
constitutional
limitations.
At
the
same
time,
like
any
other
statute,
tax
legislation
carries
a
presumption
of
constitutionality.
PKSMMN,
et
al.
vs
Executive
Secretary
The
Court
has
also
recently
declared
that
the
coco-levy
funds
are
in
the
nature
of
taxes
and
can
only
be
used
for
public
purpose.46
Taxes
are
enforced
proportional
contributions
from
persons
and
property,
levied
by
the
State
by
virtue
of
its
sovereignty
for
the
support
of
the
government
and
for
all
its
public
needs.47
Here,
the
coco-levy
funds
were
imposed
pursuant
to
law,
namely,
R.A.
6260
and
P.D.
276.
The
funds
were
collected
and
managed
by
the
PCA,
an
independent
government
corporation
directly
under
the
President.48
And,
as
the
respondent
public
officials
pointed
out,
the
pertinent
laws
used
the
term
levy,49
which
means
to
tax,50
in
describing
the
exaction.
Southern
Cross
Cement
Corporation
vs
CMAP
Respondents
also
make
the
astounding
argument
that
the
imposition
of
general
safeguard
measures
should
not
be
seen
as
a
taxation
measure,
but
instead
as
an
exercise
of
police
power.
The
vain
hope
of
respondents
in
divorcing
the
safeguard
measures
from
the
concept
of
taxation
is
to
exclude
from
consideration
Section
28(2),
Article
VI
of
the
Constitution.
POWER
TO
TAX
MAY
BE
USED
TO
IMPLEMENT
POLICE
POWER
The
motivation
behind
many
taxation
measures
is
the
implementation
of
police
power
goals.
Progressive
income
taxes
alleviate
the
margin
between
rich
and
poor;
the
so-called
sin
taxes
on
alcohol
and
tobacco
manufacturers
help
dissuade
the
consumers
from
excessive
intake
of
these
potentially
harmful
products.
Taxation
is
distinguishable
from
police
power
as
to
the
means
employed
to
implement
these
public
good
goals.
Those
doctrines
that
are
unique
to
taxation
arose
from
peculiar
considerations
such
as
those
especially
punitive
effects
of
taxation,
and
the
belief
that
taxes
are
the
lifeblood
of
the
state.
These
considerations
necessitated
the
evolution
of
taxation
as
a
distinct
legal
concept
from
police
power.
Yet
at
the
same
time,
it
has
been
recognized
that
taxation
may
be
made
the
implement
of
the
states
police
power.
X
x
X
x
X
x
X
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.49
The
Court
acknowledges
the
basic
postulates
ingrained
in
the
provision,
and,
hence,
governing
in
this
case.
They
are:
(1)
It
is
Congress
which
authorizes
the
President
to
impose
tariff
rates,
import
and
export
quotas,
tonnage
and
wharfage
dues,
and
other
duties
or
imposts.
Thus,
the
authority
cannot
come
from
the
Finance
Department,
the
National
Economic
Development
Authority,
or
the
World
Trade
Organization,
no
matter
how
insistent
or
persistent
these
bodies
may
be.
(2)
The
authorization
granted
to
the
President
must
be
embodied
in
a
law.
Hence,
the
justification
cannot
be
supplied
simply
by
inherent
executive
powers.
It
cannot
arise
from
administrative
or
executive
orders
promulgated
by
the
executive
branch
or
from
the
wisdom
or
whim
of
the
President.
(3)
The
authorization
to
the
President
can
be
exercised
only
within
the
specified
limits
set
in
the
law
and
is
further
subject
to
limitations
and
restrictions
which
Congress
may
impose.
Consequently,
if
Congress
specifies
that
the
tariff
rates
should
not
exceed
a
given
amount,
the
President
cannot
impose
a
tariff
rate
that
exceeds
such
amount.
If
Congress
stipulates
that
no
duties
may
be
imposed
on
the
importation
of
corn,
the
President
cannot
impose
duties
on
corn,
no
matter
how
actively
the
local
corn
producers
lobby
the
President.
Even
the
most
picayune
of
limits
or
restrictions
imposed
by
Congress
must
be
observed
by
the
President.
There
is
one
fundamental
principle
that
animates
these
constitutional
postulates.
These
impositions
under
Section
28(2),
Article
VI
fall
within
the
realm
of
the
power
of
taxation,
a
power
which
is
within
the
sole
province
of
the
legislature
under
the
Constitution.
Without
Section
28(2),
Article
VI,
the
executive
branch
has
no
authority
to
impose
tariffs
and
other
similar
tax
levies
involving
the
importation
of
foreign
goods.
Assuming
that
Section
28(2)
Article
VI
did
not
exist,
the
enactment
of
the
SMA
by
Congress
would
be
voided
on
the
ground
that
it
would
constitute
an
undue
delegation
of
the
legislative
power
to
tax.
The
constitutional
provision
shields
such
delegation
from
constitutional
infirmity,
and
should
be
recognized
as
an
exceptional
grant
of
legislative
power
to
the
President,
rather
than
the
affirmation
of
an
inherent
executive
power.
CIR
vs
Central
Luzon
Drug
Corporation
As
a
result
of
the
20
percent
discount
imposed
by
RA
7432,
respondent
becomes
entitled
to
a
just
compensation.
This
term
refers
not
only
to
the
issuance
of
a
tax
credit
certificate
indicating
the
correct
amount
of
the
discounts
given,
but
also
to
the
promptness
in
its
release.
Equivalent
to
the
payment
of
property
taken
by
the
State,
such
issuance
--
when
not
done
within
a
reasonable
time
from
the
grant
of
the
16
discounts
--
cannot
be
considered
as
just
compensation.
In
effect,
respondent
is
made
to
suffer
the
consequences
of
being
immediately
deprived
of
its
revenues
while
awaiting
actual
receipt,
through
the
certificate,
of
the
equivalent
amount
it
needs
to
cope
with
the
reduction
in
its
revenues.79
Besides,
the
taxation
power
can
also
be
used
as
an
implement
for
the
exercise
of
the
power
of
eminent
domain.80Tax
measures
are
but
"enforced
contributions
exacted
on
pain
of
penal
sanctions"81
and
"clearly
imposed
for
a
public
purpose."82
In
recent
years,
the
power
to
tax
has
indeed
become
a
most
effective
tool
to
realize
social
justice,
public
welfare,
and
the
equitable
distribution
of
wealth.83
While
it
is
a
declared
commitment
under
Section
1
of
RA
7432,
social
justice
"cannot
be
invoked
to
trample
on
the
rights
of
property
owners
who
under
our
Constitution
and
laws
are
also
entitled
to
protection.
The
social
justice
consecrated
in
our
[C]onstitution
[is]
not
intended
to
take
away
rights
from
a
person
and
give
them
to
another
who
is
not
entitled
thereto."84
For
this
reason,
a
just
compensation
for
income
that
is
taken
away
from
respondent
becomes
necessary.
It
is
in
the
tax
credit
that
our
legislators
find
support
to
realize
social
justice,
and
no
administrative
body
can
alter
that
fact.
To
put
it
differently,
a
private
establishment
that
merely
breaks
even85
--
without
the
discounts
yet
--
will
surely
start
to
incur
losses
because
of
such
discounts.
The
same
effect
is
expected
if
its
mark-up
is
less
than
20
percent,
and
if
all
its
sales
come
from
retail
purchases
by
senior
citizens.
Aside
from
the
observation
we
have
already
raised
earlier,
it
will
also
be
grossly
unfair
to
an
establishment
if
the
discounts
will
be
treated
merely
as
deductions
from
either
its
gross
income
or
its
gross
sales.
Operating
at
a
loss
through
no
fault
of
its
own,
it
will
realize
that
the
tax
credit
limitation
under
RR
2-94
is
inutile,
if
not
improper.
Worse,
profit-generating
businesses
will
be
put
in
a
better
position
if
they
avail
themselves
of
tax
credits
denied
those
that
are
losing,
because
no
taxes
are
due
from
the
latter.
CIR
vs
Acosta
After
a
thorough
consideration
of
this
matter,
we
find
that
we
cannot
give
retroactive
application
to
Section
204(c)
abovecited.
We
have
to
stress
that
tax
laws
are
prospective
in
operation,
unless
the
language
of
the
statute
clearly
provides
otherwise.
Revenue
statutes
are
substantive
laws
and
in
no
sense
must
their
application
be
equated
with
that
of
remedial
laws.
As
well
said
in
a
prior
case,
revenue
laws
are
not
intended
to
be
liberally
construed.22
Considering
that
taxes
are
the
lifeblood
of
the
government
and
in
Holmess
memorable
metaphor,
the
price
we
pay
for
civilization,
tax
laws
must
be
faithfully
and
strictly
implemented.
CIR
vs
Solidbank
Corporation
Double
taxation
means
taxing
the
same
property
twice
when
it
should
be
taxed
only
once;
that
is,
"x
x
x
taxing
the
same
person
twice
by
the
same
jurisdiction
for
the
same
thing."117
It
is
obnoxious
when
the
taxpayer
is
taxed
twice,
when
it
should
be
but
once.118
Otherwise
described
as
"direct
duplicate
taxation,"119
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
they
must
be
of
the
same
kind
or
character.120
First,
the
taxes
herein
are
imposed
on
two
different
subject
matters.
The
subject
matter
of
the
FWT
is
the
passive
income
generated
in
the
form
of
interest
on
deposits
and
yield
on
deposit
substitutes,
while
the
subject
matter
of
the
GRT
is
the
privilege
of
engaging
in
the
business
of
banking.
Second,
although
both
taxes
are
national
in
scope
because
they
are
imposed
by
the
same
taxing
authority
--
the
national
government
under
the
Tax
Code
--
and
operate
within
the
same
Philippine
jurisdiction
for
the
same
purpose
of
raising
revenues,
the
taxing
periods
they
affect
are
different.
The
FWT
is
deducted
and
withheld
as
soon
as
the
income
is
earned,
and
is
paid
after
every
calendar
quarter
in
which
it
is
earned.
On
the
other
hand,
the
GRT
is
neither
deducted
nor
withheld,
but
is
paid
only
after
every
taxable
quarter
in
which
it
is
earned.
Third,
these
two
taxes
are
of
different
kinds
or
characters.
The
FWT
is
an
income
tax
subject
to
withholding,
while
the
GRT
is
a
percentage
tax
not
subject
to
withholding.
In
short,
there
is
no
double
taxation,
because
there
is
no
taxing
twice,
by
the
same
taxing
authority,
within
the
same
jurisdiction,
for
the
same
purpose,
in
different
taxing
periods,
some
of
the
property
in
the
territory.125Subjecting
interest
income
to
a
20%
FWT
and
including
it
in
the
computation
of
the
5%
GRT
is
clearly
not
double
taxation.
CIR
VS
S.C.
Johnson
and
Son,
Inc.
The
purpose
of
a
most
favored
nation
clause
is
to
grant
to
the
contracting
party
treatment
not
less
favorable
than
that
which
has
been
or
may
be
granted
to
the
"most
favored"
among
other
countries.
25
The
most
favored
nation
clause
is
intended
to
establish
the
principle
of
equality
of
international
treatment
by
providing
that
the
citizens
or
subjects
of
the
contracting
nations
may
enjoy
the
privileges
accorded
by
either
party
to
those
of
the
most
favored
nation.
26
The
essence
of
the
principle
is
to
allow
the
taxpayer
in
one
state
to
avail
of
more
liberal
provisions
granted
in
another
tax
treaty
to
which
the
country
of
residence
of
such
taxpayer
is
also
a
party
provided
that
the
subject
matter
of
taxation,
in
this
case
royalty
income,
is
the
same
as
that
in
the
tax
treaty
under
which
the
taxpayer
is
liable.
Both
Article
13
of
the
RP-US
Tax
Treaty
and
Article
12
(2)
(b)
of
the
RP-West
Germany
Tax
Treaty,
above-quoted,
speaks
of
tax
on
royalties
for
the
use
of
trademark,
patent,
and
technology.
The
entitlement
of
the
10%
rate
by
U.S.
firms
despite
the
absence
of
a
matching
credit
(20%
for
17
royalties)
would
derogate
from
the
design
behind
the
most
grant
equality
of
international
treatment
since
the
tax
burden
laid
upon
the
income
of
the
investor
is
not
the
same
in
the
two
countries.
The
similarity
in
the
circumstances
of
payment
of
taxes
is
a
condition
for
the
enjoyment
of
most
favored
nation
treatment
precisely
to
underscore
the
need
for
equality
of
treatment.
We
accordingly
agree
with
petitioner
that
since
the
RP-US
Tax
Treaty
does
not
give
a
matching
tax
credit
of
20
percent
for
the
taxes
paid
to
the
Philippines
on
royalties
as
allowed
under
the
RP-West
Germany
Tax
Treaty,
private
respondent
cannot
be
deemed
entitled
to
the
10
percent
rate
granted
under
the
latter
treaty
for
the
reason
that
there
is
no
payment
of
taxes
on
royalties
under
similar
circumstances.
It
bears
stress
that
tax
refunds
are
in
the
nature
of
tax
exemptions.
As
such
they
are
regarded
as
in
derogation
of
sovereign
authority
and
to
be
construed
strictissimi
juris
against
the
person
or
entity
claiming
the
exemption.
27The
burden
of
proof
is
upon
him
who
claims
the
exemption
in
his
favor
and
he
must
be
able
to
justify
his
claim
by
the
clearest
grant
of
organic
or
statute
law.
28
Private
respondent
is
claiming
for
a
refund
of
the
alleged
overpayment
of
tax
on
royalties;
however,
there
is
nothing
on
record
to
support
a
claim
that
the
tax
on
royalties
under
the
RP-US
Tax
Treaty
is
paid
under
similar
circumstances
as
the
tax
on
royalties
under
the
RP-West
Germany
Tax
Treaty.
CIR
vs
Estate
od
Benigno
Toda
Tax
avoidance
and
tax
evasion
are
the
two
most
common
ways
used
by
taxpayers
in
escaping
from
taxation.
Tax
avoidance
is
the
tax
saving
device
within
the
means
sanctioned
by
law.
This
method
should
be
used
by
the
taxpayer
in
good
faith
and
at
arms
length.
Tax
evasion,
on
the
other
hand,
is
a
scheme
used
outside
of
those
lawful
means
and
when
availed
of,
it
usually
subjects
the
taxpayer
to
further
or
additional
civil
or
criminal
liabilities.23
[elements
of]
Tax
evasion
connotes
the
integration
of
three
factors:
(1)
the
end
to
be
achieved,
i.e.,
the
payment
of
less
than
that
known
by
the
taxpayer
to
be
legally
due,
or
the
non-payment
of
tax
when
it
is
shown
that
a
tax
is
due;
(2)
an
accompanying
state
of
mind
which
is
described
as
being
"evil,"
in
"bad
faith,"
"willfull,"
or
"deliberate
and
not
accidental";
and
(3)
a
course
of
action
or
failure
of
action
which
is
unlawful.24
All
these
factors
are
present
in
the
instant
case.
It
is
significant
to
note
that
as
early
as
4
May
1989,
prior
to
the
purported
sale
of
the
Cibeles
property
by
CIC
to
Altonaga
on
30
August
1989,
CIC
received
P40
million
from
RMI,25
and
not
from
Altonaga.
That
P40
million
was
debited
by
RMI
and
reflected
in
its
trial
balance26
as
"other
inv.
Cibeles
Bldg."
Also,
as
of
31
July
1989,
another
P40
million
was
debited
and
reflected
in
RMIs
trial
balance
as
"other
inv.
Cibeles
Bldg."
This
would
show
that
the
real
buyer
of
the
properties
was
RMI,
and
not
the
intermediary
Altonaga.
The
scheme
resorted
to
by
CIC
in
making
it
appear
that
there
were
two
sales
of
the
subject
properties,
i.e.,
from
CIC
to
Altonaga,
and
then
from
Altonaga
to
RMI
cannot
be
considered
a
legitimate
tax
planning.
Such
scheme
is
tainted
with
fraud.
CIR
vs
The
Philpiine
American
Accident
Insurance
Company,
Inc.
The
rule
that
tax
exemptions
should
be
construed
strictly
against
the
taxpayer
presupposes
that
the
taxpayer
is
clearly
subject
to
the
tax
being
levied
against
him.
Unless
a
statute
imposes
a
tax
clearly,
expressly
and
unambiguously,
what
applies
is
the
equally
well-settled
rule
that
the
imposition
of
a
tax
cannot
be
presumed.17Where
there
is
doubt,
tax
laws
must
be
construed
strictly
against
the
government
and
in
favor
of
the
taxpayer.18This
is
because
taxes
are
burdens
on
the
taxpayer,
and
should
not
be
unduly
imposed
or
presumed
beyond
what
the
statutes
expressly
and
clearly
import
PAGCOR
vs
BIR
Taxation
is
the
rule
and
exemption
is
the
exception.23
The
burden
of
proof
rests
upon
the
party
claiming
exemption
to
prove
that
it
is,
in
fact,
covered
by
the
exemption
so
claimed.24
As
a
rule,
tax
exemptions
are
construed
strongly
against
the
claimant.25
Exemptions
must
be
shown
to
exist
clearly
and
categorically,
and
supported
by
clear
legal
provision.
CIR
vs
St.
Lukes
Medical
Center
There
is
no
dispute
that
St.
Luke's
is
organized
as
a
non-stock
and
non-profit
charitable
institution.
However,
this
does
not
automatically
exempt
St.
Luke's
from
paying
taxes.
This
only
refers
to
the
organization
of
St.
Luke's.
Even
if
St.
Luke's
meets
the
test
of
charity,
a
charitable
institution
is
not
ipso
facto
tax
exempt.
To
be
exempt
from
real
property
taxes,
Section
28(3),
Article
VI
of
the
Constitution
requires
that
a
charitable
institution
use
the
property
"actually,
directly
and
exclusively"
for
charitable
purposes.
To
be
exempt
from
income
taxes,
Section
30(E)
of
the
NIRC
requires
that
a
charitable
institution
must
be
"organized
and
operated
exclusively"
for
charitable
purposes.
Likewise,
to
be
exempt
from
income
taxes,
Section
30(G)
of
the
NIRC
requires
that
the
institution
be
"operated
exclusively"
for
social
welfare.
SEC.
30.
Exemptions
from
Tax
on
Corporations.
-
The
following
organizations
shall
not
be
taxed
under
this
Title
in
respect
to
income
received
by
them
as
such:
(G)
Civic
league
or
organization
not
organized
for
profit
but
operated
exclusively
for
the
promotion
of
social
welfare;
18
However,
the
last
paragraph
of
Section
30
of
the
NIRC
qualifies
the
words
"organized
and
operated
exclusively"
by
providing
that:
Notwithstanding
the
provisions
in
the
preceding
paragraphs,
the
income
of
whatever
kind
and
character
of
the
foregoing
organizations
from
any
of
their
properties,
real
or
personal,
or
from
any
of
their
activities
conducted
for
profit
regardless
of
the
disposition
made
of
such
income,
shall
be
subject
to
tax
imposed
under
this
Code.
(Emphasis
supplied)
Thus,
even
if
the
charitable
institution
must
be
"organized
and
operated
exclusively"
for
charitable
purposes,
it
is
nevertheless
allowed
to
engage
in
"activities
conducted
for
profit"
without
losing
its
tax
exempt
status
for
its
not-for-profit
activities.
The
only
consequence
is
that
the
"income
of
whatever
kind
and
character"
of
a
charitable
institution
"from
any
of
its
activities
conducted
for
profit,
regardless
of
the
disposition
made
of
such
income,
shall
be
subject
to
tax."
Prior
to
the
introduction
of
Section
27(B),
the
tax
rate
on
such
income
from
for-
profit
activities
was
the
ordinary
corporate
rate
under
Section
27(A).
With
the
introduction
of
Section
27(B),
the
tax
rate
is
now
10%.
CIR
vs
Mitsubishi
Metal
Corp.
It
is
too
settled
a
rule
in
this
jurisdiction,
as
to
dispense
with
the
need
for
citations,
that
laws
granting
exemption
from
tax
are
construed
strictissimi
juris
against
the
taxpayer
and
liberally
in
favor
of
the
taxing
power.
Taxation
is
the
rule
and
exemption
is
the
exception.
The
burden
of
proof
rests
upon
the
party
claiming
exemption
to
prove
that
it
is
in
fact
covered
by
the
exemption
so
claimed,
which
onus
petitioners
have
failed
to
discharge.
Significantly,
private
respondents
are
not
even
among
the
entities
which,
under
Section
29
(b)
(7)
(A)
of
the
tax
code,
are
entitled
to
exemption
and
which
should
indispensably
be
the
party
in
interest
in
this
case.
KEPCO
vs
CIR
Well-settled
in
this
jurisdiction
is
the
fact
that
actions
for
tax
refund,
as
in
this
case,
are
in
the
nature
of
a
claim
for
exemption
and
the
law
is
construed
in
strictissimi
juris
against
the
taxpayer.
The
pieces
of
evidence
presented
entitling
a
taxpayer
to
an
exemption
are
also
strictissimi
scrutinized
and
must
be
duly
proven
Asia
International
Auctioneers,
Inc.
A
tax
amnesty
is
a
general
pardon
or
the
intentional
overlooking
by
the
State
of
its
authority
to
impose
penalties
on
persons
otherwise
guilty
of
violating
a
tax
law.
It
partakes
of
an
absolute
waiver
by
the
government
of
its
right
to
collect
what
is
due
it
and
to
give
tax
evaders
who
wish
to
relent
a
chance
to
start
with
a
clean
slate.23
A
tax
amnesty,
much
like
a
tax
exemption,
is
never
favored
or
presumed
in
law.
The
grant
of
a
tax
amnesty,
similar
to
a
tax
exemption,
must
be
construed
strictly
against
the
taxpayer
and
liberally
in
favor
of
the
taxing
authority
Planters
Product,
Inc.
vs
Fertiphil
Corporation
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
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
or
agrarian
reform.
It
is
clear
from
the
Letter
of
Understanding
that
the
levy
was
imposed
precisely
to
pay
the
corporate
debts
of
PPI.
We
cannot
agree
with
PPI
that
the
levy
was
imposed
to
ensure
the
stability
of
the
fertilizer
industry
in
the
country.
The
letter
of
understanding
and
the
plain
text
of
the
LOI
clearly
indicate
that
the
levy
was
exacted
for
the
benefit
of
a
private
corporation.
NPC
vs
City
of
Cabanatuan
Doubtless,
the
power
to
tax
is
the
most
effective
instrument
to
raise
needed
revenues
to
finance
and
support
myriad
activities
of
the
local
government
units
for
the
delivery
of
basic
services
essential
to
the
promotion
of
the
general
welfare
and
the
enhancement
of
peace,
progress,
and
prosperity
of
the
people.
As
this
Court
observed
in
the
Mactan
case,
"the
original
reasons
for
the
withdrawal
of
tax
exemption
privileges
granted
to
government-owned
or
controlled
corporations
and
all
other
units
of
government
were
that
such
privilege
resulted
in
serious
tax
base
erosion
and
distortions
in
the
tax
treatment
of
similarly
situated
enterprises."78
With
the
added
burden
of
devolution,
it
is
even
more
imperative
for
government
entities
to
share
in
the
requirements
of
development,
fiscal
or
otherwise,
by
paying
taxes
or
other
charges
due
from
them.
Abakada
Guro
Party
List
vs
Ermita
Nevertheless,
the
Constitution
does
not
really
prohibit
the
imposition
of
indirect
taxes,
like
the
VAT.
What
it
simply
provides
is
that
Congress
shall
"evolve
a
progressive
system
of
taxation."
The
Court
stated
in
the
Tolentino
case,
thus:
The
Constitution
does
not
really
prohibit
the
imposition
of
indirect
taxes
which,
like
the
VAT,
are
regressive.
What
it
simply
provides
is
that
Congress
shall
evolve
a
progressive
system
of
taxation.
The
constitutional
provision
has
been
interpreted
to
mean
simply
that
direct
taxes
are
.
.
.
to
be
preferred
[and]
as
much
as
possible,
indirect
taxes
should
be
minimized.
(E.
FERNANDO,
THE
CONSTITUTION
OF
THE
PHILIPPINES
221
(Second
ed.
1977))
Indeed,
the
mandate
to
Congress
is
not
to
prescribe,
but
to
evolve,
a
progressive
tax
19
system.
Otherwise,
sales
taxes,
which
perhaps
are
the
oldest
form
of
indirect
taxes,
would
have
been
prohibited
with
the
proclamation
of
Art.
VIII,
17
(1)
of
the
1973
Constitution
from
which
the
present
Art.
VI,
28
(1)
was
taken.
Sales
taxes
are
also
regressive.
Resort
to
indirect
taxes
should
be
minimized
but
not
avoided
entirely
because
it
is
difficult,
if
not
impossible,
to
avoid
them
by
imposing
such
taxes
according
to
the
taxpayers'
ability
to
pay.
In
the
case
of
the
VAT,
the
law
minimizes
the
regressive
effects
of
this
imposition
by
providing
for
zero
rating
of
certain
transactions
(R.A.
No.
7716,
3,
amending
102
(b)
of
the
NIRC),
while
granting
exemptions
to
other
transactions.
(R.A.
No.
7716,
4
amending
103
of
the
NIRC)
CIR
vs
Baier-Nickel
The
source
of
an
income
is
the
property,
activity
or
service
that
produced
the
income.
For
the
source
of
income
to
be
considered
as
coming
from
the
Philippines,
it
is
sufficient
that
the
income
is
derived
from
activity
within
the
Philippines.
In
BOAC's
case,
the
sale
of
tickets
in
the
Philippines
is
the
activity
that
produces
the
income.
The
tickets
exchanged
hands
here
and
payments
for
fares
were
also
made
here
in
Philippine
currency.
The
situs
of
the
source
of
payments
is
the
Philippines.
The
flow
of
wealth
proceeded
from,
and
occurred
within,
Philippine
territory,
enjoying
the
protection
accorded
by
the
Philippine
government.
In
consideration
of
such
protection,
the
flow
of
wealth
should
share
the
burden
of
supporting
the
government.
CIR
vs
American
Express
International
Services
Subject
to
Zero
VAT
As
a
general
rule,
the
VAT
system
uses
the
destination
principle
as
a
basis
for
the
jurisdictional
reach
of
the
tax.51Goods
and
services
are
taxed
only
in
the
country
where
they
are
consumed.
Thus,
exports
are
zero-rated,
while
imports
are
taxed.
Confusion
in
zero
rating
arises
because
petitioner
equates
the
performance
of
a
particular
type
of
service
with
theconsumption
of
its
output
abroad.
In
the
present
case,
the
facilitation
of
the
collection
of
receivables
is
different
from
the
utilization
or
consumption
of
the
outcome
of
such
service.
While
the
facilitation
is
done
in
the
Philippines,
the
consumption
is
not.
Respondent
renders
assistance
to
its
foreign
clients
--
the
ROCs
outside
the
country
--
by
receiving
the
bills
of
service
establishments
located
here
in
the
country
and
forwarding
them
to
the
ROCs
abroad.
The
consumption
contemplated
by
law,
contrary
to
petitioners
administrative
interpretation,52
does
not
imply
that
the
service
be
done
abroad
in
order
to
be
zero-rated.
Consumption
is
"the
use
of
a
thing
in
a
way
that
thereby
exhausts
it."53
Applied
to
services,
the
term
means
the
performance
or
"successful
completion
of
a
contractual
duty,
usually
resulting
in
the
performers
release
from
any
past
or
future
liability
x
x
x."54
The
services
rendered
by
respondent
are
performed
or
successfully
completed
upon
its
sending
to
its
foreign
client
the
drafts
and
bills
it
has
gathered
from
service
establishments
here.
Its
services,
having
been
performed
in
the
Philippines,
are
therefore
also
consumed
in
the
Philippines.
Unlike
goods,
services
cannot
be
physically
used
in
or
bound
for
a
specific
place
when
their
destination
is
determined.
Instead,
there
can
only
be
a
"predetermined
end
of
a
course"55
when
determining
the
service
"location
or
position
x
x
x
for
legal
purposes."56
Respondents
facilitation
service
has
no
physical
existence,
yet
takes
place
upon
rendition,
and
therefore
upon
consumption,
in
the
Philippines.
Under
the
destination
principle,
as
petitioner
asserts,
such
service
is
subject
to
VAT
at
the
rate
of
10
percent.
Respondents
Services
Exempt
from
the
Destination
Principle
However,
the
law
clearly
provides
for
an
exception
to
the
destination
principle;
that
is,
for
a
zero
percent
VAT
rate
for
services
that
are
performed
in
the
Philippines,
"paid
for
in
acceptable
foreign
currency
and
accounted
for
in
accordance
with
the
rules
and
regulations
of
the
[BSP]."57
Thus,
for
the
supply
of
service
to
be
zero-rated
as
an
exception,
the
law
merely
requires
that
first,
the
service
be
performed
in
the
Philippines;
second,
the
service
fall
under
any
of
the
categories
in
Section
102(b)
of
the
Tax
Code;
and,
third,
it
be
paid
in
acceptable
foreign
currency
accounted
for
in
accordance
with
BSP
rules
and
regulations.
Indeed,
these
three
requirements
for
exemption
from
the
destination
principle
are
met
by
respondent.
Its
facilitation
service
is
performed
in
the
Philippines.
It
falls
under
the
second
category
found
in
Section
102(b)
of
the
Tax
Code,
because
it
is
a
service
other
than
"processing,
manufacturing
or
repacking
of
goods"
as
mentioned
in
the
provision.
Undisputed
is
the
fact
that
such
service
meets
the
statutory
condition
that
it
be
paid
in
acceptable
foreign
currency
duly
accounted
for
in
accordance
with
BSP
rules.
Thus,
it
should
be
zero-rated.
Tax
Situs
of
a
Zero-Rated
Service
The
law
neither
makes
a
qualification
nor
adds
a
condition
in
determining
the
tax
situs
of
a
zero-rated
service.
Under
this
criterion,
the
place
where
the
service
is
rendered
determines
the
jurisdiction60
to
impose
the
VAT.61Performed
in
the
Philippines,
such
service
is
necessarily
subject
to
its
jurisdiction,62
for
the
State
necessarily
has
to
have
"a
substantial
connection"63
to
it,
in
order
to
enforce
a
zero
rate.64
The
place
of
payment
is
immaterial;65much
less
is
the
place
where
the
output
of
the
service
will
be
further
or
ultimately
used.
Lung
Center
vs
Quezon
City
Section
2
of
Presidential
Decree
No.
1823,
relied
upon
by
the
petitioner,
specifically
provides
that
the
petitioner
shall
enjoy
the
tax
exemptions
and
privileges:
20
SEC.
2.
TAX
EXEMPTIONS
AND
PRIVILEGES.
Being
a
non-profit,
non-stock
corporation
organized
primarily
to
help
combat
the
high
incidence
of
lung
and
pulmonary
diseases
in
the
Philippines,
all
donations,
contributions,
endowments
and
equipment
and
supplies
to
be
imported
by
authorized
entities
or
persons
and
by
the
Board
of
Trustees
of
the
Lung
Center
of
the
Philippines,
Inc.,
for
the
actual
use
and
benefit
of
the
Lung
Center,
shall
be
exempt
from
income
and
gift
taxes,
the
same
further
deductible
in
full
for
the
purpose
of
determining
the
maximum
deductible
amount
under
Section
30,
paragraph
(h),
of
the
National
Internal
Revenue
Code,
as
amended.
The
Lung
Center
of
the
Philippines
shall
be
exempt
from
the
payment
of
taxes,
charges
and
fees
imposed
by
the
Government
or
any
political
subdivision
or
instrumentality
thereof
with
respect
to
equipment
purchases
made
by,
or
for
the
Lung
Center.29
It
is
plain
as
day
that
under
the
decree,
the
petitioner
does
not
enjoy
any
property
tax
exemption
privileges
for
its
real
properties
as
well
as
the
building
constructed
thereon.
If
the
intentions
were
otherwise,
the
same
should
have
been
among
the
enumeration
of
tax
exempt
privileges
under
Section
2.
CIR
vs
CTA,
Manila
Golf
An
"item"
in
a
revenue
bill
does
not
refer
to
an
entire
section
imposing
a
particular
kind
of
tax,
but
rather
to
the
subject
of
the
tax
and
the
tax
rate.
In
the
portion
of
a
revenue
bill
which
actually
imposes
a
tax,
a
section
identifies
the
tax
and
enumerates
the
persons
liable
therefor
with
the
corresponding
tax
rate.
To
construe
the
word
"item"
as
referring
to
the
whole
section
would
tie
the
President's
hand
in
choosing
either
to
approve
the
whole
section
at
the
expense
of
also
approving
a
provision
therein
which
he
deems
unacceptable
or
veto
the
entire
section
at
the
expense
of
foregoing
the
collection
of
the
kind
of
tax
altogether.
The
evil
which
was
sought
to
be
prevented
in
giving
the
President
the
power
to
disapprove
items
in
a
revenue
bill
would
be
perpetrated
rendering
that
power
inutile
American
Bible
Society
vs
City
of
Manila
The
constitutional
guaranty
of
the
free
exercise
and
enjoyment
of
religious
profession
and
worship
carries
with
it
the
right
to
disseminate
religious
information.
Any
restraints
of
such
right
can
only
be
justified
like
other
restraints
of
freedom
of
expression
on
the
grounds
that
there
is
a
clear
and
present
danger
of
any
substantive
evil
which
the
State
has
the
right
to
prevent".
(Taada
and
Fernando
on
the
Constitution
of
the
Philippines,
Vol.
1,
4th
ed.,
p.
297).
In
the
case
at
bar
the
license
fee
herein
involved
is
imposed
upon
appellant
for
its
distribution
and
sale
of
bibles
and
other
religious
literature
which
is
constitutionally
prohibited.
Smart
Communication
vs
City
of
Davao
VI.
Non-impairment
Clause
of
the
Constitution
Another
argument
of
Smart
is
that
the
imposition
of
the
local
franchise
tax
by
the
City
of
Davao
would
violate
the
constitutional
prohibition
against
impairment
of
contracts.
The
franchise,
according
to
petitioner,
is
in
the
nature
of
a
contract
between
the
government
and
Smart.47
However,
we
find
that
there
is
no
violation
of
Article
III,
Section
10
of
the
1987
Philippine
Constitution.
As
previously
discussed,
the
franchise
of
Smart
does
not
expressly
provide
for
exemption
from
local
taxes.
Absent
the
express
provision
on
such
exemption
under
the
franchise,
we
are
constrained
to
rule
against
it.
The
"in
lieu
of
all
taxes"
clause
in
Section
9
of
R.A.
No.
7294
leaves
much
room
for
interpretation.
Due
to
this
ambiguity
in
the
law,
the
doubt
must
be
resolved
against
the
grant
of
tax
exemption.
Moreover,
Smarts
franchise
was
granted
with
the
express
condition
that
it
is
subject
to
amendment,
alteration,
or
repeal.48
As
held
in
Tolentino
v.
Secretary
of
Finance:
49
It
is
enough
to
say
that
the
parties
to
a
contract
cannot,
through
the
exercise
of
prophetic
discernment,
fetter
the
exercise
of
the
taxing
power
of
the
State.
For
not
only
are
existing
laws
read
into
contracts
in
order
to
fix
obligations
as
between
parties,
but
the
reservation
of
essential
attributes
of
sovereign
power
is
also
read
into
contracts
as
a
basic
postulate
of
the
legal
order.
The
policy
of
protecting
contracts
against
impairment
presupposes
the
maintenance
of
a
government
which
retains
adequate
authority
to
secure
the
peace
and
good
order
of
society.
In
truth,
the
Contract
Clause
has
never
been
thought
as
a
limitation
on
the
exercise
of
the
States
power
of
taxation
save
only
where
a
tax
exemption
has
been
granted
for
a
valid
consideration.
Tax
is
(repeat
wanmilyon
times
J )
21
A.
INCOME
TAXATION
INCOME
TAX
SYSTEMS
a)
Global
tax
system
which
collates
all
forms
of
income
and
then
make
one
deductions
which
are
applicable
and
subject
the
same
to
one
tax
rate.
Theres
only
one
tax
base;
theres
also
one
tax
rate.
So
regardless
of
the
form
of
income,
they
are
aggregated
into
one
and
then
all
deductions
are
also
aggregated
into
one.
You
make
the
deductions
one
time
subject
the
same
to
one
tax
rate
b)
Schedular
tax
system
Different
types
of
types
or
forms
of
income
are
subjected
to
different
taxes.
Different
tax
rate
for
every
form
of
income.
-
If
this
is
compensation
income,
this
is
subject
to
(lets
say)
5%.
-
If
this
is
interest
income,
this
is
subject
to
(lets
say)
10%.
c) Semi-schedular
or
semi-global
tax
system
The
Philippines
follows
this.
Both
of
the
above
systems,
Global
and
Schedular
are
being
followed
depending
on
the
type
of
tax
payers.
-
So
you
have
passive
income
subject
to
final
tax.
Global
System,
one
tax
one
income.
-
Semi-schedular,
this
is
clearly
presented
by
our
income
tax
table
for
individuals.
It
follows
a
particular
schedule.
-
Different
income
subject
to
different
tax
rate.
-
So
business
income,
compensation
income,
they
are
subject
to
different
tax
rates.
FEATURES
OF
THE
PHILIPPINE
INCOME
TAX
LAW
a) It
is
a
direct
tax,
it
means
that
the
burden
cannot
be
shifted
to
another
taxpayer.
b) It
is
progressive,
which
means
that
as
the
tax
base
increases,
the
tax
rate
also
increases,
specifically
if
your
income
increases,
you
will
be
subject
to
higher
taxes.
This
is
clearly
manifested
by
the
schedule
of
tax
rates
for
the
individual
taxpayer.
c) It
is
comprehensive,
meaning
it
covers
all
forms
of
income.
Tax
as
a
general
is
unlimited.
It
is
able
to
impose
taxes
on
all
forms
of
income.
d) It
is
semi-schedular
or
semi
global.
CRITERIA
IN
IMPOSING
PHILIPPINE
INCOME
TAX
a) Citizenship
Principle
a
citizen
of
the
Philippines
is
subject
to
Philippine
Income
Tax
whether
the
income
is
obtained
within
or
without
the
Philippines.
-
Whereas,
for
a
non-resident
citizen,
only
for
the
income
within.
-
So
long
as
you
are
a
citizen,
you
are
subject
to
income
tax.
b) Residency
Principle
-
If
youre
an
alien,
following
the
citizenship
principle,
supposedly
not
subject
to
tax,
but
because
we
also
follow
the
residency
principle,
we
also
impose
taxes
on
the
resident
alien.
-
Resident
aliens
are
subject
to
income
tax
for
income
earned
within
the
Philippines.
c) Source
Principle
So
even
if
youre
a
non-resident
alien,
you
may
still
be
subject
to
income
tax
here
in
the
Philippines
if
you
have
an
income
derived
here.
-
Case
of
Bayer
Nickel
discusses
the
Source
Principle.
TYPES
OF
PHILIPPINE
INCOME
TAX
a) Individual
Taxes
individual
taxpayers
b) Corporate
Taxes
corporations,
partnerships
and
joint
ventures
TAXABLE
PERIOD
a) Calendar
Period
Any
12-month
period
ending
on
December
31.
b) Fiscal
Period
Any
12-month
period
ending
other
than
on
December
31.
c) Short
Period
This
is
applicable
to
entities
or
persons
whose
taxable
period
has
been
terminated.
A
taxpayer
changes
its
taxable
period
and
it
will
be
required
to
file
a
so
called
short
period
return,
meaning,
its
less
than
its
usual
12-month
period.
Example:
One
client,
last
July
2014,
changes
its
calendar
year
from
Dec
31
to
March
30
of
every
year.
When
their
by-laws
of
corporation
has
to
be
amended,
you
have
to
put
there
that
the
fiscal
year
has
already
been
changed.
You
also
have
to
apply
a
change
of
calendar
year
with
the
BIR.
The
BIR
would
require
a
filing
of
a
short
period
return,
the
latter
should
cover
the
difference
in
the
period
of
change.
22
Dec
31
to
March
30;
I
applied
for
it
somewhere
in
June
2014.
Ni-agi
naman
ang
December
31,
right?
So
they
are
supposed
to
file
an
income
tax
return
April
15
of
that
year.
So
na-cover
na
ang
period.
So
if
they
will
be
changing
their
period
from
December
to
March
30,
when
will
be
the
deadline
of
their
filing
of
their
ITR?
It
would
be
on
15th
day
of
the
fourth
month.
So,
July
15.
So
for
that
period,
nay
period
na
di
ma-cover,
lets
just
assume
that
the
by-laws
were
approved
by
the
SEC
somewhere
in
August
na.
So
supposedly
ako
12-month
kay
nagsugod
na
pag-April,
unya
na-approve
naman
pagka-August.
Supposedly
naa
koy
period
(month)
na
wala
na-report
kay
wala
man
to
siya
na-cover
sa
ako
12
month.
Kung
August
ko
nagsugod,
unsa
naman
lang
na
months
ako
ma-report?
Wala
man
na
siya
kaabot
og
12
months.
What
the
BIR
would
require
in
addition
to
your
application,
is
a
short
period
return
from,
January
1
to
March
30.
Kay
mao
man
na
siya
ang
wala
na-recover
sa
previous
na
report.
Ayaw
nalang
ninyo
sobraa
og
sabot.
Basta
mao
nana.
J
-
Sir
The
BIR
requires
the
filing
of
a
short
period
return
between
the
months
of
the
difference
of
your
previous
Calendar
year
to
your
current
Fiscal
year.
Another
Example:
Fiscal
year
to
another
fiscal
year.
January
31
to
February
28;
one
month
lang
ang
imung
himoong
short
period
return.
This
type
of
period
applies
either
because
you
will
change
from
Fiscal
period
to
Calendar
period
or
from
Fiscal
period
to
another
Fiscal
period;
or
when
the
taxpayer
will
have
to
dissolve
its
business.
Example:
Calendar
Period
and
you
decide
to
dissolve
your
business
on
June
30,
you
will
have
to
file
an
ITR
along
with
your
financial
statements
good
for
January
to
June
30.
Thats
less
than
12
months.
That
is
a
short
period.
KINDS
OF
TAXPAYERS
Taxpayer
Within
Without
RC
T
T
NRC
and
OCW
T
X
RA
T
X
NRA
(ETB
and
NETB)
T
X
DC
T
T
FC
T
X
INDIVIDUALS:
v Citizens
of
the
Philippines
you
base
it
on
the
definition
given
by
the
Constitution.
o Resident
Citizen
he
establishes
his
dwelling
here
in
the
Philippines;
stayed
in
the
Philippines
for
most
of
the
time
during
the
year.
o Non-Resident
Citizens
refer
to
NIRC;
Title
II,
Section
22
(E):
The
term
'nonresident
citizen'
means:
(1) A
citizen
of
the
Philippines
who
establishes
to
the
satisfaction
of
the
Commissioner
the
fact
of
his
physical
presence
abroad
with
a
definite
intention
to
reside
therein.
Changed
your
residence
from
the
Philippines
to
abroad.
This
is
usually
applicable
to
persons
who
have
stayed
abroad
for
a
long
period
already.
That
it
becomes
incontrovertible
that
they
are
residents
of
the
foreign
countries.
(2) A
citizen
of
the
Philippines
who
leaves
the
Philippines
during
the
taxable
year
to
reside
abroad,
either
as
an
immigrant
or
for
employment
on
a
permanent
basis.
It
does
not
require
a
period.
If
you
leave
the
Philippines
during
the
year
and
then
the
reason
for
which
you
have
already
been
granted
an
immigrant
visa
by
some
other
country.
Automatically
you
will
become
an
NRC
regardless
of
the
period.
Bisan
pag
nag-stay
kas
Philippines
until
November.
And
on
that
month,
you
receive
your
immigration
visa
and
you
left
the
Philippines
right
away,
you
are
already
considered
as
NRC
because
the
reason
for
your
leaving
the
Philippines
is
because
you
are
already
considered
as
an
immigrant.
When
you
go
abroad
for
the
reason
of
permanent
employment,
you
will
become
an
NRC
automatically.
Example,
you
are
a
nurse,
you
applied
in
the
USA
and
on
August
of
2015,
you
received
a
definite
invitation
and
acceptance
of
an
employment
in
a
hospital
in
USA
and
then
right
away,
on
September
you
left
the
Philippines.
(3) A
citizen
of
the
Philippines
who
works
and
derives
income
from
abroad
and
whose
employment
thereat
requires
him
to
be
physically
present
abroad
most
of
the
time
during
the
taxable
year.
23
Still
refers
to
employment
but
requires
a
period;
which
is
most
of
the
time
during
the
year.
His
employment
requires
him
to
be
present
abroad
for
most
of
the
time
during
the
year.
This
refers
only
to
temporary
arrangement.
As
in
the
case
when
the
employee
is
seconded
abroad
by
a
Domestic
Corporation
to
a
Foreign
Corporation
which
is
also
a
sister
company
or
a
principal
office
of
some
entity
here
in
the
Philippines.
For
example,
you
are
an
employee
of
Dash
Engineering,
a
Japanese
entity
here
in
the
Philippines.
You
will
be
sent
to
Japan
for
some
project
that
they
have;
you
will
stay
there
for
a
year
during
2016.
Here
you
are
staying
most
of
the
time
of
the
year
abroad
and
not
on
a
permanent
basis.
Most
of
the
Time
during
the
Year
defined
as
183
days.
If
you
stay
abroad
for
at
least
183
days,
automatically,
you
are
considered
as
an
NRC.
But
the
reason
of
your
stay
abroad
has
to
be
for
employment.
In
the
succeeding
provision,
it
provides
an
exception
for
OFWs
or
OCWs
who
are
also
considered
as
NRCs.
If
youre
an
OFW
or
OCW,
do
you
have
account
your
number
of
days
that
you
will
stay
abroad
for
you
to
be
considered
as
NRC?
No.
But
it
is
required
that
the
employment
contract
must
pass
through
or
be
registered
by
the
Philippine
Overseas
Employment
Authority
or
POEA.
The
same
goes
for
the
seamen
but
the
requirement
is
that
you
must
be
employed
as
a
member
of
a
complement
of
a
vessel
which
is
exclusively
engaged
in
international
trade.
The
OFWs
and
OCWs
are
automatically
considered
as
NRCs
because
they
contribute
to
the
foreign
currency
reserves
of
the
Philippines.
(4) A
citizen
who
has
been
previously
considered
as
nonresident
citizen
and
who
arrives
in
the
Philippines
at
any
time
during
the
taxable
year
to
reside
permanently
in
the
Philippines
shall
likewise
be
treated
as
a
nonresident
citizen
for
the
taxable
year
in
which
he
arrives
in
the
Philippines
with
respect
to
his
income
derived
from
sources
abroad
until
the
date
of
his
arrival
in
the
Philippines.
Here,
it
will
require
a
timeline.
This
is
only
applicable
to
a
person
who
has
been
previously
classified
as
NRC.
If
from
January
to
August,
last
year,
you
were
considered
as
an
NRC,
then
you
decided
to
return
to
the
Philippines.
The
purpose
of
returning
must
be
to
permanently
reside
here
in
the
Philippines.
You
returned
here
sometime
in
August,
you
derived
income
from
January
to
August,
abroad.
You
received
income
worth
1m,
now
while
you
are
here
in
the
Philippines,
you
continue
to
earn
income
abroad,
500k.
From
January
to
August:
NRC,
as
such
you
are
only
taxable
for
income
within
the
Philippines.
This
1m
from
abroad,
will
not
be
subject
to
tax.
For
500k,
from
the
moment
you
return
here
in
the
Philippines
up
to
December
of
this
year,
you
will
be
already
considered
RC.
This
is
an
income
derived
abroad.
This
is
now
subject
to
tax
because
RCs
income
are
taxable
within
and
without
the
Philippines.
Hybrid
NRC.
You
are
considered
a
Hybrid
on
the
year
that
you
arrive
here
in
the
Philippines
for
purposes
of
permanent
residency.
(5) The
taxpayer
shall
submit
proof
to
the
Commissioner
to
show
his
intention
of
leaving
the
Philippines
to
reside
permanently
abroad
or
to
return
to
and
reside
in
the
Philippines
as
the
case
may
be
for
purpose
of
this
Section.
This
paragraph
applies
to
all
NRCs.
Not
a
type
of
NRC.
v
Alien
is
someone
who
did
not
comply
with
the
requirements
of
the
Constitution.
A
foreigner,
not
a
citizen
of
the
Philippines.
o Resident
Alien
A
foreigner
residing
the
Philippines.
As
a
rule
if
a
foreigner
stays
in
the
Philippines
for
at
least
a
year,
he
is
considered
as
a
resident
alien
but
that
is
not
a
hard
and
fast
rule.
It
will
depend
on
your
intention
of
staying
here
in
the
Philippines.
If
your
intention
of
staying
here
in
the
Philippines
is
definite
and
you
have
already
accomplished
that
purpose
and
then
you
just
went
back
abroad,
as
a
rule,
you
are
not
considered
as
a
resident
alien.
If
your
purpose
is
indefinite,
you
are
considered
as
a
resident.
As
an
alien,
you
present
your
clear
intention
of
your
stay
here
in
the
Philippines.
Exception:
Even
if
your
intention
is
definite
but
your
definite
purpose
would
require
you
to
stay
here
in
the
Philippines
for
an
extended
period;
so
that
you
will
make
the
Philippines
your
temporary
residence,
you
would
still
be
considered
as
a
resident
here
in
the
Philippines.
As
in
the
case
of
a
project
which
extends,
like
the
one
in
Mactan
Airport,
you
have
Indians
working
in
the
airport,
the
airport
project
would
be
probably
be
done
in
three
years,
their
intention
of
staying
is
definite,
just
to
finish
the
project;
because
of
the
period
of
their
stay.
24
There
is
really
no
hard
and
fast
rule
on
the
period
of
stay
in
the
Philippines.
Taxable
within
the
Philippines
only.
o Non-Resident
Alien
Their
purpose
here
in
the
Philippines
to
be
a
transient
or
a
sojourner,
like
for
purposes
of
vacation.
NRA-ETB
If
you
stay
here
in
the
Philippines
as
a
transient
or
sojourner
but
stays
is
up
to
181
days.
At
least
181
days
here
in
the
Philippines.
*Memory
Aid:
o NRA
at
least
181
days
o NRC
at
least
183
days
o Whichever
is
favorable
to
the
Philippines
Taxable
for
income
within
the
Philippines.
NRA-NETB
-
If
you
stay
here
in
the
Philippines
as
a
transient
or
sojourner
but
stays
is
did
not
reach
181
days.
Taxable
only
for
income
within
the
Philippines
Estates
and
Trust
Special
Form
of
Individual
Taxpayers
for
purposes
for
taxation.
o No
residency
required
so
long
as
they
are
established
here
in
the
Philippines.
It
has
to
be
a
Philippines
estate
or
trust.
o It
could
also
happen
that
there
is
an
estate
owned
by
a
Resident
Alien.
In
other
words,
estates
of
RAs
are
also
included.
The
Supreme
Court
believes
that
there
is
a
special
class
of
individual
taxpayer,
a
minimum
wage
earner
but
this
minimum
wage
earner
could
be
classified
as
a
resident
citizen
or
a
resident
alien;
refers
to
a
person
who
is
employed
in
the
PH
CORPORATIONS:
Section
22.
Definitions
-
When
used
in
this
Title:
(B)
The
term
'corporation'
shall
include
partnerships,
no
matter
how
created
or
organized,
joint-stock
companies,
joint
accounts
(cuentas
en
participacion),
association,
or
insurance
companies,
but
does
not
include
general
professional
partnerships
and
a
joint
venture
or
consortium
formed
for
the
purpose
of
undertaking
construction
projects
or
engaging
in
petroleum,
coal,
geothermal
and
other
energy
operations
pursuant
to
an
operating
consortium
agreement
under
a
service
contract
with
the
Government.
'General
professional
partnerships'
are
partnerships
formed
by
persons
for
the
sole
purpose
of
exercising
their
common
profession,
no
part
of
the
income
of
which
is
derived
from
engaging
in
any
trade
or
business.
-
Different
definition
from
that
in
the
Corporation
Code
-
A
corporation
is
not
limited
to
that
entity
which
registered
with
the
SEC
and
granted
a
separate
entity
under
the
Corporation
Code,
it
includes
partnerships,
joint
ventures,
insurance
companies
-
How
is
a
corporation
taxed
in
the
PH?
1. It
depends
if
Domestic
Corporation
(DC)
or
Foreign
Corporation
(FC)
2. Classification
of
corporate
taxpayers
based
on
their
citizenship
and
residency
-
How
do
we
classify
corporations?
DOMESTIC
CORPORATION
1. Created
or
organized
and
registered
in
the
PH
under
PH
laws
2. Taxed
30%
from
sources
within
and
without
the
PH
FOREIGN
CORPORATION
o Could
be
registered
in
the
PH
or
not
but
under
a
foreign
law
o The
law
which
creates
it
has
to
be
foreign
o Taxed
30%
from
sources
within
the
PH
o May
be
Resident
Foreign
Corporation
or
Non
Resident
Foreign
Corporation
RESIDENT
FOREIGN
CORPORATION
When
it
is
doing
business
in
the
Philippines
The
term
doing
business
is
defined
in
Section
3(d)
of
Republic
act
No.
7042
or
the
Foreign
Investments
Act
of
1991.
In
the
said
law,
doing
business
includes:
x
x
x
soliciting
orders,
service
contracts,
opening
offices,
whether
called
liaison
offices
or
branches;
appointing
representatives
or
distributors
domiciled
in
the
Philippines
or
who
in
any
calendar
year
stay
in
the
country
for
a
period
or
periods
totalling
one
hundred
eighty
(180)
days
or
more;
participating
in
the
management,
supervision
or
control
of
any
domestic
business,
firm,
entity
or
corporation
in
the
Philippines;
and
any
other
act
or
acts
that
imply
a
continuity
of
commercial
dealings
or
arrangements,
and
contemplate
to
that
extent
the
performance
of
acts
or
25
works,
or
the
exercise
of
some
of
the
functions
normally
incident
to,
and
in
progressive
prosecution
of,
commercial
gain
or
of
the
purpose
and
object
of
the
business
organization:
Provided,
however,
That
the
phrase
doing
business
shall
not
be
deemed
to
include
mere
investment
as
a
shareholder
by
a
foreign
entity
in
domestic
corporations
duly
registered
to
do
business,
and/or
the
exercise
of
rights
as
such
investor;
nor
having
a
nominee
director
or
officer
to
represent
its
interests
in
such
corporation;
nor
appointing
a
representative
or
distributor
domiciled
in
the
Philippines
which
transacts
business
in
its
own
name
and
for
its
own
account.
There
is
actually
a
case
discussing
the
two
tests
to
apply:
o Continuity
Test
it
is
more
than
a
mere
isolated
transaction
o Substantive
Test
corporation
is
normally
engaged
in
activities
incident
to
or
in
progressive
prosecution
of
earning
commercial
gain
or
pursuing
the
objects
of
such
FC
Ex:
FC
engaged
in
manufacturing
optical
parts
of
a
camera;
if
that
FC
has
a
branch
office
in
the
PH
and
that
branch
office
continues
to
manufacture
the
optical
parts
then
you
can
say
that
this
is
a
RFC
based
on
the
Continuity
and
Substantive
test
FC
can
do
business
in
the
PH
either
thru
domestic
subsidiary
or
branch
or
representative
office
SUBSIDIARY
considered
a
domestic
taxpayer
BRANCH
OFFICE
classified
as
a
RFC
because
it
is
licensed
to
do
business
in
the
PH
REPRESENTATIVE
OFFICE
RFC
because
it
is
granted
a
license
to
do
business
in
the
PH
Representative
Office
Branch
-
Does
not
earn
income
in
the
PH
-
Does
business
just
like
any
FC
doing
-
Does
not
engage
in
any
sales
business
in
the
PH
transaction
or
activity
which
allows
-
Mere
extension
of
the
personality
of
it
to
earn
profit
the
FC
-
Exempt
entities
for
tax
purposes
Representative
Office
o Does
not
earn
income
in
the
PH
o It
is
set
up
merely
to
lialise
to
set
up
customers
here
but
its
never
gonna
engage
in
any
sales
transaction
or
any
activities
which
allows
it
to
earn
profit
o Thats
why
they
are
exempt
entites
for
tax
purposes
Branch
Office
o Does
business
just
like
any
foreign
corporation
doing
business
in
their
own
country
o It
is
a
mere
extension
of
the
personalty
of
the
FC
NON
RESIDENT
FOREIGN
CORPORATION
PARTNERSHIP:
-
Under
the
Civil
Code:
By
the
contract
of
partnership
two
or
more
persons
bind
themselves
to
contribute
money,
property,
or
industry
to
a
common
fund,
with
the
intention
of
dividing
the
profits
among
themselves.
-
For
tax
purposes,
it
is
included
in
the
definition
of
a
corporation
EXCEPT
General
Professional
Partnership
-
TAXABLE
PARTNERSHIP
v
GPP
-
TAXABLE
PARTNERSHIP
GPP
-
Purpose
is
to
derive
profit
-
Objective
is
to
pursue
a
profession
-
Taxed
as
a
corporation
-
Not
taxed
as
a
corporation;
partners
-
Considered
passive
income,
are
individually
taxed
specifically
called
DIVIDEND
-
Personal
and
additional
exemptions
are
granted
to
the
partners
-
Active
income
subject
to
5-32%
-
PARTNERSHIP
v
JOINT
VENTURE
A
JV
ordinarily
has
one
objective
which
is
to
finish
a
project
-
The
SC
always
ruled
on
cases
based
on
the
definition
of
a
partnership
under
the
Civil
Code.
However,
there
are
certain
cases
which
do
not
follow
such
definition
yet
the
SC
decided
that
it
is
still
a
partnership
-
Cases
involving
unregistered
partnerships:
1. Evangelista
Case
(?)
26
2.
3.
Involves
four
siblings
who
inherited
the
property.
They
did
not
make
any
improvements
they
simply
sold
it.
BIR
taxed
them
as
an
unregistered
partnership.
SC
said
no
because
there
was
really
no
intention
to
do
business.
The
earning
of
the
profit
was
merely
incidental
to
the
sale
transaction
LORENZO
ONA
v
CIR
(case
digest
from
the
internet)
Facts:
Julia
Buales
died
leaving
as
heirs
her
surviving
spouse,
Lorenzo
Oa
and
her
five
children.
A
civil
case
was
instituted
for
the
settlement
of
her
state,
in
which
Oa
was
appointed
administrator
and
later
on
the
guardian
of
the
three
heirs
who
were
still
minors
when
the
project
for
partition
was
approved.
Although
the
project
of
partition
was
approved
by
the
Court,
no
attempt
was
made
to
divide
the
properties
and
they
remained
under
the
management
of
Oa
who
used
said
properties
in
business
by
leasing
or
selling
them
and
investing
the
income
derived
therefrom
and
the
proceeds
from
the
sales
thereof
in
real
properties
and
securities.
As
a
result,
petitioners
properties
and
investments
gradually
increased.
Petitioners
returned
for
income
tax
purposes
their
shares
in
the
net
income
but
they
did
not
actually
receive
their
shares
because
this
left
with
Oa
who
invested
them.
Based
on
these
facts,
CIR
decided
that
petitioners
formed
an
unregistered
partnership
and
therefore,
subject
to
the
corporate
income
tax.
Issue:
W/N
there
was
a
co-ownership
or
an
unregistered
partnership
W/N
the
petitioners
are
liable
for
the
deficiency
corporate
income
tax
Held:
Yes.
For
tax
purposes,
the
co-ownership
of
inherited
properties
is
automatically
converted
into
an
unregistered
partnership
the
moment
the
said
common
properties
and/or
the
incomes
derived
therefrom
are
used
as
a
common
fund
with
intent
to
produce
profits
for
the
heirs
in
proportion
to
their
respective
shares
in
the
inheritance
as
determined
in
a
project
partition
either
duly
executed
in
an
extrajudicial
settlement
or
approved
by
the
court
in
the
corresponding
testate
or
intestate
proceeding.
The
reason
is
simple.
From
the
moment
of
such
partition,
the
heirs
are
entitled
already
to
their
respective
definite
shares
of
the
estate
and
the
incomes
thereof,
for
each
of
them
to
manage
and
dispose
of
as
exclusively
his
own
without
the
intervention
of
the
other
heirs,
and,
accordingly,
he
becomes
liable
individually
for
all
taxes
in
connection
therewith.
If
after
such
partition,
he
allows
his
share
to
be
held
in
common
with
his
co-heirs
under
a
single
management
to
be
used
with
the
intent
of
making
profit
thereby
in
proportion
to
his
share,
there
can
be
no
doubt
that,
even
if
no
document
or
instrument
were
executed,
for
the
purpose,
for
tax
purposes,
at
least,
an
unregistered
partnership
is
formed.
AFISCO
INSURANCE
v
CA
petitioners-insurance
companies
formed
a
Pool
Agreement,
or
an
association
that
would
handle
all
the
insurance
businesses
covered
under
their
quota-share
reinsurance
treaty
and
surplus
reinsurance
treaty
with
Munich
is
considered
a
partnership
or
association
which
may
be
taxed
as
a
corporation.
Pool
Agreement
or
an
association
that
would
handle
all
the
insurance
businesses
covered
under
their
quota-
share
reinsurance
treaty
and
surplus
reinsurance
treaty
with
Munich
may
be
considered
a
partnership
because
it
contains
the
following
elements:
(1)
The
pool
has
a
common
fund,
consisting
of
money
and
other
valuables
that
are
deposited
in
the
name
and
credit
of
the
pool.
This
common
fund
pays
for
the
administration
and
operation
expenses
of
the
pool.
(2)
The
pool
functions
through
an
executive
board,
which
resembles
the
board
of
directors
of
a
corporation,
composed
of
one
representative
for
each
of
the
ceding
companies.
(3)
While,
the
pool
itself
is
not
a
reinsurer
and
does
not
issue
any
policies;
its
work
is
indispensable,
beneficial
and
economically
useful
to
the
business
of
the
ceding
companies
and
Munich,
because
without
it
they
would
not
have
received
their
premiums
pursuant
to
the
agreement
with
Munich.
Profit
motive
or
business
is,
therefore,
the
primordial
reason
for
the
pools
formation.
JOINT
VENTURE:
-
GR:
Taxable
as
a
corporate
taxpayer
-
XPN:
Joint
Venture
or
consortium
formed
for
the
purpose
of
Undertaking
construction
projects
or
Engaging
in
petroleum,
coal,
geothermal
and
other
energy
operations
Pursuant
to
an
operating
or
consortium
agreement
under
a
service
contract
with
the
govt.
27
28
SIR:
If
you
notice,
its
on
yearly
profits.
Its
actually
referring
to
a
12-month
period
which
can
either
be
Fiscal
or
Calendar
and
in
fact
it
can
also
be
shortened.
Nature
An
excise
tax.
Its
a
tax
on
the
privilege
to
earn
income.
General
principles
resident
citizen-
taxable
for
income
from
within
and
without
while
the
rest
are
taxable
only
for
income
within.
Corporate
Taxpayer-
Domestic
is
taxable
for
income
within
and
without
and
the
rest
are
only
taxable
for
income
within.
INCOME
Q:
How
is
income
defined?
A:
all
wealth
which
flows
into
the
taxpayer.
Income
is
the
fruit,
Capital
is
the
tree.
Jurisprudence
defined
it
as
the
flow
of
wealth
other
than
the
mere
return
of
capital.
SIR:
Capital
is
the
wealth,
Income
is
the
service
of
wealth.
Any
amount
which
is
received
by
the
taxpayer
from
his
profession,
from
the
conduct
of
trade
or
business
or
for
any
services
rendered.
Q;
Income
is
taxable
when?
A:
Elements:
a.
there
must
be
an
income,
gain
or
profit;
b.
must
be
received
(actual
or
constructive)
during
the
taxable
year,
and
c.
must
not
be
exempt
from
income
tax.
TESTS
IN
DETERMINING
WHETHER
INCOME
IS
TAXABLE
OR
NOT
1.
REALIZATION
TEST
Elements:
a.
that
the
earning
process
must
be
complete
or
virtually
complete
b.
that
there
was
an
exchange
or
transaction
SIR:
an
income
is
realized
when
it
is
borne
out
of
a
transaction.
So
if
there
is
no
transaction
then
there
is
no
realization
of
income.
This
is
the
basis
of
this
test.
There
has
to
be
an
earning
process
and
such
process
must
be
complete.
To
illustrate:
In
the
case
of
share
of
stocks.
In
the
stock
market,
PLDT
shares
fluctuate
every
day.
You
originally
bought
it
at
P1
and
now
P25.
Can
u
say
as
a
holder
of
the
shares
you
earn
income
by
the
fact
that
the
shares
you
are
holding
now
is
P25?
NO.
Although
there
was
an
earning
process
because
in
fact
you
already
bought
the
share
but
it
is
not
complete.
It
will
only
be
completed
when
you
sell
the
shares
and
be
able
to
earn
the
P25.
Then
you
can
say
that
an
income
is
said
to
be
realized.
So
for
purposes
of
this
test,
you
must
determine
if
there
is
a
transaction,
if
none,
then
no
realized
income.
In
the
case
of
your
piece
of
land.
Mere
increase
in
the
value
of
your
land
is
not
a
realized
income.
It
will
only
be
realized
when
you
sell
your
land
because
then
there
will
be
a
transaction.
But
you
may
say
na
di
ba
sir
if
nipurchase
ka
dib
a
transaction
na.
Yes
but
that
income
you
looked
at
it
at
the
point
of
view
of
the
seller.
Now
what
you
look
at
is
on
your
point
of
view.
That
you
as
a
holder
of
the
land
enters
into
transaction
and
from
such
transaction
you
were
able
to
generate
income,
then
you
can
say
that
such
income
is
realized.
Basta
class,
in
general
even
in
accounting,
if
there
is
sale
there
is
realized
income.
There
is
no
taxable
income
until
there
is
a
separation
from
capital
of
something
of
exchangeable
value
thereby
supplying
the
realization
or
transmutation
which
would
result
in
the
receipt
of
income.
If
there
is
a
transaction
there
can
be
a
realized
income.
But
of
course,
you
have
to
compare
the
cost
and
the
amount
you
received
because
even
if
there
is
a
transaction
if
the
amount
you
received
is
less
than
the
amount
you
paid
for,
is
there
income?
NO,
there
is
loss.
So
no
taxable
income
then.
Again,
it
doesnt
stop
from
the
fact
that
there
is
a
transaction;
it
must
be
that
the
amount
you
received
is
higher
than
your
cost.
2.
CLAIM
OF
RIGHT
DOCTRINE
SIR:
This
doctrine
holds
that
there
is
taxable
income
or
gain
then
there
is
already
a
claim
of
right
to
the
alleged
income
or
gain
and
there
is
an
absence
of
a
definite
unconditional
obligation
to
return
or
repay
that
which
would
otherwise
constitute
a
gain.
If
you
already
received
profit
or
income
and
yet
there
is
still
an
obligation
for
you
to
return,
still
you
considered
it
as
taxable
income
because
you
already
received
it,
you
already
have
a
claim.
Meaning
there
is
an
obligation
on
your
part
to
return
it
but
there
is
no
prohibition
for
you
not
to
use
it.
That
29
the
Philippines
does
not
adhere
to
this
doctrine
is
a
CTA
decision.
The
doctrine
is
from
U.S.
They
have
a
provision
in
their
tax
code
which
allows
you
to
deduct
from
your
succeeding
income
the
amount
which
you
returned.
So
example
in
2015,
you
received
an
amount
but
there
is
a
condition
that
you
have
to
return
it,
but
no
prohibition
not
to
use
it.
If
condition
realized
in
2016,
so
you
will
have
to
return.
The
US
you
are
allowed
to
deduct
it
from
your
2016
income.
In
the
Philippines
we
cannot
do
that
because
we
are
limited
to
what
can
be
included
in
the
itemized
deduction.
Return
of
income
previously
earned
is
not
an
allowable
deduction.
So
CTA
believes
that
we
shouldnt
adhere
to
this
doctrine.
So
even
if
you
have
the
obligation
to
return
it,
you
cannot
deduct
it
from
your
succeeding
income.
That
is
not
the
position
of
SC.
So
under
the
Philippine
Income
Taxation,
we
still
adhere
to
the
Doctrine
of
Claim
of
Right
or
Doctrine
of
Ownership,
Command
or
Control.
So
if
you
already
have
a
claim
of
right
over
the
income,
then
it
is
considered
as
taxable
income.
You
are
able
to
establish
your
right
over
that
particular
amount
its
considered
as
taxable
income.
3.
DOCTRINE
OF
PROPRIETARY
TEST
OR
ECONOMIC
BENEFIT
TEST
SIR:
If
there
is
an
increase
in
your
wealth,
that
is
already
considered
as
a
taxable
income.
Example:
Stock
Option
granted
to
an
employee.
It
is
a
compensation
income
therefore
it
is
taxable.
You
are
supposed
to
tax
it
if
it
is
already
granted
and
you
get
the
difference
between
the
exercise
price
and
the
value
of
the
shares
at
the
time
it
was
granted.
Take
note
that
there
is
already
an
increase
in
the
wealth
on
the
part
of
the
taxpayer.
It
is
a
benefit
because
if
the
taxpayer
(employee)
was
not
granted
a
stock
option
the
consequence
would
be
that
the
latter
would
purchase
the
stock
at
its
market
value,
but
because
of
the
stock
option
the
employee
was
granted
a
privilege.
Example:
Payment
of
compensation
every
15th
day
of
the
month.
Here
there
is
a
benefit
because
the
employee
receives
his/her
compensation
every
15th
day
of
the
month
and
by
virtue
of
that
the
latter
is
able
to
pay
his/her
debts.
So,
there
is
a
benefit.
4.
SEVERANCE
TEST
more
or
less
the
same
with
the
realization
test.
There
is
separation
of
capital
from
something
of
exchangeable
value
and
that
the
transaction
must
be
complete.
One
of
the
tests
in
determining
income.
From
the
word
itself
severance
something
must
have
been
let
go
by
the
taxpayer.
When
something
has
been
let
go
by
one
taxpayer
and
it
is
being
received
by
other
taxpayer
the
latter
is
said
to
have
been
earned
a
taxable
income,
provided
that
the
transaction
is
complete.
5.
ALL
EVENTS
TEST
it
is
more
applicable
in
determining
allowable
deductions
rather
than
income.
For
those
entities
using
accrual
accounting
even
if
those
entities
did
not
receive
the
income
for
as
long
as
the
transaction
has
already
been
completed,
meaning
all
events
leading
to
the
realization
of
that
income
or
all
events
leading
to
you
receiving
that
amount,
there
is
said
to
be
income
already
even
if
the
entities
did
not
actually
receive
the
said
amount.
It
is
not
necessary
to
determine
the
amount
with
accuracy,
what
is
needed
is
information
sufficient
for
the
taxpayer
to
compute
how
much
can
be
earned
there
is
said
to
be
taxable
income
(Sir:
more
applicable
to
deductions).
However,
but
looking
at
it
at
the
income
is
that
there
is
a
period
within
which
youre
supposed
to
earn
income
and
during
that
period
everything
necessary
has
already
been
done
then
there
is
said
to
be
a
taxable
income.
Look
at
it
on
a
periodic
basis.
Example:
A
taxpayer
(buyer)
which
has
transaction
dated
Dec.
29,
2014.
There
is
a
sale
of
a
parcel
of
land
however
the
contract
requires
that
the
title
of
the
land
must
be
actually
transferred
to
his
name
before
he
gives
full
payment
of
the
entire
amount,
but
the
sale
transaction
was
closed
on
Dec.
29,
2014.
When
will
the
taxpayer
consider
earning
his
income?
2014
or
2015?
It
is
2014
because
all
events
necessary
for
him
to
earn
that
income
has
already
been
completed.
We
look
at
if
he
already
has
a
right
to
the
sale;
the
sale
has
already
been
closed
because
you
cannot
transfer
title
if
the
transfer
is
not
completed.
It
is
already
completed
only
that
the
full
amount
of
purchase
price
has
been
withheld.
METHODS
OF
ACCOUNTING
Income
is
taxable
provided
there
is
income
and
the
income
has
been
realized
and
recognized
but
that
would
depend
on
the
method
of
accounting
used
by
the
taxpayer.
1.
Accrual
Income
is
recognized
when
earned
regardless
of
when
cash
is
received
Expenses
are
recognized
when
incurred
regardless
of
when
paid
2.
Cash
basis
Income
is
recognized
when
cash
is
received
Expenses
are
recognized
when
cash
is
dispensed
3.
Installment
Payment
There
is
said
to
be
installment
method
when
what
is
recognized
as
income
is
only
that
which
pertains
to
the
installments
actually
received.
30
Installment
payment/method
is
allowed
when
the
initial
payment
does
not
exceed
25%
of
the
selling
price
(in
any
sale
transaction).
In
other
words
you
have
a
contract
which
states
that
there
will
several
payments
to
be
made
in
relation
to
the
transaction.
Example:
>
Transaction
worth
1,000,000
(June
17,
2015)
>
20%
down
payment
>
10
installments
or
80,000
monthly
installments
(will
start
in
July
2015)
Query:
How
will
you
determine
if
the
initial
payment
constitutes
less
than
25%?
You
compute
the
entire
payment
for
one
taxable
year.
Take
note
that
initial
payment
refers
to
the
total
payment
made
during
the
year
(taxable
year
of
the
taxpayer).
If
it
is
an
individual
we
refer
to
the
taxable
year
of
January
to
December,
but
if
it
is
a
corporation
there
are
two
they
are
fiscal
or
calendar.
200,000
down
payment
+
480,000
(installments
starting
from
July
to
Dec.
2015)
680,000
-
Clearly
it
exceeds
25%
of
the
gross
selling
price
of
1,000,000
thus
it
cannot
avail
of
the
installment
method.
The
method
that
can
be
availed
of
is
Deferred
method,
it
will
be
considered
as
a
deferred
sale
not
installment
method/payment
on
the
ground
that
it
is
more
than
25%
of
the
selling
price.
The
entire
amount
of
1,000,000
will
be
considered
as
income
for
the
taxable
year
2015,
unlike
in
installment
method
as
shown
below.
Example:
>Transaction
worth
1,000,000
(June
17,
2015)
>10%
down
payment
>90
monthly
installments
or
10,000
monthly
installments
(will
start
in
Sept.
2015).
TN:
1,000,000
x
10%
=
100,000
->
should
be
deducted
from
1,000,000.
Therefore:
1,000,000
100,000
=
900,000
->
i.divide
sa
90
to
get
the
monthly
installment.
900,000/90
=
100,000
->monthly
installment
How
to
get
the
initial
payment
within
the
taxable
year
of
2015?
100,000
(Down
Payment)
+
40,000
(10,000
x
4)
Sept.
to
December
2015
only
4
months
140,000
Can
avail
of
the
installment
method
because
it
is
less
than
25%
of
the
gross
selling
price
of
1,000,000.
In
installment
method
only
140,000
will
be
considered
as
income
for
the
taxable
year
of
2015.
The
advantage
is
you
will
pay
less
tax.
Had
it
been
deferred
method,
the
entire
amount
of
1,000,000
would
have
been
considered
as
income
and
thus
you
will
pay
higher
amount
of
tax.
4.
Percentage
of
Completion
Method
It
is
applicable
for
a
long
term
contract
(exceeding
1
year),
ordinarily
this
will
apply
to
a
construction
contract
where
you
will
have
to
make
completion
reports
from
time
to
time
and
the
project
is
not
completed
in
just
few
months.
Just
like
installment
you
get
to
avail
of
recognition
of
taxes
on
staggered
basis.
Instead
of
the
amount
actually
paid
or
received
on
the
basis
of
installment
payment,
it
will
be
based
on
the
completion
of
the
project.
A
completion
of
a
project
ranges
from
0%
to
100%.
Example:
Completion
for
this
year
based
on
progress
billings
is
only
20%.
Under
the
percentage
of
completion
method
what
could
be
considered
as
income
is
only
equivalent
to
20%
Example:
1,000,000
(percentage
of
completion
is
40%)
Total
Income
=
10%
of
GSP
Income
Earned
=
100,000
x
40%
(percentage
of
completion)
=
40,000
->
Taxable
income
for
the
year.
The
income
that
will
be
reported
to
the
BIR
as
taxable
income.
31
GROSS
INCOME
SEC.
32.
Gross
Income.
(A)
General
Definition.
-
Except
when
otherwise
provided
in
this
Title,
gross
income
means
all
income
derived
from
whatever
source,
including
(but
not
limited
to)
the
following
items:
(1)
Compensation
for
services
in
whatever
form
paid,
including,
but
not
limited
to
fees,
salaries,
wages,
commissions,
and
similar
items;
(2)
Gross
income
derived
from
the
conduct
of
trade
or
business
or
the
exercise
of
a
profession;
(3)
Gains
derived
from
dealings
in
property;
(4)
Interests;
(5)
Rents;
(6)
Royalties;
(7)
Dividends;
(8)
Annuities;
(9)
Prizes
and
winnings;
(10)
Pensions;
and
(11)
Partner's
distributive
share
from
the
net
income
of
the
general
professional
partnership.
TN:
The
phrase
from
whatever
source
means
that
any
income
derived
legally
or
illegally
should
still
form
part
of
the
gross
income.
Also,
even
if
the
income
does
not
fall
on
any
of
the
enumerated
items
it
can
still
be
considered
as
gross
income
because
of
the
phrase
including
but
not
limited
to.
Gross
Income
does
not
account
for
the
deduction,
unlike
net
income
where
something
has
already
been
deducted.
SEC.
31.
Taxable
Income
Defined.
-
The
term
taxable
income
means
the
pertinent
items
of
gross
income
specified
in
this
Code,
less
the
deductions
and/or
personal
and
additional
exemptions,
if
any,
authorized
for
such
types
of
income
by
this
Code
or
other
special
laws.
TN:
Comparing
taxable
income
from
Gross
income
simply
means
that
your
gross
income
is
not
subject
to
any
deductions
yet;
whereas
in
taxable
income
is
less
any
deductions
allowed
under
the
law.
Taxable
income
is
different
from
net
income
in
the
sense
that
in
taxable
income
it
says
there
that
gross
income
less
any
deductions
allowed
under
the
law;
whereas
in
net
income
it
may
be
any
deductions
for
as
long
as
it
is
an
amount
spent
for
the
operations
of
the
business
it
may
be
allowed
or
not
allowed
under
the
law.
There
are
deductions
not
allowed
under
the
law
but
it
are
allowed
under
accounting
standards,
like
for
example
impairment
losses
and
EAR
expenses
(the
entire
amount
is
deductible
under
accounting
standard,
but
not
under
our
tax
code).
INDIVIDUAL
SITUS
DEPENDING
ON
THE
TYPES
OF
INCOME
INTEREST
Source
within
the
Philippines
if
the
debtor
is
residing
in
the
Philippines
then
interest
income
is
sourced
within
the
Philippines.
If
the
residence
of
the
debtor
is
in
a
country
other
than
the
Philippines
it
is
considered
as
income
sourced
outside
the
Philippines.
DIVIDENDS
If
the
issuing
corporation
is
a
domestic
corporation
any
dividends
issued
by
such
corporation
is
considered
as
income
within,
or
is
sourced
in,
the
Philippines.
If
the
issuing
corporation
is
a
foreign
corporation
and
more
than
50%
of
its
operation
is
within
the
Philippines
then
it
is
sourced
within
the
Philippines,
if
its
50%
or
less
it
is
sourced
outside
the
Philippines
(under
the
tax
code).
SERVICES
Income
is
sourced
within
the
Philippines
if
the
service,
under
which
the
income
is
derived,
is
rendered
here
in
the
Philippines.
ROYALTIES
If
royalties
is
exercised
here
in
the
Philippines
then
the
income
is
considered
within
the
Philippines.
The
basis
of
situs
is
the
place
of
exercise
or
utilization;
where
the
royalty
is
being
used.
INCOME
PARTLY
WITHIN
AND
PARTLY
WITHOUT
When
it
is
manufactured
here
in
the
Philippines
and
sold
outside
the
Philippines
or
the
other
way
around.
32
25%
15%
*Revenue
Regulation
(No.
11-2010)
only
mentions
Filipinos
working
in
an
ROHQ
or
RHQ.
The
presumption
is,
this
regulation
does
not
apply
to
Filipinos
employed
in
Offshore
Banking
Units
or
Petroleum
Service
Contractors.
[Aranas
notes]
General
guideline
in
determining
the
monetary
value:
1. If
money
is
granted
as
a
form
of
fringe
benefit,
then
the
amount
that
was
given
by
the
employer
will
be
the
Monetary
Value.
2. If
real
property
is
given,
determine
if
the
ownership
is
vested
to
the
EE:
a. If
ownership
vested
to
the
EE,
the
MV
is
the
value
of
the
property.
b. If
ownership
is
NOT
vested
to
the
EE,
depreciation
serves
as
the
MV.
33
EMPLOYEES
(occupying
managerial
or
technical
position)
employed
in
RAHQ,
ROHQ
of
the
Multinational
Companies,
Offshore
Banking
Units
and
Foreign
Service
Contractors
and
Sub-contractors
engaged
in
petroleum
and
geothermal
operations
15%
FBT
rate.
Therefore
if
the
latter
received
fringe
benefit
the
monetary
value
would
be
85%
of
the
entire
amount
of
the
fringe
benefit.
Provided
that
the
employees
subject
to
the
15%
preferential
rate
must
comply
with
the
TESTS:
THREE
TEST
FOR
ELIGIBILITY
TO
THE
15%
PREFERENTIAL
TAX
RATE
I.
Position
and
Function
Test.
-
The
employee
must
occupy
a
managerial
position
or
technical
position
AND
must
actually
be
exercising
such
managerial
or
technical
functions
pertaining
to
said
position;
II.
Compensation
Threshold
Test
-
In
order
to
be
considered
a
managerial
or
technical
employee
for
income
tax
purposes,
the
employee
must
have
received,
or
is
due
to
receive
under
a
contract
of
employment,
a
gross
annual
taxable
compensation
of
at
least
PhP
975,000.00
(whether
or
not
this
is
actually
received);
III.
Exclusivity
Test
The
Filipino
managerial
or
technical
employee
must
be
exclusively
working
for
the
RHQ
or
ROHQ
as
a
regular
employee
and
not
just
a
consultant
or
contractual
personnel.
Exclusivity
means
having
just
one
employer
at
a
time.
KINDS
OF
FRINGE
BENEFITS
(HEVHIMEHEL)
(a)
Housing
Privilege
CASE
ANNUAL
VALUE
of
BENEFIT
Employer
leases
residential
property
for
use
of
the
employee
34
*Exceptions:
I.
Housing
privilege
of
officials
of
AFP,
Philippine
Navy
and
Philippine
Air
Force;
-
Take
note
walaI
Philippine
National
Police
ha..
II.
A
housing
unit
which
is
situated
inside
or
within
the
maximum
of
fifty
(50)
meters
from
the
perimeter
of
the
business
premises
or
factory.
(deemed
to
be
for
the
convenience
of
the
ER)
-
Exception:
wherein
the
EE
is
still
exempted
of
the
housing
privileged
of
up
to
100
meters
if
ERs
factory
is
hazardous.
III.
Temporary
housing
for
an
employee
who
stays
in
a
housing
unit
for
three
(3)
months
or
less.
-
Applies
to
transient
EE,
like
he
is
in
Manila
for
training
etc.
(b)
Expense
account
Monetary
Value
=
equivalent
of
the
value
that
was
paid
for
by
the
Employer.
Examples:
transportation
expenses,
parking
expenses,
communication
expenses.,
etc.
for
as
long
as
they
are
related
to
the
trade
or
business
of
the
employer.
When
can
an
expense
account
not
considered
as
a
fringe
benefit
When
the
expenditures
are
duly
receipted
for
and
in
the
name
of
the
employer
and
the
expenditures
do
not
partake
the
nature
of
a
personal
expense
attributable
to
the
employee.
In
short,
when
it
is
required
to
be
liquidated
by
the
employee.
It
will
then
be
considered
as
ordinary
expense
of
the
employer.
1) Business
expenses
1. Related
to
the
business
of
the
employer.
2. Common
in
law
firms
or
auditing
firms:
Having
a
lunch
meeting
with
clients.
3. GR:
Not
subject
to
the
Fringe
Benefits
Tax,
provided:
1. It
is
duly
receipted.
2. The
receipt
is
under
the
name
of
the
employer.
EXC:
Not
duly
receipted.
2) Personal
expenses
Purchases
of
groceries
for
the
personal
consumption
of
the
employee
and
his
family
members
paid
for
or
reimbursed
by
the
employer
to
the
employee
shall
be
treated
as
taxable
fringe
benefits
of
the
employee
whether
or
not
the
same
are
duly
receipted
for
in
the
name
of
the
employer.
(c)
Vehicle
of
any
kind
Guidelines
in
valuation
of
Motor
Vehicles:
CASE
TRANSACTION
MONETARY
VALUE
of
Benefit
1
2
Acquisition
Cost
Amount
of
cash
received
by
the
employee
35
Take
note:
every
time
ownership
is
not
vested,
and
the
EE
is
benefited,
it
always
50%.
(d)
Household
expenses
Monetary
Value
=
the
amount
shouldered
by
the
employer.
Examples:
cost
of
utilities,
homeowners
association
dues,
garbage
dues,
salaries
of
household
help,
personal
driver
of
the
employee,
or
other
similar
personal
expenses,
etc.
(e)
Interest
on
loan
at
less
than
market
rate
Monetary
Value
=
difference
between
the
market
value
less
the
interest
imposed.
(No
revenue
regulation
coming
from
BIR
adopting
the
6%
per
annum
as
the
legal
interest.)
(f)
Membership
fees,
dues
and
other
expenses
borne
by
the
employer
for
the
employee
in
social
and
athletic
clubs
or
other
similar
organizations.
Monetary
Value
=
the
cost
of
membership.
(g)
Expenses
for
foreign
travel
General
rule:
subject
to
fringe
benefit
tax
Except:
1)
reasonable
business
expense
2)
inland
travel
expenses,
excluding
lodging
cost
in
a
hotel,
amounting
to
$300
or
less
3)
the
cost
of
economy
and
business
class
airplane
ticket;
30%
of
the
cost
of
first
class
airplane
ticket.
Requisites
in
order
to
be
exempted
from
the
fringe
benefit
tax:
1. Reasonable
business
expenses
which
are
paid
for
by
the
employer
for
the
foreign
travel
of
his
employee
for
the
purpose
of
attending
business
meetings
or
conventions
which
are
necessary
to
the
trade
or
business
of
the
employer
shall
NOT
be
treated
as
taxable
fringe
benefits
because
here
you
are
most
likely
required
to
liquidate
you
expenses.
However,
if
in
the
same
scenario
you
will
NOT
be
required
to
liquidate,
then
fringe
benefit
may
apply.
o The
expenses
should
be
supported
by
documents
proving
the
actual
occurrences
of
the
meetings
or
conventions.
official
invitation/communication
letters
from
business
associates
abroad
indicating
its
purpose.
2. Inland
travel
expenses
(such
as
expenses
for
food,
beverages
and
local
transportation)
except
lodging
cost
in
a
hotel
(or
similar
establishments)
amounting
to
an
average
of
US$300.00
or
less
per
day,
shall
NOT
be
subject
to
a
fringe
benefit
tax.
Not
subject
to
fringe
benefit
tax
Subject
to
fringe
benefit
tax
1)
Inland
travel
expenses
such
as:
1) Lodging
cost
in
a
hotel
amounting
to
an
1) Food
average
of
US$300.00
or
less
per
day.
2) Beverages
3) Local
transportation
2)
Lodging
cost
in
a
hotel
higher
than
$300
per
day.
(this
will
be
considered
as
income
of
the
EE.)
3. The
cost
of
economy
and
business
class
airplane
ticket
shall
not
be
subject
to
a
fringe
benefit
tax.
However,
30
percent
of
the
cost
of
first
class
airplane
ticket
shall
be
subject
to
a
fringe
benefit
tax.
Travelling
expenses
which
are
paid
by
the
employer
for
the
travel
of
the
family
members
of
the
employee
shall
be
treated
as
taxable
fringe
benefits
of
the
employee.
Not
subject
to
fringe
benefit
tax
Subject
to
fringe
benefit
tax
1) Cost
of
airplane
ticket
which
are:
1) 70%
of
the
cost
of
first
class
airplane
ticket
i. economy
class
2) Travelling
expenses
which
are
paid
by
the
ii. business
class
employer
for
the
travel
of
the
family
2) 30%
of
the
cost
of
first
class
airplane
members
of
the
employee
ticket
36
37
c)
Medical
cash
allowance
to
dependents
of
employees,
not
exceeding
P750
per
employee
per
semester
or
P125
per
month;
This
pertains
to
dependents
of
employees.
d)
Rice
subsidy
of
P1,500
or
one
(1)
sack
of
50
kg.
rice
per
month
amounting
to
not
more
than
P1,500;
Example:
Employee
E
is
given
a
sack
of
Jasmin
rice
worth
P3,000
by
Employer
R.
The
excess
of
P1,500
will
be
added
to
the
P82k
other
benefits
threshold.
e)
Uniform
and
Clothing
allowance
not
exceeding
P5,000
per
annum;
P2,500
per
semester.
P416.67
per
month.
f)
Actual
medical
assistance,
e.g.
medical
allowance
to
cover
medical
and
healthcare
needs,
annual
medical/executive
check-up,
maternity
assistance,
and
routine
consultations,
not
exceeding
P10,000.00
per
annum;
This
pertains
to
the
employee
himself.
Sample
question:
Medical
cash
allowance
for
employees
in
order
to
be
considered
de
minimis
benefit,
and
therefore
exempt
from
fringe
benefit
tax
is
limited
P750
per
semester:
False.
g)
Laundry
allowance
not
exceeding
P300
per
month;
h)
Employees
achievement
awards,
e.g.,
for
length
of
service
or
safety
achievement,
which
must
be
in
the
form
of
a
tangible
personal
property
other
than
cash
or
gift
certificate,
with
an
annual
monetary
value
not
exceeding
P10,000
received
by
the
employee
under
an
established
written
plan
which
does
not
discriminate
in
favor
of
highly
paid
employees;
If
you
were
given
cash
or
gift
certificate,
it
is
merely
considered
as
a
supplemental
income
and
not
a
de
minimis
benefit.
If
you
were
given
a
gold
ring
worth
P15,000,
the
excess
of
P5000
falls
to
the
P82k
threshold.
i)
Gifts
given
during
Christmas
and
major
anniversary
celebrations
not
exceeding
P5,000
per
employee
per
annum;
j)
Daily
meal
allowance
for
overtime
work
and
night/graveyard
shift
not
exceeding
twenty-five
percent
(25%)
of
the
basic
minimum
wage
on
a
per
region
basis;
To
benefit
the
call
center
agents,
nurses
and
other
employees
working
on
a
graveyard
shift.
TAKE
NOTE:
All
other
benefits
given
by
employers
which
are
not
included
in
the
above
enumeration
shall
not
be
considered
as
"de
minimis"
benefits,
and
hence,
shall
be
subject
to
income
tax
as
well
as
withholding
tax
on
compensation
income.
Atty
A:
The
old
revenue
regulation
used
to
include
Flowers,
fruits,
books
or
similar
items
given
to
employees
under
special
circumstances,
e.g.
on
account
of
illness,
marriage,
birth
of
a
baby,
etc
as
de
minimis
benefit.
These
do
not
form
part
of
the
P82k.
What
forms
part
of
the
P82k
are
the
excesses
of
the
items
enumerated
above.
Now
taxable
as
ordinary
compensation.
3.
PROFESSIONAL
INCOME
Income
derived
from
the
exercise
of
ones
profession
either
on
his
own
or
by
joining
a
General
Professional
Partnership.
In
both
instances,
they
are
allowed
to
make
deductions
for
their
expenses.
1)
On
his
own:
Tax
rate:
5%-32%
Example:
A
doctors
consultation
fee.
2)
General
Professional
Partnerships
formed
by
persons
for:
i.
The
sole
purpose
of
exercising
a
common
profession
and
ii.
No
part
of
the
income
of
which
is
derived
from
engaging
in
any
trade
or
business.
The
partnership
is
not
taxable
because
it
is
the
partners
themselves
who
are
liable
to
pay
tax
for
the
shares
they
received.
o The
income
received
by
the
partnership
is
deemed
constructively
received
by
the
partners
so
that
it
will
be
considered
income
of
the
partners
subject
to
tax.
Shares
in
the
GPP
is
another
item
in
the
GROSS
INCOME
enumeration.
o Example:
law
firms,
accounting
firms,
clinics,
etc.
o The
partners
will
file
their
income
tax
return
and
their
income
is
classified
as
business/professional
income.
Being
a
professional
income,
there
is
still
a
withholding
tax
equivalent
to
10%,
but
it
is
a
creditable
withholding
tax
which
means
you
will
have
to
deduct
it
to
your
taxable
income
in
order
to
get
your
net
income
tax
still
due
or
payable.
iii.
Needs
registration
with
the
BIR.
o GPP
will
be
required
to
file
an
income
tax
return
even
if
you
are
tax
exempt
or
not
subject
to
tax.
Its
purpose
is
to
countercheck
if
the
partners
are
correctly
declaring
the
shares
that
they
received
in
the
GPP
regardless
of
whether
or
not
the
shares
have
been
distributed.
38
Example:
Partnership
X
is
composed
of
3
partners.
If
the
GPP
declared
a
net
income
of
P300k
but
one
of
the
partners
only
declared
P50k
as
the
share
he
received,
then
the
BIR
will
question
such
partner.
In
a
GPP,
once
the
partnership
declares
a
net
income,
its
already
deemed
to
be
received
constructively
by
the
partners.
BIR
will
simply
divide
the
net
income
with
the
number
of
members
in
a
partnership.
In
order
to
avoid
any
inconvenience,
some
GPPs
prefer
to
submit
the
ITR
of
the
GPP
together
with
the
individual
ITRs
of
the
partners.
4.
INCOME
ROM
BUSINESS
Income
derived
from
engaging
in
trade
or
business.
It
can
either
be
sole
proprietorship,
partnership
or
corporation.
Take
note
for
tax
purposes,
corporations
include
partnership
however
organized
(except
GPP).
1)
Business
selling
services:
income
comes
in
the
form
of
gross
receipts.
Gross
income
means
gross
receipts
less
returns,
discounts,
and
allowances.
For
income
taxation
purposes,
gross
receipt
is
not
limited
to
amounts
actually
received.
You
can
use
accrual
accounting
for
purposes
of
income
tax.
Unlike
in
VAT
where
we
only
consider
gross
receipt
if
actually
received.
2)
Business
selling
goods:
Gross
income
derived
from
business
shall
be
equivalent
to
gross
sales
less
sales
returns,
discounts
and
allowances
and
'cost
of
goods
sold.'
Cost
of
good
sold'
shall
include
all
business
expenses
directly
incurred
to
produce
the
merchandise
to
bring
them
to
their
present
location
and
use.
o 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.
o 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.
GROSS
INCOME
Less
ALLOWABLE
DEDUCTION
TAXABLE
INCOME
X
30%
5.
INCOME
FROM
DEALINGS
IN
PROPERTY
Two
types
of
properties:
1. Ordinary
asset
includes
Stocks
in
trade
must
be
part
of
your
inventory;
Property
primarily
held
for
sale
(building
house
for
the
purpose
of
selling
it);
Property
used
in
trade
or
business,
subject
to
allowance
for
depreciation
-
(depreciable
assets:
machineries,
equipments);
Real
property
used
in
trade
or
business
(building
used
as
display
area
for
your
merchandise
or
inventory;
real
estate
dealers)
2. Capital
asset
-
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.
ORDINARY
ASSET
CAPITAL
ASSET
Individual:
5-32%
Real
Property:
6%
of
the
GSP
or
FMV,
whichever
is
higher
Shares
of
Stocks:
Listed
&
Traded
in
the
Local
Stock
Exchange:
(Stock
Transaction
Tax)
of
1%
based
on
GSP.
Not
listed
or
not
traded
in
the
Stock
Exchange:
1st
100K
=
5%
Excess
of
100K
=
10%
Other
Capital
Asset:
Short
term
(12mos
or
less):
100%
of
the
net
capital
gain
Long
term:
50%
of
the
net
capital
gain
Net
capital
gains/loss
=
GSP
cost
of
acquiring
the
asset
39
40
Example
3:
2015
GI
P1,000,000
AD
P900,000
TI
100,000
Taxpayer
is
an
individual.
Since
birth
he
is
an
owner
of
a
Rolex
watch.
He
is
now
25
yrs
old
just
like
Kyle.
He
sold
his
Rolex
watch
forP500,000.
It
only
cost
him
P100,000.
GSP
P500,000
Cost
P100,000
CG
P400,000
How
much
is
the
Net
Taxable
Income
of
Kyle
in
2015?
Since
Kyle
had
this
watch
since
birth,
we
multiply
our
Capital
Gains
with
50%
because
it
is
long
term.
That
would
be
P200,000
NTI
is
P300,000
Example
4:
What
if
the
cost
is
P700,000
GSP
P500,000
Cost
P700,000
CL
(P200,000)
How
much
is
the
Net
Taxable
Income
of
Kyle
for
2015?
P100,000
GI
P1,000,000
AD
P800,000
TI
P200,000
Again
in
2016
Kyle
sold
his
other
Rolex
watch.
GSP
P500,000
Cost
P300,000
CG
P200,000
x
50%
P100,000
How
much
is
the
Net
Taxable
Income
of
Kyle
for
2016?
Take
note:
Just
because
the
loss
on
the
year
it
was
incurred
is
considered
a
long-term
loss
it
does
not
mean
that
it
cannot
be
carried
over.
It
can
still
be
carried
over
but
it
will
be
treated
as
a
short
term
loss.
CONDITIONALLY
EXEMPT
FROM
PAYMENT
OF
CGT
INSOFAR
AS
THE
SALE
OF
YOUR
PRINCIPAL
RESIDENCE:
1. The
proceeds
of
the
sale
of
the
Principal
Residence
have
been
fully
utilized
in
acquiring
or
constructing
new
principal
residence
within
18
calendar
months
from
the
date
of
sale
or
disposition.
[includes
transferring
to
a
condo
unit.]
To
prove
such
property
is
your
principal
residence,
you
may
need
to
obtain
a
certification
from
your
barangay
chairwoman.
Take
note:
CGT
of
6%
FMV
or
selling
price,
whichever
is
higher.
Cost
is
not
deducted
from
the
FMV
or
selling
price
when
multiplied
by
the
rate
of
6%
to
get
the
CGT
of
the
capital
asset;
cost
is
only
deducted
if
it
is
classified
as
ordinary
asset.
2. The
historical
cost
or
adjusted
basis
of
the
real
property
sold
or
disposed
will
be
carried
over
to
the
new
principal
residence
built
or
acquired;
3. The
Commissioner
has
been
duly
notified,
through
prescribed
return,
within
30
days
from
the
date
of
sale
or
disposition
of
the
persons
intention
to
avail
of
the
tax
exemption
4. Exemption
was
availed
only
once
every
ten
years;
and
5. 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
will
be
subject
to
CGT.
The
portion
not
utilized
will
not
subject
to
CGT.
Determine
total
proceeds
of
the
sale
and
the
cost
of
the
new
principal
residence.
41
6.
In
case
of
sale/transfer
of
principal
residence,
the
Buyer/Transferee
shall
withhold
from
the
seller
and
shall
deduct
from
the
agreed
selling
price/consideration
the
6%
capital
gains
tax
which
shall
be
deposited
in
cash
or
managers
check
in
interest-bearing
account
with
an
Authorized
Agent
Bank
AAB
under
an
Escrows
Agreement
between
the
concerned
Revenue
District
Officer,
the
Seller
and
the
Transferee,
and
the
AAB
to
the
effect
that
the
amount
so
deposited,
including
its
interest
yield,
shall
only
be
released
to
such
Transferor
upon
certification
by
the
said
RDO
that
the
proceeds
of
the
sale/disposition
thereof
has,
in
fact,
been
utilized
in
the
acquisition
or
construction
of
the
Seller/Transferors
new
principal
residence
within
18
calendar
months
from
the
date
of
sale
or
disposition.
The
date
of
sale
or
disposition
of
a
property
refers
to
the
date
of
notarization
of
the
document
evidencing
the
transfer
of
said
property.
CG
x
6%
=
CGT
x
unutilized
proceeds
=
CGT
payable
Gross
selling
price
GSP/FMV
x
6%
=
CGT
x
UP/GSP
=
CGT
Payable
You
will
still
be
subject
to
surcharge
and
interest.
6.
INTEREST
INCOME
RULE:
look
at
the
source
o It
comes
from
interest
in
bank
deposit
20%
FWT;
20%
passive
income
o It
comes
from
deposit
substitute
20%
FWT
must
be
registered
and
traded
security
Deposit
Substitutes
alternative
form
of
obtaining
funds
from
the
public,
other
than
deposit,
through
the
issuance,
endorsement
or
acceptance
of
debt
instrument
for
the
borrowers
own
account,
for
the
purpose
of
relending
or
purchasing
of
receivables
and
other
obligations,
or
financing
their
own
needs
or
the
needs
of
their
agent
or
dealer.
Securitized
and
registered;
you
can
buy
and
sell
in
the
market
o Public
means
borrowing
from
20
or
more
individual
or
corporate
lenders
at
any
one
time
o Not
a
deposit
substitute
20%
CWT
o Not
a
deposit
substitute
+
20,000
corporations
BORROWER
2%
CWT
(BDO
vs
RP
2015)
o From
ordinary
lending/personal
transaction
5-32%;
30%
TABLE:
Interest
Income
from:
Bank
Deposit
&
Deposit
Ordinary
Lending
or
Do
not
constitute
Not
Deposit
Substitutes
Personal
Loan
as
a
Deposit
Substitute
BUT
Transaction
Substitute
BORROWER
COPORATION
is
considered
as
Large
taxpayer
(Top
20,000)
20%
Final
Withholding
Tax
5-32%;
30%
Dumping
20%
Creditable
2%
CWT
Ground
Computation
Withholding
Tax
IMPOSITITON
OF
THEORETICAL
INTEREST
o No
income
from
theoretical
interest
must
be
actual
and
constructive
receipt
of
income
o CIR
VS
FILINVEST
CASE:
ISSUE:
CIR
argues
that
the
CA
erred
in
reversing
the
CTAs
finding
that
theoretical
interests
can
be
imputed
on
the
advances
FDC
extended
to
its
affiliates
in
1996
and
1997
considering
that,
for
said
purpose,
FDC
resorted
to
interest-
bearing
fund
borrowings
from
commercial
banks
SC:
CIR
had
adduced
no
concrete
proof
that
said
funds
were,
indeed,
the
source
of
the
advances
the
former
provided
its
affiliates.
While
admitting
that
FDC
obtained
interest-bearing
loans
from
commercial
banks,45
Susan
Macabelda
-
FDC's
Funds
Management
Department
Manager
who
was
the
sole
witness
presented
before
the
CTA
-
clarified
that
the
subject
advances
were
sourced
from
the
corporation's
rights
offering
in
1995
as
well
as
the
sale
of
its
investment
in
Bonifacio
Land
in
1997.46
More
significantly,
said
witness
testified
that
said
advances:
(a)
were
extended
to
give
FLI,
FAI,
DSCC
and
FCI
financial
assistance
for
their
operational
and
capital
expenditures;
and,
(b)
42
were
all
temporarily
in
nature
since
they
were
repaid
within
the
duration
of
one
week
to
three
months
and
were
evidenced
by
mere
journal
entries,
cash
vouchers
and
instructional
letters."47
More
so,
when
it
is
borne
in
mind
that,
pursuant
to
Article
1956
of
the
Civil
Code
of
the
Philippines,
no
interest
shall
be
due
unless
it
has
been
expressly
stipulated
in
writing.
Considering
that
taxes,
being
burdens,
are
not
to
be
presumed
beyond
what
the
applicable
statute
expressly
and
clearly
declares,48
the
rule
is
likewise
settled
that
tax
statutes
must
be
construed
strictly
against
the
government
and
liberally
in
favor
of
the
taxpayer.49
Accordingly,
the
general
rule
of
requiring
adherence
to
the
letter
in
construing
statutes
applies
with
peculiar
strictness
to
tax
laws
and
the
provisions
of
a
taxing
act
are
not
to
be
extended
by
implication.50
While
it
is
true
that
taxes
are
the
lifeblood
of
the
government,
it
has
been
held
that
their
assessment
and
collection
should
be
in
accordance
with
law
as
any
arbitrariness
will
negate
the
very
reason
for
government
itself.51
Note:
Only
instruction
letters
and
journal
and
ledgers
subject
to
DST
but
not
subject
to
interest
income.
o
7.
DIVIDEND
INCOME
(Kinds
of
dividends)
A. CASH
DIVIDENDS
RULE:
INDIVIDUAL:
RC/NRC/RA
NRA-ETB
NRA-NETB
CASH
DIVIDEND
10%
FT
20%
FT
25%
FT
CORPORATION:
RECEPIENT
DC
RFC
NRFC
DC
Exempt
Exempt
15%
or
30%
-
deferred
because
-
TAX
SPARING
it
will
be
later
on
taxed
to
its
ISSUING
individual
SH.
RFC
30%
30%
GR:
NA
EXC:
if
more
than
50%
INCOME
WITHIN
THE
PHIL.
NRFC
30%
NA
situs
is
not
NA
situs
is
not
within
within
TAX
SPARING:
o based
on
reciprocity
rule;
it
is
when
part
of
the
tax
is
spared
in
favor
of
the
NRFC
o the
rule
on
reciprocity
DOES
NOT
APPLY
when:
no
tax
treaty
between
the
Philippines
and
the
domicile
country
of
the
NRFC
or
domicile
country
of
the
NRFC
does
not
give
the
same
benefits
to
Filipino
corporation
who
earns
the
same
income
who
is
domiciled
in
the
same
country
of
the
NRFC
DC
cash
or
property
dividends
to
DC
or
RFC:
o Exempt.
This
is
a
deferred
transaction
o This
is
exempt
because
the
corporation
here
upon
receipt
of
the
dividend
will
not
yet
distribute
it
to
the
shareholder
SH
it
is
only
within
the
entity,
no
one
is
benefited
yet.
It
will
later
on
be
declared
as
a
dividend
again
to
its
SH.
This
is
when
you
tax
the
SH
for
the
dividend
income.
o If
you
tax
it
ahead
upon
dividend
to
the
corporation
and
tax
it
again
upon
dividend
to
the
SH
it
will
be
taxed
twice.
So
to
avoid
this
kind
of
arrangement
and
to
make
it
beneficial
and
encourage
stockholdings
the
tax
code
deems
it
necessary
to
tax
it
once.
It
will
only
be
taxed
upon
distribution
to
natural
persons.
RFC
cash
or
property
dividends
to
NRFC:
o As
rule
it
is
not
applicable
because
the
situs
of
the
income
is
outside
the
jurisdiction
of
the
Philippines
43
B.
PROPERTY DIVIDENDS
C.
D.
EXCEPTION:
is
the
RFC
issues
dividend
and
does
business
here
in
the
Philippines
to
the
extent
of
MORE
THAN
50%
of
its
income
it
is
considered
situs
inside
the
Philippines
based
on
the
3
year
period
from
when
the
dividend
was
declared.
Example:
dividend
income
2014,
basis
therefore
is
2014,
2013
and
2012
income.
Count
the
percentage
of
the
income
derived
here
in
the
Philippines.
If
it
exceeds
50%
then
it
is
earned
here
in
the
Philippines.
rule:
same
BUT
the
value
of
the
property
should
be
FMV
of
the
property
whichever
is
higher
of
the
assessment
by
BIR
or
Local
assessor
(for
tax
purposes)
Q:
How
do
you
record
dividend?
A:
Normally,
the
basis
is
book
value
but
for
tax
purposes
it
should
be
Fair
Market
Value
(FMV)
because
in
effect
there
is
an
exchange/conveyance
of
property.
Treasury
shares
considered
as
property
dividends.
44
45
E.
the
shares
so
they
can
have
more
shares.
If
the
corporation
gave
an
option
to
receive
cash
or
stocks,
there
is
really
an
intention
to
give
out
profits
to
the
SH.
This
is
clearly
presented
by
the
fact
that
one
opted
to
receive
cash.
Its
as
if
the
corporation
issued
cash
and
others
opted
to
buy
the
shares
with
the
money
that
they
were
supposed
to
receive.
This
is
the
reason
why
the
law
deems
it
to
be
taxable
on
the
part
of
the
SH
who
are
paying
for
the
additional
shares
those
who
opted
for
stock
dividends.
All
SH
(those
who
opted
for
cash
and
those
who
opted
for
stocks)
will
be
taxed
the
same
way.
(3) Where
the
recipient
is
other
than
the
SH:
o If
there
is
a
usufruct
on
the
shares.
If
there
is
a
stock
dividend
issued,
then
the
increase
is
an
income
on
the
part
of
the
usufructuary.
So
such
shall
be
subject
to
income
tax.
Only
the
usufructuary
shall
be
subject
to
tax
because
as
to
him
it
shall
be
considered
as
additional
income.
LIQUIDATING
DIVIDENDS
Rule
:
Taxable
as
to
the
difference
between
the
amount
received
from
the
corporation
and
the
cost
of
shares
surrendered
by
the
SH
SH
Shares
Valued
at
Upon
Liquidation:
A=
100
10,
000
Net
Asset=
30,000,000
B=
100
10,
000
C=
100
10,
000
o Q:
Is
it
possible
that
the
corporation
has
a
capital
stocks
of
only
30,000
yet
the
Net
Asset
is
30M?
A:
Yes.
If
there
is
retained
earnings
of
29,970,000.
But
by
then
you
will
be
subject
to
improperly
accumulated
earnings.
Net
Asset=
30,000,000
Liquidating
Dividends
Shares
Invested
Taxable
Income
A=
10M
10k
9,
990,000
B=
10M
10k
9,
990,000
C=
10M
10k
9,
9
90,000
o Q:
Will
the
liquidating
dividends
be
subject
to
tax?
If
so,
how
much?
A:
Individually
on
the
part
of
SH.
To
determine,
compare
the
value
of
the
assets
he
actually
received
and
the
value
of
the
assets
he
invested.
In
this
case,
each
only
invested
10,000
but
at
the
end
of
the
corporate
life,
they
received
30M
each.
So
the
SH
actually
earned
9,990,000
each.
Reason:
if
you
do
not
declare
dividends
ever
year
and
at
the
end
of
the
corporate
life
you
will
not
be
subject
to
tax,
you
can
get
away
with
the
tax
on
dividends.
So
the
law
deems
it
that
they
will
be
taxed
upon
liquidation.
The
corporation
could
have
declared
30M
dividends,
having
not
done
so
it
is
said
that
the
government
has
been
deprived
of
the
revenue
it
supposed
to
get.
So
the
law
will
tax
on
the
distribution
of
the
assets
which
includes
the
dividends
which
had
not
been
declared.
The
difference
in
the
amount
invested
and
the
amount
received,
clearly
that
portion
that
is
in
excess
is
the
profits
of
the
corporation
and
should
have
been
declared
as
dividends.
DISGUISED
DIVIDENDS
Also
known
as
Indirect
Dividends
Examples:
o Those
paid
by
the
corporation
to
a
SH
in
a
form
of
honorarium
or
any
cash
payment
not
reflected
as
cash
dividends
but
in
reality
they
are.
o Use
of
company
vehicle
of
corporation
by
the
SH.
This
may
be
considered
as
property
dividends
on
the
part
of
SH.
Though
this
is
difficult
to
prove
because
the
car
is
registered
in
the
name
of
the
corporation.
But
when
you
can
see
that
the
car
is
being
used
for
the
personal
activities
of
the
SH
then
it
can
be
considered
as
disguised
dividends.
Common
practice
in
family
corporations.
o Forgiveness
of
debt
of
SH
by
the
Corporation.
No
consideration
given
other
than
the
reason
that
he
is
a
SH.
You
were
not
required
to
do
anything.
By
that
benefit
you
said
to
have
earned
income.
As
a
SH,
you
supposed
to
be
given
benefit
only
when
such
corporation
declares
dividends.
o
F.
46
8.
ROYALTY
INCOME
Rule:
o if
Passive
source
on
time
creation
of
the
royalty
and
no
subsequent
or
continuous
service
of
the
royalty.
o GR:
20%
on
royalty
EXC:
books,
literary
works,
and
musical
composition
10%
o if
active
source
5-32%
or
30%;
This
is
when
the
royalties,
as
part
of
the
ordinary
business,
the
person
who
earns
the
royalties
due
to
the
nature
of
the
operation
of
my
royalty,
there
is
continuous
rendition
of
service
for
the
use
of
the
royalty.
o Example:
author
of
a
Book,
this
yr
the
book
was
written
and
printed
by
rex
bookstore.
How
will
the
income
received
from
rex
be
taxed?
This
year:
passive
because
the
writing
of
the
book
was
done
just
once.
Next
year
when
it
was
sold
again:
still
passive
income
because
the
book
was
written
only
once.
There
was
no
continued
rendition
of
service
on
the
part
of
the
author.
The
service
here
to
be
rendered
is
not
continuous
in
relation
to
the
royalty
income.
Even
is
there
is
a
subsequent
edition,
the
mere
editing
of
the
book
entitles
the
author
to
another
royalty,
separate
and
distinct
to
that
of
the
previous
thus
it
is
still
a
passive
income.
Each
book
is
covered
by
a
different
copyright.
As
opposed
to
a
publishing
house
or
a
music
label,
here
they
earn
an
active
income
because
the
income
they
earn
this
is
the
source
of
their
ordinary
business.
Lending
out
of
the
copyright
here
becomes
the
business
of
the
income
earner
therefore
it
is
active
not
passive.
o Example:
Jollibee,
someone
acquired
from
it
a
franchise.
There
is
income
on
the
franchise.
How
is
it
taxed?
Here
this
is
an
active
income
because
unlike
an
author,
part
of
the
earning
of
my
franchise
income
is
the
continued
rendering
of
service
of
Jollibee
for
the
continuance
of
the
franchise
as
part
of
its
operation.
Again
in
a
franchise,
the
franchise
is
a
source
of
income
and
that
you
continue
to
service
the
person
using
the
franchise
in
relation
to
the
nature
of
the
royalty
income
earned.
Goodwill
is
created
because
there
is
continuous
rendition
of
service
to
the
other
party.
ROYALTY
INCOME
RC/NRC/RA
NRA-ETB
NRA-NETB
DC/RFC
NRFC
Intangible
Properties
20%
FT
20%
FT
25%
FT
20%
FT
30%
FT
(PASSIVE)
Books,
Literary
10%
FT
10%FT
25%
FT
20%
FT
30%
FT
works,
and
musical
composition
(PASSIVE)
ALL
(ACTIVE
5-32%
5-32%
25%
30%
30%
GI
INCOME)
SUMMARY:
-
Determine
if
it
is
from
active
source
or
passive
source
-
Royalty
is
a
valuable
property
that
can
be
developed
and
sold
on
a
regular
basis
for
a
consideration;
in
which
case,
any
gain
derived
therefrom
is
considered
an
ACTIVE
income
subject
to
the
normal
income
tax
(5-32%
-
individual;
30%
-
corporation)
-
When
a
person
pays
royalty
to
another
for
the
use
of
its
intellectual
property,
such
is
PASSIVE
income
of
the
owner
thus
subject
to
final
withholding
tax
o Royalty
as
passive
income:
Recipient
is
Citizen/RA/NRA
ETB/DC/RFC
-
20%
FWT
except
royalty
on
books,
other
literary
works
and
musical
compositions
received
by
individuals
which
is
subject
to
10%
final
tax
Recipient
is
NRA
NETB
25%
FWT
unless
lower
tax
rate
is
allowed
under
existing
tax
treaty
Recipient
is
a
NRFC
-
30%
FWT
unless
lower
tax
rate
is
allowed
under
existing
tax
treaty
9.
RENTAL
INCOME
RULE:
5%
withholding;
but
still
subject
to
5-32%
income
tax
or
30%
dumping
ground
computation
Two
types
of
Lease:
o Operating
Lease
RULE:
Taxed
as
and
rent
income
subject
to
5%
WT;
5-32%
47
Cost
of
the
property
is
not
wholly
amortized
during
the
primary
period
of
the
lease.
The
lessor
does
not
rely
solely
on
the
rentals
during
the
primary
period
for
his
profits
but
looks
for
the
recovery
of
the
balance
of
his
cost
and
the
rest
of
his
profit
from
the
sale
or
release
of
the
leased
property.
Earn
income
by
letting
others
use
the
property
but
rent
is
not
the
way
to
recover
the
property
cost.
You
can
recover
the
cost
by
selling
it
at
the
end
of
the
lease.
LEGAL
Finance
Lease
RULE:
Taxed
as
and
ordinary
income
not
subject
to
5%
withholding
Entire
cost
of
the
property
is
amortized
for
at
least
70%
of
said
amount,
which
must
be
amortized
for
not
less
than
2yrs.
PARTIES:
o Investor-
who
will
buy
the
property;
o seller
of
the
property;
o person
interested
but
cannot
afford
1st
transaction:
is
the
sale
of
the
property
from
the
seller
to
the
investor
2nd
transaction:
lease
contract
between
the
investor
and
the
person
interested
but
who
cannot
afford.
In
the
lease
contract
the
transaction
is
between
the
investor
and
the
person
buying.
The
investor
is
the
first
owner.
Investor
will
then
amortize
the
ENTIRE
cost
of
his
transaction
over
the
lease
to
RECOVER
such
through
the
lease
contract.
at
least
70%
of
the
cost
must
be
amortized
IN
A
PERIOD
OF
NOT
LESS
THAN
2YRS.
Finance
Lease
is
different
from
sale
in
installment:
because
here
at
the
end
of
the
lease
contract
the
LESSEE
HAS
NO
OBLIGATION
NOR
OPTION
TO
PURCHASE
THE
PROPERTY
TO
THE
LEASE
AT
THE
END
OF
THE
LEASE.
TN:
COMPARISON
OF
TAX
RATE:
OPERATING
LEASE:
Taxed
as
and
rent
income
subject
to
5%
WT;
5-32%
LEGAL
FINANCE
LEASE:
Taxed
as
and
ordinary
income
not
subject
to
5%
withholding
INSTALLMENT
SALE:
considered
as
an
ordinary
sale
income;
depends
whether
a
capital
asset
then
taxed
as
capital
gain
or
ordinary
asset
then
taxed
as
an
ordinary
gain.
LEASE
HOLD
IMPROVEMENT
(will
come
out)
Rule:
title
must
be
vested
to
lessor;
income
on
the
part
of
the
lessor
Two
ways
to
recognize:
o Outright
o Spread
out
SPREAD
OUT
the
value
of
the
rent.
How?
get
the
value
of
the
property
at
the
end
of
the
lease
period:
o Depreciation
=
Value
of
the
LI
divide
by
Useful
Life
o Value
of
LI
at
the
end
=
Value
of
LI
less
(depreciation
times
remaining
period
of
the
lease)
VAT
if
shouldered
by
the
lessee
which
forms
part
of
the
rental
IS
NOT
INCOME.
Example:
if
the
rental
i
2M
divide
by
15yrs
=
133,333.33
Example
1:
NOTHING
ANYMORE
TO
TRANSFER
AT
THE
END
OF
LEASE
TERM
o Lessor
A
&
Lessee
B
o Lease
Term:
30
yrs
o Annual
Rent:
100,000.00
o Leasehold
Improvement:
2,000,000.00
o Useful
Life:
15
yrs
o Title
vests
at
the
end
of
the
lease
o Leasehold
Completed
5th
yr
o What
should
be
recognized?
YEAR
1
to
YEAR
4
Lessor
A:
Rent
Income
100k
Lessee
B:
Rent
Expense
100k
o
48
YEAR
5
Lessor
A:
Rent
Income
100k
No
additional
Income.
The
LI
was
completed
on
the
5th
yr
then
it
has
a
life
of
15
yrs.
So
on
the
20th
year
the
LI
will
be
fully
depreciated.
At
the
end
of
the
lease
contract
nothing
would
have
been
left
to
the
lessor.
Nothing
can
be
transferred
therefore
no
income.
Example:
OUTRIGHT
&
SPREAD
OUT
o Lessor
A
&
Lessee
B
o Lease
Term:
30
yrs
o Annual
Rent:
100K
o Leasehold
Improvement:
2M
o Useful
Life
15
yrs
o Leasehold
Completed
29th
yr
o What
should
be
recognized:
YR
1
to
28
Lessor:
Rent
Income
of
lessor:
100k
Lessee:
Rent
Expense
lessee:
100k
COMPUTATIONS:
Yearly
Depreciation:
o Yearly
Depreciation
of
the
Leasehold
Improvement
=
COST/Useful
Life
o Yearly
Depreciation
of
the
Leasehold
Improvement
=
2M/15yrs
=
133,333.34
Who
will
recognize
this
depreciation
expense?
The
lessee
for
the
remaining
2
yrs
of
the
contract
Value
of
the
LI
to
be
recognized
by
the
Lessor
o Value
=
Cost
less
yearly
Depreciation
of
the
remaining
lease
term
o Value
=
2M
less
(133,333.34
x
two
years
left)
=
1,733,333.34
OUTRIGHT
METHOD:
o YR
29
Lessor
Rent
Income
of
100K
Leasehold
Improvement:
additional
Rent
Income
1,733,334
o Asset
here
is
recognized
on
the
year
the
building
is
completed.
o Cannot
recognize
depreciation
because
the
use
is
still
with
the
lessee
Lessee
Rent
Expense
of
100k
Depreciation
Expense
133,333.34
Leasehold
Improvement
to
be
recognized
by
lessee
is
266,667
(Balance
2M
less
1,733,334)
SPREADOUT
METHOD:
o YR
29
&
30
Lessor
Rent
Income
of
100K
Leasehold
Improvement
additional
Rent
Income
of
866,667
(1,733,334/2)
Asset
of
Lessor
of
866,667
Lessee
Rent
Expense
of
100k
Depreciation
Expense
133,333.34
Asset
of
Lessee
of
1,133,333
49
YR
29
&
30
Lessor
Rent
Income
of
100K
Leasehold
Improvement
additional
Rent
Income
of
866,667
(1,733,334/2)
Lessee
Rent
Expense
of
100k
Depreciation
Expense
133,333.34
Asset
of
Lessor
of
1,733,333
Asset
of
Lessee
of
0
Depreciation
expense
of
133,333
recognized
by
lessee
BV=
1,733,334
of
improvement
(Additional
points/discussion
in
RENTAL
INCOME)
-
If
the
VAT
is
shouldered
by
the
lessee
it
should
NOT
be
considered
as
part
of
the
income
to
the
lessor
o VAT
is
a
tax
and
not
an
income.
To
tax
a
tax
would
result
in
tax
pyramiding
which
is
not
allowed
in
our
jurisdiction
o You
never
hold
on
to
VAT,
it
has
to
be
remitted
to
the
govt.
The
statutory
taxpayer
is
required
to
remit
it
every
20th
day
of
the
month
following
-
EX:
Rent
is
P11,200
inclusive
of
VAT.
How
much
is
to
be
recognized
as
income?
o Only
10k
is
considered
as
income;
the
P1,200
represents
VAT
and
should
not
be
treated
as
part
of
the
income
-
What
is
then
contemplated
by
the
law
when
it
says,
when
taxes
are
shouldered
by
the
lessee
it
will
be
considered
as
income
of
the
lessor?
o Whenever
there
is
a
direct
tax
to
be
shouldered
by
the
lessee
such
is
considered
as
an
income
by
the
lessor.
That
which
the
law
does
not
allow
to
be
passed
on.
o When
there
are
taxes,
which
under
the
law
are
not
supposed
to
be
passed
on
to
your
lessee
and
yet
it
is
paid
by
the
lessee,
that
is
considered
as
additional
income
on
the
part
of
the
lessor
o
EX:
Withholding
tax.
If
the
5%
WT
is
to
be
shouldered
by
the
lessee
such
should
be
considered
as
additional
income
of
the
lessor
because
you
are
ordinarily
not
supposed
to
pass
it
on.
You
are
supposed
to
pay
it.
Real
Property
Tax
when
covered
by
the
lessee
is
considered
additional
income
by
lessor.
It
is
ordinarily
the
owner
of
the
property
should
pay
the
RPT
-
ADVANCE
RENTAL
o Considered
income
if
these
advanced
amounts
are
within
the
control
of
the
lessor
to
dispose
-
SECURITY
DEPOSIT
o Not
recognized
as
income
because
you
ordinarily
have
no
control
or
a
right
to
the
disposition
of
such
amount.
o You
are
not
supposed
to
be
benefited
from
it.
It
does
not
comply
with
the
claim
of
right
doctrine.
Not
considered
as
income
just
yet.
o This
has
become
a
gray
area
lately
because
of
the
BIR
regulation
with
regard
to
VAT.
If
there
is
a
security
deposit,
it
is
supposed
to
be
subject
to
VAT.
10.
ANNUITIES,
PROCEEDS
FROM
LIFE
INSURANCE
OR
OTHER
TYPES
OF
INSURANCE
Any
periodic
payment
resulting
from
your
investments.
o Example:
You
invest
during
the
period
of
your
service,
and
upon
resignation,
you
will
receive
periodic
payments
as
annuity.
It
is
an
income
to
the
extent
of
the
difference
between
the
amount
that
you
paid
and
the
amount
that
you
received.
Illustration:
1. You
paid
a
premium
of
1M.
In
a
span
of
ten
years,
you
will
receive
100K
annually.
There
is
no
income
but
mere
return
of
investment.
2. You
paid
a
premium
of
1M.
In
a
span
of
ten
years,
you
will
receive
200K
annually.
-There
is
an
income
of
1M
which
is
the
difference
between
the
amount
of
your
investment
and
the
total
amount
received.
Rates:
A. Sources
within
the
Philippines:
a. Individual
Taxpayer:
5%-32%
b. Non
Resident
Alien
Not
Engaged
in
Trade
or
Business:
25%
c. Corporation:
30%
50
B.
11.
PRIZES
AND
AWARDS
1.
2.
3.
PRIZE
There
is
effort
(but
not
in
the
submission)
Less
than
10K:
5%-32%
Excess:
20%
Ex.
Literary
Award
1.
2.
WINNINGS
Game
of
chance
Regardless
of
amount:
20%
3.
Ex. Bingo
1.
2.
The
prize
received
by
a
corporation
from
PBA
is
subject
to
20%
final
tax.
If
the
corporation
will
give
bonus
to
the
players,
it
will
be
subject
to
the
ordinary
income
tax
of
5%-32%
as
compensation
to
its
employees.
It
does
not
matter
if
the
amount
distributed
to
the
players
is
the
prize
from
the
basketball
tournament.
Manny
Pacquiaos
prize
from
boxing
abroad
is
subject
to
the
rate
of
5%-32%
He
is
a
resident
citizen.
The
Philippine
Tax
Authority
does
not
have
jurisdiction
abroad.
There
is
also
no
withholding
agent
abroad.
12.
PENSIONS
RETIREMENT
BENEFITS,
OR
SEPARATION
PAY
It
pertains
to
payment
in
the
future
in
consideration
of
past
service.
Generally,
subject
to
income
tax.
Except:
1. New
retirement
law
a. Rendered
at
least
5
years
of
service
b. Under
the
same
employer
c. At
least
60
years
of
age
for
voluntary
and65
for
compulsory
d. Applicable
if
there
is
no
private
benefit
place
2. Reasonable
Private
Retirement
Plan
a. There
must
be
a
profit
sharing
plan
b. It
must
be
registered
with
the
BIR
c. Employee
must
be
at
least
50
years
of
age
d. Service
of
at
least
10
years
under
the
same
employer
(not
necessarily
continuous)
e. Must
be
availed
of
only
once
You
can
start
working
as
a
private
employee
and
later
on
apply
in
the
government.
There
is
a
different
retirement
plan
for
the
government.
Governments
retirement
plan
may
also
be
tax-free.
You
may
voluntarily
resign
and
still
avail
of
the
tax
exemption
if
you
fall
within
the
qualifications
of
your
retirement
plan
policy.
51
52
Example
3:
2014
Computation:
Gross
Income
50K
50
[Would
be
Income
50K
0
]
(0)
[Actual
Income
50K
100K
]
Bad
Debt:
(100K)
Taxable
Income:
(50K)
50K
[Taxable
Bad
debt]
2015
*you
only
recognize
50k
even
if
100k
was
recovered
because
you
were
only
benefited
up
to
the
extent
of
50k
Gross
Income:
200K
Recovered
Bad
Debt:
100K
Taxable
Income:
250K
Example
4:
2014
Computation:
0
[Would
be
Income
50k
60K]
Gross
Income
50K
0
[Actual
Income
50k
100k]
Bad
Debt:
(100K)
0 [Taxable
Bad
Debt]
Taxable
income:
(50k)
*You
would
deduct
60k
from
your
gross
income
to
get
a
Would
be
2015
income
of
-10
because
60k
would
be
the
bad
debts
you
would
have
recognized
in
2014
had
you
known
that
40
out
of
the
100k
would
be
Gross
Income:
200K
recovered
on
a
future
date.
Recovered
Bad
Debt:
40K
There
being
no
taxable
benefit
in
this
situation,
you
dont
recognize
any
Taxable
Income:
200K
as
part
of
taxable
income
for
2015.
If
given
the
same
facts,
but
the
recovered
bad
debt
for
2015
is
60k,
you
will
recognize
a
Taxable
Income
of
210K.
Gross
Income
of
50K,
less
Would
be
bad
debts
of
40K,
would
equal
to
10K.
If
what
is
recovered
would
be
80,
the
Taxable
Income
for
2015
would
230K.
50K
20K
actual
income
of
0
=
30k
taxable
benefit.
C.
Taxes
Not
all
taxes
are
deductible,
such
as
the
following:
1. Income
tax
2. Donorstax
3. Estate
Tax
4. Stock
Transaction
Tax
5. Special
assesment
6. Income
tax
paid
for
in
foreign
country
recognized
as
tax
credit
7. Value
added
tax
Tax
Benefit
Rule
applies.
D.
Campaign
contributions
Generally,
campaign
contribution
should
not
be
subject
to
tax
as
long
as
it
is
utilized
in
the
election.
Excpetions:
1. Excess
or
unutilized
portion
2. Failure
to
file
in
the
COMELEC
the
statement
of
expenditure
E.
Corporate
Bonds
Liability
of
the
corporation
which
is
securitized.
There
is
a
paper
representing
it
If
corporation
sell
it
in
its
FACE
VALUE,
it
is
NOT
TAXABLE
because
there
is
no
gain.
If
issued
at
a
PREMIUM,
the
GAIN
IS
TAXABLE.
If
the
bond
is
worth
1M
and
the
corporation
sells
its
a
1.5M,
the
EXCESS
OF
500K
IS
TAXABLE.
However,
it
is
not
taxed
outright.
It
must
be
AMMORTIZED.
If
the
lifetime
of
the
bond
is
5
years,
it
is
taxable
for
100K
every
year.
53
If
issued
AT
A
DISCOUNT,
the
LOSS
IS
TO
BE
RECOGNIZED.
If
the
bond
is
worth
1M
and
it
was
sold
at
900k,
there
is
a
loss
of
100K
which
is
deductible.
It
has
to
be
amortized
over
the
life
of
the
bond.
If
the
lifetime
of
the
bond
is
5
years,
there
is
a
deduction
of
20K
every
year.
If
you
start
with
a
discount,
you
add.
If
you
start
with
a
premium,
you
deduct.
Both
must
reach
the
face
value
If
you
REDEEM
the
bond
equivalent
to
its
value,
it
is
not
subject
to
tax
as
there
is
no
gain.
Redemption
of
the
Bond:
REDEMPTION
PRICE
VS
CARRYING
VALUE
Example:
Face
value:
1.5
Redeemed
at
1M
on
the
third
year
Life
span
of
5
years
a. Amortize
the
premium
which
is
500K
(1.5M-
1M)
over
a
period
of
5
years.
Every
year
you
deduct
100k,
so
on
the
3rd
year
you
were
able
to
deduct
300K.
The
CARRYING
VALUE
is
1.2M,
which
is
1.5M
minus
300K.
You
were
able
to
earn
200k
which
is
the
CARRYING
VALUE
MINUS
THE
REDEMTION
PRICE
(1.2M
1M).
It
is
income
on
your
part
which
is
taxable.
b. If
it
is
a
discounted
amount
of
900K,
you
amortize
100K
in
a
span
of
5
years.
Every
year
you
deduct
20K.
On
the
third
year
of
redemption,
the
CARRYING
VALUE
is
960k
which
is
900
plus
60K
(20K
x
3years).
You
may
deduct
40K
which
is
the
REDEMPTION
PRICE
MINUS
THE
CARRYING
VALUE
(1M-
960
K).
F.
Compensation
for
Damages
Generally,
compensation
for
damages
is
not
subject
to
tax
because
it
is
a
mere
reversion
to
where
you
were
prior
to
its
award.
Except:
1. Loss
of
expected
profit
o Illegal
dismissal
and
compensation
for
back
wages
2. Damages
for
defending
a
patent
G.
Tax
Informers
Reward
Generally
subject
to
tax
at
the
rate
of
10%
final
tax.
It
must
not
exceed
1M,
but
in
reality
it
is
only
900K
because
105
goes
to
the
government.
There
must
be
proper
collection
of
tax,
as
well
as
the
imposition
of
penalties
and
surcharges.
It
may
include
smuggled
goods
EXCLUSIONS
Immunities
or
privilege
of
not
paying
taxes
despite
the
fact
that
you
actually
have
income.
Theres
no
question
that
if
its
a
return
of
capital,
then
it
should
NOT
be
subject
to
tax.
In
general,
majority
of
these
exclusions
are
items
of
gross
income.
But
because
the
law
specifically
provides
that
they
are
excluded
in
gross
income,
then
they
are
NOT
subject
to
tax.
EXCLUSIONS
DEDUCTIONS
Items
of
gross
income
Items
of
allowable
deductions
Something
you
receive
Something
you
gave
up
or
spent
Specific;
provided
for
in
the
Tax
Code
While
enumerated
in
the
tax
code,
these
are
not
exclusive
(there
could
be
additional
deductions
allowed
even
if
its
not
provided
under
the
NIRC)
Exclusions
come
in
the
form
of
an
exemption
and
so
must
be
strictly
construed
against
the
taxpayer
(similar
to
deductions
which
must
be
construed
strictly
against
the
taxpayer)
1.
PROCEEDS
OF
LIFE
INSURANCE
Section
32.
Gross
Income.
-
xxx
B)
Exclusions
from
Gross
Income.
-
The
following
items
shall
not
be
included
in
gross
income
and
shall
be
exempt
from
taxation
under
this
title:
(1)
Life
Insurance.
-
The
proceeds
of
life
insurance
policies
paid
to
the
heirs
or
beneficiaries
upon
the
death
of
the
insured,
whether
in
a
single
sum
or
otherwise,
but
if
such
amounts
are
held
by
the
insurer
under
an
agreement
to
pay
interest
thereon,
the
interest
payments
shall
be
included
in
gross
income.
54
55
Isnt
it
a
violation
of
the
exclusion
principle
under
the
tax
code
that
states
that
proceeds
of
life
insurance
is
excluded
from
income
tax?
It
ought
to
be
a
violation
but
it
is
the
law.
In
fact,
even
before
the
tax
laws
have
been
codified,
its
also
stated
in
Revenue
Reg.2
that
if
theres
an
assignment,
exclusion
should
just
be
the
consideration
paid
plus
subsequent
payments.
Atty:
My
opinion
is
that
you
dont
want
to
have
people
transferring
their
life
insurance,
youre
putting
premium
on
the
life
of
a
person.
2.
AMOUNTS
RECEIVED
BY
INSURED
AS
RETURN
OF
PREMIUM
(2)
Amount
Received
by
Insured
as
Return
of
Premium.
-
The
amount
received
by
the
insured,
as
a
return
of
premiums
paid
by
him
under
life
insurance,
endowment,
or
annuity
contracts,
either
during
the
term
or
at
the
maturity
of
the
term
mentioned
in
the
contract
or
upon
surrender
of
the
contract.
If
ever
theres
a
policy
which
allows
you
to
recover
proceeds
even
if
you
did
NOT
DIE
What
is
contemplated
here
is
a
type
of
insurance
called
ENDOWMENT
In
the
first
place,
this
is
NOT
income,
it
is
only
a
return
of
CAPITAL.
3.
GIFTS,
BEQUESTS
AND
DEVISES
(3)
Gifts,
Bequests,
and
Devises.
_
The
value
of
property
acquired
by
gift,
bequest,
devise,
or
descent:
Provided,
however,
That
income
from
such
property,
as
well
as
gift,
bequest,
devise
or
descent
of
income
from
any
property,
in
cases
of
transfers
of
divided
interest,
shall
be
included
in
gross
income.
Gifts-one
given
gratuitously
covered
under
the
law
on
Donation
Bequests
aka
Legacy;
personal
property
given
by
way
of
will
Devises
real
property
given
through
a
will
It
is
excluded
since
it
is
already
subject
to
Estate
and
Donors
Tax
4.
COMPENSATION
FOR
INJURIES
AND
SICKNESS
(4)
Compensation
for
Injuries
or
Sickness.
-
amounts
received,
through
Accident
or
Health
Insurance
or
under
Workmen's
Compensation
Acts,
as
compensation
for
personal
injuries
or
sickness,
plus
the
amounts
of
any
damages
received,
whether
by
suit
or
agreement,
on
account
of
such
injuries
or
sickness.
In
relation
to
the
physical
aspect,
you
must
be
affected
personally
Injured
personally
Example:
Car1
bumped
into
Car2.
The
owner
of
Car2
demanded
damages
for
his
car
amounting
to
200k.
The
car
insurance
of
Car1,
paid
only
100k
to
Car2
while
the
other
100k
was
shouldered
by
the
owner
of
Car1.
How
much
is
excluded?
o NOTHING
is
excluded.
How
would
you
treat
the
entire
200k?
o Sadly,
the
ENTIRE
amount
is
taxable.
Because
it
is
NOT
exempted
under
the
law.
But
isnt
this
just
a
return
of
capital?
After
all,
you
have
incurred
a
loss,
so
isnt
it
just
a
return?
Yes,
thats
right.
But
you
present
it
in
your
income
tax
return.
First,
theres
gross
income
so
include
it
in
gross
income,
then
after
that
you
claim
it
as
a
deduction.
Whether
it
is
taxable,
then
yes
it
is
taxable
but
it
may
happen
that
you
may
be
able
to
deduct
it.
5.
INCOME
EXEMPT
UNDER
TREATY
(5)
Income
Exempt
under
Treaty.
-
Income
of
any
kind,
to
the
extent
required
by
any
treaty
obligation
binding
upon
the
Government
of
the
Philippines.
-
Because
we
treat
other
states
as
superior
in
their
own
jurisdiction,
we
cannot
tax
them
for
we
do
not
hold
jurisdiction
over
them.
Sometimes,
what
we
do
is
we
enter
into
agreements
as
to
how
we
tax
certain
items
which
may
belong
to
other
states.
-
Our
tax
law
is
very
specific
that
if
it
is
already
provided
in
the
Tax
Treaty
that
this
particular
item
is
exempted
then
it
should
be
considered
exclusions
already
from
gross
income.
-
Employees
in
IRRI,
Embassies
are
exempted
from
income
tax.
But
this
presupposes
that
they
are
foreign
nationals.
Deutsche
Bank-AG
Manila
Branch
vs
CIR
Gr
no.
188550,
8-19-2013
(based
from
the
Case
Summaries
Compiled
last
year)
Facts:
In
accordance
with
Section
28
(A)
(5)
of
the
National
Internal
Revenue
Code
(NIRC)
of
1997,
petitioner
withheld
and
remitted
to
respondent
on
21
October
2003
the
amount
of
PHP67,688,553.51,
representing
fifteen
percent
(15%)
branch
profit
remittance
tax
(BPRT)
on
its
regular
banking
unit
(RBU)
net
income
remitted
to
Deutsche
Bank
Germany
(DB
Germany)
for
2002
and
prior
taxable
years.
Believing
that
it
made
an
overpayment
of
the
BPRT,
petitioner
filed
with
the
BIR
Large
Taxpayers
Assessment
and
Investigation
Division
on
4
October
2005
an
administrative
claim
for
refund
or
issuance
of
its
tax
credit
certificate
in
the
total
amount
of
PHP22,562,851.17.
On
the
same
date,
56
petitioner
requested
from
the
International
Tax
Affairs
Division
(ITAD)
a
confirmation
of
its
entitlement
to
the
preferential
tax
rate
of
10%
under
the
RP-Germany
Tax
Treaty.
Alleging
the
inaction
of
the
BIR
on
its
administrative
claim,
petitioner
filed
a
Petition
for
Review
with
the
CTA
on
18
October
2005.
Petitioner
reiterated
its
claim
for
the
refund
or
issuance
of
its
tax
credit
certificate
for
the
amount
of
PHP22,562,851.17
representing
the
alleged
excess
BPRT
paid
on
branch
profits
remittance
to
DB
Germany.
Issue:
Whether
or
not
the
failure
to
strictly
comply
with
RMO
No.
1-2000
will
deprive
persons
or
corporations
of
the
benefit
of
a
tax
treaty.
Ruling:
No.
The
denial
of
the
availment
of
tax
relief
for
the
failure
of
a
taxpayer
to
apply
within
the
prescribed
period
under
the
administrative
issuance
would
impair
the
value
of
the
tax
treaty.
At
most,
the
application
for
a
tax
treaty
relief
from
the
BIR
should
merely
operate
to
confirm
the
entitlement
of
the
taxpayer
to
the
relief.
"A
state
that
has
contracted
valid
international
obligations
is
bound
to
make
in
its
legislations
those
modifications
that
may
be
necessary
to
ensure
the
fulfillment
of
the
obligations
undertaken."
Thus,
laws
and
issuances
must
ensure
that
the
reliefs
granted
under
tax
treaties
are
accorded
to
the
parties
entitled
thereto.
The
obligation
to
comply
with
a
tax
treaty
must
take
precedence
over
the
objective
of
RMO
No.
1-2000.
It
is
significant
to
emphasize
that
petitioner
applied
though
belatedly
for
a
tax
treaty
relief,
in
substantial
compliance
with
RMO
No.
1-2000.
Clearly,
there
is
no
reason
to
deprive
petitioner
of
the
benefit
of
a
preferential
tax
rate
of
10%
BPRT
in
accordance
with
the
RP-Germany
Tax
Treaty
Attys
Discussion:
-
This
involves
a
branch
profit
remittance
tax.
While
they
filed
an
administrative
claim
for
tax
refund,
they
also
filed
for
a
confirmation
from
the
BIR
ITAD
(International
Tax
Affairs
Division
of
the
BIR).
This
is
where
you
file
for
a
tax
treaty
relief
the
so-
called
ITAD,
and
thats
your
ITAD
ruling.
If
youve
seen
a
lex
libris
software
in
the
library,
youll
see
tax
rulings
of
the
BIR
which
has
a
separate
icon
called
ITAD
ruling.
This
ruling
is
a
ruling
issued
by
BIR
in
relation
to
tax
treaties
of
the
Philippines.
You
file
it
to
the
International
Tax
Affairs
Division
of
the
BIR
(or
I.T.A.D.)
-
They
asked
for
confirmation
if
they
can
avail
of
the
10%
tax
rate.
BIR
denied
it
on
the
basis
that
there
must
be
an
application
for
ITAD
ruling
at
least
15
days
before
you
can
avail
of
the
tax
treaty
relief.
The
reason
for
this
is
that
it
will
prevent
the
consequences
of
an
erroneous
interpretation
and
application
of
the
treaty
provisions.
-
But
the
SC
ruled
that
the
tax
code
clearly
provides
that
if
there
are
items
excluded
under
a
treaty
then
we
ought
to
comply
with
it.
In
the
case,
there
is
a
provision
in
the
RP
Germany
that
it
will
be
subject
to
10%.
SC
said
we
are
to
comply
with
our
agreements
with
the
international
community
in
accordance
with
the
principle
pacta
sunt
servanda.
-
So
every
treaty
in
force
is
binding
upon
parties
and
obligations
under
the
treaty
must
be
performed
by
them
in
good
faith.
A
state
that
has
contradicted
valid
international
obligations
is
bound
to
make
it
in
its
legislations
those
modifications
that
may
deem
necessary
to
ensure
the
fulfilment
of
the
obligations
undertaken.
-
We
ought
to
make
legislations
compliant
with
our
international
agreements
rather
than
preventing
them.
-
So
does
that
mean
then
that
we
dont
need
to
apply
anymore
for
a
tax
treaty
relief?
NO,
we
are
still
required.
If
you
do
not
apply,
you
may
be
subject
to
penalties.
6.
RETIREMENT
BENEFITS,
PENSIONS
AND
GRATUITIES
(6)
Retirement
Benefits,
Pensions,
Gratuities,
etc.-
(a)
Retirement
benefits
received
under
Republic
Act
No.
7641
and
those
received
by
officials
and
employees
of
private
firms,
whether
individual
or
corporate,
in
accordance
with
a
reasonable
private
benefit
plan
maintained
by
the
employer:
Provided,
That
the
retiring
official
or
employee
has
been
in
the
service
of
the
same
employer
for
at
least
ten
(10)
years
and
is
not
less
than
fifty
(50)
years
of
age
at
the
time
of
his
retirement:
Provided,
further,
That
the
benefits
granted
under
this
subparagraph
shall
be
availed
of
by
an
official
or
employee
only
once.
For
purposes
of
this
Subsection,
the
term
'reasonable
private
benefit
plan'
means
a
pension,
gratuity,
stock
bonus
or
profit-sharing
plan
maintained
by
an
employer
for
the
benefit
of
some
or
all
of
his
officials
or
employees,
wherein
contributions
are
made
by
such
employer
for
the
officials
or
employees,
or
both,
for
the
purpose
of
distributing
to
such
officials
and
employees
the
earnings
and
principal
of
the
fund
thus
accumulated,
and
wherein
its
is
provided
in
said
plan
that
at
no
time
shall
any
part
of
the
corpus
or
income
of
the
fund
be
used
for,
or
be
diverted
to,
any
purpose
other
than
for
the
exclusive
benefit
of
the
said
officials
and
employees.
(b)
Any
amount
received
by
an
official
or
employee
or
by
his
heirs
from
the
employer
as
a
consequence
of
separation
of
such
official
or
employee
from
the
service
of
the
employer
because
of
death
sickness
or
other
physical
disability
or
for
any
cause
beyond
the
control
of
the
said
official
or
employee.
(c)
The
provisions
of
any
existing
law
to
the
contrary
notwithstanding,
social
security
benefits,
retirement
gratuities,
pensions
and
other
similar
benefits
received
by
resident
or
nonresident
citizens
of
the
Philippines
or
aliens
who
come
to
reside
permanently
in
the
Philippines
from
foreign
government
agencies
and
other
institutions,
private
or
public.
(d)
Payments
of
benefits
due
or
to
become
due
to
any
person
residing
in
the
Philippines
under
the
laws
of
the
United
States
administered
by
the
United
States
Veterans
Administration.
57
(e)
Benefits
received
from
or
enjoyed
under
the
Social
Security
System
in
accordance
with
the
provisions
of
Republic
Act
No.
8282.
(f)
Benefits
received
from
the
GSIS
under
Republic
Act
No.
8291,
including
retirement
gratuity
received
by
government
officials
and
employees.
General
rule
Pensions
are
generally
subject
to
income
tax.
Exception
Special
laws,
i.e.
retirement
New
Retirement
Law:
1) Complulsory-
65
yrs
old
Voluntary
-60
yrs
old
2) Rendered
service
for
the
same
employer
for
at
least
5
years
Reasonable
Private
Benefit
Plan
1) Registered
in
the
BIR
2) At
least
50
years
old
3) Rendered
service
for
at
least
10yrs
(not
necessarily
continuous,
but
just
TOTAL)
4) Availed
of
once
If
you
have
your
own
retirement
benefit
plan,
can
you
still
avail
of
the
retirement
law?
o Yes.
Whichever
is
more
favourable
to
the
taxpayer,
he/
she
can
avail
of
it.
For
example,
under
the
retirement
plan
of
a
company,
he
cannot
avail
of
the
benefits
under
the
Retirement
Plan,
and
so
he
may
be
subject
to
income
tax.
If
he
failed
to
render
10
years
of
service,
he
can
still
avail
of
the
New
Retirement
Law.
Take
note
that
when
you
already
availed
of
the
exemption
under
the
New
Retirement
Law,
you
can
no
longer
avail
of
it
under
the
reasonable
private
benefit
plan.
You
can
only
avail
of
it
once.
Retirement
vs
Separation
Retirement
Separation
Any
separation
from
employment
in
Through
law,
even
OUTSIDE
the
law
(leave
without
compliance
with
the
retirement
law
absence
or
committed
a
crime-
in
violation
of
law,
thats
why
it
is
outside
the
law)
or
agreement
of
the
parties
It
is
the
law
which
provides
the
policies
for
retirement,
by
agreement,
or
by
CBA
Separation
excluded
by
gross
income:
1) Involuntary
(beyond
the
control
of
the
employee)
a. Retrenchment
cost
saving
device
where
employees
will
be
let
go
for
economic
purposes
b. Cessation
of
business
c. Redundancy
2) Death
3) Sickness
4) Physical
disability
Terminal
leave
benefits
are
sick
or
vacation
leave
benefits
which
you
availed
of
just
before
you
leave
the
company.
It
could
happen
that
within
the
year
you
are
entitled
to
lets
say
20
leave
benefits,
if
you
leave
some
time
in
March,
and
you
have
not
availed
of
any
of
your
vacation
leave,
if
theres
a
rule
in
your
company
that
it
will
be
commuted
to
cash,
then
that
benefit
is
considered
income
on
your
part
and
it
will
be
subject
to
tax
but
only
to
the
extent
of
the
excess
of
10
days
vacation
leave.
Because
the
10days
is
considered
a
de
minimis
benefit
and
not
subject
to
income
tax.
So
first
10
days
is
exempt;
the
excess
is
the
one
subject
to
income
tax.
So
if
ever
your
employer
will
give
you
separation
benefits
and
a
terminal
leave
pay,
just
tell
your
employer
to
NOT
consider
it
as
a
terminal
leave
benefit,
just
consider
it
as
part
of
separation
pay
so
that
it
will
also
be
exempted
since
theres
no
limit
on
the
amount
of
separation
pay.
7.
MISCELLANEOUS
BENEFITS
A.
Income
Derived
by
Foreign
Government.
-
Income
derived
from
investments
in
the
Philippines
in
loans,
stocks,
bonds
or
other
domestic
securities,
or
from
interest
on
deposits
in
banks
in
the
Philippines
by
(i)
foreign
governments,
(ii)
financing
institutions
owned,
controlled,
or
enjoying
refinancing
from
foreign
governments,
and
(iii)
international
or
regional
financial
institutions
established
by
foreign
governments.
58
For
Atlas
to
continue
its
operations,
it
will
have
to
get
a
loan
from
any
financial
institution
supposedly.
Because
Atlas
is
the
main
supplier
of
Mitsubishi,
they
entered
into
an
agreement
where
Mitsubishi
will
loan
Atlas
the
amount
necessary
to
continue
supplying
Mitsubishi
But
Mitsubishi
to
be
able
to
comply
with
the
loan
agreement
also
has
to
loan
the
amount,
and
it
loaned
from
Eximbank
which
happens
to
be
owned
by
the
Japanese
government
Issue:
the
loan
agreement
of
Atlas
and
Mitsubishi
had
a
stipulation
for
the
payment
of
interest.
So
there
is
interest
income
here.
The
question
is
whether
the
interest
income
of
Mitsubishi
should
be
subject
to
income
tax
Mitsubushis
contention:
under
the
tax
code,
part
of
the
exclusions
are
interests
on
deposits
in
banks
in
the
Philippines
by
foreign
governments,
financing
institutions
owned
or
controlled
or
enjoying
refinancing
from
foreign
governments,
and
international
or
regional
financial
institutions
established
by
foreign
governments.
This
is
just
a
loan
agreement,
and
supposedly
only
interests
from
deposits
are
subject
to
the
exclusions,
but
Mitsubishi
would
want
to
extend
the
exclusions
to
include
interest
income
owned
by
the
foreign
government
This
is
not
an
investment
here.
This
is
a
loan
agreement.
Supposedly,
that
alone
should
have
told
Mitsubishi
this
is
not
covered
by
the
exemption
According
to
SC:
This
interest
income
is
provision
is
not
between
Eximbank
and
Atlas,
it
is
between
Mitsubishi
and
Atlas.
The
interest
income
has
nothing
to
do
with
the
foreign
government.
If
that
is
the
case,
if
we
allow
this
type
of
arrangement,
then
all
foreign
corporations
will
just
loan
from
their
foreign
banks
then
extend
the
loan
to
entities
here
in
the
Philippines
so
they
can
get
away
with
the
payment
of
taxes.
SC
said
the
exclusion
provision
under
the
tax
code
does
not
apply.
This
is
not
an
investment
income.
This
is
an
interest
income
from
a
loan.
(This
is
a
landmark
case,
read
it!)
B.
Income
derived
by
the
Government
or
its
Political
Subdivisions.
-
Income
derived
from
any
public
utility
or
from
the
exercise
of
any
essential
governmental
function
accruing
to
the
Government
of
the
Philippines
or
to
any
political
subdivision
thereof
C.
Prizes
and
Awards.
-
Prizes
and
awards
made
primarily
in
recognition
of
religious,
charitable,
scientific,
educational,
artistic,
literary,
or
civic
achievement
but
only
if:
(i)
The
recipient
was
selected
without
any
action
on
his
part
to
enter
the
contest
or
proceeding;
and
(ii)
The
recipient
is
not
required
to
render
substantial
future
services
as
a
condition
to
receiving
the
prize
or
award.
Already
discussed,
in
relation
to
prizes
and
awards
D.
Prizes
and
Awards
in
sports
Competition.
-
All
prizes
and
awards
granted
to
athletes
in
local
and
international
sports
competitions
and
tournaments
whether
held
in
the
Philippines
or
abroad
and
sanctioned
by
their
national
sports
associations
The
national
sports
commission
is
the
Philippine
Olympics
Committee
E.
13th
Month
Pay
and
Other
Benefits.
-
Gross
benefits
received
by
officials
and
employees
of
public
and
private
entities:
Provided,
however,
That
the
total
exclusion
under
this
subparagraph
shall
not
exceed
Thirty
thousand
pesos
(P30,000)
which
shall
cover:
(i) Benefits
received
by
officials
and
employees
of
the
national
and
local
government
pursuant
to
Republic
Act
No.
6686;
(ii) Benefits
received
by
employees
pursuant
to
Presidential
Decree
No.
851,
as
amended
by
Memorandum
Order
No.
28,
dated
August
13,
1986;
(iii) Benefits
received
by
officials
and
employees
not
covered
by
Presidential
decree
No.
851,
as
amended
by
Memorandum
Order
No.
28,
dated
August
13,
1986;
and
(iv) Other
benefits
such
as
productivity
incentives
and
Christmas
bonus:
Provided,
further,
That
the
ceiling
of
Thirty
thousand
pesos
(P30,000)
may
be
increased
through
rules
and
regulations
issued
by
the
Secretary
of
Finance,
upon
recommendation
of
the
Commissioner,
after
considering
among
others,
the
effect
on
the
same
of
the
inflation
rate
at
the
end
of
the
taxable
year.
The
latest
now
is
Php82,000.00
How
do
you
compute
for
the
82K?
Example:
You
are
a
purely
compensation
earner
Monthly
Compensation
60,000
Rice
Subsidy
2,000
59
Laundry
Allowance
Productivity
Incentive
X-mas
bonus
500
5,000
at
the
end
of
the
year
20,000
COMPUTE:
How
much
is
subject
to
tax?
Item
Amount
subject
to
tax
Compensation
Income
60,000
x
12
=720,000
Other
Benefits
Rice
Subsidy
500
X
12
=
6,000
(1500
is
exempted
since
it
is
de
minimis
benefit)
Laundry
Allowance
200
X
12
=
2,400
Productivity
Incentive
5,000
(not
a
de
minimis
benefit)
X-mas
bonus
20,000
13th
month
pay
60,000
Total:
93,400
-
82,000
(the
limit
for
other
benefits)
Total
other
benefits
subject
to
tax:
11,400
The
purpose
of
the
82,000
limit
is
to
get
the
ceiling
for
13th
month
pay
and
other
benefits.
Do
not
deduct
82,000
from
the
compensation
income.
So
do
not
commit
the
mistake
of
saying
that
13th
month
pay
is
exempted
from
tax.
Only
82,00
is
exempted
from
tax
in
relation
to
13th
month
pay
Question:
Can
the
X-mas
bonus
be
considered
x-mas
gift
under
de
minimis
benefits?
Sir:
Here
in
the
miscellaneous,
it
is
X-mas
BONUS,
not
GIFT.
If
what
is
provided
in
the
problem
is
gifts,
apply
the
5,000
in
de
minimis.
If
not
mentioned,
consider
it
as
not
part
of
de
minimis
benefits,
so
dont
deduct.
Mamalateo
says
x-mas
bonus
can
be
xmas
gift,
but
for
purposes
of
computation,
theres
a
distinction
between
bonus
and
gift.
The
tax
code
mentions
in
exclusions
that
its
x-mas
BONUS
specifically.
For
my
exam,
distinguish
bonus
from
gift
Based
on
RR
1-2015
(latest
amendment
to
de
minimis
benefits)
the
following
is
considered
a
de
minimis
benefit:
Benefits
received
by
an
employee
by
virtue
of
a
collective
bargaining
agreement
(CBA)
and
productivity
incentive
schemes
provided
that
the
total
annual
monetary
value
received
from
both
CBA
and
productivity
incentive
schemes
combined
do
not
exceed
ten
thousand
pesos
(Php
10,000.00)
per
employee
per
taxable
year.
Therefore:
CBA
AND
productivity
incentive
benefit
COMBINED
should
NOT
exceed
Php
10,000
per
year
per
employee.
TN:
Not
necessary
that
both
should
be
present
to
be
considered
de
minimis.
What
is
required
only
is
that
when
both
are
combined
they
should
not
exceed
Php
10,000
to
be
considered
de
minimis.
****
The
computation
of
last
meeting
wherein
there
was
a
productivity
incentive
received
of
Php
5,000
should
not
have
been
included.
But
if
dont
want
to
change
your
notes
too
much
just
make
the
productivity
incentive
received
to
Php
15,000
so
that
the
solution
of
last
meeting
would
still
be
correct.
So
in
addition
to
your
Php
82,000
you
have
Php
10,000
productivity
incentive
that
goes
with
your
CBA.
o
F.
GSIS,
SSS,
Medicare
and
Other
Contributions.
-
GSIS,
SSS,
Medicare
and
Pag-ibig
contributions,
and
union
dues
of
individuals
Example
Paid
by
ER
Actual
Amount
to
be
paid
Excess
SSS
700
600
100
Philhealth
700
500
200
PAG-IBIG
500
100
400
To
illustrate
that:
If
you
have
a
total
compensation
of
60,000
per
month,
you
can
reflect
the
exemption
by
taking
it
away
from
the
amount
subject
to
withholding
tax
Every
month
you
are
subject
to
withholding
tax.
To
do
this,
the
payroll
master
will
deduct
the
contributions
made
to
SSS,
philhealth,
pag
ibig.
They
will
deduct
600,
500,
100
so
that
you
will
now
end
up
with
a
taxable
income
of
58,800.
Only
this
58,800
will
be
subject
to
tax.
The
contributions
you
made,
even
if
you
really
earned
60,000,
will
not
be
subject
to
tax.
Its
as
if
you
only
earned
58,800.
They
are
excluded
by
them
being
deducted
from
compensation
income
The
excess
were
never
deducted,
they
are
included
in
the
58,800.
The
contributions
are
made
deductions
from
your
income
Answer
to
a
question:
Those
voluntarily
registering
themselves
as
SSS,
philhealth
members
ought
to
be
subject
to
tax
as
to
the
excess.
But
if
I
am
that
person,
I
will
not
pay
tax.
I
will
just
say
this
is
not
in
excess
as
provided
by
law.
I
am
only
to
contribute
this
much
under
the
law.
The
pension
also
will
not
be
subject
to
tax
because
that
is
now
the
benefit
from
SSS
and
Philhealth.
The
exclusion
is
60
in
relation
to
contribution,
not
benefit.
There
is
no
exemption
as
to
the
benefits,
only
as
to
the
contribution
that
there
is
a
limit.
The
contributions
have
a
limit,
but
the
benefits
from
SSS,
Philhealth,
PAGIBIG,
GSIS
are
specifically
exempted
by
law
from
taxes
regardless
of
how
much
the
benefit
is.
This
was
started
by
Henares
that
the
excess
in
voluntary
contributions
is
subject
to
tax.
The
reason
given
by
her
was
that
the
excess
is
now
an
investment.
It
is
not
a
mandatory
contribution
anymore,
and
therefore
outside
the
contemplation
of
the
law
G.
Gains
from
the
Sale
of
Bonds,
Debentures
or
other
Certificate
of
Indebtedness.
-
Gains
realized
from
the
same
or
exchange
or
retirement
of
bonds,
debentures
or
other
certificate
of
indebtedness
with
a
maturity
of
more
than
five
(5)
years.
If
you
sell
or
exchange
bonds,
debentures
or
other
certificates
of
indebtedness
on
premium,
on
discount,
or
sale
on
face
value,
you
are
subject
to
tax.
However,
if
it
provides
that
the
maturity
date
of
the
bond
or
debenture
is
already
more
than
5
years,
it
could
be
excluded
from
income
tax
as
provided
under
Sec
32
In
addition
to
your
analysis,
if
it
relates
to
sale
of
bonds,
debentures
or
other
securities,
you
also
look
at
the
period
of
maturity.
If
it
is
more
than
5
years,
it
is
exempted
from
income
tax
H.
Gains
from
Redemption
of
Shares
in
Mutual
Fund.
-
Gains
realized
by
the
investor
upon
redemption
of
shares
of
stock
in
a
mutual
fund
company
as
defined
in
Section
22
(BB)
of
this
Code.
There
has
to
be
a
company
engaged
in
mutual
fund
investment.
Examples:
Philam
Life
and
other
insurance
companies
Supposedly,
on
your
own,
you
cannot
invest
in
share
of
stocks
because
you
cannot
afford
or
you
do
not
trust
yourself
to
be
good
on
investments,
so
what
you
do
is
you
invest
in
a
mutual
fund
company.
This
company
will
take
care
of
the
money
you
invested
and
it
will
do
the
buying
and
trading
of
the
share
on
your
behalf.
Its
not
only
you
who
invested,
there
are
several
individuals.
In
return,
they
will
give
you
shares
equivalent
to
the
amount
you
invested.
You
will
receive
a
certificate
of
ownership
as
to
your
investment.
That
ownership
under
the
law
is
already
considered
as
shares
in
mutual
fund
If
you
will
redeem
it,
since
this
is
short-term
investment,
you
will
return
the
certificate
and
get
back
the
amount
that
you
received,
that
is
exempted
from
income
tax.
In
the
ordinary
situation,
if
you
give
the
shares
back
to
the
company
who
owns
them,
that
would
have
been
subject
to
capital
gains
tax.
But
in
this
case,
it
is
excluded
under
the
tax
code
when
you
sell
your
shares
or
giving
it
back
to
the
mutual
fund
company
The
reason
is
because
the
government
would
like
to
encourage
investments
in
capital
markets
so
they
exclude
these
from
income
tax
ALLOWABLE
DEDUCTIONS
Allowable
Deductions
are
amounts
that
you
can
deduct
from
your
gross
income
in
order
to
arrive
at
the
taxable
income
of
the
taxpayer
Deductions
vs
Exclusions
1. Deductions
are
outflows
of
wealth,
exclusions
are
actually
inflows.
2. Deductions
are
pertinent
to
determine
taxable
income,
exclusions
are
pertinent
in
computing
your
gross
income
3. Deductions
are
amounts
you
spent,
exclusions
are
amounts
you
may
receive
Deductions
vs
Exemptions
1. Deductions
are
items
of
cost
and
expenses
related
to
your
business,
exemptions
are
amounts
arbitrarily
determined
by
law
2. Deductions
are
to
recover
the
cost
of
doing
business
EXEMPTIONS
Individuals
have
a
basic
personal
exemption
of
Php50,000
and
additional
exemption
of
Php25,000
These
exemptions
are
allowed
only
to
individuals
RC
NRC
RA
NRA-ETB
NRA-NETB
Basic
Personal
Subject
to
X
Exemptions
reciprocity
(BPE)
Additional
X
X
Exemptions
(AE)
It
doesnt
matter
whether
youre
married
or
single
to
avail
of
BPE,
it
only
matters
on
whether
you
have
a
dependent
or
not
Who
are
DEPENDENTS?
Legitimate,
illegitimate,
legally
adopted
CHILD
No
senior
citizens,
parents,
brothers
or
sisters;
these
are
only
to
determine
if
you
are
head
of
family
or
not.
In
claiming
AE,
it
should
only
be
a
CHILD
61
CONDITIONS
for
a
child
to
be
dependent
1. Not
more
than
21
years
old
2. Unmarried
3. Not
gainfully
employed
4. Chiefly
supported
by
the
taxpayer
5. Living
with
the
taxpayer
Example.
As
a
general
rule,
the
husband
will
claim
the
exemption
except
if
he
is
not
gainfully
employed
or
there
is
an
express
waiver
in
writing
by
the
husband,
or
he
cannot
claim
it
for
non-compliance
of
the
conditions
under
the
law.
Example
you
are
legally
separated
from
your
wife
and
your
child
is
living
with
your
wife.
So
the
wife
will
claim
the
exemption.
STATUS-AT-THE-END-OF-THE-YEAR
RULE
If
there
is
a
change
in
the
status
of
the
taxpayer,
it
is
always
construed
in
favor
of
the
taxpayer
If
your
child
is
born
in
the
middle
of
the
year,
it
is
as
if
the
child
is
born
at
the
beginning
of
the
year
If
your
child
will
celebrate
his
birthday
in
the
middle
of
the
year,
its
as
if
he
celebrated
at
the
end
of
the
year.
This
matters
because
there
is
age
limit
for
a
dependent.
If
he
celebrates
his
22nd
birthday
at
the
middle
of
the
year,
its
as
if
he
celebrated
at
the
end
of
the
year
so
you
can
still
claim
the
exemption
A
muslim
can
only
claim
AE
equivalent
to
4
children
still,
same
applies
as
to
whether
the
child
is
living
with
them
or
not.
It
becomes
confusing
because
Muslims
are
allowed
4
wives
and
what
if
the
wives
have
children.
What
if
he
specifically
waives
in
writing,
who
among
the
wives
can
claim
the
exemption?
This
is
not
yet
answered.
Even
Henares
has
not
spoken
about
this
ESTATES
AND
TRUSTS
Allowed
BPE
equivalent
to
20,000
or
50,000,
still
a
gray
area,
but
it
should
be
50,000
Deductions
in
general
OSD
Itemized
Deductions
BPE
AE
RC
NRC
INDIVIDUALS
RA
NRA-ETB
reciprocity
X
NRA-NETB
X
DC
X
X
CORPORATIONS
RFC
NRFC
X
X
X
For
individuals
to
be
allowed
deductions,
they
must
be
earning
income
from
trade
or
business
or
exercise
of
a
profession.
Individuals
earning
compensation
income
are
not
allowed
deductions
Make
a
distinction
for
OSD
for
individuals
and
corporations
For
individuals,
they
cannot
claim
deductions
for
cost
of
sales
and
cost
of
services
for
purposes
of
computing
OSD
(2010
Bar
Exam)
The
40%
is
based
on
gross
sales
/
gross
receipts
for
individual,
and
on
gross
income
for
corporation
Example:
Youre
an
individual
and
you
have:
Total
sales
1M
Cost
of
sales
_500K
_
Gross
profit
500K
Since
youre
an
individual,
you
base
the
40%
on
1M.
If
youre
a
corporation,
you
base
it
on
500K
So
CORRECTION
(as
to
the
discussion
way
back):
If
you
are
engaged
in
sale
of
services,
you
can
deduct
cost
of
services
62
63
b)
Paid
while
AWAY
FROM
HOME
(must
indicate
office
as
final
destination
should
not
be
your
house
otherwise
it
will
not
be
deductible)
E.
Entertainment,
Amusement
and
Recreation
Expenses
(EAR)
Requisites:
1. Reasonable
in
amount
2. Incurred
during
the
taxable
period
3. Connected
to
the
trade
and
business
4. Not
contrary
law
or
public
morals
and
public
policy
TN:
If
clients
are
brought
to
KTV
Bar
and
GROs
are
hired,
for
purposes
of
answering
the
Bar,
it
should
not
be
allowed
for
it
is
against
public
morals.
But
you
may
try
to
argue
that
they
are
legitimate
businesses
as
they
are
given
permits
thus
the
hiring
of
GROs
for
your
client
should
be
deductible.
5. Does
not
exceed
the
limit:
Sale
of
goods
0.5%
of
Net
Sales
Sale
of
services
1%
of
Net
Receipts
If
both:
Proportional
Nets
sales/Net
Revenue
x
ACTUAL
EXPENSE
Total
Net
sales
&
revenue
Ex:
Actual
EAR
=
3000;
Net
sales
=200K;
Net
Receipt
=
300K
o (200K
500K)
x
3000
=
1200
o (300K
500K)
x
3000
=
1800
Get
the
limit:
o NS=
200K
x
0.5%
=1k
o NR=
300k
x
1%
=
3K
Compare;
Use
whichever
is
lower:
o NS:
Limit
1000
vs
Actual
1200
=
for
Net
sales
1000
o NR:
Limit
3000
vs
Actual
1800
=
for
Net
revenue
1800
o TOTAL
ALLOWED
DEDUCTION:
2800
F.
Repairs
and
Maintenance
Expense
Only
ORDINARY
repairs
are
allowed.
Ordinary
if
it
extends
the
life
of
the
asset
by
not
more
than
1
year.
EXTRAORDINARY
repairs
extend
the
life
or
value
of
the
asset
repaired
thus
it
is
a
capital
expenditure
which
should
be
subject
to
depreciation/amortization
G.
Supplies
and
Materials
Goods
used
in
the
ordinary
course
of
the
Business
or
incidental
thereto
Different
from
INVENTORY
which
are
the
goods
subject
of
your
business,
these
are
the
goods
to
be
actually
sold
Must
be
actually
consumed
during
the
year
H.
Litigation
Expenses
GR:
Allowable
deduction
for
the
year
incurred;
Period
Cost
o Exception:
litigation
incurred
in
the
defense
or
protection
of
title
are
capital
in
nature
such
as
INTELLECTUAL
PROPERTIES
(
patent,
copyright
or
trademark)
o Cost
of
the
litigation
will
usually
form
part
of
the
cost
of
intellectual
property
o Cost
of
land
litigation
is
an
ordinary
litigation
expense;
litigation
expense
will
not
form
part
of
the
value
of
the
land
as
the
land
will
always
have
a
concrete
valuation
I.
Expenses
of
Regular
Business
Unit
of
the
Bank
Only
regular
business
units
expense
can
be
deductible.
FCDU
and
offshore
transactions
are
not
allowed
as
deduction
because
they
are
outside
our
jurisdiction
and
not
subject
to
tax
J.
Option
to
Private
Educational
Institution
Option:
1.
Deduct
the
capital
outlay
outright
or
as
a
period
cost
or
2.
Consider
it
as
a
capital
asset
and
subject
it
to
depreciation
over
the
period
of
its
useful
life
K.
Under
the
Expanded
Senior
Citizens
Law
The
20%
discount
given
to
senior
citizens
can
be
allowed
as
a
deduction
If
ever
you
employ
senior
citizens,
you
can
make
an
additional
15%
deduction
of
the
wages
you
pay
64
L.
Magna
Carta
of
Persons
with
Disability
20%
discount
can
be
deducted
as
well
INTEREST
Requisites:
a. Incurred
within
the
taxable
year
b. Must
relate
to
an
indebtedness
c. In
connection
to
trade
and
business
d. Stipulated
in
writing
e. Not
used
to
finance
petroleum
operations
nor
should
it
be
between
related
parties
Deductible
in
full
when
taxpayer
DOES
NOT
EARN
interest
income
subject
to
final
tax.
Not
Deductible
in
full
when
they
earn
such
interest
income.
This
is
to
prevent
Tax
Arbitrage
Theoretical
Interest
Expense
is
NOT
DEDUCTIBLE;
it
is
just
made
up
interest;
speculation,
no
bearing
Imputed
Interest
Expense
is
NOT
DEDUCTIBLE;
It
is
not
recognized
under
the
law,
because
the
interest
must
be
in
writing.
Interest
on
Penalties
on
Unpaid
tax
YES,
20%.
NOT
SUBJECT
TO
LIMITATION
May
be
allowed
when:
Legally
due
Out
of
forbearance
of
money
Only
on
unpaid
business
related
tax
o Income
tax
yes
related
to
business
o Surcharge
NO
o Compromise
NO
TAX
ARBITRAGE
RULE:
the
interest
expense
is
reduced
by
33%
of
the
interest
income
subject
to
final
tax.
-
Interest
Income:
1M
-
Interest
Expense:
500K
-
500K
less
(1M
x
33%)
=
170,000
may
only
be
deducted
TAXES
basic
taxes
only
interest
and
penalties
on
unpaid
taxes
are
not
included
in
the
item
taxes
for
purposes
of
deduction.
They
would
be
computed
with
the
item
interest
for
deduction.
Taxes
not
allowed
as
deduction:
a. Philippine
Income
Tax
b. Estate
and
Donors
Tax
c. Special
Assessment
d. Stock
transaction
tax
e. Value
Added
Tax
f. Foreign
Income
Tax
if
claimed
as
tax
credit
LOSSES
Losses
sustained
in
the
course
or
in
relation
to
the
trade,
business
or
profession
of
the
taxpayer.
All
deductions,
except
charitable
contributions,
are
in
relation
to
the
trade,
business
or
profession
of
the
taxpayer.
Loss
must
arise
from
fire,
storms,
shipwrecked,
other
casualties,
robbery,
theft
or
embezzlement
and
other
losses.
And
not
compensated
for
by
insurance
or
other
forms
of
indemnity.
The
requirement
is
that
it
must
be
reported
in
a
period
not
less
than
thirty
(30)
days
nor
more
than
ninety
(90)
days
from
the
date
of
discovery
of
the
casualty
(sec
34
D)
What
you
recognize
as
loss:
o If
total
destruction,
the
book
value
of
the
property.
o If
partial
destruction,
cost
of
restoration
or
the
book
value
whichever
is
lower.
Net
Operation
Loss
Carry-over
o shall
be
carried
over
as
a
deduction
from
the
gross
income
for
the
next
3
consecutive
taxable
years
immediately
following
the
year
of
loss.
o However,
any
net
loss
incurred
in
a
taxable
during
which
the
taxpayer
was
exempt
from
income
tax
shall
not
be
allowed
as
a
deduction.
Tax
is
(repeat
wanmilyon
times
J )
65
Example:
Net
Income
Deduction
Year
1
(100k)
2
0
(cannot
deduct
as
the
taxpayer
is
exempt
as
it
is
not
subject
to
tax)
3
40K
(40k)
(deduction
is
limited
to
the
extent
of
income)
4
50k
(50K)
Same
reason
as
year
3
Rationale:
so
that
you
cannot
deduct
the
remaining
60K
for
another
3
years
as
a
loss
5
10K
-
The
remaining
10k
cannot
be
deducted
as
it
is
beyond
the
3
consecutive
years
stated
in
the
tax
code
-
-
-
-
-
What
is
allowed
to
be
deducted
in
NOLCO
is
up
to
the
extent
of
the
income
for
that
particular
year.
This
is
because,
if
you
allow
100k
to
be
deducted
in
year2,
the
remaining
60k
could
be
considered
as
a
loss
in
that
year
that
would
be
carried
over
for
another
3
years.
Thus,
the
taxpayer
would
be
allowed
to
perpetrate
the
loss
for
more
than
3
years.
In
year
5,
no
net
loss
carry-over
is
allowed
as
it
is
more
than
3
consecutive
years
following
the
year
of
such
loss.
Thus,
even
if
there
was
taxable
year
that
is
exempt
from
taxes
or
had
income
tax
holiday
or
0
taxable
income
it
still
included
in
the
counting
for
purposes
of
NOLCO.
Question:
Are
you
allowed
to
deduct
NOLCO
if
you
are
in
OSD?
o No,
because
NOLCO
is
part
of
itemized
deduction
involving
losses.
So
if
you
opted
OSD
meaning
you
forego
any
itemized
deduction.
But
if
during
the
year
that
you
availed
the
OSD
would
you
include
it
in
counting
the
3
years
for
NOLCO?
Example,
in
year
2
you
opted
OSD,
would
it
be
counted
for
purposes
of
NOLCO?
o Yes,
regardless
of
the
circumstance
that
happened
within
the
3
year
period,
the
counting
still
continues.
Another
requirement
is
that
there
should
be
no
substantial
change
in
the
ownership
of
the
business
of
the
taxpayer.
(i) Not
less
than
seventy-five
percent
(75%)
in
nominal
value
of
outstanding
issued
shares,
if
the
business
is
in
the
name
of
a
corporation,
is
held
by
or
on
behalf
of
the
same
persons;
or
(ii) Not
less
than
seventy-five
percent
(75%)
of
the
paid
up
capital
of
the
corporation,
if
the
business
is
in
the
name
of
a
corporation,
is
held
by
or
on
behalf
of
the
same
persons.
o This
will
only
result
in
case
of
merger/
consolidation
or
business
combination.
Loss
from
shrinkage
of
stocks
is
NOT
ALLOWED
as
a
deduction.
It
is
only
a
theoretical
loss,
not
yet
realized.
o Allowed
as
a
deduction
when
the
stock
is
sold
and
its
value
has
lessen.
Here,
there
is
an
actual
loss.
Loss
of
useful
value
is
allowed
as
a
deduction
because
this
is
already
realized.
There
is
no
more
value
for
the
property
that
you
just
purchased.
The
asset
has
been
obsolete
or
you
are
legally
prohibited
to
use
it.
(Example:
inkjet
which
is
now
not
commonly
use
or
firecrackers
that
is
now
legally
prohibited)
Loss
from
wash
sale
is
NOT
ALLOWED
as
a
deduction
because
it
is
example
of
a
stock
manipulation
activity.
EXCEPT
if
you
are
a
dealer
in
security
because
you
sell
securities
from
time
to
time.
o Wash
Sale:
61
day
period
sale
bought
30
days
before
and
sold
after
30
days;
involving
substantially
the
same
shares.
o Sec.
38
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
made
in
the
ordinary
course
of
the
business
of
such
dealer.
o Basis
of
the
loss,
is
the
time
you
incurred
the
loss.
WAGERING
LOSSES
only
deductible
to
the
extent
of
wagering
gains.
How
come
there
would
be
a
gambling
loss
that
is
related
to
your
trade
or
business.
Thus,
if
it
not
related
to
trade
or
business
it
is
not
deductible.
66
BAD
DEBTS
Requisites:
a. There
must
be
an
existing
debt
of
the
taxpayer
which
must
be
validly
and
legally
demandable.
b. It
is
incurred
in
connection
with
the
trade,
business
or
profession
of
the
taxpayer.
c. It
must
not
be
sustained
in
a
transaction
entered
into
by
related
parties
(Sec.
36B).
d. It
must
be
actually
charged
off
in
the
books
of
accounts
of
the
taxpayer
as
of
the
end
of
the
taxable
year.
e. It
must
be
actually
ascertained
to
be
worthless
and
uncollectable
as
of
the
end
of
the
taxable
year.
Is
it
required
that
there
be
a
court
decision
or
ruling
for
you
to
be
able
to
charge
off
your
collectibles?
o There
need
not
be
a
court
ruling
as
long
as
you
can
provide
pertinent
supporting
documents
showing
that
there
is
impossibility
for
its
collection.
As
for
a
person
who
is
really
insolvent
based
on
the
financial
statement
of
the
corporation
as
it
has
incurred
losses
for
a
period
of
three
years.
This
could
be
taken
as
an
evidence
or
reasonable
proof
that
the
receivables
can
be
collected.
o Of
course
the
best
evidence
is
a
court
decision
that
a
person
is
indeed
insolvent.
o Tax
Benefit
Rule
(no
more
discussion
as
it
was
already
covered
last
time)
DEPRECIATION
Allowable
Methods:
a. Straight-line
Method
o
Formula:
Depreciable
Value
useful
life
o Example:
Property=
1M
Useful
life=
10
years
1M
10
=
P100,000
(Recognized
Depreciation)
b. Declining
Balance
Method
o It
can
be
single
or
double
DBM.
o For
Single
DBM
the
Formula:
1
useful
life
=
rate
o Multiply
the
rate
to
the
balance
every
year
after
each
depreciation
o Example:
(same
figures)
110=
1/10
or
10%
Thus,
1st
year
1M
x
10%
=
P100,000
(Recognized
Depreciation)
2nd
year
900,000
x
10%
=
P90,000
(Recognized
Depreciation)
3rd
year
810,000
x
10%
=
P81,000
(Recognized
Depreciation)
o If
double
DBM
just
multiply
the
rate
by
two.
Thus,
(1
useful
life)
x
2
In
our
example,
1/10
=
.10
or
10%
x
2
=
20%
c. Sum-of-the-years-digit
Method
o Formula:
Life
Remaining/
D
multiply
value
of
the
property
o Use
the
Sequence
Formula
to
come
up
with
your
denominator:
D
=
life[
(life+1)
/2]
o So
if
the
useful
life
is
5
years.
5[(5+1)/2]=
5(6/2)=
5(3)
=
15
o Thus,
5/15
x
1M
=
333,333
4/15
x
1M
=
266,667
3/15
x
1M
=
200,000
2/15
x
1M
=
133,333
1/15
x
1M
=
66,667
d. Any
other
method
prescribed
by
the
Secretary
of
Finance
You
can
enter
into
an
agreement
with
the
BIR
that
another
method
would
be
the
best
method
in
dealing
with
your
particular
asset.
This
is
subject
to
the
agreement
of
the
BIR.
There
could
be
Units
of
Production
as
when
you
are
engaged
in
the
business
of
manufacturing.
o Example
if
you
want
to
know
the
depreciation
value
of
an
equipment
used
in
manufacturing
bottle.
You
expect
it
to
produce
200M
bottles.
And
the
equipment
is
worth
1M.
o Formula:
67
68
2.
3.
4.
a)
b)
3)
Recipient
is
foreign
institutions
or
international
organizations
which
are
fully
deductible
in
pursuance
of
or
in
compliance
with
agreements,
treaties,
or
commitments
entered
into
by
the
Government
of
the
Philippines
and
the
foreign
institutions
or
international
organizations
or
in
pursuance
of
special
laws
69
Example:
INDIVIUAL
600K
donation
to
Accredited
NGO
not
complying
with
all
condition
GI
for
the
YR
10M
Itemized
deduction
excluding
Charitable
contribution:
5M
Net
income
before
CC:
5M
CC
to
be
deducted
is
5M
x
10%
=
500,000
limitation;
compared
to
actual
of
600K
use
whichever
is
lower.
Therefore,
deduct
500K.
If
you
avail
for
OSD,
you
cannot
deduct
as
Charitable
Contribution
is
part
of
the
Itemized
Deduction.
Accrediting
Body
for
NGO
(EO
671)
DSWD,
DOST,
PHIL.
SPORTS
COM,
NCCA,
CHED
o Certificate
of
Donation
in
the
form
prescribed
by
the
BIR
and
notice
to
the
RDO
if
donation
is
more
than
1M
o The
certificate
of
donation
is
given
by
the
receiving
entity
(NGO)
RESEARCH
AND
DEVELOPMENT
Research
and
development
as
an
item
of
deduction
refers
to
cost
of
materials,
equipment,
facilities,
personnel,
purchased
intangibles,
contract
services
and
a
reasonable
allocation
of
indirect
cost
that
is
specifically
related
to
research
and
development
activities
and
that
have
no
alternative
future
use.
Considered
research
activities
are
those
undertaken
to
discover
new
knowledge
that
will
be
useful
in
developing
new
products,
services
or
process.
Considered
development
activities
involve
the
application
of
research
findings
to
develop
a
product,
service
or
process.
There
is
an
option
of
the
taxpayer
to
treated
it
as
a
deferred
expenditure
or
as
an
expense.
Deferred
expenditure:
(a)
Paid
or
incurred
by
the
taxpayer
in
connection
with
his
trade,
business
or
profession;
(b)
Not
treated
as
expenses
under
paragraph
(1)
hereof;
and
(c)
Chargeable
to
capital
account
but
not
chargeable
to
property
of
a
character
which
is
subject
to
depreciation
or
depletion.
In
computing
taxable
income,
such
deferred
expenses
shall
be
allowed
as
deduction
ratably
distributed
over
a
period
of
not
less
than
sixty
(60)
months
as
may
be
elected
by
the
taxpayer.
Limitation
to
the
Deduction:
shall
not
apply,
(a)
Any
expenditure
for
the
acquisition
or
improvement
of
land,
or
for
the
improvement
of
property
to
be
used
in
connection
with
research
and
development
of
a
character
which
is
subject
to
depreciation
and
depletion;
and
(b)
Any
expenditure
paid
or
incurred
for
the
purpose
of
ascertaining
the
existence,
location,
extent,
or
quality
of
any
deposit
of
ore
or
other
mineral,
including
oil
or
gas.
PENSION
TRUSTS
This
would
refer
to
any
reasonable
amount
transferred
or
paid
into
such
trust
during
the
taxable
year
in
excess
of
such
contributions,
but
only
if
such
amount
(1)
has
not
theretofore
been
allowed
as
a
deduction,
and
(2)
is
apportioned
in
equal
parts
over
a
period
of
ten
(10)
consecutive
years
beginning
with
the
year
in
which
the
transfer
or
payment
is
made.
Given
for
past
or
current
service
as
when
you
set
up
pension
trust,
the
trustee
will
count
from
the
start
of
his/her
service
and
not
from
the
date
the
pension
trust
was
established.
Since
the
taxpayer
(employer)
is
paying
and
nothing
will
be
returned
to
the
taxpayer
then
it
is
deductible
but
subject
to:
o
Current
Year
fully
deductible
o
Past
years
apportioned
to
the
next
10
years;
1/10
deductible
per
year
Example:
1-10
year
=
no
pension;
70
but
on
the
11th
to
15th
year
decided
to
make
a
pension
trust
and
asked
to
make
a
contribution
of:
Current
Year
=
100K;
Past
Year=
200K;
15th
to
20th
contribution
is
Current
Year
200K;
Past
Year
300K
on
the
20th
yr:
CY
=
200K
PY:
11
to
15
200k
divided
by
10
=
20K
15
to
16
300k
divided
by
10
=
30K
TOTAL
DEDUCTIBLE
EXPENSE:
250K
pension
trust
expense
PREMIUMS
ON
HEALTH
AND
HOSPITALIZATION
Allowed
to
individual
taxpayers
RC,
NRC
and
RA
only
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
Conditions:
a)
That
said
nuclear
family
has
a
gross
income
of
not
more
than
Two
hundred
fifty
thousand
pesos
(P250,000)
for
the
taxable
year
b) The
taxpayer
must
be
the
person
who
availed
of
health
or
hospitalization
benefit
ITEMS
NOT
ALLOWED
AS
A
DEDUCTION
(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;
This
Subsection
shall
not
apply
to
intangible
drilling
and
development
costs
incurred
in
petroleum
operations
o These
are
capital
expenditures.
They
are
allowed
as
a
deduction
in
the
form
of
depreciation.
(3)
Any
amount
expended
in
restoring
property
or
in
making
good
the
exhaustion
thereof
for
which
an
allowance
is
or
has
been
made
o Also
a
capital
expenditure.
(4)
Premiums
paid
on
any
life
insurance
policy
covering
the
life
of
any
officer
or
employee,
or
of
any
person
financially
interested
in
any
trade
or
business
carried
on
by
the
taxpayer,
individual
or
corporate,
when
the
taxpayer
is
directly
or
indirectly
a
beneficiary
under
such
policy.
o Payments
may
or
may
be
deductible
depending
on
the
beneficiary
o Ex.
insurance
on
an
employee
for
the
benefit
of
the
employer
Insurance
proceed
subject
to
tax
NO
Insurance
payments
deductible
NO
(5)
Losses
from
Sales
or
Exchanges
of
Property
Between
Related
Taxpayers
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
half-blood),
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
(6)
Between
a
fiduciary
of
a
trust
and
beneficiary
of
such
trust.
71
WITHHOLDING
TAX
Withholding
tax
is
not
a
type
of
tax.
It
is
a
system
of
collection
of
taxes.
KINDS
OF
WITHHOLDING
TAX
1. Creditable
withholding
a.)
Expanded
withholding
tax
on
certain
income
payments
made
by
private
persons
to
resident
taxpayers
b.)
Withholding
tax
on
compensation
income
for
services
done
in
the
Philippines
c.)
Withholding
tax
on
money
payments
of
the
government
2. Final
withholding
tax
Final
withholding
tax-
is
a
kind
of
withholding
tax
which
is
prescribed
on
certain
income
payments
and
is
not
creditable
against
the
income
tax
due
of
the
payee
on
other
income
subject
to
regular
rates
of
tax
for
the
taxable
year.
Income
Tax
withheld
constitutes
the
full
and
final
payment
of
the
Income
Tax
due
from
the
payee
on
the
particular
income
subjected
to
final
withholding
tax.
SIR:
not
included
for
the
computation
of
income
tax
for
the
year.
Creditable
withholding
tax-
taxes
withheld
on
certain
income
payments
are
intended
to
equal
or
at
least
approximate
the
tax
due
of
the
payee
on
the
said
income.
It
is
creditable
because
it
is
supposed
to
be
deducted
on
the
tax
due.
It
is
an
advance
payment.
SIR:
included
for
the
computation
of
income
tax
for
the
year.
Example:
rent
income,
compensation
income.
You
receive
30
k
monthly.
Also
there
is
a
corresponding
taxes
withheld
from
you,
monthly.
Thats
why
you
received
less
than
30k
monthly.
At
the
end
of
the
year,
the
employer
will
add
all
of
the
withholding
taxes
and
must
equal
to
the
tax
to
be
paid
for
that
specific
year.
If
it
is
less,
then
the
employee
is
liable
for
the
additional
tax.
Example
on
professional
income:
You
rendered
service
as
a
lawyer.
You
have
a
retainer
10k
every
month.
120k
is
the
year.
Withholding
tax:
If
it
exceeds
720k
for
the
year
=
15
%
monthly.
If
it
is
720k
or
less
=
10
%
monthly
Answer:
Since
it
is
120k,
then
the
withholding
tax
is
10%
monthly
(12k).
FOREIGN
TAX
CREDIT
applicable
only
to
RC
and
DC
(tax
within
and
without)
2
Limitations:
1) Per
Country
Limitation
Per
Country
Income
x
Phil.
Taxable
Income
=
Per
Country
Limitation
Total
Income
2) Global
Limitation
All
Foreign
Income
x
Phil.
Taxable
Income
=
Global
Limitation
Global
Income
EXAMPLE
1:
Phil
taxable
income:
1,
000,000
Phil
tax
due:
300,
000
US
taxable
income:
500,
000
US
tax
due:
200,
000
*Actual
tax
paid
500,
000
x
300,
000
=
100,
000
*Per
Country
Limit
lower
tax
1,500,
000
ANSWER:
The
foreign
tax
credit
will
be
the
per
country
limitation
or
the
actual
tax
paid
whichever
is
lower.
In
this
case,
the
per
country
limit
(100K)
will
be
the
basis
of
the
deduction.
72
EXAMPLE
2:
Phil
taxable
income:
1,000,000
Phil
tax
due:
300,
000
US
taxable
income:
500,
000
US
tax
due:
200,000
*Actual
tax
paid
Japan
taxable
income:
300,
000
Japan
tax
due:
40,
000
*
Actual
tax
paid
the
lower
tax
PER
COUNTRY
LIMITATION:
Note:
Remember
the
whichever
is
lower
rule
US:
500,000
x
300,
000
=
83,
333
*
Per
Country
1
the
lower
tax
1,
800,000
Japan:
300,
000
x
300,
000
=
50,
000
*Per
Country
2
1,800,000
TOTAL
TAXES:
40,
000
(
actual
tax
paid
Japan)
+
83,
333
(per
country
limit
US)
=
123,333
BASIS
(LIMIT
1)
GLOBAL
LIMITATION:
800,
000
x
300,
00=
133,
333
*
Global
Limit
(LIMIT
2)
1,
800,
000
ANSWER:
LIMIT
1:
123,
333
(Foreign
tax
credit
the
lower
tax)
Tax
Due
Less:
Tax
Credit
Tax
Payable
TAXABLE
INCOME
TAXABLE
INCOME-
the
pertinent
items
of
gross
income
specified
in
this
Code,
less
the
deductions
and/or
personal
and
additional
exemptions,
if
any,
authorized
for
such
types
of
income
by
this
Code
or
other
special
laws.
(Sec
.
31,
NIRC)
GROSS
INCOME
(CG2IR2DAP3)
Less
Allowable
Deductions/Exemptions
(ExInTaLoBaChaRePrePreDepDep)
TAXABLE
INCOME
X
Tax
Rate
(5-32%
or
30%)
TAX
DUE
AND
PAYABLE
73
TAX
RATE
depends
on
what
kind
of
income
(passive
or
active)
PASSIVE
INCOME
Passive
Income
RC
NRC
RA
NRA
ETB
NRA
NETB
DC
RFC
NRFC
20%
20%
20%
20%
25%
20%
20%
This
should
be
included
in
its
gross
income
subject
to
30%
*tax.
BUT
in
the
case
of
interest
on
loans
which
have
been
made
on
or
after
August
1,
1986,
the
same
is
subject
to
20%
final
tax.
10%
10%
10%
10%
25%
10%
10%
30%
20%
20%
5-32%
20%
5-32%
20%
5-32%
25%
5-32%
25%
20%
20%
30%
30%
(regardless
(regardless
of
the
of
the
amount)
amount)
-
30%
30%
(regardless
of
the
amount)
20%
20%
20%
20%
25%
20%
20%
20%
20%
25%
30%
30%
30%
7.5%
7.5%
7.5%
7.5%
Exempt
These
dividends
received
from
DC
by
NRFC
is
subject
to
15%
Final
Tax
IF:
the
foreign
corp
allows
a
tax
credit
atleast
15%
of
the
taxes
deemed
paid
in
the
Philippines
by
NRFC.
10%
10%
10%
20%
25%
Exempt
6%
6%
30%
30%
5%
10%
5%
10%
5%
10%
5%
10%
25%
74
investments
evidenced
by
certificates
Upon
pre-termination
before
the
fifth
year,
there
should
be
imposed
on
the
entire
income
from
the
proceeds
of
the
long-term
deposit
based
on
the
remaining
maturity
thereof:
Holding
Period:
- Four
(4)
years
to
less
than
five
(5)
years
- Three
(3)
years
to
less
than
four
(4)
years
- Less
than
three
(3)
years
INDIVIDUALS
Amount
of
Net
Taxable
Income
But
Not
Over
Over
10,000
10,000
30,000
30,000
70,000
70,000
140,000
140,000
250,000
250,000
500,000
500,000
5%
12%
20%
5%
12%
5%
12%
20%
20%
5%
12%
20%
Rate
5%
P500
+
10%
of
the
Excess
over
10,000
P2,500
+
15%
of
the
Excess
over
30,000
P8,500
+
20%
of
the
Excess
over
70,000
P22,500
+
25%
of
the
Excess
over
140,000
P50,000
+
30%
of
the
Excess
over
250,000
P125,000
+
32%
of
the
Excess
over
500,000
CORPORATIONS
CORPORATIONS
DC
RFC
NRFC
TAX
RATE
30%
30%
30%
TAX
BASE
Net
income
Net
income
Gross
Income
PROBLEM
1:
Mr.
X
is
an
RA,
earning
business
and
compensation
income,
as
follows:
Gross
Business
Income
600,000
Gross
Compensation
Income
240,000
Itemized
deductions-
300,000
Compute
for
his
tax
due
and
payable.
75
600,000
240,000
840,000
50,000
350,000
490,000
50,000
72,000
122,000
1,300,000
475,000
Taxable
Income
Tax
Rate
For
the
first
500,000
In
excess
of
500,000
(32%
x
325,000)
825,000
125,000
104,000
229,000
76
TAX
ON
CORPORATIONS
Corporations
are
subject
to
3
TYPES
OF
TAX
REGIMES:
1) Normal
income
tax
2) Minimum
Corporate
income
tax
3) Gross
income
tax
NORMAL
INCOME
TAX
:
Follows
the
same
computation
like
in
the
dumping
ground
computation
so
you
have
Gross
computation
Less:
Allowable
deductions
(no
exemption)
__________________________________
Taxable
income
x
tax
rate
of
30%
__________________________________
Income
Tax
Due
and
Payable
Sample
problem:
Gross
sales-
1M
Sales
Return
and
Allowances-
50,000
Sales
Discount-
10,000
Cost
of
sales-
400,000
Itemized
deductions-
100,000
Data
of
Corp
X,
determine
the
tax
due
and
payable:
77
Gross
sales-
Sales
R&A
Sales
Disc.
Net
sales
COS
Gross
Income
Itemized
deductions
Taxable
income
Tax
rate
Tax
due
&
payable
1M
-
(50,000)
(10,000)
940,000
-
400,000
540,000
-
100,000
440,000
x
30%__
=132,000.00
Atty.
A
:
Now
what
if
its
a
manufacturing
concern:
instead
of
seeing
a
Cost
of
sales
there
you
will
see
cost
of
goods
manufactured
and
sold
or
cost
of
goods
sold.
If
its
a
service
entity
then
its
cost
of
services.
This
matters
in
computing
the
gross
income
because
it
is
important
when
we
will
compute
the
MCIT
for
the
basis
is
the
gross
income.
So
dont
commit
a
mistake!
SPECIAL
REGIMES
PEZA
there
are
entities
that
does
not
follow
this
computation
for
they
are
subject
to
special
rates
like
in
the
case
of
those
registered
under
PEZA
for
there
is
in
lieu
of
all
taxes
for
5%
based
on
gross
income,
in
fact
they
can
avail
of
the
tax
holiday
for
the
first
4
or
5
or
6
yrs.
depending
if
its
pioneer
or
non-pioneer.
PROPRIETARY
NON-PROFIT
HOSPITAL
and
PROPRIETARY
NON-PROFIT
EDUCATIONAL
INSTITUTION
rate
of
10%
and
that
is
the
subject
matter
of
the
case
of
ST.
LUKES
So
for
proprietary
educational
institutions
they
are
required
to
subject
themselves
to
the
predominance
test.
If
the
income
from
unrelated
activities:
more
than
50%
=
then
subject
to
30%
tax
rate
Is
50%
or
less
=
then
subject
to
the
special
rate
of
10%
based
on
its
net
taxable
income
(meaning
they
can
avail
deductions.)
Example:
ABC
University
a
proprietary
non-profit
educational
institution
has
a
gross
income
for
taxable
year
2015
of
15M,
and
of
the
total
gross
income
5M
was
derived
from
unrelated
trade
or
business,
total
deductions
amount
to
3M.
Compute
the
tax
due
and
payable?
Ans.
so
apply
the
predominance
test.
=
5M
15M
33%
So
does
not
exceed
the
50%
so
the
rate
applicable
is
10%
of
the
net
taxable
income
of
ABC
corp.
15M
-
3M
12M
X
10%
Tax
due
and
payable
=
1.2M
EXEMPTION
FROM
TAX
ON
CORPORATIONS
SEC.
30.
Exemptions
from
Tax
on
Corporations
-
The
following
organizations
shall
not
be
taxed
under
this
Title
in
respect
to
income
received
by
them
as
such:
(A) Labor,
agricultural
or
horticultural
organization
not
organized
principally
for
profit;
(B) Mutual
savings
bank
not
having
a
capital
stock
represented
by
shares,
and
cooperative
bank
without
capital
stock
organized
and
operated
for
mutual
purposes
and
without
profit;
(C) A
beneficiary
society,
order
or
association,
operating
for
the
exclusive
benefit
of
the
members
such
as
a
fraternal
organization
operating
under
the
lodge
system,
or
mutual
aid
association
or
a
nonstock
corporation
organized
by
employees
providing
for
the
78
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
payment
of
life,
sickness,
accident,
or
other
benefits
exclusively
to
the
members
of
such
society,
order,
or
association,
or
nonstock
corporation
or
their
dependents;
Cemetery
company
owned
and
operated
exclusively
for
the
benefit
of
its
members;
Nonstock
corporation
or
association
organized
and
operated
exclusively
for
religious,
charitable,
scientific,
athletic,
or
cultural
purposes,
or
for
the
rehabilitation
of
veterans,
no
part
of
its
net
income
or
asset
shall
belong
to
or
inures
to
the
benefit
of
any
member,
organizer,
officer
or
any
specific
person;
Business
league
chamber
of
commerce,
or
board
of
trade,
not
organized
for
profit
and
no
part
of
the
net
income
of
which
inures
to
the
benefit
of
any
private
stock-holder,
or
individual;
Civic
league
or
organization
not
organized
for
profit
but
operated
exclusively
for
the
promotion
of
social
welfare;
A
nonstock
and
nonprofit
educational
institution;
Government
educational
institution;
Farmers'
or
other
mutual
typhoon
or
fire
insurance
company,
mutual
ditch
or
irrigation
company,
mutual
or
cooperative
telephone
company,
or
like
organization
of
a
purely
local
character,
the
income
of
which
consists
solely
of
assessments,
dues,
and
fees
collected
from
members
for
the
sole
purpose
of
meeting
its
expenses;
and
Farmers',
fruit
growers',
or
like
association
organized
and
operated
as
a
sales
agent
for
the
purpose
of
marketing
the
products
of
its
members
and
turning
back
to
them
the
proceeds
of
sales,
less
the
necessary
selling
expenses
on
the
basis
of
the
quantity
of
produce
finished
by
them;
Notwithstanding
the
provisions
in
the
preceding
paragraphs,
the
income
of
whatever
kind
and
character
of
the
foregoing
organizations
from
any
of
their
properties,
real
or
personal,
or
from
any
of
their
activities
conducted
for
profit
regardless
of
the
disposition
made
of
such
income,
shall
be
subject
to
tax
imposed
under
this
Code.
so
in
this
we
distinguish
two
types
of
income
as
read(
one
in
bold
letters):
1) income
from
use
of
property
2) any
other
activities
conducted
for
profit,
and
its
regardless
of
disposition.
So
it
can
be
taxable.
So
in
the
case
of
St.
Lukes
like
those
used
for
clinics
it
will
be
subject
to
tax
notwithstanding
sec.
30
because
sec.
30
also
provides
that
as
to
those
properties
it
will
be
subject
to
income
tax.
Q:
if
a
cemetery
is
used
for
a
halloween
concert,
so
if
used
for
the
maintenance,
will
it
be
subject
to
tax?
A:
yes
because
still
its
used
for
profit
nganong
pa
concert2
man
ka!
Kai
nag
pa
concert
ka
sa
falling
under
used
for
profit
bisag
piso
pana.
Q:
what
if
nay
coffee
shop
sa
cemetery?dibah
pede
mukita?
Or
sample
starbucks.
A;
STILL
YES
it
will
be
subject
to
tax
for
it
is
a
profit
for
use
of
property
regardless
of
the
disposition.
SPECIAL
RULES:
When
can
a
resident
foreign
corporation
be
subject
to
a
different
tax
rate?
1. In
case
of
an
INTERNATIONAL
CARRIER
(air
or
shipping)
-
2.5%
For
as
long
as
there
is
a
flight/voyage:
Which
is
from
the
point/port
in
the
Philippines,
any
income
earned
there
can
be
subject
to
the
rate
of
2.5%
based
on
gross
Philippine
billings.
The
gross
Philippine
billings
will
have
to
account
for
that
portion
of
the
travel
which
is
from
the
Philippines
to
another
country.
(phil-abroad)
If
there
is
transshipment,
Ex.
Philippines-
Hongkong-
US.
If
you
paid
your
ticket
for
the
entire
voyage,
only
the
portion
from
the
philippines
to
hongkong
will
be
taxed
here.
2. OFFSHORE
BANKING
UNITS
(10%)
Foreign
currency
transactions
only.
If
there
is
a
bank
here
in
the
phil.
which
engages
in
offshore
banking
and
regular
banking
only
the
offshore
banking
portion
will
be
subject
to
the
preferential
rate.
3. BRANCH
PROFIT
REMITTANCE
(15%)
Total
profits
applied
or
earmarked
for
remittance
without
deductions
for
the
tax
component.
4. REGIONAL
OPERATING
HEADQUARTERS
OF
MULTINATIONAL
COMPANIES
10%
of
the
taxable
income
5. REGIONAL
AREA
HEADQUARTERS
Exempt
79
80
Solution:
Normal
Tax
Gross
Sales
Less:
Sales
returns
and
allowances
Sales
Discounts
Net
Sales
Less:
Cost
of
goods
manufactured
and
sold
P900,000
P30,000,000
1,500,000
2,400,000
P27,600,000
10,500,000
Sales
Discounts
Net
Sales
Less:
Cost
of
goods
manufactured
and
sold
P17,100,000
250,000
Gross
Profit
from
sales
Add:
Other
gross
income
Gross
income
LESS:
Deductions
Net
Income
Multiply
by
Tax
Rate
Normal
Tax
1,500,000
P30,000,000
2,400,000
P27,600,00
10,500,000
P17,100,000
P2,350,000
30%
Multiply
by
2%
P342,000
P705,000
MCIT
Income
Tax
Due
Other
Gross
Income:
Interest
on
Notes
Receivable
Dividends
from
Ceramics
Corporation
TOTAL
P
705,000
P
50,000
200,000
P
250,000
Final
Tax
on
Passive
Income:
Interest
Income
from
International
Bank
(P
3M
x
7.5%)
Capital
gain
on
sale
of
beauty
corporation
(P90,000
x
5%)
TOTAL
P
225,000
P
4,500
P
229,500
81
Normal
Tax
Gross
Receipts
Less:
Sales
returns
and
allowances
Sales
Discounts
Net
Receipts
P360,000
900,000
1,260,000
P16,740,000
Add:
Other
Gross
Income
100,000
Gross income
P16,840,000
LESS:
Deductions
Net
Income
Multiply
by
Tax
Rate
Normal
Tax
16,190,000
P
650,000
30%
P 195,000
Sales
Discounts
Net
Receipts
Less:
Cost
of
services
P18,000,000
900,000
1,260,000
P16,740,00
Gross
Income
P11,740,000
Multiply
by
MCIT
2%
P234,800
5,000,000
Income
Tax
Due
Other
Gross
Income:
Interest
on
Notes
Receivable
Dividends
from
aerobics
corporation
is
exempt.
Final
tax
on
Passive
Income:
Capital
gain
from
sale
of
land
and
building
(P6M
x
6%)
P
234,800
P
100,000
P
360,000
RECAP:
Please
be
guided
on
the
dumping
ground
computation,
always
begin
with
the
determination
of
what
composes
gross
income;
and
then
from
there,
you
will
then
determine
what
are
the
allowable
deductions
so
that
we
can
end
up
with
the
taxable
income.
And
then
you
can
apply
the
applicable
rate
to
such
taxable
income
so
you
can
get
the
tax
due
and
payable.
A
corporation
may
be
subject
to
three
(3)
types
of
tax
regime.
This
could
be
simultaneous
but
one
is
mutually
exclusive.
1. Regular
or
the
normal
income
tax
(NIT),
2. Minimum
Corporate
Income
Tax
(MCIT);
and
3. Gross
Income
Tax
(GIT).
Gross
income
tax
can
not
go
together
with
MCIT
and
normal
income
tax;
but
a
corporation
may
be
subject
to
NIT
and
MCIT.
The
determination
is
simultaneous
for
the
particular
year
but
only
one
type
of
regime
may
be
applied
for
such
year.
So
its
always
whichever
is
higher,
between
the
MCIT
and
NIT.
But
then
again,
if
there
is
excess
MCIT,
the
excess
can
be
carried
for
three
(3)
successive
years.
So
that
after
the
3
year
period,
any
excess
which
remains
unused
can
no
longer
be
applied
to
succeeding
NIT.
IMPROPERLY
ACCUMULATED
EARNINGS
TAX
(IAET)
This
other
type
of
tax
used
as
a
penalty
for
not
declaring
dividends
to
stockholders.
Before
this
is
termed
as
SurTax
but
it
has
been
nominated
as
improperly
accumulated
earnings
Tax
(IAET)
under
the
NIRC
of
1997.
Who
can
be
subject
to
IAET:
only
be
applied
to
one
type
of
corporation
which
is
CLOSELY
HELD
CORPORATIONS.
o the
corporation
here
is
the
same
corporation
referred
to
in
the
corporation
code.
82
83
REVALUATION
SURPLUS
even
if
included
as
part
of
EQUITY/CAPITAL
will
NOT
BE
INCLUDED
as
part
of
the
100%
paid-up
capital
for
purposes
of
determining
WON
there
is
EXCESS
over
UNAPPROPRIATED
Retained
Earnings
(ACCUMULATED
EARNINGS).
Atty.
A:
Actually,
when
you
consider
the
amount
that
you
really
paid
for
the
shares
its
the
TOTAL
value
you
actually
paid
for,
that
includes
the
premium
or
the
APIC.
However,
on
the
part
of
the
Government
(BIR),
they
would
want
it
to
be
beneficial
to
them
(to
collect
more
taxes),
thus
they
really
want
that
dividends
be
declared
and
paid
AND
that
the
PAID-UP
Capital
is
only
the
PAR
VALUE.
If
I
were
to
take
a
position,
I
would
have
included
the
premium/APIC
in
computing
for
the
PAID-UP
CAPITAL
as
it
is
part
of
the
amount
that
a
stockholder
actually
paid,
but
I
AM
NOT
BIR.
Thus,
as
of
now,
PAID-UP
capital(PUC)
is
limited
to
the
PAR
VALUE
of
the
shares.
After
having
considered
the
reasonable
needs
of
the
business
as
determined
by
the
immediacy
test
and
after
having
determined
that
there
is
Excess,
WHAT
happens
if
it
turned
out
that
there
is
no
BASIS
for
the
accumulation
of
the
earnings
as
there
is
no
reasonable
immediate
business
needs,
and
that
you
were
able
to
accumulate
in
EXCESS
of
the
100%
PUC
?
So
it
will
now
be
subjected
to
IMPROPERLY
ACCUMULATED
EARNINGS
TAX
(IAET).
EVIDENCE
OF
PURPOSE
TO
AVOID
INCOME
TAX
(1) Prima
Facie
Evidence.
-
the
fact
that
any
corporation
is
a
mere
holding
company
or
investment
company
shall
be
prima
facie
evidence
of
a
purpose
to
avoid
the
tax
upon
its
shareholders
or
members.
(2) Evidence
Determinative
of
Purpose.
-
The
fact
that
the
earnings
or
profits
of
a
corporation
are
permitted
to
accumulate
beyond
the
reasonable
needs
of
the
business
shall
be
determinative
of
the
purpose
to
avoid
the
tax
upon
its
shareholders
or
members
unless
the
corporation,
by
the
clear
preponderance
of
evidence,
shall
prove
to
the
contrary.
(3) Circumstances
indicative
of
improper
accumulation
of
profits
1. Withdrawals
by
stockholders
disguised
as
loans.
2. Expenditures
by
the
corp.
for
the
personal
benefit
of
the
stockholders.
3. Investments
in
unrelated
business.
4. Radical
change
of
business
when
large
profits
have
been
accumulated.
5. Yearly
substantial
advances
made
to
stockholders-officers.
Covered
Corporations
Only
domestic
corporations
classified
as
closely-held
corporations
are
liable
for
IAET.
84
For
purposes
of
this
paragraph,
the
family
of
an
individual
includes
his
brothers
or
sisters
(whether
by
whole
or
half-blood),
spouse,
ancestors
and
lineal
descendants.
(3)
Option
to
Acquire
Stocks.
-
If
any
person
has
an
option
to
acquire
stock,
such
stock
shall
be
considered
as
owned
by
such
person.
For
purposes
of
this
paragraph,
an
option
to
acquire
such
an
option
and
each
one
of
a
series
of
option
shall
be
considered
as
an
option
to
acquire
such
stock.
(3)
Constructive
Ownership
as
Actual
Ownership.
-
Stock
constructively
owned
by
reason
of
the
application
of
(a)
or
(c)
shall,
for
purposes
of
applying
(1)
or
(2),
be
treated
as
actually
owned
by
such
person.
But
stock
constructively
owned
by
the
individual
by
reason
of
the
application
of
(b)
shall
NOT
be
treated
as
owned
by
him
for
purposes
of
again
applying
such
paragraph
in
order
to
make
another
the
constructive
owner
of
such
stock.
Pro
forma
computation
of
improperly
accumulated
taxable
income
Taxable
income
xxx
Add:
Income
exempt
from
tax
xxx
Income
excluded
from
gross
income
xxx
Income
subject
to
final
tax
xxx
The
amount
of
net
operating
loss
carry-over
deducted
xxx
xxx
Total
xxx
Less:
Dividends
actually
or
constructively
paid
xxx
Income
tax
paid
for
the
whole
year***
xxx
Amount
reserved
for
the
reasonable
needs
of
the
business
xxx
xxx
Improperly
accumulated
taxable
income
xxx
X
IAET
Rate
10%
IAE
Tax
XX
(You
may
refer
also
to
RMC
35-2011
for
a
more
detailed
computation
as
used
in
Tax
Practitioners.)
***You
have
to
take
note
WON
the
company
may
be
subjected
to
Normal
Income
Tax
or
MCIT.
Consider
also
all
other
taxes
paid,
e.g.
Final
Tax.
Illustration:
Assume
that
in
taxable
year
2010,
Peace
Corporation,
a
domestic
trading
corporation,
is
subject
to
improperly
accumulated
earnings
tax
after
having
been
assessed
as
retaining
earnings
beyond
the
reasonable
needs
of
the
business.
Following
are
related
data:
Gross
Sales
P
7,500,000
Sales
returns
and
allowances
225,000
Sales
discounts
375,000
Cost
of
goods
sold
2,625,000
Deductions
3,275,000
Interest
income
from
USA
Bank
under
the
Foreign
currency
deposit
750,000
system
Interest
on
notes
receivable
50,000
Dividend
from
Landscaping
Corporation,
a
resident
foreign
corporation
100,000
Dividend
from
Crafts
Corporation,
a
domestic
corporation
65,000
85
Capital
gain
on
sale
of
Gem
&
Diamond
Corp.
shares,
a
Domestic
Corporation,
to
a
direct
buyer
Dividend
paid
75,000
800,000
The
income
tax
to
be
paid
is
the
higher
amount
between
the
normal
tax
and
minimum
corporate
income
tax.
COMPUTATION:
Income
Tax
Due
P345,000
Other
gross
income:
Interest
on
notes
receivable
P
50,000
Dividend
from
Landscaping
Corporation
100,000
Total
P150,000
Divident
from
Crafts
Corporate
is
exempt.
Final
Tax
on
Passive
income:
Interest
income
from
BSA
Bank
(P750,000
x
7.5%)
P
56.250
Capital
gain
on
sale
of
Gem
and
Diamond
Corporation
Shares
(P75,000
x
5%)
3,750
Total
P
60,000
The
computation
of
tax
on
improperly
accumulated
earnings
follows:
Taxable
Income
P
1,150,000
Add:
Income
exempt
from
tax:
Dividend
from
Crafts
P
65,000
Income
subject
to
final
tax:
Interest
from
BSA
Bank
P
750,000
Capital
gain
on
sale
of
Gem
&
Diamond
shares
75,000
890,000
Total
P
2,040,000
Less:
Dividend
paid
P
800,000
Income
tax
2007
345,000
Final
Tax
on
passive
income
60,000
1,205,000
Improperly
accumulated
earnings
P
835,000
Multiply
by
10%
Improperly
accumulated
earnings
tax
P
83,500
For
corporation
using
the
calendar
year
basis,
the
accumulated
earnings
tax
shall
not
apply
on
improperly
accumulated
income
as
of
Dec.
31,
1997.
In
the
case
of
corporations
adopting
the
fiscal
year
accounting
period,
the
improperly
accumulated
income
not
subject
to
this
tax
shall
be
reckoned,
as
of
the
end
of
the
month
comprising
the
twelve-month
period
of
fiscal
year
1997-1998.
Steps
in
Determining
the
IAET:
1.
Determine
the
Taxable
Income
2.
Determine
the
income
subject
to
final
tax
3.
Determine
the
income
exempted
from
income
tax
4.
Determine
the
income
excluded
from
income
tax
5.
Determine
the
rates
applicable
to
each:
Taxable
Income
NIT
or
MCIT
Income
subject
to
final
tax
and
the
rate
applicable
What
you
consider
as
Improperly
Accumulated
Earnings
is
not
as
simple
as
getting
the
difference
between
the
RE
and
the
Paid
Up
capital
because
there
is
a
different
formula
provided
in
the
tax
Code.
86
To
Determine
whether
the
Corporation
has
Improperly
Accumulated
Earnings
is
one
thing
and
the
determination
of
the
IAET
is
another.
To
determine
whether
a
Corporation
should
be
subject
to
IAET
or
not
:
Compare
the
RE
Paid
Up
with
the
Capital
in
the
books
of
the
Corporation
There
is
no
improper
or
unreasonable
accumulation
RE
is
more
than
100%
of
Paid
Up
Capital
If
Justified,
there
is
no
Improperly
Accumulated
Earnings
If
not
justified,
proceed
with
the
Computation
of
the
IAET
provided
in
Section29(D)
IAET
is
applicable
to
both
Domestic
and
Resident
Foreign
Corporations.
It
does
not
apply
to
Non-Resident
Foreign
Corporations.
It
is
applicable
only
to
closely-held
corporations.
Because
closely-held
corporations
are
not
being
regulated
by
a
specific
Government
Agency.
So
it
is
very
easy
to
manipulate.
The
stockholders
may
just
agree
with
each
other
not
to
declare
dividends
and
thus
not
subjected
to
10%
Dividends
Tax.
The
IAET
is
imposed
in
order
to
curtail
the
practice
of
Corporations
in
not
declaring
dividends
so
that
they
can
get
away
with
the
imposition
of
the
10%
Final
Tax
on
Dividends.
For
public
corporations
they
are
exempted
from
IAET
because
they
are
regulated
by
the:
PSE
when
their
stocks
are
listed
If
not
listed,
the
corporation
is
regulated
not
by
a
specific
agency
but
by
the
stockholders
themselves.
The
control
there
will
be
difficult
considering
the
number
of
the
stockholders.
For
banks
BSP
Insurance
Companies
Insurance
Commission
Public
Utilities
Ex.
ERC
PRIMA
FACIE
EVIDENCE
OF
ACCUMULATION
OR
PROFITS
BEYOND
THE
REASONABLE
NEEDS
OF
THE
BUSINESS
Section
29
(C).
Evidence
of
Purpose
to
Avoid
Income
Tax.
1.
Prima
Facie
Evidence.
The
fact
that
any
corporation
is
a
mere
holding
company
or
investment
company
shall
be
prima
facie
evidence
of
a
purpose
to
avoid
the
tax
upon
its
shareholders
or
members.
2.
Evidence
Determinative
of
Purpose.
The
fact
that
the
earnings
or
profits
of
a
corporation
are
permitted
to
accumulate
beyond
the
reasonable
needs
of
the
business
shall
be
determinative
of
the
purpose
to
avoid
the
tax
upon
its
shareholders
or
members
unless
the
corporation,
by
the
clear
preponderance
of
evidence
shall
prove
the
contrary.
o Prima
Facie
evidence
of
Accumulation
of
profits
beyond
the
reasonable
needs
of
business
:
1) Being
a
mere
holding
company
because
the
purpose
of
a
holding
company
is
to
earn
profits
through
investment.
2) Investment
of
a
substantial
earning
of
a
corporation
in
unrelated
business,
or
in
stocks
and
securities
of
an
unrelated
business
earnings
are
supposedly
given
out
to
the
stockholders;
Investing
in
another
business
is
not
a
reasonable
need
of
the
business.
3) Investment
in
bonds
and
other
long
term
securities.
4) Accumulation
of
earnings
in
excess
of
100%.
87
Will
the
Income
Previously
subjected
to
IAET
be
subjected
to
IAET
in
the
succeeding
Taxable
Year?
Year
5
Year
6
Year
7
Retained
Earnings
200,000
400,000
600,000
Paid-Up
Capital
100,000
100,000
100,000
Subject
to
IAET?
Yes
Yes*
Yes**
*
Will
the
same
income
subjected
to
IAET
in
year
5
be
subject
again
to
IAET
for
Year
6?
No,
the
fact
that
that
earnings
have
already
been
subjected
to
IAET,
it
will
no
longer
be
subjected
to
IAET
even
if
the
Corporation
did
not
declare
dividends
for
the
succeeding
years.
It
will
no
longer
be
included.
*Moreover,
for
the
determination
of
whether
or
not
there
is
an
improper
accumulation
of
earnings,
is
it
based
on
the
difference
between
the
RE
and
the
Paid
In
Capital?
No.
It
is
actually
based
on
the
Taxable
income
every
year.
So
you
consider
the
current
years
operation.
**
For
year
6
and
year
7
you
only
consider
the
income
added
to
the
RE
for
the
current
year.
Hence
only
200,000
vs.
100,000.
Retained
earnings
is
the
account
used
wherein
you
accumulated
all
your
profits
from
the
start
of
the
operations.
Hence,
every
year,
if
you
continuously
earn
profits,
your
RE
will
continue
to
increase
if
the
Corporation
will
not
declare
dividends.
Thats
why
in
the
illustration
above,
in
year
5
you
have
RE
amounting
to
200,000,
in
year
6
your
profit
is
another
200,000
so
your
RE
is
already
400,000
and
in
year
7
you
earned
another
200,000
so
you
have
600,000
RE
by
the
end
of
year
7.
For
purposes
of
determining
if
there
is
Improper
accumulation
of
earnings
you
only
look
at
the
profit
added
to
the
RE
for
the
taxable
year.
Hence
for
year
6,
compare
only
200,000
vs.
100,000
since
the
first
200,000
has
already
been
determined
the
year
before.
Same
goes
in
Year
7,
because
you
will
only
account
for
earnings
for
that
particular
year.
Its
on
a
yearly
basis.
APPLICABILITY
OF
THE
PRESCRIPTIVE
PERIODS
SET
OUT
UNDER
REMEDIES
The
prescriptive
periods
apply.
IAET
is
an
example
of
a
tax
where
no
return
is
filed.
Hence
the
prescriptive
period
shall
be
10
years
from
discovery.
Other
authors
may
say
that
it
is
imprescriptible
because
the
BIR
can
always
say
that
they
discovered
it
just
recently.
Hence
the
period
did
not
even
begin
to
run.
GROSS
INCOME
TAX
(GIT)
An
incentive
given
by
Pres.
Joseph
Estrada
The
reduced
corporate
income
tax
rates
shall
be
applied
on
the
amount
computed
by
multiplying
the
number
of
months
covered
by
the
new
rates
within
the
fiscal
year
by
the
taxable
income
of
the
corporation
for
the
period,
divided
by
twelve
Provided,
further,
That
the
President,
upon
the
recommendation
of
the
Secretary
of
Finance,
may
effective
January
1,
2000,
allow
corporations
the
option
to
be
taxed
at
fifteen
percent
(15%)
of
gross
income
as
defined
herein,
after
the
following
conditions
have
been
satisfied:
(1)
A
tax
effort
ratio
of
twenty
percent
(20%)
of
Gross
National
Product
(GNP);
(2)
A
ratio
of
forty
percent
(40%)
of
income
tax
collection
to
total
tax
revenues;
(3)
A
VAT
tax
effort
of
four
percent
(4%)
of
GNP;
and
(4)
A
0.9
percent
(0.9%)
ratio
of
the
Consolidated
Public
Sector
Financial
Position
(CPSFP)
to
GNP.
The
option
to
be
taxed
based
on
gross
income
shall
be
available
only
to
firms
whose
ratio
of
cost
of
sales
to
gross
sales
or
receipts
from
all
sources
does
not
exceed
fifty-five
percent
(55%).
The
election
of
the
gross
income
tax
option
by
the
corporation
shall
be
irrevocable
for
three
(3)
consecutive
taxable
years
during
which
the
corporation
is
qualified
under
the
scheme.
CONDITIONS
for
the
applicability
of
the
GIT
o If
a
corporation
has
a
cost
to
sales
ratio
of
55%
Determine
the
gross
sales
and
the
cost
of
sales
Cost
ratio=
Cost
of
goods
sold/gross
sales
or
gross
receipts
But
sirs
position
is
that
it
should
be
cost
of
goods
sold/
NET
SALES
or
NET
RECEIPTS.
88
o
o
If
there
is
no
return
and
allowances,
you
use
GROSS
SALES
or
GROSS
RECEIPTS
but
if
there
are
returns
and
allowances,
you
use
NET
SALES
or
NET
RECEIPTS
nalang.
GIT
is
available
only
to
firms
whose
ration
of
cost
of
sales
to
gross
sales
or
receipts
from
all
sources
do
not
exceed
fifty-five
per
cent
(55%).
Take
note
of
the
other
conditions.
See
Sec.27A
of
NIRC.
You
dont
need
to
memorize
them.
Remember
that
this
is
only
an
OPTION,
but
once
you
chose
this,
it
will
be
irrevocable
for
3
consecutive
years.
GIT
is
15%
of
Gross
Income.
You
base
your
gross
income
sa
definition
sa
tax
code:
Service
concern:
Gross
income
x
15%
(you
do
not
deduct
cost
of
services,
it
is
automatic)
Manufacturing
or
merchandising
concern:
gross
sales
less
cost
of
sales
or
goods
sold
x
15%
PARTNERSHIP
General
co-partnership
or
trade
partnership
is
one
intended
for
profit
-
tax
rate
is
the
same
sa
corporations
its
just
that
there
is
a
constructive
distribution
of
income
to
each
of
the
partners.
If
there
is
no
profit
and
loss
ratio,
determined
based
on
their
capital
contribution,
if
there
is
an
agreement
as
to
their
share
of
profits
and
losses
then
the
same
should
be
followed.
If
one
contributes
services,
then
he
will
not
share
in
the
losses.
Thus
if
trade
partnership
earns
income
and
the
partners
received
constructively,
the
partnership
will
be
taxed
at
the
rate
of
30%.
The
partners
will
be
subject
to
10%,
the
same
rate
as
dividends
because
this
is
considered
as
dividends
income
which
is
a
passive
income
for
TRADE
partnership
but
this
will
not
apply
to
GPPs.
For
GPP,
it
is
not
subject
to
tax,
considered
as
a
mere
conduit
of
the
partners,
tax
will
only
be
imposed
on
the
person
of
the
partners.
Income
of
partners
will
be
subject
to
5-32%.
TN:
Determine
first
if
the
partnership
is
a
GPP
or
a
trade
partnership
because
the
partners
are
subject
to
different
tax
rates.
Rules
on
GPPS
If
the
GPP
availed
of
ID,
the
partners
may
still
claim
ID
except
those
already
claimed
by
the
GPP.
Example:
You
have
a
law
firm,
you
are
so
hardworking
you
always
bring
in
income
to
the
partnership.
Of
course
the
partnership
will
record
it
as
part
of
the
income
and
at
the
end
of
the
year
you
will
receive
your
own
income.
But
while
youre
doing
this,
youre
using
your
own
car,
you
go
to
meetings
using
your
personal
car
and
you
never
charge
the
partnership
for
the
value
of
your
car,
in
your
income
from
the
partnership,
can
you
deduct
the
depreciation
if
your
car?
o Yes,
provided
the
car
was
never
registered
as
part
of
the
assets
of
the
partnership
and
the
car
was
actually
used
in
the
practice
of
prof.
This
is
not
considered
as
purely
compensation
income,
there
is
no
prohibition
to
deduct
ID.
o The
rule
then
is:
for
as
long
as
expenses
have
not
been
claimed
by
the
partnership,
you
can
claim
it
as
part
of
the
deduction
but
provided
such
expenses
can
be
related
to
the
practice
of
a
profession.
OW
you
cannot
deduct
it.
For
example,
expenses
for
lunch
meals
everyday-
cannot
claim
as
deduction
for
your
won
expenses.
Thats
a
personal
expense.
TN
in
this
instance,
the
GPP
availed
of
the
ID,
and
the
partners
claim
ID.
Can
they
claim
OSD?
No.
o If
the
GPP
availed
of
the
ID,
the
partners
can
only
avail
of
the
OSD.
o If
the
GPP
avails
of
OSD,
the
partners
cannot
avail
of
OSD,
except
when
theres
other
gross
income,
but
only
in
relation
to
his
other
income.
For
ex:
partner
in
the
law
firm
also
has
manpower
business,
its
possible
to
claim
OSD.
Partner,
however,
cannot
claim
ID.
This
is
the
problem
because
if
your
professional
partnership
claims
OSD,
you
can
claim
OSD
regardless
of
where
the
income
is
from.
TN
that
that
will
only
happen
if
youre
other
business
is
a
sole
prop.
Because
if
the
other
business
is
a
corporation
also
or
another
partnership
which
is
not
a
GPP,
theres
no
question
that
you
can
deduct
OSD
or
ID
because
in
the
first
place
that
income
will
never
be
recorded
as
your
income.
Youre
other
income
is
either
subjected
already
to
final
tax
already
of
10%
because
it
will
be
dividend
when
it
comes
to
you,
not
part
of
the
dumping
ground.
For
ex:
you
have
a
law
firm,
that
manpower
services
is
a
corporation,
do
you
record
the
income
of
the
manpower
services
as
part
of
your
income
from
the
GPP?
No,
because
you
will
receive
only
dividend
from
the
manpower
services
corporation.
There
is
no
issue
of
whether
you
can
claim
OSD
or
not.
It
is
different
if
the
manpower
services
is
a
sole
proprietorship,
because
if
it
is,
whatever
the
income
of
the
manpower
service,
you
would
have
to
add
it
up
to
your
income
from
the
GPP.
The
problem
is
that
you
cannot
claim
ID
if
the
GPP
claims
OSD.
What
you
can
just
claim
is
still
OSD.
(Refer
to:
REV
REG
2-
2010)
If
the
partner
also
derives
other
gross
income
from
trade,
business
or
practice
of
profession
apart
and
distinct
from
his
share
in
the
net
income
of
the
GPP,
the
deduction
that
he
can
claim
from
his
other
gross
income
would
follow
the
same
deduction
availed
of
from
his
partnership
income.
Provided,
however,
that
if
the
GPP
opts
for
the
OSD,
the
individual
partner
may
still
claim
40%
of
its
89
gross
income
(Book
authors
note:
RA
9504
specifically
states
that
for
individuals,
the
basis
of
the
40%
OSD
shall
be
gross
sales
or
gross
receipts)
from
trade,
business
or
practice
of
profession
but
not
to
include
his
share
from
the
net
income
of
the
GPP.
Illustration:
For
the
taxable
year
2014,
Part
and
Ner,
partners
of
a
General
Professional
Partnership
agreed
to
divide
profits
and
losses
50:50,
respectively.
Both
are
married
and
without
qualified
dependents.
The
following
are
the
details
of
the
accounts:
Sale
of
Services,
GPP
2,500,000
Cost
of
Services,
GPP
875,000
Itemized
Deductions,
GPP
825,000
PART
NER
Travelling
Expenses
(not
liquidated
by
the
GPP)
34,500
16,500
Representation
Expenses
(personal
Credit
card
of
Partner
used)
14,250
23,500
Cost
of
Car,
to
be
depreciated
over
5
yrs.
(used
in
the
practice,
750,000
580,000
Registered
under
the
Partner)
Salaries
from
the
GPP
360,000
300,000
Lotto
Winnings
900,000
Interest
on
Bank
Deposit
25,000
20,000
Book
Royalties
250,000
The
distributable
net
income
of
the
GPP,
share
of
each
partner
and
taxable
income
are
computed
as
follows:
GPP
GPP
If
OSD
If
Itemized
Sale
of
Services
2,500,000
2,500,000
Less:
Cost
of
Services
875,000
875,000
Gross
Income
1,625,000
1,625,000
Less:
Deductions
40%
OSD
650,000
Itemized
Deductions
825,000
Distributable
Net
Income
975,000
800,000
Share
of
Each
Partner
(50:50)
487,500
400,000
GPP
GPP
If
OSD,
then
If
Itemized,
then
PART
NER
PART
NER
OSD
OSD
Itemized
Itemized
Share
of
Each
Partner
in
the
GPP
487,500
487,500
400,000
400,000
Less:
Additional
Itemized
Deductions
Travelling
Expenses
-
-
34,500
16,500
Representation
Expenses
-
-
14,250
23,500
Depreciation
of
Car
-
-
150,000
116,000
Net
Share
of
Each
Partner
in
the
GPP
487,500
487,500
201,250
244,000
Add:
Salaries
from
the
GPP
360,000
300,000
360,000
300,000
Total
847,500
787,500
561,250
544,000
Less:
Personal
Exemptions
50,000
50,000
50,000
50,000
Taxable
Income
797,500
737,500
511,250
494,000
Tax
Due
and
Payable
(125,000
+
32%
of
the
excess
over
500,000)
220,200
201,000
128,600
(50,000
+
30%
of
the
excess
over
250,000)
123,200
90
91
Clarifications:
A. A
GPP
is
not
taxed
the
same
as
a
corporation
or
trade
partnerships,
but
it
can
still
claim
OSD.
It
is
not
actually
that
it
is
not
subject
to
tax
but
it
is
just
exempted
from
the
corporate
income
tax.
So
OSD
is
still
applicable
to
a
GPP.
B. When
it
comes
to
the
salaries
of
the
partners,
the
GPP
also
considered
as
a
withholding
agent.
Even
if
the
GPP
is
a
withholding
agent,
the
salaries
paid
to
its
partners
will
still
be
included
in
the
total
income
of
the
individual
partners
at
the
end
of
the
taxable
year
upon
filing
of
the
annual
ITR.
Remember:
taxes
withheld
from
salary
or
compensation
by
an
employer-
is
a
Creditable
Withholding
Tax,
not
a
final
withholding
tax.
Thus,
you
still
have
to
account
for
the
whole
income
even
those
from
which
CWT
had
been
withheld
from.
It
will
just
reduce
the
tax
due
and
payable
at
the
end
of
the
year
because
you
can
deduct
from
it
whatever
was
withheld
by
the
GPP.
It
will
remain
360,000/300,000
as
the
total
income
from
salary
to
be
added
to
the
net
share
(refer
to
example
above).
For
example,
what
were
withheld
were
200,000,
which
refer
to
the
tax
itself
already
and
not
to
theincome.
So
you
will
deduct
that
as
a
credit
from
the
tax
due
and
payable
and
not
from
the
income.
What
will
happen
is
that
at
the
end
of
the
year
when
you
file
your
annual
tax
return,
this
will
include
both
your
income
from
GPP
and
your
Business
income.
So
all
income
will
be
added
altogether
with
deduction
from
the
total
tax
due
and
payable
for
what
was
withheld.
In
the
example
(above),
we
did
not
account
for
creditable
withholding
tax
but
in
practice,
there
is
tax
withheld
on
the
salary
that
is
deductible
from
the
total
tax
due
for
the
year.
Whatever
taxes
that
were
paid
in
advance
will
be
deducted
from
the
tax
due
itself.
Thus,
it
will
affect
the
actual
taxes
that
will
be
due
and
payable
at
the
end
of
the
year
but
it
will
not
affect
the
salary
you
received.
So
it
will
still
be
computed
in
the
same
way
but
the
effect
of
the
Creditable
withholding
Tax
will
be
after
the
tax
due
computation
for
the
reason
that
there
was
already
payment
of
part
of
the
whole
tax
due
as
withheld
by
the
employer.
C. In
case
the
GPP
failed
to
remit
the
amount
as
withholding
agent,
the
partner
will
still
be
liable
for
the
tax
that
should
have
been
withheld
and
paid
but
not
actually
remitted
to
the
BIR.
If
you
have
an
employer,
you
have
to
be
vigilant
because
if
it
so
happens
that
your
employer
did
not
withhold
and
remit
the
right
amount
of
taxes
and
you
will
suppose
to
file
your
total
income
tax
for
the
whole
year
because
you
have
other
income
aside
from
compensation,
and
there
was
no
withholding
tax
paid
by
your
employer,
you
cannot
deduct
the
amount
that
was
supposedly
withheld.
It
is
as
if
you
have
never
paid.
So
you
will
have
to
pay
the
entire
tax
due
and
payable.
But
it
doesnt
prejudice
your
right
to
go
against
your
employer
who
failed
to
remit
the
tax
and
in
addition
to
that,
the
latter
will
be
subject
to
penalties,
twice
the
amount
of
the
tax
not
remitted.
D. The
limits
as
to
the
percentage
of
allowable
deductions
applied
to
corporation
and
trade
partnerships
are
also
applicable
to
GPPs,
e.i.
EAR
of
1%
or
2%-
Entertainment,
Amusement,
Recreation.
(The
example
given
above
refers
to
Representation
Expense)
E. Winnings
of
the
corporation
are
subject
to
30%
since
they
are
not
part
of
passive
income
if
received
by
DC
and
RFC.
They
are
considered
as
other
income
on
the
part
of
the
DC
and
RFC.
But
if
received
by
NRFC,
it
is
30%
but
on
gross.
F. On
how
to
determine
whether
dividend
income
from
RFC
are
considered
within
or
without:
Make
qualification
on
the
3
yr
period
from
the
declaration
of
income
It
is
Atty.
Amagos
position
to
follow
the
Tax
Code
since
the
50%-85%
partly
within
partly
without
provision
in
the
regulation
is
not
actually
sanctioned
by
the
Tax
Code.
Thus,
if
within
the
preceding
3-year
period
the
dividend
income
from
a
Resident
Foreign
Corporation
(RFC)
is:
a. 50%
or
less:
as
to
income
of
corporation
from
its
domestic
operation,
all
dividend
income
will
be
considered
outside
the
Philippines
b. more
than
50%:
as
to
income
of
corporation
from
its
domestic
operation
all
income
is
considered
within
the
Philippines
G. As
to
the
Unliquidated
Travelling
Expense
in
the
above
given
example,
the
GPP
did
not
deduct
it.
Thus,
it
is
still
deductible
on
the
part
of
each
partner.
92
It
is
as
if
the
GPP
does
not
know
about
it
yet
but
each
partner
knows
about
it
since
they
were
the
ones
who
actually
incurred
the
expense.
So
they
can
deduct
it.
Unliquidated
simply
means
the
partners
have
not
informed
the
GPP
about
such
expense.
H.
As
a
rule,
one
of
the
requisites
for
deductions
to
be
allowed
is
that
proper
withholding
taxes
have
been
paid.
Thus,
if
an
employer
failed
to
withhold
and
remit
CWT
on
salaries
of
its
employees,
it
cannot
deduct
the
salaries
paid
as
one
of
the
allowable
deductions.
However,
remember
the
Cohan
Rule.
The
BIR
cannot
completely
disallow
an
entity
from
deducting
expenses
which
are
allowable
under
the
law.
It
can
only
disallow
to
the
extent
of
50%
under
the
Cohan
Rule.
-
end
-
Abejo|Bandoy|Bonghanoy|Burdeos|Corominas|Cuado|Deveraturda|Entera|Erojo|Garcia,
E.|
Gaviola|Geonzon|Gillamac|Gocuan|Honculada|Itao|Licup|Otero|Papa|Querubin|Rocha|Salcedo|Sevilla|Tamayo
93