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TAXATION 1

Based on the Lectures of Dean Quibod


August 2, 2016
By Isay Abad
Title 1 Organization and Function of the Bureau of
Internal Revenue
We will take up tonight Title 1 of the National Internal Revenue
Code (NIRC), in so far as the Organization and Function of the
Bureau of Internal Revenue (BIR).
_History_

1904 - Our Internal Revenue (IR) tax laws dates back


as early as 1904. It was patterned after the IR laws of
the United States, being then a colony of the US.
From 1904 it went to series of amendments in 1913,
1916 and 1970.

1939 - The NIRC from then up to now began only in


1939. Prior to 1939, it was just called an Internal
Revenue Law. And in 1939, the NIRC was enacted.
This was under CA 466 (?).

1972 - From 1939 it went to series of amendments


until on 1972, the declaration of Martial Law, where
Marcos re-enacted the NIRC and called it the NIRC of
1977. Of course, it went through series of
amendments. Marcos that time had both legislative
and executive powers.

1986 - Then came EDSA in 1986. An Executive Order


was enacted re-enacting the same and called it the
NIRC of 1986. Cory at that time also had Legislative
and Executive powers under a Revolutionary
Government.

1997 - The current NIRC is now the NIRC of 1997


RA 8424. This was promulgated through the
persuasions of the World Bank to reform our IR laws.
So you notice in your Section 1:
Section 1. Title of the Code. This Code shall be known as
the National Internal Revenue Code of 1997.
Now, this law took effect on January 1, 1998. This has been
the law until now which was also subjected to amendments.
What we are using now is the NIRC of 1997 as amended. That
is the brief background of our Section 1 on how these all came
about.
You have Section 2, the Powers and Duties of the BIR, in so
far as the BIR set-up.
Section 2. Powers and Duties of the Bureau of Internal
Revenue The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect
to and administer the supervisory and police powers conferred
to it by this Code or other laws.
In the exercise of the power of taxation which was brought up
under our discussion in the Principles, the power of Taxation is
inherent in the State. It is exercised by the Legislative body, in
our case, the Congress. Specifically, the tax measures should
emanate and originate in the House. So Congress will
determine what we call as the Tax Policy, thus the NIRC was
enacted. (Of course, the legislation is brought to the President
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for signing, or the President will not act on it and after 30 days
it will lapse into a law.)
So the NIRC, in so far as the Executive Department,
the implementation and enforcement of the law is in
the Department of Finance (DOF).
-

It is brought to the BIR, the agency in charge in


so far as our internal revenue laws.
The other agency, in charge also of revenue
collection is the Bureau of Customs (BOC). But
here, what is legislated involves the Tariff and
Customs Code. Currently you have the Customs
Modernizations Act of 2016. It lapsed into law
sometime in June for Pnoy did not sign.

Nevertheless, in so far as taxation of imported articles, it will be


governed by the Tariff and Customs Code (TACC) and
likewise, it will still be the DOF that is in charge.
The Tax Policy on the levy is on Congress, the Tax
administration aspect is done by the Executive through the
DOF. But for specific purposes, as in the enforcement of the
TACC, it is the BOC.
In the case of BOC, you have there the Commissioner,
wherein below him are the District collectors. The Philippines
is divided into several districts where there are district
collectors assigned.
In the case of the BIR( in so far as internal revenue laws in
connection with the NIRC and other special laws), it is headed
by the Commissioner, and below him are the Revenue
Regional Directors. Like the BOC, the revenue collection
offices are also brought down to the regional levels, not
necessarily following the regional political set-up. Then below
the Regional Directors is the Revenue District Officers (RDO)
in the cities.
The you have Section 3. The Officials of the BIR is headed by
the Commissioner with 4 deputy commissioners.
Section 3. Chief Officials of the Bureau of Internal
Revenue - The Bureau of Internal Revenue shall have a chief
to be known as Commissioner of Internal Revenue, hereinafter
referred to as the Commissioner and four (4) assistant chiefs to
be known as Deputy Commissioners.
Now the BIR has 2 essential functions:
1.
Quasi-legislative power to make rules and
regulations in the enforcement of the NIRC or the tax
law, for purposes of assessment and collection under
Section 2.
2. Quasi-judicial the power under Section 4, the
power to interpret. Interpretation is usually judicial in
character such as in deciding cases.
The Commissioner both has this legislative and powers.
SEC. 4. - Power of the Commissioner to Interpret Tax Laws
and to Decide Tax Cases.
The power to interpret the provisions of this Code and other tax
laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.
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TAXATION 1
Based on the Lectures of Dean Quibod

So take note of the scope of authority. It is exclusive and


original. No other office in the government has the power to
interpret, except the Commissioner, subject to review by the
Secretary of Finance.
SEC. 4. - Power of the Commissioner to Interpret Tax Laws
and to Decide Tax Cases.
Xxxx
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
So, second paragraph of Section 4. All matters involving
assessments.
How come they are to decide disputed assessments?
Because the taxes in the NIRC are what we call
Self-assessing taxes.
They are called self-assessing because the tax
payer himself determines the tax liability.
How?
-

He files the tax return and pays the tax.

Is there any intervention outside of the tax payer?


None. The tax payer is the one who files the
return, makes the declaration of the return, on the
basis of such, computes the tax and pays the
amount he computed.
Unlike real property tax, there is an intervention, this is what we
call as the Non- self-assessing.
Example of a non- self-assessing is the Customs
Duties. The importer is unable to determine the
dutiable value. The imported article upon arrival,
will pass through the Customs Examiner and
Customs Appraiser and will go to the Customs
Collector.
In the NIRC, there is no such process. Just like in your income,
the determination of your income is not dictated by the
government, ikaw mismo as a tax payer would know the
income or wages that you will be earning. On the basis of that,
ikaw ang magfifile ng iyong returns kasi ikaw yung
nakakaalam. Whether dayaan mo iyan o hindi, that is up to
you. On the basis of that return, you will be paying the tax. This
is a general feature ha, this is not the nitty-gritty yet because
the statute will provide the peculiarities.
After that is done, does that mean na tapos na iyon?
Natanggap nan g BIR yung return and bayad mo, hanggang
doon na lang ba? The answer is No. After filing the return and
paying, tska palang papasok iyong tax assessment process.
You will now be subject to tax examination, merong taga BIR
na pupunta sa tindahan mo dala ang letter of authority that you
are under investigation. You are under investigation not for the
reason na nandaya ka, but for purposes that they want to
examine on whether you declared the correct income and filed
the correct tax. Malalaman lang na nandaya ka after the result
of the examination, meanwhile, wala pa iyon. There is no
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suspicion. That is a routinary process done kasi nga selfassessing. How will the BIR know na tama iyong dineclare at
binayaran mo. So, since hindi alam ng gobyerno na tama iyon,
it goes to that assessment process. The government is given 3
years after the filing of the return, from the deadline, the
government is given 3 years to determine kung tama ba iyong
dineclare mo at tama ba iyong tax.
However, not all dadaan sa assessment, may mga suki lang
jan. Of course, if you are a wage earner you will not be subject
to that. The government will be spending so much for the
examination and then 1thousand lang pala ang babayaran mo
na tax. In other words, there is bench marking and selection
process, titingnan nila sino itong big tax payers. If you are a big
business or a large tax payer then they will have a basis for the
examination.
Your returns now will be investigated kung tama ba iyon. After
that they will send you now a notice of assessment, on the
basis na meron silang nakita na deficiency, pag-recompute
may kulang, a notice will now be sent. So kung gusto mong
ichallenge yung assessment deficiency, then the remedy of the
tax payer is to protest. The protest is lodged to the CIR (BIR)
on the basis of its Quasi-judicial powers. It will either be
granted or denied.
Also, under section 4 the tax payer may file for a tax refund. If
the tax payer discovers that he has overpaid or erroneously
paid the tax then magfifile siya ng claim for refund. The BIR will
either grant or deny, if denied, it will go to the CTA.
Now Section 5, the power of the Commissioner to Obtain
information, and to Summon/Examine, and to take Testimony.
Section 5. Power of the Commissioner to Obtain
information, and to Summon/Examine, and Take
Testimony of Persons. - In ascertaining the correctness of
any return, or in making a return when none has been made,
or in determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in evaluating
tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which
may be relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and
local
governments,
government
agencies
and
instrumentalities, including the Bangko Sentral ng Pilipinas and
government-owned or -controlled corporations, any information
such as, but not limited to, costs and volume of production,
receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations,
mutual fund companies, insurance companies, regional
operating headquarters of multinational companies, joint
accounts, associations, joint ventures of consortia and
registered partnerships, and their members;
(C) To summon the person liable for tax or required to file a
return, or any officer or employee of such person, or any
person having possession, custody, or care of the books of
accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other
person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or
other data, and to give testimony;
(D) To take such testimony of the person concerned, under
oath, as may be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a
canvass from time to time of any revenue district or region and
inquire after and concerning all persons therein who may be

TAXATION 1
Based on the Lectures of Dean Quibod
liable to pay any internal revenue tax, and all persons owning
or having the care, management or possession of any object
with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding,
nothing in this Section shall be construed as granting the
Commissioner the authority to inquire into bank deposits other
than as provided for in Section 6(F) of this Code
Ito yung mangyayari during the 3year period. The BIR will ask
you to submit your receipts, books and records. They will
obtain 3rd party information, your suppliers and customers.
Baka meron palang undeclared income.
Then on the last paragraph, on the authority to inquire on your
bank accounts. In spite of all these vast powers and authority
of the Commissioner, hindi nito saklaw ang paginquire sa iyong
bank deposits. There is actually a proposal in Congress to
relax the Bank Secrecy Law because its provisions are very
strict.
There are only 2 grounds within which the BIR can inquire into
your bank accounts:
1. For Estate Tax purposes
2. When the tax payer files for compromise on tax
deficiency based on financial incapacity
After a finding of a deficiency, the tax payer
would now ask for a compromise. May finding na
10M ang deficiency and the tax payer will say na
I am willing to pay pero wala akong pera, may
pera ako sa bangko pero 500T nalang. So totoo
ba yan, papirmahin ka ng waiver to inquire now
into your bank accounts.
Outside of the 2 grounds, there is no way.
Then Section 6. Another Power of the Commissioner to Make
assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. That is really a power in so
far as the tax administration aspect.
Under section 6(a). Examination of Returns and Determination
of Tax Due. After the return has been filed, che-check apin
kung tama ba yun by the Commissioner through the district
revenue officers.
Section 6. Power of the Commissioner to Make
assessments and Prescribe additional Requirements for
Tax Administration and Enforcement
(A)Examination of Returns and Determination of Tax Due.
- After a return has been filed as required under the provisions
of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided,
however; That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any
taxpayer.
The tax or any deficiency so assessed shall be paid upon
notice and demand from the Commissioner of from his duly
authorized representative.
Any return, statement of declaration filed in any office
authorized to receive the same shall not be withdrawn:
Provided, That within three (3) years from the date of such
filing, the same may be modified, changed, or amended:
Provided, further, That no notice for audit or investigation of
such return, statement or declaration has in the meantime
been actually served upon the taxpayer.

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Section 6(b). For failure to submit required returns, statements,


reports and other documents, then the Commissioner will make
the assessments on the basis of the best evidence obtainable.
Like you did not file a return, what is the basis now for the BIR
if wala kang record sa kanila, they will now investigate you and
ask for your records. On the basis of the best evidence
obtainable, they will now make an assessment na ito ang hindi
mo binayaran, they will make an assessment of your tax
deficiency.
(B) Failure to Submit Required Returns, Statements,
Reports and other Documents. When a report required by
law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is reason to
believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best
evidence obtainable.
In case a person fails to file a required return or other
document at the time prescribed by law, or willfully or otherwise
files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through
testimony or otherwise, which shall be prima facie correct and
sufficient for all legal purposes.
Then Section 6(c), for the authority to conduct inventory-taking,
surveillance and to prescribe Presumptive Gross Sales and
Receipts. They would go to your bodega and conduct
inventories. Or do surveillance like na tip-off yung BIR na
heavy yung business but noticed that the volume of the
business that come and go does not match to the returns of the
tax that you are paying. Magoobserve ngayon sila sa business
mo, across the street, magcocoffeeshop, titingnan tingnan ang
labas pasok ng business mo. On that day alone, they will be
able to record of the volume. If it will not match their
surveillance, they will now make a presumptive gross sales
and receipts, kasi you underdeclared your gross rates.
(C) Authority to Conduct Inventory-taking, surveillance
and to Prescribe Presumptive Gross Sales and Receipts.
- The Commissioner may, at any time during the taxable year,
order inventory-taking of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities, or may place the
business operations of any person, natural or juridical, under
observation or surveillance if there is reason to believe that
such person is not declaring his correct income, sales or
receipts for internal revenue tax purposes. The findings may be
used as the basis for assessing the taxes for the other months
or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and
invoices in violation of the requirements of Sections 113 and
237 of this Code, or when there is reason to believe that the
books of accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be
filed under the provisions of this Code, the Commissioner, after
taking into account the sales, receipts, income or other taxable
base of other persons engaged in similar businesses under
similar situations or circumstances or after considering other
relevant information may prescribe a minimum amount of such
gross receipts, sales and taxable base, and such amount so
prescribed shall be prima facie correct for purposes of
determining the internal revenue tax liabilities of such person.

TAXATION 1
Based on the Lectures of Dean Quibod
Section 6(d), is the authority to terminate taxable period which
will take place when the tax payer will retire. Hindi ibig sabihin
na wala ka ng obligasyon when you retire. Babalikan ka pa rin
ng BIR, paano iyong transactions before that. When you retire,
the BIR will make an assessment, a tax period otherwise
babalikan ka. They will investigate you again to determine you
still have to pay deficiency tax. We also have those intending to
leave the country or removing property or hide or concealing
property tending to obstruct the collection of the tax.
We will just finish this part. When the assessment has already
become final, the next thing that will happen is collection.
Paano ba nila kokolektahin ang deficiency tax. They would run
after you real and personal properties, garnish your properties
to collect the deficiency. The assessment is 3 years, the BIR is
given 5 years to complete the collection.
(D) Authority to Terminate Taxable Period. - When it shall
come to the knowledge of the Commissioner that a taxpayer is
retiring from business subject to tax, or is intending to leave the
Philippines or to remove his property therefrom or to hide or
conceal his property, or is performing any act tending to
obstruct the proceedings for the collection of the tax for the
past or current quarter or year or to render the same totally or
partly ineffective unless such proceedings are begun
immediately, the Commissioner shall declare the tax period of
such taxpayer terminated at any time and shall send the
taxpayer a notice of such decision, together with a request for
the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, or
such portion thereof as may be unpaid, and said taxes shall be
due and payable immediately and shall be subject to all the
penalties hereafter prescribed, unless paid within the time fixed
in the demand made by the Commissioner.
Section 6(e). The authority to prescribe real property values.
For purposes of real property tax, it is your local assessor (city
or provincial) which determines the fair market value in a
particular territory or locality. The BIR also makes its own
valuation which we call as the zonal value. Usually the zonal
value of the BIR is higher than the fair market value of the
assessor. They are not necessarily bound to follow the
valuation of the assessor. So, in determining fair market value
therefore, there are 2 valuations. For purposes of the tax base,
the rule is whichever is higher between the BIR and the
assessor.
(E) Authority of the Commissioner to Prescribe Real
Property Values. - The Commissioner is hereby authorized to
divide the Philippines into different zones or areas and shall,
upon consultation with competent appraisers both from the
private and public sectors, determine the fair market value of
real properties located in each zone or area. For purposes of
computing any internal revenue tax, the value of the property
shall be, whichever is the higher of:
(1) the fair market value as determined by the Commissioner,
or
(2) the fair market value as shown in the schedule of values of
the Provincial and City Assessors.
Section 6(f). This is the authority to inquire into the bank
accounts, whether you have the peso or foreign currency.
Looking into the 2 instances, for the estate and on the basis to
compromise the tax liability based on financial capacity.
Now there is a third one which is introduced under RA 10021,
this is an inquiry by a foreign tax authority. A foreign tax
authority may inquire on the BIR for a tax information, and that
is allowed under this section 6f number 3. Ang haba2x ng
provision. (Please refer to your codal for the provision.)
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Section 6(g). Authority to accredit and register tax agents.


Hindi ito mga fixers. They used to be fixers. Ngayon, kasi di
mapigilan ang mga taong nagfofollow-up, they are now able to
regulate the fixers by accrediting them. They are accredited
based on their professional competence, integrity and moral
fitness. This is required if you are not a lawyer. If you are a
lawyer, you can go to all offices without need of any
accreditation. But for purposes of the BIR, kailangan
accredited ka. If you are a lawyer, there is no need for such
accreditation.
(G) Authority to Accredit and Register Tax Agents. - The
Commissioner shall accredit and register, based on their
professional competence, integrity and moral fitness,
individuals and general professional partnerships and their
representatives who prepare and file tax returns, statements,
reports, protests, and other papers with or who appear before,
the Bureau for taxpayers. Within one hundred twenty (120)
days from January 1, 1998, the Commissioner shall create
national and regional accreditation boards, the members of
which shall serve for three (3) years, and shall designate from
among the senior officials of the Bureau, one (1) chairman and
two (2) members for each board, subject to such rules and
regulations as the Secretary of Finance shall promulgate upon
the recommendation of the Commissioner.
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Section 6(h). This is for purposes of compliance. If they see
some loopholes in your requirements then they will require
some more documents.
(H) Authority of the Commissioner to Prescribe Additional
Procedural or Documentary Requirements. - The
Commissioner may prescribe the manner of compliance with
any documentary or procedural requirement in connection with
the submission or preparation of financial statements
accompanying the tax returns.
Now, Section 7. Authority of the Commissioner to delegate
power. The powers of the commissioner will be delegated
down to the regional directors down to the revenue offices.
However, there are powers that cannot be delegated.
SEC. 7. Authority of the Commissioner to Delegate Power.
- The Commissioner may delegate the powers vested in him
under the pertinent provisions of this Code to any or such
subordinate officials with the rank equivalent to a division chief
or higher, subject to such limitations and restrictions as may be
imposed under rules and regulations to be promulgated by the
Secretary of finance, upon recommendation of the
Commissioner: Provided, however, That the following powers
of the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate, xxx
(d) The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are
produced or kept.
SEC. 8. Duty of the Commissioner to Ensure the Provision and
Distribution of forms, Receipts, Certificates, and Appliances,
and the Acknowledgment of Payment of Taxes.
SEC. 9. Internal Revenue Districts.
SEC. 10. Revenue Regional Director.

TAXATION 1
Based on the Lectures of Dean Quibod
SEC. 11. Duties of Revenue District Officers and Other Internal
Revenue Officers.
SEC. 12. Agents and Deputies for Collection of National
Internal Revenue Taxes. - The following are hereby
constituted agents of the Commissioner:
(a) The Commissioner of Customs and his subordinates with
respect to the collection of national internal revenue taxes on
imported goods;
(b) The head of the appropriate government office and his
subordinates with respect to the collection of energy tax; and
(c) Banks duly accredited by the Commissioner with respect to
receipt of payments internal revenue taxes authorized to be
made thru bank.
Any officer or employee of an authorized agent bank assigned
to receive internal revenue tax payments and transmit tax
returns or documents to the Bureau of Internal Revenue shall
be subject to the same sanctions and penalties prescribed in
Sections 269 and 270 of this Code.
For Section 12(a) We have here the BOC, in connection with
importation. When you import you dont only pay the duties,
you also pay an internal revenue tax (like VAT) on account of
importation on excise tax. Since the excise tax is due to the
BIR, it is the BOC who is in charge of collecting kasi doon
dadaan sa kanila. We dont place BIR personnel there but
under the law they are now deputized.
For Section 6(c). Payment of taxes may now be made online to
duly accredited banks.
SEC. 13. Authority of a Revenue Offices. - subject to the
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a
Revenue Officer assigned to perform assessment functions in
any district may, pursuant to a Letter of Authority issued by the
Revenue Regional Director, examine taxpayers within the
jurisdiction of the district in order to collect the correct amount
of tax, or to recommend the assessment of any deficiency tax
due in the same manner that the said acts could have been
performed by the Revenue Regional Director himself.
Section 13. The Revenue officer could not make his
assessment functions without that Letter of Authority (LOA). No
revenue officer can go to the tax payer and say iimbestigahan
ka na namin that we are asking for your books of account etc.,
that could not be done if he is not armed with the letter of
authority. That LOA should also define kung anong year ka
iimbestigahan, kasi paano kung nagprescribe na pala.
SEC. 15. Authority of Internal Revenue Officers to Make
Arrests and Seizures. - The Commissioner, the Deputy
Commissioners, the Revenue Regional Directors, the Revenue
District Officers and other internal revenue officers shall have
authority to make arrests and seizures for the violation of any
penal law, rule or regulation administered by the Bureau of
Internal Revenue. Any person so arrested shall be forthwith
brought before a court, there to be dealt with according to law.
SEC. 16. Assignment of Internal Revenue Officers Involved
in Excise Tax Functions to Establishments Where Articles
subject to Excise Tax are Produced or Kept. - The
Commissioner shall employ, assign, or reassign internal
revenue officers involved in excise tax functions, as often as
the exigencies of the revenue service may require, to
establishments or places where articles subject to excise tax
are produced or kept: Provided, That an internal revenue
officer assigned to any such establishment shall in no case
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stay in his assignment for more than two (2) years, subject to
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
Section 16. Here, revenue officers may be assigned to certain
establishments for 2 years lang. After that pwede ng palitan
because familiarity brings ------. Kung magtagal yan, di na yan
magbantay, magbeso2x na yan and magchikachika.
SEC. 17. Assignment of Internal Revenue Officers and
Other Employees to Other Duties. - The Commissioner may,
subject to the provisions of Section 16 and the laws on civil
service, as well as the rules and regulations to be prescribed
by the Secretary of Finance upon the recommendation of the
Commissioner, assign or reassign internal revenue officers and
employees of the Bureau of Internal Revenue, without change
in their official rank and salary, to other or special duties
connected with the enforcement or administration of the
revenue laws as the exigencies of the service may require:
Provided, That internal revenue officers assigned to perform
assessment or collection function shall not remain in the same
assignment for more than three (3) years; Provided, further,
That assignment of internal revenue officers and employees of
the Bureau to special duties shall not exceed one (1) year.
Section 17. Assignment of Internal Revenue Officers and
Other Employees to Other Duties. They could be assigned to
other duties but it shall not be more than 3 years. This became
a law because prior to this law during the time of
Commissioner Liwayway Santiago, she made reassignments.
Of course, yung mga racket nila matatamaan, so they
complained. Kung mag-assign ka 3 years lang.
SEC. 19. Contents of Commissioner's Annual Report. - The
Annual Report of the Commissioner shall contain detailed
statements of the collections of the Bureau with specifications
of the sources of revenue by type of tax, by manner of
payment, by revenue region and by industry group and its
disbursements by classes of expenditures.
In case the actual collection exceeds or falls short of target as
set in the annual national budget by fifteen percent (15%) or
more, the Commissioner shall explain the reason for such
excess or shortfall.
SEC. 20. Submission of Report and Pertinent Information
by the Commissioner
(A) Submission of Pertinent Information to Congress. - The
provision of Section 270 of this Code to the contrary
notwithstanding, the Commissioner shall, upon request of
Congress and in aid of legislation, furnish its appropriate
Committee pertinent information including but not limited to:
industry audits, collection performance data, status reports in
criminal actions initiated against persons and taxpayer's
returns: Provided, however, That any return or return
information which can be associated with, or otherwise identify,
directly or indirectly, a particular taxpayer shall be furnished the
appropriate Committee of Congress only when sitting in
Executive Session Unless such taxpayer otherwise consents in
writing to such disclosure.
(B) Report to Oversight Committee. - The Commissioner shall,
with reference to Section 204 of this Code, submit to the
Oversight Committee referred to in Section 290 hereof,
through the Chairmen of the Committee on Ways and Means
of the Senate and House of Representatives, a report on the
exercise of his powers pursuant to the said section, every six
(6) months of each calendar year.

TAXATION 1
Based on the Lectures of Dean Quibod
Section 19. and Section 20. These reports are submitted to
Congress by the commissioner, specially if the statutes have
loopholes on the basis of her reports. Any tax leakages or
loopholes will be brought to the oversight committee for its
corresponding legislation.
Section 21. Sources of Revenue. These taxes are selfassessing.
SEC. 21. Sources of Revenue. - The following taxes, fees
and charges are deemed to be national internal revenue taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue.
Next meeting we will go now to Income Tax.

INCOME DERIVED FROM


BUSINESS OR PROFESSION

LABOR,

EXERCISE

OF

From services rendered. Income is also pertains to earnings


derived from services rendered. Wages are paid services for
rendered. Likewise, salaries are paid for the labor rendered,
there is income.
Who earned the income? The laborer or the worker.
From the exercise of business or profession. It is through
the use of capital as a form of business or investment. Income
is derived from profit in the exercise of a business. Also,
income is derived when investments are made. When a gain or
profit is made through those investments then you will have
also income.
So income may be derived from labor, exercise of business or
investment, or both.
GAINS IN DEALINGS OF PROPERTY

August 9, 2016
By Yasmine Ibay
INTRODUCTION TO INCOME TAXATION
What is Income?
Income is the amount of money or property received by a
taxpayer (person or corporation) within a specified time
whether as payment for services, interest, or profits from
investments.
Supreme Courts Definition of Income - Income is the flow of
wealth into the hands of the taxpayer other than return of
capital.
*Note: This is a broader concept of income.
CONCEPT OF INCOME
Capital is the fund whereas, income is the wealth. However,
not all wealth which goes into the hands of the taxpayer will
become income. Part of that will be considered as capital.
As an illustration, we look into a borrower-lending relationship.
The lender lends money to the borrower for P10,000 with 12%
interest.
Principal:
10,000
Interest:
(10,000 *12%)
1,200
Total Payment due:
11,200 (10,000 is a return
of capital and 1,200 is the income)
Take note that a part of the 11,200 is capital and capital is not
considered as income. So 10,000 is the capital and the 1,200
is the income.
Wealth which goes into the hands of the taxpayer will be
income provided that it does not pertain to capital. If the wealth
that goes into the hands of the taxpayer includes income, then
you have to remove capital portion in order to determine the
income.
3 Manresa 2016-2017

Income is also derived from the gains or profits in dealings in


property whether real or personal. The gain or profit in excess
of capital as a result of the exchange of transactions will be
called as income. However, we are not only interested in the
income. What we are interested of is the taxability of the
income. For purposes of taxability, there are 3 essential
requisites for the taxability of the income.

ESSENTIAL
INCOME
1.

REQUISITES

FOR

THE

TAXABILITY OF

There must be a gain or profit.


Mere expectation for profit is not income. An increase
or appreciation in the value of the property does
not give rise to income.
For instance, you are a holder of shares of stocks
which you acquired 5 years ago and it was just selling
at P1.00. So you acquired 1,000 shares at P1.00 at a
total of P1,000. 5 years after, the value of the shares
ballooned to P1,000.00/share. So from P1.00, the
value of the share increased to P1,000.
Is there income?
No. There is merely an appreciation or increase in the
value of the property. There is no income.
For purposes that there will be an income, there
must be a transaction that will give rise to the
income. Hence, a transaction where no exchange of
value is given or received does not give rise to an
income. For income to be recognized, there must be
a transaction where there is a change of value. How
will that be? There must be a sale, conveyance or
transfer of the property. If there is no change or
transaction, there will just be an appreciation. What
you are looking at is just a capital which just

TAXATION 1
Based on the Lectures of Dean Quibod
appreciated in value. But in the event that you are
going to sell that property and you are going to derive
a gain upon that sale, then there will be an income.
So a transaction where there is no exchange of
values, it does not give rise to an income.
2.

during the tax year. Hence, if the taxpayer uses the


actual receipt, then all income that he is going to
receive during the tax year shall be based on the
actual receipt. The same is true if he opts to use the
constructive receipt.

The gain or profit must be realized or received.


3.
Basis on recognizing income:
a. Actual receipt (Cash Basis)
b. Constructive Receipt (Accrual Basis)
In the context of realization of income, income is
recognized on the basis of actual receipt or
constructive receipt. Under the Tax Code in relation
for accounting purposes, the taxpayer is given an
option at what point in time income is to be
recognized. It may be recognized on the basis of
actual receipt or constructive receipt. In other words,
income will be recognized upon the actual receipt of
the money. Or income is recognized when it was
realized even though actual receipt is only later.
In accounting, the actual receipt is called the CASH
BASIS. On the other hand, constructive receipt refers
to the ACCRUAL BASIS. Here, income is already
recognized although actual receipt is later.
Example:

Declaration of Dividends by X Corporation


November 15, 2015 declaration of
dividends
January 15, 2016 distribution of dividends

You are a stockholder of the corporation and you


received dividends. Lets say, on the basis of your
shareholdings, there is a dividend of P1,000 and you
received the dividends on January 15, 2016. If you
are a stockholder, when did you realize/recognize the
income? The taxpayer under the NIRC is given 2
options at what point in time he is going to recognize
the income. If a stockholder uses the actual receipt for
recognizing the income, income is recognized only on
January 15, 2016 (taxable in the year 2016). This is
the time he realized the income on the basis of actual
receipt.
But if the stockholder is a constructive receipt
taxpayer, that he recognized the income at the time it
was earned even though receipt will take place later,
then income is recognized as early as 2015
(November 15, 2015) when the dividends were
declared. So at the point where dividends were
declared, income was already there even though he is
going to receive that later on. The income was
constructively received as early as November 15,
2015.
So that is the option given to the taxpayer. He may
use constructive or actual receipt in recognizing the
income.
*Note: The law and for accounting purposes
requires consistency in recognizing/ realizing the
amount of income that you are going to earn
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The gain or profit must not be excluded by law or


treaty from taxation. (It is not tax-exempt.)

TWO APPROCHES IN TAXATION


In taxation of income, there are 2 role approaches.
1. Global Approach
2. Schedular Approach
Brief History of our Tax System. The Philippine Income Tax
System evolved from global to schedular. Before the late 80s,
we have the global system of taxation. The global system
follows the principle that all income are one and the same.
Under this income recognition, the law did not recognize the
different kinds and classes of income. In other words, since all
income is treated as one and the same, all types of income that
you will receive during the tax year (whether compensation,
business, profits, gains, and from other transactions) will be all
treated as one and the same. They are declared one time,
claim the deductions, and the taxable income will remain
subject to the income tax rates. So there was no differentiation
of the different types of income because all income are one
and the same.
Case Ruling
Tan vs. Del Rosario (237 SCRA 324)
Global Approach refers ta a system where the tax
treatment views indifferently the tax base and
generally treats in common all categories of taxable
income of the taxpayer.
On the other hand, Schedular Approach refers to a
system employed where the income tax treatment
varies and made to depend on the kind or category of
taxable income of the taxpayer.

Take note that the tax treatment view indifferently the tax base.
There is no distinction. It generally treats in common the
categories of taxable income. All income are mingled, we allow
deductions if applicable, then you have your taxable income
times the income tax rate.
The opposite is what we call as the Schedular. There is a
distinction or differentiation of the different classes/items of
income. Under the Schedular, there is a separate treatment for
compensation, separate treatment for professional/business
income, passive income, and capital gains. There is now a
distinction of the different types of income which the taxpayer
may earn.
Our current income tax system follows the schedular. We
categorize our income into 4 classes.
Four classes of categories of income:

TAXATION 1
Based on the Lectures of Dean Quibod
1.
2.
3.
4.

Compensation income
Business income / professional income
Passive income
Capital gains

In your readings you may encounter semi-schedular, semiglobal etc. but predominantly it is schedular. You would go over
the tax treatment over the different classes of taxpayers from
individuals to corporations. Youll notice the differentiation in
the manner of the treatment of these income. But they would
say that it is semi-global because there would be a common
treatment to all other income which are not subject to
special/preferential rates.
WITHHOLDING TAXES
When we shifted from the global to schedular, when there was
a distinction and differentiation of income, we introduced a tax
reform. We introduced the withholding of taxes.
Under the global approach, since it follows the principle that all
income are one and the same, a lot of income items have
escaped taxation. If you are a taxpayer who is purely
compensation income earner, normally the income that will be
taxed are those income arising from your labor. Now, if you
have a bank deposit having an amount of P10,000 and at the
end of the year it earned an interest of P100, normally you will
not anymore declare an interest income of P100 since it is
merely of minimal value. However, what if there are 100 million
people doing the same thing? Then that would be a big chunk
of revenue that would escape taxation. Nakaligtaan itax
because of the global approach of taxing income. There will be
a lot of income items which will not be reported. So we
addressed that by shifting to schedular approach. Then we
introduced the withholding of taxes.
The withholding of taxes follows the principle of pay-asyou-go. Under the principle of pay-as-you-go, a tax is already
collected at the source of the income. In the case of wages,
upon the receipt from the employer, the taxes due are already
deducted and withheld by the employer. The employer then
remits the same to the BIR.
Yung interest income niyo sa deposit, masking P100 lang yan,
kinaltasan na yan ng bangko for the withholding tax on interest
income which we also call as passive income.
Withholding Agents. Under this principle, the tax was already
charged against the taxpayer at the very source of the income.
So you have withholding agents. The employer, banks,
whoever has custody of the income before its remittance to the
recipient. That custodian or withholding agent is the one, under
the law, with the obligation to make the withholding. Upon
receipt of income by the recipient, the tax had already been
deducted.
Who are the withholding agents?
Compensation income: employer
If you are engaged in the business or practice of profession,
when you bill your clients for services rendered, upon receipt of
the check, the withholding tax had already been removed.
Illustration:
3 Manresa 2016-2017

A fee has been charged at P100,00 for the services rendered


to a client. Normally, the withholding tax is at 10%. Hence, only
the P90,00 will be actually received. The P10,000 has been
withheld as income tax.
PASSIVE INCOME
An example would be interest income on bank deposits.
CAPITAL GAINS
Capital gains are when you have properties which are not used
in business. For instance, you sell a house and lot. There is
capital gains tax on the sale of the real property. A tax is
already collected unlike before. Before, the gains are declared
on an annual basis. Under the global, there is only one return
to be filed. You consolidate the income you have already
earned during the year, claim the deductions, then determine
your taxable income. From the taxable income you apply it to
the rates. Then thats the income tax you are going to pay. We
shifted from that and introduced the schedular.

Case Digest by Dean


Sison vs. Ancheta
When the simplified net income tax scheme or gross modified
income taxation was introduced, we recognized as early as
that, the 4 categories of income. Under that system, there were
separate traits for compensation income. To the individuals
engaged in business or practice of their profession were also
subject to different set of rates. A group of professionals
challenged the validity of that law. They questioned as to why
the rates for the compensation income earners are lower
than those earning business income.
Ruling: Apparently, what misled petitioner is his failure to take
into consideration the distinction between a tax rate and a tax
base Taxpayers may be classified into different categories.
To repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences Taxpayers
who are recipients of compensation income are set apart
as a class. As there is practically no overhead expense, these
taxpayers are not entitled to make deductions for income tax
purposes because they are in the same situation more or less.
On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their
income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose
on all alike the same tax rates on the basis of gross income.
There is ample justification then for the Batasang Pambansa to
adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as
regards professional and business income.

*Note: Later on, after EDSA Revolution, Cory Aquino revised


the tax rates complained of by the people. From that time until
now, youll notice that the rates of the individuals who are

TAXATION 1
Based on the Lectures of Dean Quibod
compensation income earners or engaged in business or
practice of profession have the same rates. From 5%-32%. We
have the commonality insofar as the rates of their taxable
income.

Rental income

location of the property


*If the property is found abroad,
it is a foreign sourced income. If
in the Philippines, the rental
income is deemed earned in the
Philippines.

FORMS OF INCOME

Money
Property
Service

In receiving income, it is not always necessary that the income


that you are going to receive will be in the form of cash. Income
is also recognized even if you will receive property. Likewise,
income is deemed recognized even if you receive a rendition of
service.
For instance, you are a lawyer and you are able to help
someone. Then the client has no money, in turn, hell render
services to you as payment. He subsequently becomes your
driver. Hence, rendering such service(driving) is considered as
payment to the lawyer.

Royalties or Gains derived


from the use of intellectual
property
Gains on sale of real
property
Gain on sale of real property

citizenship of the taxpayer


residence of taxpayer
source of income

If you are a citizen of the state, the income you earned is


subject to income tax by reason of your citizenship. If you are
an alien residing in that state, the state taxes your income by
reason of your residence. If you are an alien not residing in
that country but you are deriving income from that country, you
are still taxed based on the source of the income.
Likewise, in our jurisdiction, we follow that rule on situs. We tax
income on the basis of citizenship, residence or source.
DETERMINATION OF SOURCE

of

the

location of the property


place of sale
the
Philippines
but
the
consummation
was
in
Hongkong then it is an income
without.

Sale of merchandise
Interest income

place of sale
residence of the debtor
*Contract of loan having a
lender-borrower
relationship,
the source of income is the
residence of the debtor. Lender
is in the Philippines, borrower is
from Hongkong. Interest income
is earned in Hongkong.

SITUS OF TAXATION

1.
2.
3.

use

*Even if the product is found in

A combination of cash, property or service is also allowed.

Situs is the place of taxation. The place where the income is


due. For purposes of income tax, the situs is determined based
on the following:

place of
intangibles

Dividend Income

residence/office
corporation

Dividends
are
profits
earned by a corporation
distributed
to
its
stockholders.

Mining
Farming

of

the

* If prinicipal office is in the US


and you are a Filipino
stockholder residing in the
Philippines, the income is
earned in the US. It is not the
place
of
payment
that
determines the source of the
income but the office of the
corporation. Hence, it is an
income earned outside of the
Philippines.

place where the mine is


located
place where the farm is
located

As a rule, it is not the place of payment which determines


where the income was earned.
Income
Compensation for services
rendered

Source
place of performance of
service (not the place of
payment)
*Note: A talent receiving
compensation in this country
but the performance was made
abroad, the income shall be
considered as an income
earned outside the Philippines
(income without). Because that
is the place of performance of
the service.

3 Manresa 2016-2017

August 11, 2016


By Shahata Tagtagan
(NOTE: Sorry guys hindi ko narecord ang 1st 3 minutes
(approx) na discussion ni Dean. Pero sure ako na Section 31
lang ang diniscuss nya na namiss ko. Let me cite the provision
here and put some discussion based on the Casasola book.
)

TAXATION 1
Based on the Lectures of Dean Quibod
1) Compensation. It pertain to compensation for
SECTION 31 TAXABLE INCOME DEFINED The term taxable income
income specified in this Code, less the deductions and/or personal and additional
exemptions,
services
in whatever form paid, including but not
such types of income by this Code or other special laws.
limited to fees, salaries, wages, commissions, and
similar others. For purposes of compensation income,
regardless of whatever form the services were paid, it
could still be taxable compensation income and they
Taxable income refers to the gross income subject to tax, less
the deductions, whether itemized or optional standard
form part of your taxable income.
deductions, and/or personal and additional exemptions, if any,
authorized for such type of income. This term refers to the tax
There are employers who will provide mere
base.
allowance, board and lodging, or representation. All
these will form part of the compensation income of the
For individuals who are employed, it is the income after
employee. There is the rule we call for the
deducting the exclusions and the exemptions.
convenience of the employer rule the board
For individuals engaged in trade or business or in the practice
and lodging and meal allowance are provided by
of their profession, it is the income after deducting exemptions.
the employer, because the employer has to have
For corporations and other juridical entities, taxable income
that person (e.g driver). He has to have the person
would mean the net income, also after deducting the itemized
available 24 hours because of the nature of the
deductions or the optimal standard deductions of 40%, at the
profession. The employer will provide housing and
option of the taxpayer.
meals.
Computation of taxable income must be computed with
respect to a fixed period. That period is twelve months ending
December 31st of every year, except in the case of a
corporation filing returns on a fiscal year basis, in which case
taxable income will be computed on the basis of such fiscal
year.

In that occasion, will these board and lodging and the


meals and other facilities be included as part of this
compensation income?
NO MORE, because these facilities are extended to
the employee which are for the convenience of the
employer.

DEANS DISCUSSION PROPER


(To reiterate: If facilities are provided for the
Principle involving taxation: Income pertains to the flow of
convenience of the employer, these allowances will no
wealth which goes into the hands of the taxpayer other
longer form part of the taxable compensation income
than return of capital. This gross income makes all income
of the employee, in accordance with the for the
derived from whatever source including but not limited to the
convenience of the employer rule. They are
following items:
expenses on the part of the employer; it will not be an
SECTION 32. GROSS INCOME
additional taxable compensation income on the part of
(A) General Definition Except when otherwise provided in this Title, grossthe
income
meansWhat
all income
employee.
will bederived
taxable perhaps are the
from whatever source, including, but not limited to the following items: wages and salaries).
(1) Compensation;
(2) Gross income derived from the conduct of trade or business or the exercise
of aalso
profession;
There are
employers, especially those engaged
(3) Gains derived from dealings in property;
in business, where representation is provided. Gas
(4) Interest;
allowance, or even service vehicle, or vehicle
(5) Rents;
allowance is provided by the employer, which are in
(6) Royalties;
pursuit of his trade or business.
(7) Dividends;
If these allowances will require the employee:
(8) Annuities;
a) to account how they were spent;
(9) Prizes and winnings;
b) provide receipts; and
(10) Pensions; and
c) return any excess,
(11) Partners distributive share from the net income of the general professional partnership.

The gross income is defined under Section 32 by providing a


list of what would be considered as income, but the list is not
limited only to the items enumerated. From this list of 1 11,
these are not only the sources of your gross income. For
purposes of income taxation, or even for purposes of
taxation, whether the source is lawful or unlawful, it will
still be taxable, unlike in imposition of license fee which is
normally imposed on legitimate activities. But for purposes of
tax, in particular income, whether you derive income from, say,
drag race, prostitution, gambling, other vices, all these income
are still taxable. If you want to, you may be made to declare
these sources of income, whether legitimate or illegitimate
sources.

3 Manresa 2016-2017

then these allowances will not form part of the


compensation income in the hands of the
employee. Meron kang mga salesman, sales
representative. They go around promoting the
business, to get customers. The employer will provide
them for this __. May sasakyan sila, gasoline,
representation etc. However, if these allowances will
require them to liquidate or account or provide
receipts on how they were spent, then return any
excess, then these allowances will not form part of the
compensation income. While there may be expenses
on the part of the employer, it is not income on the
hands of the employee.
On the other hand, if the allowances will NOT
require the employee to provide receipts, like add
on na lang yun sa sweldo nya, no requirement to
liquidate and account for them, then that

10

TAXATION 1
Based on the Lectures of Dean Quibod
allowances will form part of his taxable
compensation income. Those allowances will be
subject to tax, including his salaries and wages.
2)

3)

4)

Gross income derived from the conduct of trade


or business or the exercise of a profession
When in the course of the conduct of the business,
income was derived, then that income is also taxable.
Or in the exercise of a profession, there is
professional income in the performance of profession,
then a professional income is recognized, and
therefore also taxable.
Gains derived from dealings in property - This
pertains to transactions where gain is derived when
properties are sold, exchanged or conveyed, whether
real or personal properties. For as long as there will
be a gain or profit in those dealings, the gain or profit
will also be a taxable income.
Interest - It pertains to the use or forbearance of
money. In a contract of loan, the lender will impose an
interest on the money borrowed by the borrower. An
interest income is earned in the loan, then that
interest income is also a taxable income.

5)

Rents - Rental income for the use, or as a


consideration for the use of the property. The lessee
pays rentals to the lessor, then in the hands of the
lessor, that is a rental income, and therefore taxable.

6)

Royalties This pertains to the consideration for the


use of intangibles/intellectual properties or the use of
the trade name or trademark, where the owner is
entitled to the payment of royalties. In the hands of
the owner of the trade name or trademark, that is a
taxable income.
Dividends These are distribution of profits, as
earned by the corporation, to the stockholders or
business partner in a partnership. That is considered
as taxable dividends.

7)

8)

Annuities - Like interest income,


periodic payment. There is a fund
fund earns or generates income
annuities. This is taxable income in
beneficiary.

this pertains to
set up, and that
in the form of
the hands of the

9)

Prizes and winnings - There are conditions and


requirements for their exclusion. However as a rule,
these are taxable.

10) Pension - In the event you retire, you receive


pensions. These pensions include retirement pay and
3 Manresa 2016-2017

separation pay. They are taxable, as a rule, because


they are payment for services rendered. They will be
excluded only when they comply with the
requirements for purposes of exclusion.
11) Partners distributive share from the net income of
the general professional partnership - In the case
of the professional partnership, this pertains to the
exercise of a common profession. The partnership
earns income from the exercise of a common
profession. However, when we go to Section 26, the
partnership is not a taxable person (the professional
partnership). The taxable persons are the professional
individuals in that partnership. The individual
partners distributive share is a taxable income.
The income of the professional partnership per se
is not a taxable entity.
Again, these items from 1-11 are just some of the sources of
taxable income, but not limited only to them. There are other
sources. The rule is: as long as they would pertain to the
flow of wealth, which goes to the hands of the taxpayer
other than return of capital, then that will be income.

SECTION 32 (B) EXCLUSIONS FROM GROSS INCOME - The following


and shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to
the insured, whether in a single sum or otherwise, but if such
agreement to pay interest thereon, the interest payments shall b
(2) Amount Received by Insured as Return of Premium. - The am
premiums paid by him under life insurance, endowment, or annu
maturity of the term mentioned in the contract or upon surrender
(3) Gifts, Bequests, and Devises. The value of property acq
Provided, however, that income from such property, as well as
from any property, in cases of transfers of divided interest, shall
(4) Compensation for Injuries or Sickness. - amounts received, thr
Workmen's Compensation Acts, as compensation for personal
damages received, whether by suit or agreement, on account of
(5) Income Exempt under Treaty. - Income of any kind, to the exte
upon the Government of the Philippines.
1)

Life Insurance - How is this excluded? It is excluded


when the insured dies, and the insurance company
faces the heirs/beneficiaries. On the death of the
insured, the proceeds of the life insurance policy are
the receipt (?) of the proceeds income. Under 32 b
(1), life insurance proceeds are not income, because
what the heirs/beneficiaries receive pertains to return
of capital, because that is an indemnity for the loss of
life. Ano na ang kapalit ng life? Pera na. Namonetize
ang life by reason of the death of the insured. What
you receive actually is the return of capital, being
contracts of indemnity.
(NOTE: Dean started saying #2 Amount received
pero hindi nya tinuloy. So Im guessing part pa rin ito
ng #1) Another feature (?) of insurance is when they
are paid in installments. Say coverage is for P500k,
then you are paid in installments. When you add up all

11

TAXATION 1
Based on the Lectures of Dean Quibod
the installment payment, naging P560k, then there is
income. The income is P60k, the difference of the
principal coverage/principal amount of the policy. The
interest feature of the installment payment is
recognized as a taxable income.
2)

3)

4)

(ii)

Amount received by insured as return of premium


- There are insurance policies that, during their life,
there are amounts received by the insured. Say, on
the 5thyr, the insured will receive this much, then on
the 10thyr, and towards the life of the policy. Amounts
are received at certain point during the life of the
policy.
Are these amounts that you received, are they
income?
Under b2, these amounts represent return of your
premiums. The premium payments are the capital or
the consideration that you paid (?) for that contract of
insurance. The payments you received by reason of
that feature in the policy are not actually income, but
they represent return of capital, or return of the
premium. Your premium is your capital. There is no
income.
Gifts, bequest, and devices
When an heir/beneficiary receives a gift, bequest or
device, is the receipt of this property as a gift, bequest
or device, income?
No. What you have received is a receipt of capital.
When this capital will earn income or will have fruits,
then that is the time you recognize an income.
Example: few of the properties you received from the
estate are apartment dwellings. There are renters.
When you received the apartment, even when there
are existing renters, that is still not income, but receipt
of capital. However, when you are the one starting to
collect the rent from the renters, then this time it
becomes your income.
Compensation for injuries or sickness
(a) The amounts received for accidents, or
(b) health insurance, or
(c) under Workmans Compensation Act, or
(d) as compensation for personal injury or sickness
PLUS the amount of any damages received
whether by suit or agreement on account of such
injuries/sickness
-> ARE EXCLUDED. Again, they are forms of
indemnity. The amounts you received are receipt
of capital; you are being indemnified for the
loss/accident. In the context of the damages, the
damages wherein an income is recognized,
pertains only to loss of income or loss of
earning capacity, or loss of profits. By reason
of the accident, you will be hospitalized; you
incurred expenses in your confinement. You are
further indemnified for the loss of your income,
you were unable to work for 1month, and you
were indemnified for the loss of that income.
Are the amounts you received income?
(i)
Insofar as to the other damages and
indemnity (the expenses incurred for the

3 Manresa 2016-2017

confinement, for medicine etc, medical bills)


they are excluded as they represent return
of capital. They are forms of indemnity.
But the indemnity insofar as the loss of
income, loss of earning capacity or loss of
profit, they will now be considered as
taxable income.

Even if these were derived as a judgment in your


favor, being the injured party, where the offender was
adjudged to be liable and was ordered to pay, still it
will not change whether the amount you received is
income or not. There will be income only when the
damages referred to would involve loss of earning
cap, loss of income or loss of profit.
In terms of moral, exemplary, actual etc damages,
they will be excluded. In the course of the litigation,
you entered into amicable settlement/compromise
agreement. You agreed to the following indemnities that the offender will have to pay for your
hospitalization, damages, loss of income, then you
have now to determine what items are to be excluded
and the items to be considered as income.
(To reiterate: Insofar as loss of income or loss of
earnings, those are the damages which will be
considered as taxable income.)
5)

Income exempt under treaty - The income of any


kind to the extent required under a treaty obligation is
binding upon the Government of the Philippines.
Here, the Philippine Government enters into a treaty
with another country to exempt, for income tax
purposes, several items of income. Usually this is
done on the basis of reciprocity. Tax
agreements/treaties which would extend exemptions
on the basis of reciprocity are executive agreements
which DO NOT operate similar to an international
treaty, where the latter will need senate ratification.
Being an executive agreement, there is no need for
this to be approved by the senate. Reciprocity means
we will exempt that income from this foreigner in the
Philippines provided the Filipinos in that country will
also be given similar exemption.

6)

Retirement benefits, pensions, gratuities, etc.

SECTION 32 (B)
6.) Retirement benefits received under Republic Act No. 7641 and th
private firms, whether individual or corporate, in accordance with a reaso
employer: Provided, That the retiring official or employee has been in th
ten (10) years and is not less than fifty (50) years of age at the time o
benefits granted under this subparagraph shall be availed of by an offic
this Subsection, the term 'reasonable private benefit plan' means a pen
plan maintained by an employer for the benefit of some or all of his offic
made by such employer for the officials or employees, or both, for the
employees the earnings and principal of the fund thus accumulated, and
time shall any part of the corpus or income of the fund be used for, or b
exclusive benefit of the said officials and employees.
RECIT!!

12

TAXATION 1
Based on the Lectures of Dean Quibod
How are these retirement benefits become excluded?
What is R.A. 7641?
How many retirement benefits are contemplated in that
provision?
There are two.
(1) Under R.A. 7641 (amending Art. 287 of the Labor Code);
(2) 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.
The provision contemplates two types of retirements wherein
the law excludes from tax.
(1) When you retire under the Labor Code, the retirement
benefits have their own requirements. Hindi na inulit
dito as it made reference to R.A. 7641. Your
retirement pay will be excluded.
(2) When your employer sets up reasonable private
benefit plan. It pertains to pension, gratuity, stock
bonus, or profit-sharing plan etc. The employer
sets up its own, whether individual or corporate,
reasonable private benefit plan. Ibig sabihin, nagsetup sya ng sarili nyang retirement fund, pension fund,
etc. For purposes of the exclusion, these are the
requirements, so that those retiring under the
employers own benefit plan will be excluded.
REQUIREMENTS:
(a) It must be in accordance with a reasonable
private benefit plan. This reasonable private
benefit plan should be one approved and
accredited by the BIR. It could not just set up
private benefit plan without having this approved
by the BIR.
(b) Length of service minimum length of service
requirement is at least 10 years.
(c) Age requirement not less than 50 years of
age.
(d) It must be availed of the employee only once.
For purposes of exclusion, if you are retiring and the
employer has its own retirement policy, the private
benefit plan should comply with these requirements.
When the employee retires under the reasonable private
benefit plan at 49 years of age, would his retirement excluded
or taxable?
TAXABLE, because the requirement is that the employee must
be at least 50 years old.
If he retired at 50, but his length of service is only 8 years, will
the retirement benefit be excluded or taxable?
TAXABLE, because minimum length of service requirement is
at least 10 years. All the requirements must be complied with.
For purposes of exclusion, and for purposes of being taxed,
what is the essential requirement?
3 Manresa 2016-2017

All the four requirements must be complied with.


Absent one requirement, what will happen?
The retirement shall be TAXABLE.
(To reiterate: All those requisites must be there for purposes of
the exclusion. Otherwise, requirement benefits shall be
taxable.)
Supposed the employer sets up a retirement plan as approved
by the BIR, then his retirement policy is that kelangan ng 20
years of service, then the age now is 65yo. Then the employee
retires at the age of 60 and rendered 20 years of service.
Employer told him that is taxable! Employee insisted that is not
taxable because I complied with the requiremens under the
NIRC! Decide. If the employer sets up a higher standards
for purposes of retirement (length of service/retirement age
is higher than that set by law), that has to be followed. That
will now be the basis for the retirement. The employee could
not retire under the requirements of NIRC. If employer sets
up higher requirements than NIRC, then the employee
retires lower than that set up by the employer, the
retirement now becomes taxable. The requirements of the
retirement policy of the employer have to be followed, because
these policy requirements, including the reasonable
private benefit plan, were already made known to the BIR
for purposes of the exemption.

SECTION 32 (B)
6) (b) Any amount received by an official or employee or by his heir
separation of such official or employee from the service of the employer
disability or for any cause beyond the control of the said official or employ
Section 32 B, #6 (b) pertains to treatment of separation pay.
Payment on account of death, sickness or other physical
disability or for any cause beyond the control of the official or
employee, then the separation pay is excluded. For purposes
of the exclusion, it does not only cover the death sickness or
other physical disability of the employee but for any cause. All
other causes, for as long as they are involuntary or
beyond the control of said employee, the separation pay
shall be excluded. However, if the cause of the separation
is one within the control of the employee (voluntary),
separation pay is taxable. Example is resignation. In labor
law, when you resign, you are not entitled to separation pay.
But despite that, the employer extended separation pay. That
separation pay becomes taxable.
SCENARIO: If you resigned because you applied for job
abroad. The employer abroad told you to get the next flight, so
you resigned. Your employer in the Philippines learned about it
and gave you separation pay. What is the treatment of that
separation pay? It will now be taxable because it was
voluntary.
There are instances when despite resignation, the resignation
is not voluntary. Example: Business acquisition or business
combination (merger, consolidation). The new owners will bring
the new managers. Previous managers will tender their
resignation, allowing the new management to have free hands
to run the business. The old managers will be given separation
pay. What is the treatment? The resignation is INVOLUNTARY
because they extended that courtesy for purposes of allowing
the employer to have a free hand. Being involuntary in nature,
it is beyond the control of said employees, therefore the
separation pay is excluded.

13

TAXATION 1
Based on the Lectures of Dean Quibod

August 16, 2016


By April Liz Pareo
*Continuation of Sec. 32B, Par. 6 (Exclusion from Gross
income of Retirement benefits, etc.)
(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.
Separation pay, as a rule, are to be taxable because they are
given also for services rendered. They will be excluded when
the ground for the separation is one which is involuntary or one
beyond the control of separated employee.
c), treatment of social security benefits from abroad, 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.
Take note that the source of these benefits are from foreign
government agencies or from foreign institutions whether
private or public. The law based the exclusion of this retirement
from tax because it is foreign source.

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.
We exclude that because the rule on international comity. We
do not tax another sovereign. Income derived from investments
in the Philippines by foreign governments, financial institutions
who are in control or enjoying the financing from foreign
governments. Then you have the national/regional financial
institutions established by foreign governments
(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.
This is the rule on immunity of government from tax. The
government does not tax itself and it excludes taxing itself
when it performs governmental function.
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.

(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.

As a prior rule, under 32(a), prizes and winnings are taxable.


For the purposes of their exclusion you have prizes and
awards under Section C.

This is in connection with benefits received by our immigrants


from the World War II who are still around and still continue to
receive benefits from the US. We grant the exclusion.

Under (i), when he join the contest and sent his application to
join and he won. Despite that it was a recognition of religious,
charitable, scientific, etc., prizes and awards are now taxable
because the recipient took action to enter the contest. But
when he was nominated without him knowing about such fact,
for that recognition or for that prize and award, you were
selected, then comes the exclusion.

(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.
The retirement gratuity received by the retiring officials and
employees would cover the terminal leave pay as well as
unused leave credits which are not convertible to cash. The
law excludes them from the tax.
(7) Miscellaneous Items. (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
3 Manresa 2016-2017

Under (ii), while in some competitions where prizes and awards


are given, the recipient is made to render future services but
still theres an exclusion because it was not substantial. When
you say substantial, it means he has to promote this contest,
he becomes an ambassador for that certain competition
wherein he was given a prize and award and where it will take
his time and devote his time for that recognition, prize and
award. The services now being substantial, will now require
taxability of that prizes.
If the services rendered is not substantial, he is made to
promote but only for some conditions. For example, he is made
to promote on certain dates like for 1 year, tatlong araw then in
selected dates(???). Its not really substantial that will take up
his time, then exclusion will be invoked and the prizes and
awards will no longer be taxable.
(d) Prizes and Awards in sports Competition. - All prizes and

14

TAXATION 1
Based on the Lectures of Dean Quibod
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.

Still, it will be consolidated for as long as it will not exceed 82k.


Since this will be annualized, pag nag-exceed, the excess will
be subject to tax. The 82k is the one that is excluded.

The one who won in the Olympics, so the prizes and awards
granted in local as well as international sports competition,
whether in the Philippines or abroad. One important
requirement is that the participation must be recognized and
approved and allowed by the respective sports association.

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS,


SSS, Medicare and Pag-ibig contributions, and union dues of
individuals.

Eg: A participated in the sports competition, while his sport is


weight lifting, but he participated abroad as player in chess,
then the prizes and awards will be subject to tax.
In one case, the chess players of the Philippines have been
divide because of Politics. Some went to abroad, participated
in intl sports competition without the sanction from their
respective sport association. They won, received cash prizes
which were subjected to tax.
For purposes of the exclusion when there are competitions
here or abroad, local or intl, should be one allowed by your
national sports association.
(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;

They are excluded because in the determination of your tax in


your salary, it is based on the gross amount without the benefit
of the deduction. Like yung mga cash advances mo, utang, will
be subject to salary deduction. The withholding tax, the income
tax of your wages is not based on the net pay but on the gross
amount that you are going to receive without the benefit
deduction. If these contributions are tax free, the tax base of
the withholding tax against your salaries will be adjusted.
What will happen here, is yung salaries less contributions.
Whether SSS in private, GSIS in in government, PhilHealth,
PAG_IBIG or union dues if its an organized standard. Ibawas
yan to arrive at your net salary. The net now is now the tax
based for purposes of the income tax.
(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.
These are excluded because of the maturity of this
indebtedness, what we call long term investments.

(ii) Benefits received by employees pursuant to Presidential


Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986;

(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.

(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

They are exempted for purposes of giving incentive in these


forms of investments and these redemption also of shares in
Mutual fund operates as a redemption of Capital.

(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.

We go back to Section 22. Definitions - When used in this


Title:

13th month pay is taxable since it forms part of your services


rendered. For purposes of exclusion, the law sets a limit. You
have RA 10653 where the exclusion is up to P 82, 000.00 That
is the maximum amount.
Eg: You receive a13th month pay of 100k, the 82k is exempted,
the excess is taxable. The 13th month pay whether received
from public or private will take into different forms. Merong iba
nagbibigay ng 14th month pay or 6th month bonus, etc.

3 Manresa 2016-2017

(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.

(E) The term 'nonresident citizen' means:

15

TAXATION 1
Based on the Lectures of Dean Quibod

(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.
(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.
(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.
(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.
(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.

(K) The term 'withholding agent' means any person required


to deduct and withhold any tax under the provisions of Section
57.
Our Income Tax System has a withholding of taxes feature
under the principle of pay as you go. Our passive income and
capital gains are already subject to tax at the time or source of
the income. Even the income has not yet received by the tax
payer, the tax has already been collected and claimed through
the withholding agent. What is received by the income recipient
of the beneficiary *** is already net of tax.
(P) The term 'taxable year' means the calendar year, or the
fiscal year ending during such calendar year, upon the basis of
which the net income is computed under this Title. 'Taxable
year' includes, in the case of a return made for a fractional part
of a year under the provisions of this Title or under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for which
such return is made.
Individuals are required to follow the calendar year as the tax
year, regardless of citizenship. In case of corporations, the
taxable year may be the calendar year or the fiscal year.
For tax purposes, you will see that the terms are defined in the
negative. Like for example, a fiscal year, a period of 12 months
that does not begin in December and does not end in January.
Section 39 on how capital assets are assigned, they are also
defined in the negative.

3 Manresa 2016-2017

(Z) The term 'ordinary income' includes any gain from the
sale or exchange of property which is not a capital asset or
property described in Section 39(A)(1). Any gain from the sale
or exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary income' shall be
treated as gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1). The term
'ordinary loss' includes any loss from the sale or exchange of
property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall be treated
as loss from the sale or exchange of property which is not a
capital asset.
Capital gain gain on a capital asset.
When there is sale or disposition of ordinary assets, we call it
ordinary income. When there is loss, we call it ordinary loss.

FF) The term 'long-term deposit or investment certificates'


shall refer to certificate of time deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments with a maturity period of not less than five (5)
years, the form of which shall be prescribed by the Bangko
Sentral ng Pilipinas (BSP) and issued by banks only (not by
nonbank financial intermediaries and finance companies) to
individuals in denominations of Ten thousand pesos (P10,000)
and other denominations as may be prescribed by the BSP.
More than 5 years, long term investment. Less than 5 years,
short term.
Section 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on

16

TAXATION 1
Based on the Lectures of Dean Quibod
income derived from sources within the Philippines.

and you engage in a regular business, your income will be


taxable. You will be tax of your business partnership or
professional partnership.

The rules are simple.

C.

Partnerships:

Business Partnership: one who is not in the


exercise of a professional partnership (in the
negative). They will be taxed like the corporations.

Professional partnership: one exercising a common


profession. Under Section 26, they are not taxable.
Taxable are the individual professional partnership.

So far as Individuals, resident citizens lang ang taxable for all


sources. The rest of them, Philippine source income lang.
I.

Individuals

A. Citizens

Resident citizens : taxable for all sources within and


without ( Philippine or Foreign Source)

Non-resident citizens : taxable only on sources within

B. Aliens : Regardless of their status, taxable only on sources


within

If you set up a professional partnership to engage in the


practice of law, so you registered, agreed to such partnership,
that is not taxable. It will be the individual partners who will
bring along the respective share on the income of that
partnership, they will be individually and separately taxed like
individuals. It will be the individual professional partners who
are taxable not the professional partnership.
III.

Resident alien

Non-resident alien :
a) Engaged in trade or business
b) Not engaged in trade or business

II.

CORPORATIONS
A.

Domestic corporation: is one which is organized


and created under Philippine laws. Taxable on all
sources within and without. All income in the
Philippines are taxable as well as the foreign sourcre
income.

B.

Foreign Corporation:
Philippines

one organized outside the

Resident Foreign Corporation : one with


license or authority to engage in business

Non-resident foreign Corporation: no authority


to do business yet it earns income. We tax that
because the source is in the Philippines.

The rule on situs will take place on the basis of citizenship,


residency and the source. In the case of citizens, we tax them
because of their citizenship. We tax the aliens because they
reside here. We tax the resident alien because the source of
the income is in the Philippines. That holds true, likewise, in
the case of corporations.

ESTATES : pertains to the taxpayer represented by


the executor or administrator or one of the surviving
spouse or the children of the decedent, wherein the
decedent left behind income-generating properties
prior to his death. The estate, while earning income
may still be taxable as an estate. Tax will still be
collected against estate, it will be treated as a
separate taxable person from the personality of the
administrator or executor.

Trust created by the grantor or for the benefit of the beneficiary.


The trust is treated as a separate taxable person form the
person of the grantor. So when the trust earns income because
property or money is in the trust, then it is invested, income is
earned then it is treated as a separate taxable person from the
grantor.
In the case of estates, the property is in abroad the decedent is
earning income from that property. If the decedent is a citizen,
that would be taxable. Being a citizen, the foreign source
income of the estate will be subject to income tax.
In determining the taxability of the income:
1) Know where is the income (Phil or outside)
2) Know the earner (Filipino, Phil corp or alien, or foreign
corp)
3) Determine the rate

In these categories, there are only two taxpayers that are


taxable on all sources: the Resident Citizens and the Domestic
Corporations. The rest of the entities, individuals are taxable
only within.
The third category is the partnership. As we have mentioned,
the term, corporation involves partnership. If you organize
among yourselves and you make a group, even if you are not
registered with the SEC, even if you do not have a business
3 Manresa 2016-2017

17

TAXATION 1
Based on the Lectures of Dean Quibod
Section 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.
An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within and
without the Philippines be every individual citizen of
the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines
who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C)
of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (b), (C) and (D) of this Section, derived
for each taxable year from all sources within the
Philippines by an individual alien who is a resident of
the Philippines.
The tax shall be computed in accordance with and at the rates
established in the following schedule:

Section 24. Income Tax Rates.

Not over
P10,000

Over P10,000 but not over


P30,000
Individual citizens do not speak whether resident or nonresident but speaks of a citizen in general. The aliens that are
Over P30,000
butfornotthis
over
covered here are only the resident aliens.
The rates
P70,000
are 5-32% imposed on these citizens and individual resident
aliens.
Over P70,000 but not over
P140,000
The rates applicable are 5-32% are the
income mentioned in
Section 24 A. all other income within or without which are not
24 B, C, D. you have to determine by Over
exclusion.
Those
P140,000
butwhich
not over
are passive income which are not B, P250,000
capital gains which are
not C will be taxed.
Over P250,000 but not over
The rates here is 5-32%, the application
is cumulative. If the
P500,000
taxable income is 100, 000.00. you compute it bracket to
bracket. It belongs to the bracket more than 70,000 but less
than 140, 000. So the tax is 8, 500 plus Over
20% P500,000
of the excess.

Eg: Tax due = 100, 000


=8,500 + 205 (100k -70k)
=8,500 + 20% (30,000)
8,500 + 6,000
=14, 500
If your income is 1million, you get the maximum bracket. You
will be taxed 125,000 + 32% of the excess of 500,000. Do the
math.
These rates were to apply on the individual citizen who is
residing outside the Philippines including OFW if they earn
income in the Philippines
3 Manresa 2016-2017

The non-resident citizens, the one referred to Section 24 A (i),


in letter B, the non-resident with income therein. On a resident
alien, for the income within which are not B, C, D.
Then you have the minimum wage earners, whether public or
private, are exempted from income tax. The wages include
your overtime, night shift, hazard pay, they will be exempted
from tax.
If you are husband and wife who are both income tax earners,
they are treated as separate taxable income persons. They file
their own separate income tax returns.
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final
tax at the rate of twenty percent (20%) is hereby imposed upon
the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived
from sources within the Philippines: Provided, however, That
interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the
expanded foreign currency deposit system shall be subject to a
final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income: Provided, further, That interest
income from long-term deposit or investment in the form of
5% common or individual trust funds, deposit substitutes,
savings,
investment management accounts and other investments
evidenced
by certificates
in such form prescribed by the
P500+10%
of the
Bangko
Sentral ng over
Pilipinas (BSP) shall be exempt from the
excess
tax P10,000
imposed under this Subsection: Provided, finally, That
should the holder of the certificate pre-terminate the deposit or
P2,500+15%
the fifth (5th) year, a final tax shall be
investment
beforeof the
excess
over
imposed on the entire income and shall be deducted and
P30,000
withheld
by the depository bank from the proceeds of the longtermP8,500+20%
deposit or investment
certificate based on the remaining
of the
maturity
thereof: over
excess
P70,000
P22,500+25%Fourof(4) years to less than five (5) years the excess 5%;
over
P140,000
P50,000+30%Three
of (3) years to less than (4) years - 12%;
and
the excess over
P250,000
Lessofthan three (3) years - 20%
P125,000+34%
the excess over
P500,000 in 1998.
2) Cash and/or Property Dividends - A final tax at the
following rates shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual
from a domestic corporation or from a joint stock company,
insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a
partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the net

18

TAXATION 1
Based on the Lectures of Dean Quibod
income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a
member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1,
1999;
Ten percent (10% beginning January 1,
2000.
Provided, however, That the tax on dividends
shall apply only on income earned on or after
January 1, 1998. Income forming part of
retained earnings as of December 31, 1997
shall not, even if declared or distributed on or
after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded


in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.

Not
over 5
P100,000 %

presumed to have been realized from the sale or disposition of


their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from
the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided,
finally, that if there is no full utilization of the proceeds of sale
or disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or fair
market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion
and the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.

August 18,2016
Jennifer Lim
GOING BACK TO SECTION 24.

SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and
Individual Resident Alien of the Philippines.-

On any amount in 10
excess
of %
P100,000

(1) An income tax is hereby imposed:


(a) On the taxable income defined in Section 31 of this Code,

D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the
taxpayer.
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
3 Manresa 2016-2017

other than income subject to tax under Subsections (B), (C)


and (D) of this Section, derived for each taxable year from all
sources within and without the Philippines be every individual
citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C) of
Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,

19

TAXATION 1
Based on the Lectures of Dean Quibod
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual alien who is a
resident of the Philippines.
In Section 24, it refers to the rates imposed to the tax payers
who are citizens whether resident or non-resident and then to
the resident alien.
Section 24(A), we have the rates of 5-32 %. These rates will
be used for the compensation or income of citizens and
resident aliens as well as all other types of income not subject
to the preferential tax rates.
So if you are a citizen and resident alien and your income is
not under paragraphs b, c and d then the rates applicable to
you will be 5- 32%. Because b, c and d are preferential tax
rates for specific types of income.
LETS MOVE ON TO SECTION 24 (B), (C) AND (D).
Note: Dean said he will leave us responsible to read the codal
provisions.
(B) Rate of Tax on Certain Passive Income: (1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and
musical compositions, which shall be imposed a final tax of ten
percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax
under Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived
from sources within the Philippines: Provided, however, That
interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the
expanded foreign currency deposit system shall be subject to a
final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income: Provided, further, That interest
income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, That should
the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the longterm deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

following rates shall be imposed upon the cash and/or property


dividends actually or constructively received by an individual
from a domestic corporation or from a joint stock company,
insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a
partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the net
income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a
member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only
on income earned on or after January 1, 1998. Income forming
part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be
subject to this tax.
In Section 24 (B):
(1)The passive income on interests, royalties, prizes and other
winnings. There will be a tax or lien.
(2)Cash and/or property dividends

(C) Capital Gains from Sale of Shares of Stock not Traded


in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.
Not over P 100,000

5%

On any amount in excess of P 100,000

10%

In Section 24 (C) , the capital gains from the sale of shares of


stock and not traded in stock exchange.
So what about shares of stocks traded in stock exchange?
In so far as shares of stocks which are traded it is no longer an
income tax, but the applicable rates will be section 127 under
the percentage tax.
In your NIRC, Section 127 is the tax on sale, barter, or
exchnge of shares of stock listed and traded through the local
stock exchange or through initial public offering. Now, this item
used to be in income taxation, nilipat nila and transferred it
here to the percentage tax. So insofar as shares of stocks
traded in stock exchange, it is no longer an income tax but a
percentage tax; anong naiwan are the shares of stocks not
traded in stock exchange.

(2) Cash and/or Property Dividends. - A final tax at the


3 Manresa 2016-2017

20

TAXATION 1
Based on the Lectures of Dean Quibod

(D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the
taxpayer;

In Section 24 (D), it talks about capital gains from the sale of


real property.
When we say capital gains it refers to capital assets.
Meaning properties of the tax payers which are not used in the
business. So the real property contemplated--- the sale of real
property, are subject to the 6% capital gains tax or what we call
the capital assets. Ex: the house and lot of the payer which are
not used in business. The applicable rate will be under section
24 (D).
Now the application of the 6% will not only apply to the sale but
also on the rules on exchange. So let's say 2 tax payers
would like to exchange their properties ( lot 1 and lot 2), the
exchange is subject to the capital gains tax. The owner of lot 1
will pay for the capital gains tax and the owner of lot 2 will also
pay the capital gains tax. So sila dalawa mag bayad with
respect to their real properties in case of exchange of real
properties. Because here, unless you are granted an
exemption then can the exemption apply; otherwise, the
exchange will be taxable.

Now take note also that for purposes of the 6% the property
must be found in the Philippines.
What if you have a real property or condo abroad tapos
binenta mo, kumita ka, is the property taxable in the
Philippines? And you are a resident citizen wherein you are
taxed on all sources. is the 6% capital gains tax applicable?
No more. because the criteria is a property located in the
Philippines. So ano ngayon gagamitin mo? Then you will use
the 5-32%.
As we mentioned, the 5-32% is the applicable tax rates if they
are foreign sourced income of a resident citizen or the income
of a citizen which are not subject to preferential tax rates or
income which are not b c or d of this section. In other
words, the rates 5-32% will be the catch-all of other income not
subject to the mentioned. It does not follow na hindi magiging
taxable (yung condo), magiging taxable and the rate will be 532%.
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from
the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided,
finally, That if there is no full utilization of the proceeds of sale
or disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or fair
market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion
and the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.

ON OTHER DISPOSITION OF REAL PROPERTY


So what about donation?
Donation will be not be covered by this because there is a
separate treatment for donations
What about succession?
There is also a separate tax treatement for succession
Other dispositions such as foreclosure of mortgage. If there is
a foreclosure of a real estate mortage then that portion, the
highest bidder will be the one subject to the capital gains tax.
Whether you auction it under Article 3135 or under other
current mortgage statutory provisions.

3 Manresa 2016-2017

Take note also under Section 24 (D), the application of the


exemption. Take note of the requisites for the purposes of the
tax exemption from the real property tax. When you would
dispose of your house to construct a new business and what
are the requirements for purposes of the exemption.
Taken from previous TSN
The acquisition or construction of the new principal residence,
you are required within 18 months from the date of sale or
disposition shall be exempt from the capital gains tax. Within
the period, for purposes of the exemption you have the
following requirements:
1.
You avail of the exemption once
2.
The historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired.
3.
3. That the Commissioner shall have been duly

21

TAXATION 1
Based on the Lectures of Dean Quibod
notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption
4.
4. The said tax exemption can only be availed of
only once every ten (10) years

As per Dean: Just dissect that long provision. himay himayin


niyo. I dont know why it had to be worded this way.

So to avail of the exemption, the proceeds shall be used to


acquire or construct. Remember the period within which you
can avail of the exemption, you are only allowed to avail this
once every 10 years when you would sell your principal or
acquire or construct a new residence.

Yung royalties dito in any form, take note of the distinction in


Section 24 of the royalties. Royalties on books, musical
composition and literary works, iba yong rate. Royalties to
other forms which are not musical composition, or other literary
works you have a different rate.

NOW LET'S GO TO TAX ON TREATMENT ON NONRESIDENT ALIENS UNDER SECTION 25


Now remember a nonresident alien could be:
1.
2.

Non resident alien engaged in business and trade.


Nonresident alien not engaged in business and trade

Taken from previous TSN:

Pero pagdating sa non-resident alien engaged in trade, the


royalties and any form, regardless of the form or kind of
royalties and as well as prizes except prizes amounting to 10k
or less shall be subject to tax under Subsection (B)(1) of
Section 24 which is 20% in tax rate. Which includes other
winnings. Depending on the length of time you pre-terminated,
you have the rates 5, 12, and 20.

SEC. 25. Tax on Nonresident Alien Individual. -

For the clarification, you have still the rates of 20% or cash or
property dividends 20% or interest, royalties and other forms,
winning and prizes, except prizes 10k below except also for
PCSO and Lotto the rate is 20%.

(A) Nonresident Alien Engaged in trade or Business Within

Royalties on books, literary works, musical compositions the

the Philippines. -

rate is still the same 10%. Royalties on books, literary works,


and musical compositions for the non-resident alien engaged in

(1) In General. - A nonresident alien individual engaged in

trade or business, final withholding tax of 10%.

trade or business in the Philippines shall be subject to an


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

In Section 25A(1), it talks about the length of stay or the 180


day period. For the purposes of the classification of the nonresident alien doing business or not doing business

Less than 180 days = non-resident alien not engaged


More than 180 days but less than a year = a nonresident alien engaged
A year or more = He will be now considered a resident
alien.

For the non-resident alien not engaged in paragraph A(1)


where the applicable rate would still be the 5-32%. Section
25A (2) on the applicable rates for all other income like cash or
improvements and other specific treatment.
3 Manresa 2016-2017

As for the capital gains, the same treatment with Section 25 (C


& D)
Now Section 25(B) is the non-resident alien individual not
engaged in trade or business. Yun pinaka simple because you
have uniform tax rate of 25% on all types of income
without deduction. But if they have other income or property
in the Philippines, the applicable rates are provided by
Section25 (C&D).
So the Section 24 C&D and Section 25 wherein it involves tax
payers with shares of stocks not traded and real properties as
well as assets then we have the same tax treatments. 5 &10%
for the shares of stock; 6% for the capital gains tax of the
real property.
Now, Section 25 C D &E are tax treatments for expats. Now
what is new here is that before Filipinos are given different tax
rates whereas these expats are given lesser rates. Now it is
the same, the Filipino counterpart receives the same tax
treatment with their foreign counterpart. kasi sa mga
corporation may mga expats who have preferential tax
treatments whether financial compensation package and etc,
the rates applied to these will be similar to their Filipino
counterpart. I hold you responsible to read the other details

Taken from previous TSN:


These are the aliens employed by regional area headquarters,

22

TAXATION 1
Based on the Lectures of Dean Quibod
regional operational headquarters of multinationals(C). Aliens
employed by offshore banking units(D), and aliens employed
by petroleum service contractor (E).
So you have here a rate of 15%. Now the rate of 15% given to
the expats will be the same rate to the Filipino counterpart. So
Filipinos employed and occupied the same positions as those
of the aliens/expats will also be given a similar rate of 15%.
Otherwise this would be a deprivation; yong alien expats will

(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.

have a lesser rate than the Filipino counterpart.

What is the operative factor there? Exercising their common


profession.

The Filipino counterpart, having the same position as the

So if you have a professional partnership of a certain


corporation, may doctor, lawyer architect, accountant. It
renders multi-disciplinary services and operates as a
partnership. How do you tax such when it does not suit the
definition of a general professional corporation? This time now
it will be taxed as a business partnership because the
criteria under section 26 is an exercise of a common
profession. Kung lawyer lahat, lawyer. engineer lahat,
engineer. cpa lahat, cpa. If you have an assortment of
professionals, while professional partnership siya but for tax
purposes it will not be treated as such.

expats 5to 32%. So kung he is earning 5 million annually he


will be given the maximum rate of 32%. Yong expat 15% lang.
The Filipino counterpart will be given a similar rate, 15%.

LETS PROCEED TO SECTION 26 ON TREATMENT FOR


GENERAL PROFESSIONAL PARTNERSHIPS.
SEC. 26. Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as such
shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income tax
only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be computed
in the same manner as a corporation.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of
the partnership.
The general professional partnership is not subject to
income tax. Persons engaging in business aspartners in a
general professional partnership shall be liable for income tax
only in their separate and individual capacities. In other words,
the professional partners are the ones separately and
individually liable not the partnership itself.
In the case of a business partneship, it will not be taxed under
section 26. It will be taxed as corporations under Sections 27
and 28. Why is that so? You have the definition of a taxable
corporation in Section 22(b). This includes partnerships no
matter how created or organized; joint stock companies, joint
accounts etc.

3 Manresa 2016-2017

So when you went to that office, biglang may nag lagay ng


stethoscope pero attorney hinahanap ko. The need of the client
was not met. so it will be taxed like a business partnership.
Now in the case of DOMESTIC COPORATIONS IN SECTION
27. Like the resident citizen who is taxed on all sources;
domestic corporations are also taxed on all sources. The
current rate that we have now is 30%. This is 30% under
taxable income and the giving the benefit of deductions.
Now there is an optional tax treatment in the case of
corporations. Domestic corporations 15% of the gross income.
We have the law, but it is not in place or operationalized. What
is being done is the regular corporate income tax rate.
Then SECTION 27(B), the proprietary educational institutions
and hospitals. So educational institutions and hospitals which
are for profit shall pay a tax of 10% of their taxable income
except those covered under Section B meaning their passive
income. In other words, the educational income or hospital
income will be subject to this preferential tax rate of 10% the
taxable income provided that it will be subject to the
predominance test.

What is this predominance test?


The predominance of income test means that the proprietary
educational insittutions and hospitals will have the so called
tuition and non-tuition income & hospital and non-hospital
income. That will now be the basis of the tax. In the case of
educational institutions, tuition and non-tuition. The rule here is

23

TAXATION 1
Based on the Lectures of Dean Quibod
that the 10% applicable tax rate is to be applied when the
predominant income is tuition. But if the predominant income is
non-tuition, then the regular corporate income tax is applicable
so it will now the the total income.
If more than 50% of the taxable income constitutes tuition, then
you apply the 10% rate. If the predominant income meaning
more than 50% of the total income is non-tuition, like rentals
and yung ibang kinikita, whatever income derived to will be
subject to the 30% income tax rate. So if the predominant
tuition 10%; if non-tuition 30%.

So if you are a corporate entity, you will be subject to these tax


treatement. But you will pay only one kind of tax even though
you are subject to different tax treatments. In other words, for
purposes of the MCIT of paragraph (E), if at the end of the year
(but now it is done quarterly) , there will be two computations. Icocompute annually or quarterly the income actualized to
compute it at 30% of the taxable income compared with 2% of
the gross income whichever is higher. If the MCIT is higher,
you will pay such. if the 30% is higher, then you will pay the tax
of 30%.

The same rule applies to hospitals, if the predominant income


is hospital income then the 10% tax rate will apply. if it
otherwise (non-hospital income), then apply the regular
corporate income tax of 30%.

The determination of what tax treatment wil apply to the


corporation is kung saan yung malaking income tax. Depende
sa computation, if the MCIT is higher, it will have higher income
tax due, then you pay the MCIT. If the corporate income tax
due is higher than the mcit, then it will be subject to the regular
corporate income tax rate.

Who are
institutions?

NOW LETS GO TO SECTION 28,

covered

by

these

proprietary

educational

(taken from previous tsn/codal provision) A Proprietary


educational institution' is any private school maintained and
administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
NOW SECTION 27 ON THE GOVERNMENT-OWNED AND
CONTROLLED
CORPORATIONS,
AGENCIES
OR
INSTRUMENTALITIES.
Now, as a rule GOCCs are taxable persons subject to the
income tax rate of 30% on the regular income tax.
How are they exempted?
Unless the law of the charter grants so. Who are exempted
from here? GSIS, SSS, PhilHealth, Local Water Districts, and
the PCSO. Dati andyan yung PAGCOR but it has been
removed under RA 9337. Now PAGCOR is a taxable person
subject to income tax.
Now in Section 27(D), the passive income, capital gains from
the sale of shares of stocks not traded as the same rate as
individuals, tax income derived under the expanded foreign
currency
deposit
system,
intercorporate
dividends
(intercorporate dividends received by domestic corporation
from another corporation shall not be subject to tax), and
capital gains realized from the sale, exchange, or disposition of
lands and/ or buildings not actually used in business meaning
capital assets. Subject to the 6% similar to the capital gains tax
of individuals.
Then Section 27(E), the application of the MCIT or the
minimum corporate income tax. (we will discuss this next time)
Now in the case of corporations, they are subject to two tax
treatments.
1.
2.

Normal corporate income tax/ regular corporate


income tax or 30% of the taxable income.
MCIT equivalent to 2 % of the gross income.

3 Manresa 2016-2017

SEC. 28. Rates of Income Tax on Foreign Corporations. - [21]

(A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%). [22]
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each
month of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve. [23]
Provided, however, That a resident foreign corporation shall be
granted the option to be taxed at fifteen percent (15%) on
gross income under the same conditions, as provided in
Section 27 (A).
Tax treatment Resident Foreign Coporations. These are
corporations organized abroad authorized to do business in the
Philippines also taxed at 30%. The non-resident foreign
corporation will also be subject to these tax treatments 30%.
The treatment for computing the corporate income tax due
either for 30% or 2%.
Now there are Resident Foreign Corporations who are
engaged in a particular type of business. like number 3
international carriers doing business in the Philippines.
(Singapore Air, etc.).
(3) International Carrier. - An international carrier doing

24

TAXATION 1
Based on the Lectures of Dean Quibod
business in the Philippines shall pay a tax of two and one-half
percent (2 1/2 %) on its 'Gross Philippine Billings' as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings'
refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any part outside the
Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of
Gross Philippine Billings.

It will be taxed at 30% which will operate as the tax rate


used for those income outisde the preferential tax rates.
30% will the applicable to all other income not subject to these
preferential tax rates.
Going back to the domestic corporation, if the domestic
corporation has foreign sourced income, then the applicable
rate will also be 30%.
What if the corporation which is domestic has real properties
abroad which are capital assests?
Then we apply the 6% subject to the regular rate.
Now other income such as the OBUs or the offshore banking
units Number 4, as a rule they are exempted.

(4) Offshore Banking Units. - The provisions of any law to the


contrary notwithstanding, income derived by offshore banking

(b)
International
Shipping. 'Gross
Philippine
Billings' means gross revenue whether for passenger, cargo
or mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or
freight documents.

units authorized by the Bangko Sentral ng Pilipinas (BSP),

Provided, That international carriers doing business in the


Philippines may avail of a preferential rate or exemption from
the tax herein imposed on their gross revenue derived from the
carriage of persons and their excess baggage on the basis of
an applicable tax treaty or international agreement to which the
Philippines is a signatory or on the basis of reciprocity such
that an international carrier, whose home country grants
income tax exemption to Philippine carriers, shall likewise be
exempt from the tax imposed under this provision.

Bangko Sentral ng Pilipinas (BSP) to transact business with

As international carriers by air or by sea, they have a


preferential tax treatment. We do not tax them at 30%. They
are taxed at 2.5 % on their gross billings without the benefit of
deduction. Kung ano yung gross income nila from tickets of
passengers. They will be subject to on their gross billing and
this holds true for international shipping.
From previous TSN: gross billings refer to the amount of gross
revenue derived from carriage of persons, excess baggage
But what if it is an international carrier but it has no landing
rights in the Philippines? Because in order to avail the 2.5% tax
on gross billings, it must be a resident foreign corporation
authorized to do business in the Philippines and may landing
rights sila. What if they derive income from the Philippines but
wala silang landing rights?
They will not be taxed under this as international carrier
because they pertain to revenues from passengers originating
in the Philippines but again they do not have landing right
kumikita sila dito but ang boarding, doon sa Thailand. From the
Philippines to Bangkok na aircraft, applicable pa. but then
again when you board that aircraft from Bangkok it will be
something else.
How will you tax it then?

3 Manresa 2016-2017

from foreign currency transactions with nonresidents, other


offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the
offshore banking units shall be exempt from all taxes except
net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary
Board which shall be subject to the regular income tax payable
by banks: Provided, however, That any interest income derived
from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including
local, branches of foreign banks that may be authorized by the
BSP to transact business with offshore banking units, shall be
subject only to a final tax at the rate of ten percent
(10%). [24]Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore banking units
shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted
by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered
with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections
57 and 58 of this Code: Provided, that interests, dividends,
rents, royalties, including remuneration for technical services,

25

TAXATION 1
Based on the Lectures of Dean Quibod
salaries, wages premiums, annuities, emoluments or other

3.

fixed or determinable annual, periodic or casual gains, profits,


income and capital gains received by a foreign corporation
during each taxable year from all sources within the Philippines
shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business
in the Philippines.
Then you have Branch Profits Remittances Tax under
Number 5. These are the tax rates imposed when the branch
office would remit profits to the head office. It will be coursed
through the Central Bank. The tax rate there is 15%. Take
note of the base which is 15% of the total profits applied or
earmarked for remmittance without any deductions for the tax
component thereof.

4.

The resident owner or lessor of vessels chartered by


Philippine Nationals . A non-resident owner or lessor
of vessels shall be subject to tax of 4.5% of gross
rentals
Non-resident owner or lessor of aircraft, machineries,
and other equipment shall be subject to tax of 7.5% of
the gross rental and fees.

Then letter(B) intercorporate dividends. Have a matrix of these


dividends kasi mahaba ang provision. It will be easier if may
matrix.
Taken from previous TSN:

So kung mag remit ang branch office ng $100, ang mag dating
doon, $85 na lang because 15% has been deducted. The
branch profit will be taxed. But the 15% is based on the total
profits applied, not the net profits.
That used to be an issue before, kasi pag remit nila at pag
dating doon sa HongKong or abroad, it was then less 15% pa.
But that has been clarified by the Supreme Court. It should be
based on the profits applied or earmarked for remittance. As
clarified by the Supreme Court, it is the total profits which will
be applied without deduction for the tax component thereof. In
other words, pag dating doon automatically set na, wala nang
further deductions.
Then we have Number 6, the Regional Area Or Head
Quarters And Regional Operating Head Quarters Of Multi
National Companies.
The Regional Head Quarter area is not taxable but the
Regional Operating Headquarters is taxable at 10% of their
taxable income.
Then you have tax on certain incomes received by a resident
foreign corporation:

7a on the interest from deposits and royalties


7b on the income derived from foreign currency
deposits
7c on the capital gains from the sale of shares of
stock not traded in the stock exchange.
7d on intercorporate dividends. in the case of a
resident feoreign coporaytion, the dividends receivfed
from the domestic is not taxable, excluded or
exempted from tax.

THEN SECTION 28 B THE NON-RESIDENT FOREIGN


CORPORATION
1.

2.

The non-resident foreign corporation is taxed on gross


( meaning without deductions, similar to the nonresident alien taxed at 15% tax on gross). Itong nonresident foreign corporation taxed at 30% on gross.
Nonresident cinematographic film owner, lessor, or
distributor shall be subject to the 25% gross.

3 Manresa 2016-2017

Take note also that these rates, these are dividends from a
domestic source of these corporations. The stockholders are
citizen, resident aliens, non-resident aliens or a non-resident
alien in business and trade or a non-resident alien not engaged
in business and trade, or a domestic corporation. They are the
owners or stock holders who are the recipients of dividends
coming from the domestic sources.
If the dividends came from a domestic foreign corporation, take
note that the taxability of all sources will be applicable only to
resident citizens and domestic corporation. Kasi taxable sila
within and without the Philippines. So the dividends from a
foreign corporation received by a citizen are not taxable.
The non-resident alien or the non-resident citizen. In so far as
the resident alien, not taxable. Because they are only taxable
within. Likewise all the aliens for that matter taxable na siya.
The rate then is 30%, the regular tax rate. Pag foreign hindi
taxable kasi foreign source man yan. Foreign corporations are
also sourced from income within and not outside the country.
Take note of how the tax dividends move correspondingly to
the individual recipients.
Then you have this IMPROPERLY
EARNINGS TAX UNDER SECTION 29.

ACCUMULATED

The improperly accumulated earnings tax is a form of penalty


tax or a surtax. These are imposed on corporations who would
accumulate earnings beyond the reasonable tax rates and the
penalty is 10% of the improperly accumulated income. Kasi if
you are a corporation, you will be piling up and accumulating
earnings, kung mag pile up yan bigyan mo ng dividends yung
stockholders. Do not pile it up. Matatakot naman sila na idistribute kasi baka nga ma charge ng 10% penalty tax in the
case of dividends. If such happens, we will just postpone. But
when they will distribute it later on, ganun pa naman din,
matatamaan pa din sila ng 10%. So if they continue
accumulating earnings, then babalik sila ng surtax or 10% tax
on their improperly accumulated earnings. So that is precisely

26

TAXATION 1
Based on the Lectures of Dean Quibod
why you should divide or give rewards for profits to the stock
holders of corporations.
Now in accumulating also earnings, the corporations do not
uphold the accumulated earnings. The burden that on these
accumulated earnings are on the tax payer now. He has to
prove to the BIR that there is a need or a reasonable business
and on why they need to accumulate the earnings of the
declaration of dividends as when they would contemplate
expansion- they want to buy new equipment and machineries.
Instead of borrowing money, they resort to capital sourcing as
funds or capital to expand. Therefore, the accumulation is
justified.
Once justified, the BIR will withdraw from assessing you the
10% tax. Again, the burden of proving otherwise is with the tax
payer. The term reasonable means of business depends upon
the tax payer to justify the reasonably anticipated needs of the
business.
SECTION 30 YOU HAVE THE EXEMPTIONS 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
organized principally for profit;

organization

not

(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 payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for
the benefit of its members;
(E) 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 inure to the
benefit of any member, organizer, officer or any specific
person;
(F) 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;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;

3 Manresa 2016-2017

(J) 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
(K) 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.
These are the corporations exempted from the earnings tax.
What is important here is the last paragraph.
In other words, the corporations will be exempted when what
has been earned was in pursuance of the objective and
purpose of the exempt corporation. But if these exempt
corporation has other income of whatever kind and character of
the foregoing organizations from any of their properties, real or
personal, then that is taxable.
If it has activities conducted for profit, regardless of the
disposition means that even if the income are flowed back to
the exempted corporation, it will still be taxable.
Case Discussion by Dean
YMCA vs. CIR
FACTS: In 1980, YMCA earned an income of 676,829.80 from
leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators and 44,259 from parking
fees collected from non-members. On July 2, 1984, the CIR
issued an assessment to YMCA for deficiency taxes which
included the income from lease of YMCAs real property. YMCA
formally protested the assessment but the CIR denied the
claims of YMCA. On appeal, the CTA ruled in favor of YMCA
and excluded income from lease to small shop owners and
parking fees. However, the CA reversed the CTA but affirmed
the CTA upon motion for reconsideration.
ISSUE: Whether the rental income of YMCA is taxable
RULING: Yes. The exemption claimed by YMCA is expressly
disallowed by the very wording of then Section 27 of the NIRC
which mandates that the income of exempt organizations (such
as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. While the
income received by the organizations enumerated in Section
26 of the NIRC is, as a rule, exempted from the payment of tax
in respect to income received by them as such, the exemption
does not apply to income derived 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.

27

TAXATION 1
Based on the Lectures of Dean Quibod
In YMCA, it was argued that it was a charitable educational
institution. But in this case, Supreme Court said that while it is
an exempted institution for tax purposes it rented some of its
spaces for lessees. It had a parking lot for its members but it
allowed non-members to park provided that they pay parking
fees. So income was earned from the parking fees collected
from non-members and rents from the rents of its spaces in the
building.
All these income were used for the objective of YMCA. Now
they claim exemption. SC ruled that they cannot claim
exemption even if the income was flowed back to its purpose
or used for their non-profit objective because of the last
paragraph of Section 30. Income of whatever kind. Kahit ano
pang income yan whatever kind or character from any of the
properties.
For example: a building doon nila nilagay ang office and other
tax exempt activities and ngayon binenta nila yung kainilang
building or lot, and construct a new one.

Is the sale of the building and the lot exempted?


Probably not . Precisely based on the provision of the last
paragraph on income of whatever kind and character of the
foregoing organizations from any of their properties. Even if the
proceeds of that sale will be used to buy another property
which will be used for the objective of the institution, it will still
be not granted with exemption. The sale will be subject to
income tax.
Likewise, if they engage in activities which they would profit
even if the proceeds thereof are used back to their tax exempt
purpose, it will still be subject to tax.
So you have a list here of the exempted institutions from A-K.
The tax treatment of these institutions should be harmonized
with the provisions of the Constitution on the non-stock nonprofit organizations. (Article XVI, Section 4(3))
Supposedly, that should not be there (referring to the NIRC
provision) because for as long as non-stock nonprofit income is
used for its purposes, it yields to exemption. To tax that income
of the non-stock non-profit educational institution or non-tuition
income used for it tuition purposes, will defeat the
Constitutional provision. You would not encroach on what has
been established by the Constitution by virtue of the legislative
enactment. You can not reduce the extent of the tax exemption.

August 25,2016
Weng Resurreccion
Those workers which are covered under the minimum wage
law or what we call minimum wage earners, their
compensation income are not taxable.They cover both the
government and private and it includes the ovetime pay, night
shift differential, hazard pay received by these minimum wage
earners. If the compensation income received is over and
above the minimum wage, it is no longer covered by the
exemption. The tax treatment is not the difference, i.e, the
3 Manresa 2016-2017

minimum wage is 300 and he is given 350, ang itax nyo lang is
the 50 differential. No. He would be taxed entirely. So,lets say
the monthly min wage is is 8k, but you are receiving 10k, then
the entire 10k is taxable.
In the case of the husband and the wife, teh
spouses are given a separate income tax rate while on
the case of par. B in case of interest, royalties, prizes and
other winnings, they have tax rate of 20% excpt on
rayalties on books, musical and other literary
compositions which is taxed at 10%.
Prizes are taxed at 20% those 10k or below which is taxed
based on the schedular rate under 24A. So, the prizes under
10k should be added to the regular income. Winnings, it shall
also be subject to 20% final withholding tax except those
PCSO and lotto winnings which are tax exempt.
We also have ecpanded foreign currency deposit(EFCD)
which is subject to 7 1/2 tax rate but what is taxed is the
interest income. While long term deposits are tax free which
has a maturity of 5 years or more. If during the lifetime of the
deposit, the tax payer decided to pre-terminate, it becomes
taxable. The rate will depend on the date of the pre
termination.
In the case of cash or property dividends, take note
of the various types of dividends. What is taxable here
pertains to cash and property dividends. Dividends are
distribution of profits of corporations to theri stock holders.
Now, the scope of the taxation of dividends is 10%? In the
case of citizens and resident alien. This 2 will cover also
distribution of profits of partnerships except when it is
engaged in a professional partnership engaged in the
practice of a profession; When you are given a share of
income in latter, then that income is taxed as part of the
individual partner income.
As to business partnership, being taxable enities are
taxed like corporations.
As to capital gains for the sale of shares of stocks
that are no traded are 5 or 10%. The tax treatment here is
that the first 100k is taxed at 5% while the excess thereof
is taxed at 10%. While capital gains on sale of real
property, it pertains to property considered as capital
asset. These are real properties of an individual citizen
etc that are not used for business. These includes
exchange or other dispositions, such as foreclosure of
mortgage. After the expiration of the redemption period,
the highest bidder thereof shall pay a capital gains tax.
If a GOCC or any of its political subdivision would
purchase a property, then the option would belong to the
seller whether the tax rate would be the schedular tax rate
or the 6%. If it is in 6% capital gains tax, you have there a
tax base which is the gross selling price or the fair market
value as determined by the Commissioner or the
Provincial or City Assessor whichever is higher. But if the
seller choose the schedular rate then the tax base therein
is the gain from the sale. Take note also the requirement
for the applicatio of the exemption if you would sell a
house and lot and you decide to rebuild another using the
proceeds, then you can apply for he exemption.
In case of corporations, we have the NCIT which
applies to domestic as well as resident foreign

28

TAXATION 1
Based on the Lectures of Dean Quibod
corporations including all other corporation subject to
regular based tax. So hhere in Section 27(E) and the
applicable concession under 28(A)(2), is the treatment of
the NCIT. So, the minmum corporate income tax of 2% of
the gross income is also imposed on corporations taxable
under NCIT.
In other words, if you are a corporation taxed a 30%,
then you will also be assessed the 2% MCIT, and you will
pay whichever is higher. And if you are taxed at a special
rate, then the MCIT does not apply such as international
carriers which is a resident foreign corporation. Ordinarily,
resident foreign corporations are taxed at 30% but if it is
an international carrier, then it is taxed at 2 1/2% of their
Gross Philippine Billing. The computation now is quarterly
but let as assume it is still in the yearly scheme. Lets say
you have a corporation:

2010
2011
2012
Total
Excess
Tax Due

NCIT
of
30%
100,000
130,000
200,000

MCIT of 2%

Excess

150,000
190,000
180,000

50, 000
60,000
110,000

200,000-110,0000=90,000

In 2010, pay the 150k but MCIT is only applicable if


the corporation is already more than 3 years in operation
and then the MCIT be imposable beginning the 4th taxable
year. The law also recognizes that you are only to pay
the regular rate hence the excess which is the difference
of the MCIT and NCIT. Its purpose is the carry forward of
the excess minmum tax which shall be carried forward
and credited against the normal income tax in the 3
succeeding taxable year. The credit is applicable when
the NCIT rate is higher than the MCIT. In the effect, lets
say if the MCIT is still higher then, it is not creditable.
*Revenue Regulation 12-2007(?)
Can the taxpayer ask for the suspenson of the
effects of the MCIT?
Yes.
We have No. 3. The Sec. Of Finance may to
suspend its imposition when the corp. Suffers losses on
account of prolonged labor dispute or on account of force
majeure or caused by legitimate business reverses.
Hence, you are still taxable under the NCIT. This
treatment also applies to resident foreign corporations.
For corporations, the inter corporate dividends are
not taxable both from the domestic and resident foreign
corp. But not in the case of non resident foreign corp.
which receives dividends from other corps., has a
specified tax rate. The rate depends on whether or not the
corporation is entitled to a tax sparring Credit. The rate is
either 15 or 30% which shall be collected under the tax
withholding system..
It is subject to the conditon that the country in which
the non-resident foreign corporation is domiciled shall
allow a credit against the tax due to a non resident

3 Manresa 2016-2017

foreign corporation, taxes deemed to have been granted


to them by the Philippines equivalent to 20%.
The Improperly Accumulaed Earnings Tax is a
penalty tax or a surtax. This is imposed oly to
corporations which accumulated earnings beyond the
reasonable need of the business or industry. WHile corps.
Are allowed to accumulate profits they are however
prohibted to accumulate it beyond reasonable needs of
business. It is determined by BIR when the corps. File
their tax return, they are required to attach their financial
statements. It is taxed at 10% of the improperly
accumulated earnings. There are however corps. Which
are exempted under Sec. 29, the law mentions publicly
held corporations meaning those traded in the stock
exchange, there are banks, financial corps, financial
intermediaries and insurance companies. You also have
business partnerships, professional partnerships, nontaxable joint ventures for construction of coal and
geothermal facilities and energy constructions.
We also have a special treatment of fringe benefits
tax.
The fringe benefits are received by employees (EEs)
to be considered as rank and file EEs. It forms part of
the compensation of the EE. If you are a rank and file
EE and you receive a fringe benefit, it comes in a
different forms.
Section 33 (b)Fringe Benefit defined. - For purposes of
this Section, the term 'fringe benefit' means any good,
service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank
and file employees as defined herein) such as, but not
limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted;
(6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational
dependents; and

assistance

to

the

employee

or

his

29

TAXATION 1
Based on the Lectures of Dean Quibod
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
(C) Fringe Benefits Not Taxable. - The following fringe
benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from
tax under special laws;
(2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit
plans;
(3) Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the Commissioner,
such rules and regulations as are necessary to carry out
efficiently and fairly the provisions of this Section, taking into
account the peculiar nature and special need of the trade,
business or profession of the employer.

Except when they are for the convenience of the


employer or they are in pursuit of the business of the
employer.
Those not excluded will be added to their
compensation.
The other group of EEs who receive fringe benefits
are what we call supervisory and managerial EEs. While these
fringe benefits form part of their compensation as a general,
this not however form part of their taxable compensation.
These benefits will then be taxed to the employer. The
employers will pay the tax for those benefits.
What is the scope of this fringe benefit?
Please be guided of Revenue Regulation 3-98
Revenue Regulations No. 3-98 - Fringe Benefit Tax

May 21, 1998 January 1, 1998


REVENUE REGULATIONS NO. 03-98
SUBJECT
:
Implementing Section 33 of the
National Internal Revenue Code, as Amended by Republic Act
No. 8424 Relative to the Special Treatment of Fringe Benefits
TO
:
All Internal Revenue Officers and Others
Concerned
Pursuant to Section 244, in relation to Section 33 of
the National Internal Revenue Code of 1997, these
Regulations are hereby promulgated to govern the collection at
3 Manresa 2016-2017

source of the tax on fringe benefits which have been furnished,


granted or paid by the employer beginning January 1, 1998.
SEC. 2.33.
BENEFITS

SPECIAL TREATMENT OF FRINGE

(A)
Imposition of Fringe Benefits Tax A final
withholding tax is hereby imposed on the grossed-up monetary
value of fringe benefit furnished, granted or paid by the
employer to the employee, except rank and file employees as
defined in these Regulations, whether such employer is an
individual, professional partnership or a corporation, regardless
of whether the corporation is taxable or not, or the government
and its instrumentalities except when: (1) the fringe benefit is
required by the nature of or necessary to the trade, business or
profession of the employer; or (2) when the fringe benefit is for
the convenience or advantage of the employer. The fringe
benefit tax shall be imposed at the following rates:
Effective January 1, 1998
Effective January 1, 1999
Effective January 1, 2000

34%
33%
32%

The tax imposed under Sec. 33 of the Code shall be


treated as a final income tax on the employee which shall be
withheld and paid by the employer on a calendar quarterly
basis as provided under Sec. 57 (A) (Withholding of Final Tax
on certain Incomes) and Sec. 58 A (Quarterly Returns and
Payments of Taxes Withheld) of the Code.
The grossed-up monetary value of the fringe benefit
shall be determined by dividing the monetary value of the
fringe benefit by the following percentages and in accordance
with the following schedule:
Effective January 1, 1998
Effective January 1, 1999
Effective January 1, 2000

66%
67%
68%

The grossed-up monetary value of the fringe benefit


represents the whole amount of income realized by the
employee which includes the net amount of money or net
monetary value of property which has been received plus the
amount of fringe benefit tax thereon otherwise due from the
employee but paid by the employer for and in behalf of his
employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only
those fringe benefits given or furnished to managerial or
supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means
all employees who are holding neither managerial nor
supervisory position. The Labor Code of the Philippines, as
amended, defines "managerial employee" as one who is
vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off,
recall, discharge, assign or discipline employees. "Supervisory
employees" are those who, in the interest of the employer,
effectively recommend such managerial actions if the exercise
of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment.

30

TAXATION 1
Based on the Lectures of Dean Quibod
Moreover, these regulations do not cover those
benefits properly forming part of compensation income subject
to withholding tax on compensation in accordance with
Revenue Regulations No. 2-98.
Fringe benefits which have been paid prior to
January 1, 1998 shall not be covered by these Regulations.
Determination of the Amount Subject to the
Fringe Benefit Tax In general, the computation of the fringe
benefits tax would entail (a) valuation of the benefit granted
and (b) determination of the proportion or percentage of the
benefit which is subject to the fringe benefit tax. That the Tax
Code allows for the cases where only a portion (i.e. less than
100 per cent) of the fringe benefit is subject to the fringe benefit
tax is clearly stated in Section 33 (a) of R.A. 8424 which
stipulates that fringe benefits which are "required by the nature
of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or
advantage of the employer" are not subject to the fringe benefit
tax. Thus, in cases where the fringe benefits entail joint
benefits to the employer and employee, the portion which shall
be subject to the fringe benefits tax and the guidelines for the
valuation of fringe benefits are defined under these rules and
regulations.
Unless otherwise provided in these regulations, the
valuation of fringe benefits shall be as follows:
(1)
If the fringe benefit is granted in money, or is
directly paid for by the employer, then the value is the amount
granted or paid for.
(2)
If the fringe benefit is granted or furnished by
the employer in property other than money and ownership is
transferred to the employee, then the value of the fringe benefit
shall be equal to the fair market value of the property as
determined in accordance with Sec. 6 (E) of the Code
(Authority of the Commissioner to Prescribe Real Property
Values).
(3)
If the fringe benefit is granted or furnished by
the employer in property other than money but ownership is not
transferred to the employee, the value of the fringe benefit is
equal to the depreciation value of the property.
Taxation of fringe benefit received by a nonresident alien individual who is not engaged in trade or
business in the Philippines A fringe benefit tax of twentyfive percent (25%) shall be imposed on the grossed-up
monetary value of the fringe benefit. The said tax base shall be
computed by dividing the monetary value of the fringe benefit
by seventy-five per cent (75%).
Taxation of fringe benefit received by
(1) an alien individual employed by regional or area
headquarters of a multinational company or by regional
operating headquarters of a multinational company;
(2) an alien individual employed by an offshore
banking unit of a foreign bank established in the Philippines;
(3) an alien individual employed by a foreign service
contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines; and

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(4) any of their Filipino individual employees who


are employed and occupying the same position as those
occupied or held by the alien employees. A fringe benefit tax
of fifteen per cent (15%) shall be imposed on the grossed-up
monetary value of the fringe benefit. The said tax base shall be
computed by dividing the monetary value of the fringe benefit
by eighty-five per cent (85%).
Taxation of fringe benefit received by employees
in special economic zones Fringe benefits received by
employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade
Zone, are also covered by these regulations and subject to the
normal rate of fringe benefit tax or the special rates of 25% or
15% as provided above.
(B)
Definition of Fringe Benefit In general,
except as otherwise provided under these regulations, for
purposes of this Section, the term "FRINGE BENEFIT" means
any good, service, or other benefit furnished or granted by an
employer in cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file employee as defined
in these regulations) such as, but not limited to the following:
(1)
Housing;
(2)
Expense account;
(3)
Vehicle of any kind;
(4)
Household personnel, such as maid, driver
and others;
(5)
Interest on loan at less than market rate to
the extent of the difference between the market rate and actual
rate granted;
(6)
Membership fees, dues and other expenses
borne by the employer for the employee in social and athletic
clubs or other similar organizations;
(7)
Expenses for foreign travel;
(8)
Holiday and vacation expenses;
(9)
Educational assistance to the employee or
his dependents; and
(10)
Life or health insurance and other non-life
insurance premiums or similar amounts in excess of what the
law allows.
For this purpose, the guidelines for valuation of
specific types of fringe benefits and the determination of the
monetary value of the fringe benefits are give below. The
taxable value shall be the grossed-up monetary value of the
fringe benefit.
(1)

Housing privilege

(a)
If the employer leases a residential property
for the use of his employee and the said property is the usual
place of residence of the employee, the value of the benefit
shall be the amount of rental paid thereon by the employer, as
evidenced by the lease contract. The monetary value of the
fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
(b)
If the employer owns a residential property
and the same is assigned for the use of his employee as his
usual place of residence, the annual value of the benefit shall
be five per cent (5%) of the market value of the land and
improvement, as declared in the Real Property Tax Declaration
Form, or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the

31

TAXATION 1
Based on the Lectures of Dean Quibod
Commissioner to Prescribe Real Property Values), whichever
is higher. The monetary value of the fringe benefit shall be fifty
per cent (50%) of the value of the benefit. cda
The monetary value of the housing fringe benefit is
equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c)
If the employer purchases a residential
property on installment basis and allows his employee to use
the same as his usual place of residence, the annual value of
the benefit shall be five per cent (5%) of the acquisition cost,
exclusive of interest. The monetary value of fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
(d)
If the employer purchases a residential
property and transfers ownership thereof in the name of the
employee, the value of the benefit shall be the employer's
acquisition cost or zonal value as determined by the
Commissioner pursuant to Section 6(E) of the Code (Authority
of the Commissioner to Prescribe Real Property Values),
whichever is higher. The monetary value of the fringe benefit
shall be the entire value of the benefit.
(e)
If the employer purchases a residential
property and transfers ownership thereof to his employee for
the latter's residential use, at a price less than the employer's
acquisition cost, the value of the benefit shall be the difference
between the fair market value, as declared in the Real Property
Tax Declaration Form, or zonal value as determined by the
Commissioner pursuant to Sec. 6(E) of the Code (Authority of
the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The
monetary value of the fringe benefit shall be the entire value of
the benefit.
(f)
Housing privilege of military officials of the
Armed Forces of the Philippines (AFP) consisting of officials of
the Philippine Army, Philippine Navy and Philippine Air Force
shall not be treated as taxable fringe benefit in accordance with
the existing doctrine that the State shall provide its soldiers
with necessary quarters which are within or accessible from the
military camp so that they can be readily on call to meet the
exigencies of their military service.
(g)
A housing unit which is situated inside or
adjacent to the premises of a business or factory shall not be
considered as a taxable fringe benefit. A housing unit is
considered adjacent to the premises of the business if it is
located within the maximum of fifty (50) meters from the
perimeter of the business premises.
(h)
Temporary housing for an employee who
stays in a housing unit for three (3) months or less shall not be
considered a taxable fringe benefit.
(2)

Expense account

(a)
In general, expenses incurred by the
employee but which are paid by his employer shall be treated
as taxable fringe benefits, except when the expenditures are
duly receipted for and in the name of the employer and the
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expenditures do not partake the nature of a personal expense


attributable to the employee.
(b)
Expenses paid for by the employee but
reimbursed by his employer shall be treated as taxable benefits
except only 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
said employee.
(c)
Personal expenses of the employee (like
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.
(d)
Representation
and
transportation
allowances which are fixed in amounts and are regular
received by the employees as part of their monthly
compensation income shall not be treated as taxable fringe
benefits but the same shall be considered as taxable
compensation income subject to the tax imposed under Sec.
24 of the Code.
(3)

Motor vehicle of any kind

(a)
If the employer purchases the motor vehicle
in the name of the employee, the value of the benefit is the
acquisition cost thereof. The monetary value of the fringe
benefit shall be the entire value of the benefit, regardless of
whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
(b)
If the employer provides the employee with
cash for the purchase of a motor vehicle, the ownership of
which is placed in the name of the employee, the value of the
benefits shall be the amount of cash received by the employee.
The monetary value of the fringe benefit shall be the entire
value of the benefit regardless of whether the motor vehicle is
used by the employee partly for his personal purpose and
partly for the benefit of his employer, unless the same was
subjected to a withholding tax as compensation income under
Revenue Regulations No. 2-98.
(c)
If the employer purchases the car on
installment basis, the ownership of which is placed in the name
of the employee, the value of the benefit shall be the
acquisition cost exclusive of interest, divided by five (5) years.
The monetary value of the fringe benefit shall be the entire
value of the benefit regardless of whether the motor vehicle is
used by the employee partly for his personal purpose and
partly for the benefit of his employer.
(d)
If the employer shoulders a portion of the
amount of the purchase price of a motor vehicle the ownership
of which is placed in the name of the employee, the value of
the benefit shall be the amount shouldered by the employer.
The monetary value of the fringe benefit shall be the entire
value of the benefit regardless of whether the motor vehicle is
used by the employee partly for his personal purpose and
partly for the benefit of his employer.
(e)
If the employer owns and maintains a fleet of
motor vehicles for the use of the business and the employees,
the value of the benefit shall be the acquisition cost of all the
motor vehicles not normally used for sales, freight, delivery

32

TAXATION 1
Based on the Lectures of Dean Quibod
service and other non-personal used divided by five (5) years.
The monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
The monetary value of the motor vehicle fringe
benefit is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f)
If the employer leases and maintains a fleet
of motor vehicles for the use of the business and the
employees, the value of the benefit shall be the amount of
rental payments for motor vehicles not normally used for sales,
freight, delivery, service and other non-personal use. The
monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
(g)
The use of aircraft (including helicopters)
owned and maintained by the employer shall be treated as
business use and not be subject to the fringe benefits tax.
(h)
The use of yacht whether owned and
maintained or leased by the employer shall be treated as
taxable fringe benefit. The value of the benefit shall be
measured based on the depreciation of a yacht at an estimated
useful life of 20 years.
(4)
Household expenses Expenses of the
employee which are borne by the employer for household
personnel, such as salaries of household help, personal driver
of the employee, or other similar personal expenses (like
payment for homeowners association dues, garbage dues,
etc.) shall be treated as taxable fringe benefits.
(5)

Interest on loan at less than market rate

(a)
If the employer lends money to his employee
free of interest or at a rate lower than twelve per cent (12%),
such interest foregone by the employer or the difference of the
interest assumed by the employee and the rate of twelve per
cent (12%) shall be treated as a taxable fringe benefit.
(b)
The benchmark interest rate of twelve per
cent (12%) shall remain in effect until revised by a subsequent
regulation.
(c)
This regulation shall apply to installment
payments or loans with interest rate lower than twelve per cent
(12%) starting January 1, 1998.
(6)
Membership fees, dues, and other
expenses borne by the employer for his employee, in
social and athletic clubs or other similar organizations.
These expenditures shall be treated as taxable fringe benefits
of the employee in full.
(7)

Expenses for foreign travel

(a)
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
shall not be treated as taxable fringe benefits. In this instance,
inland travel expenses (such as expenses for food, beverages
3 Manresa 2016-2017

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. The
expenses should be supported by documents proving the
actual occurrences of the meetings or conventions.
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.
(b)
In the absence of documentary evidence
showing that the employee's travel abroad was in connection
with business meetings or conventions, the entire cost of the
ticket, including cost of hotel accommodations and other
expenses incident thereto shouldered by the employer, shall be
treated as taxable fringe benefits. The business meetings shall
be evidenced by official communications from business
associates abroad indicating the purpose of the meetings.
Business conventions shall be evidenced by official
invitations/communications from the host organization or entity
abroad. Otherwise, the entire cost thereof shouldered by the
employer shall be treated as taxable fringe benefits of the
employee.
(c)
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.
(8)
Holiday and vacation expenses Holiday
and vacation expenses of the employee borne by his employer
shall be treated as taxable fringe benefits.
(9)
Educational assistance to the employee
or his dependents
(a)
The cost of the educational assistance to the
employee which are borne by the employer shall, in general,
be treated as taxable fringe benefit. However, a scholarship
grant to the employee by the employer shall not be treated as
taxable fringe benefit if the education or study involved is
directly connected with the employer's trade, business or
profession, and there is a written contract between them that
the employee is under obligation to remain in the employ of the
employer for period of time that they have mutually agreed
upon. In this case, the expenditure shall be treated as incurred
for the convenience and furtherance of the employer's trade or
business.
(b)
The cost of educational assistance extended
by an employer to the dependents of an employee shall be
treated as taxable fringe benefits of the employee unless the
assistance was provided through a competitive scheme under
the scholarship program of the company.
(10)
Life or health insurance and other nonlife insurance premiums or similar amounts in excess of
what the law allows The cost of life or health insurance
and other non-life insurance premiums borne by the employer
for his employee shall be treated as taxable fringe benefit,
except the following: (a) contributions of the employer for the
benefit of the employee, pursuant to the provisions of existing
law, such as under the Social Security System (SSS), (R.A.
No. 8282, as amended) or under the Government Service
Insurance System (GSIS) (R.A. No. 8291), or similar
contributions arising from the provisions of any other existing

33

TAXATION 1
Based on the Lectures of Dean Quibod
law; and (b) the cost of premiums borne by the employer for
the group insurance of his employees.

(10)
Flowers, fruits, books or similar items given
to employees under special circumstances, e.g. on account of
illness, marriage, birth of a baby, etc

(C)
Fringe Benefits Not Subject to Fringe
Benefits Tax In general, the fringe benefits tax shall not be
imposed on the following fringe benefits:

(D)
Tax Accounting for the Fringe Benefit
Furnished to the Employee and the Fringe Benefit Tax Due
Thereon. As a general rule, the amount of taxable fringe
benefit and the fringe benefits tax shall constitute allowable
deductions from gross income of the employer. However, if the
basis for computation of the fringe benefits tax is the
depreciation value, the zonal value as determined by the
Commissioner pursuant to Section 6(E) of the Code or the fair
market value as determined in the current real property tax
declaration of a certain property, only the actual fringe benefits
tax paid shall constitute a deductible expense for the employer.
The value of the fringe benefit shall not be deductible and shall
be presumed to have been tacked on or actually claimed as
depreciation expense by the employer.

(1)
Fringe benefits which are authorized and
exempted from income tax under the Code or under any
special law;
(2)
Contributions of the employer for the benefit
of the employee to retirement, insurance and hospitalization
benefit plans;
(3)
Benefits given to the rank and file, whether
granted under a collective bargaining agreement or not;
(4)
De minimis benefits as defined in these
Regulations;
(5)
If the grant of fringe benefits to the employee
is required by the nature of, or necessary to the trade, business
or profession of the employer; or
(6)
If the grant of the fringe benefit is for the
convenience of the employer.
The exemption of any fringe benefit from the fringe
benefit tax imposed under this Section shall not be interpreted
to mean exemption from any other income tax imposed under
the Code except if the same is likewise expressly exempt from
any other income tax imposed under the Code or under any
other existing law. Thus, if the fringe benefit is exempted from
the fringe benefits tax, the same may, however, still form part of
the employee's gross compensation income which is subject to
income tax, hence, likewise subject to a withholding tax on
compensation income payment.
The term "DE MINIMIS" benefits which are exempt
from the fringe benefit tax shall, in general, be limited to
facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees
such as the following:
(1)
Monetized unused vacation leave credits of
employees not exceeding ten (10) days during the year;
(2)
Medical cash allowance to dependents of
employees not exceeding P750 per semester or P125 per
month;
(3)
Rice subsidy of P350 per month granted by
an employer to his employees;
(4)
Uniforms given to employees by the
employer;
(5)
Medical benefits given to the employees by
the employer;
(6)
Laundry allowance of P150 per month;
(7)
Employee 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 onehalf () month of the basic salary of the employee receiving
the award under an established written plan which does not
discriminate in favor of highly paid employees;
(8)
Christmas
and
major
anniversary
celebrations for employees and their guests;
(9)
Company picnics and sports tournaments in
the Philippines and are participated exclusively by employees;
and
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Provided, however, that if the aforesaid zonal value


or fair market value of the said property is greater than its cost
subject to depreciation, the excess amount shall be allowed as
a deduction from the employer's gross income as fringe benefit
expense.
Illustrations on fringe benefit furnished or granted by
the employer to an employee (other than a rank-and-file
employee)
(1)
During the year 1998, ABC Corporation paid
for the monthly rental of a residential house of its branch
manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up
monetary value of the said fringe benefit furnished or granted
to its branch manager (Mr. Dela Cruz) shall be P50,000.00,
computed as follows:
Monthly rental for the residential house
P66,000.00
Grossed-up monetary benefit granted
(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable portion)
P50,000.00

Fringe benefit tax due thereon (34%)


P17,000.00
=========
ABC Corporation shall take up in its books of
accounts the P66,000.00 fringe benefit furnished to Mr. Dela
Cruz, under account title "Fringe Benefit Expense" and the
amount of 17,000.00 under the account title "Fringe Benefit Tax
Expense". The aforesaid amounts shall be fully allowed as
deductions from the gross income of ABC Corporation and
shall be taken up in the said employer's books of accounts as
follows:
Debit: Fringe Benefit Expense
P66,000
Debit: Fringe Benefit Tax Expense P17,000
Credit: Cash P83,000
To record fringe benefit expense and fringe benefit
tax paid on rental of the residential property furnished to Mr.
Dela Cruz for his residential use. (Note: If the fringe benefit
expense of P66,000.00 has already accrued but not yet paid,
use the account title "fringe benefit payable". If the fringe

34

TAXATION 1
Based on the Lectures of Dean Quibod
benefit tax has already accrued but not yet paid, use the
account title "fringe benefit tax payable").

Credit:
P10,732.32

(2)
XYZ Corporation owns a condominium unit.
During the year 1998, the said corporation furnished and
granted the said property for the residential use of its Assistant
Vice-President. The fair market value of the said property as
determined by the Commissioner pursuant to Section 6(E) of
the Code amounts P10,000,000.00 while its fair market value
as shown in its current Real Property Tax Declaration amounts
to P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be
used in computing the monetary of the fringe benefit so
furnished or granted to said employee and the fringe benefit
tax due thereon shall be computed as follows:

To record fringe benefit and fringe benefit tax


expenses and income constructively realized from the use of
company-owned residential property furnished to employees.

Monthly rental value of the property


(P10,000,000 times 5% thereof times 50%
divided by 12 months)
P20,833.33
Grossed-up monetary value thereof as fringe
benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66
Fringe Benefit tax due thereon (34%)
P10,732.32
=========
In general, under this illustration, the XYZ
Corporation shall not further claim deduction for allowing its
Assistant Vice-President the use of its residential property
since the cost for the use thereof has already been recovered
as deduction from its gross income under "Depreciation
Expense". However, since the fringe benefit tax in the amount
of P10,732.32, assumed and paid by XYZ corporation has not
as yet been recovered by way of deduction from gross income,
the same shall be allowed as a deduction from its gross
income. XYZ Corporation shall take up the foregoing in its
books of accounts, as follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable
P10,732.32
To record fringe benefit tax expense for the
residential property furnished to employees.
However, if the cost of the aforesaid condominium
unit subject to depreciation allowance (example: its acquisition
cost is only P7,000,000.00) is lesser that its fair market value
as determined by the Commissioner (i.e. P10,000,000.00), the
excess amount (i.e. P3,000,000.00) shall be amortized
throughout the remaining estimated useful life of the residential
property used in computing the said employer's depreciation
expense and allowed as a deduction from the said employer's
gross income as fringe benefit expense. Thus, if the remaining
estimated useful life thereof during the year 1998 is fifteen (15)
years, its monthly amortization shall be computed as follows:
Monthly amortization (P3,000,000.00 divided by
15 years divided by 12 months)
P16,666.67

Cash/Fringe

benefit

tax

payable

Under Section 33, the term 'fringe benefit'


means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an
individual employee except rank and file employees.
Prior to 1998, there was no such provision but there
are schemes which are off books.

It is based on the
Fringe benefit= gross-up monetary value x 32%
The tax base now is not the actual value.
Gross-up monetary value = actual value divided by 68

EXAMPLE:
Actual Value = 10,000,000 vehicle
Gross-up monetary value = 10,000,000
68%
= 147058.82
Fringe Benefit= 147058.82 x 32%
= 4595.59(?)

Those fringe benefits for the convenience of the


employer which are excluded from tax ad those
benefits which are necessary for the business of the
employer.

Take note also of 13th month pay, the guaranteed or


exempted amount is up to 82,000.00. If the EE has a
200,000.00 13th mo. Pay then deduct the 82,000.00
first since that is exempted. The excess is taxable.

In this case, XYZ Corporation shall take up the


foregoing in its books of accounts as follows:
Debit: Fringe benefit expense
P16,666.67
Debit: Fringe benefit tax
P10,732.32
Credit:
Income
constructively
realized
P16,666.67

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35

TAXATION 1
Based on the Lectures of Dean Quibod

3 Manresa 2016-2017

36