IT

Income Taxation Notes 2018 :)
PRELIMINARIES In case of resident citizens, they are subject to income tax

on income derived from within and without the
Philippines.
I. Income Taxation
Non-resident citizen is only subject to income from sources
a. Income Tax Defined within the Philippines.
Income tax is a tax based on gross or net.
b. Nature of Income (Tax) b. Residence

An income tax is an excise tax and not a tax on property. It The basis of the imposition is the residence of the taxpayer.
is levied on the privileged of receiving income or profit.(PM
Reyes) All income derived by persons residing in the Philippines,
whether citizens or aliens, whether domestic or foreign
corporations shall be subject to income tax on income
II. Income Tax Systems derived from sources within the Philippines.
a. Global Tax System This follows the territoriality principle.

System employed where the tax system deals indifferently
the tax base and generally treats income of all categories of
taxable income. c. Source of Income
(*one rate for all types of gross income) The basis of the imposition of income tax is under this
principle is the source of the income.
b. Schedular Tax System
It is a system where the income tax treatment varies and it All income derived from sources within the Philippines shall be
is made to depend on subject to income tax.
a. Kind and
b. category of income of the tax payer Thus even non-resident citizens or aliens and foreign corporations
who derive income from within the Philippines shall also be liable
c. Semi-schedular for income tax on all income derived within the country.
This also follows the territoriality principle.
III. Features of Philippine Income Tax Law
a) Direct Tax V. Types of Income Tax

The burden is borne by the income recipient upon whom the
tax is imposed 1. Gross Income Defined
b) Excise tax TSN: Income earned by the taxpayer without the benefit of any
It is not a property tax. It is not a tax on the money earned deductions except the capital.
but a tax on the privilege of earning income within the
Philippines. SEC. 32 Gross Income. -
c) Progressive (A) General Definition. -

Tax base increases as tax rate increased Except when otherwise provided in this Title, gross income means
 all income derived from whatever source, including (but not
d) Comprehensive limited to) the following items:
By adopting the citizenship principle, resident principle and
source principle (1) Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions, and similar items;
e) Semi-Circular or Semi-global (2) Gross income derived from the conduct of trade or business or the
exercise of a profession;
The tax system is either (3) Gains derived from dealings in property;
a. Global (eg. Taxpayer with compensation income not subject (4) Interests;
to FWT or business professional income or mixed income- (5) Rents;
compensation and business or professional income (6) Royalties;
b. Schedular (taxpayer with compensation, capital gains, (7) Dividends;
passive income, or other income subject to FWT) (8) Annuities;
c. Both global and scheduler may be applied depending on the (9) Prizes and winnings;
nature of the income realized by the taxpayer during the (10) Pensions; and
year. (11) Partner's distributive share from the net income of the general
professional partnership.
The current method of taxation under the NIRC is partly scheduler and
partly global.
2. Net Income
 The tax base is the net income itself
 Meaning there is an income and you deduct the capital
IV. Criteria in Imposing Philippine Income Tax (Casasola)
a. Citizenship 3. Presumptive Income

The basis of the imposition of income is the taxpayer’s  This is imposed in relation to a group of person’s actual
citizenship. expenditures and presumed income.

All subjects of the Philippines, whether residents or non-  The law already presumed that there is income received by
residents are subject to our income tax law. taxpayer
 Eg. Capital gains taxation
1 CHANYEE GWAPA NOTES 

4. Composite Tax If a taxpayer, other than an individual,

 Tax consisting of a series of separate quasi-personal taxes  with the approval of the Commissioner,
assessed to a particular source of income with a  changes the basis of computing net income
superimposed personal tax on the income as a whole  from fiscal year to calendar year,
Eg. NIRC a separate final or adjustment return shall be made
a. for the period between the close of the last fiscal
year for which return was made and
5. Unitary Tax System b. the following December 31.
 The income is arranged according to source
Eg. Interest income, deposits
CALENDAR TO FISCAL
VI. Taxable Periods If the change is from calendar year to fiscal year, a separate final or
adjustment return shall be made
Calendar Is an accounting period which starts from
January 1 and ends on December 31. a. for the period between the close of the last calendar
Fiscal Period Accounting period ending on the last day of year for which return was made and
any month other than December 31 b. the date designated as the close of the fiscal year.
Short period Is an accounting period wherein income
shall be computed on the basis of less than
FISCAL TO ANOTHER FISCAL
12 months
If the change is from one fiscal year to another fiscal year,
SEC. 43. General Rule. - The taxable income shall be computed
 upon the basis of the taxpayer's annual accounting period 1. a separate final or adjustment return shall be made for the
(fiscal year or calendar year, as the case may be) period
 in accordance with the method of accounting regularly
employed a. between the close of the former fiscal year and
 in keeping the books of such taxpayer, b. the date designated as the close of the new fiscal year.
BUT (B) Income Computed on Basis of Short Period. Where a
1. if no such method of accounting has been so employed, or a. separate final or
b. adjustment return
2. if the method employed does not clearly reflect the income, is made under Subsection (A)
 on account of a change in the accounting period, and
the computation shall be made in accordance
 with such method  in all other cases where a separate final or adjustment
 as in the opinion of the Commissioner return is
 clearly reflects the income. a. required or
b. permitted by rules and regulations prescribed by the
If the taxpayer's annual accounting period Secretary of Finance,
1. is other than a fiscal year, as defined in Section 22(Q), or
upon recommendation of the Commissioner,
2. if the taxpayer has no annual accounting period, or  to be made for a fractional part of a year,
 then the income shall be computed on the basis of the
3. does not keep books, or period
 for which separate final or adjustment return is made.
4. if the taxpayer is an individual,
the taxable income shall be computed Q: Can an individual compute his income on the basis of a fiscal
on the basis of the calendar year. year?
 No. Individual taxpayers cannot use the fiscal period. They

Short Period are required to use only the calendar year. (RR 2-40). This
would include Estates and Trusts and General Professional
SEC. 46. Change of Accounting Period. Partnerships
If a taxpayer, other than an individual, [meaning only juridical persons
are allowed] Q: Is a corporation required to use only the calendar year?
changes his accounting period  No. As a general rule, income tax returns, whether
individuals or for corporations, are required to be made and
1. from fiscal year to calendar year, their income computed for each calendar year. However,
2. from calendar year to fiscal year, or corporations may with the approval of the CIR, file their
3. from one fiscal year to another, returns and compute their income on the basis of a fiscal
year. (see Section 43, Tax Code).
the net income shall,
 with the approval of the Commissioner,
 be computed on the basis of such new accounting period, Q: In what instances shall taxable income be computed on the
 subject to the provisions of Section 47. basis of calendar year?
1. Taxpayer’s accounting period is other than fiscal year
2. Taxpayer has no annual accounting period
SEC. 47. Final or Adjustment Returns for a Period of Less than 3. Taxpayer does not keep books
Twelve (12) Months. - 4. Taxpayer is an individual
5. Taxpayer is a general professional partnership
(A) Returns for Short Period Resulting from Change of 6. Taxpayer is an estate or a trust
Accounting Period. -
FISCAL TO CALENDAR YEAR

[JURIDICAL PERSONS ONLY]

Q: In what instances shall taxable income be computed on the NOTE: OCW are considered non-resident citizens for income tax
basis of a short period? purposes
 The general rule is that the taxable period is always 12

months. The exceptions (where a taxpayer may have a 3. Overseas Contract Worker
taxable period of less than 12 months) are:
1. Taxpayer, other than an individual, changes his (C) An individual citizen of the Philippines who is working and deriving
accounting period from fiscal to calendar year or from income from abroad
calendar year to fiscal year or from one fiscal year to  as an overseas contract worker
another (Section 46, Tax Code)  is taxable only on income derived from sources within the
2. Taxpayer dies Philippines:
3. Corporation is newly organized
4. Corporation is dissolved Provided, that a seaman
5. Tax period is terminated by the CIR by authority of law 1. who is a citizen of the Philippines and
(Section 6(D), Tax Code) 2. who receives compensation
3. for services rendered abroad as a member of the
complement of a vessel
Q: Can a taxpayer change his accounting period? 4. engaged exclusively in international trade
 Yes, but this applies only to corporate taxpayers. If the shall be treated as an overseas contract worker;
corporate taxpayer wishes to change his accounting period
from fiscal to calendar year, from calendar year to fiscal Note: To be considered as an OCW, they must be duly registered with
year, or from one fiscal year to another, the net income the POEA with a valid OEC, and a valid Seaferer’s Identification record
shall, with the approval of the CIR, be computed on the book issued by MARINA.
basis of such new accounting period. (see Section 46, Tax
Code) Thus, an OCW’s income arising out of his overseas employment is
exempt from income tax. (Casasola)
Rule on Taxation for Non-resident Citizens

VII. Kinds of Taxpayers
The income of a Non-resident derived from all sources within the
Taxpayer Defined Philippines for each taxable year shall be subject to the following
rules:
SEC 22 (N) The term "taxpayer" means any person subject to tax
imposed by this Title. 1. REGULAR INCOME: schedular tax rate of 5-32 %
2. PASSIVE INCOME: subject to the applicable final
withholding tax depending on the kind of income received
Person Defined by him
(A) The term "person" means an (I,T,E,C)

1. individual,
2. a trust, 4. Alien Individual
3. estate or
4. corporation (D) An alien individual,
1. whether a resident or
2. not of the Philippines,
a. Individual Taxpayers  is taxable only on income derived from sources within
the Philippines;
i. Citizens TSN: An alien may be considered as a resident of the Philippines for
income tax purposes if:
1. He is not a mere transient/sojourner
1. Resident Citizens (eg. Foreigners marrying Filipinas)
SEC. 23. General Principles of Income Taxation in the 2. He has no definite intention as to his stay (eg. Traveling)
Philippines- Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income 3. His purpose is to such nature that an extended stay may be
derived from sources necessary for the accomplishment (eg. NGO workers)
1. within and
2. without the Philippines; Notes: (Casasola)
Whether a transient or not, is determined by his intentions with regard
Rules on Taxation for Resident Citizens: (Casasola) to the
1. Length
1. Regular Taxable Income for each taxable year: subject to 2. Nature of his stay
schedular tax rates of 5-32 %
2. PASSIVE INCOME: subject to final withholding taxes A mere floating intention indefinite as to time, to return to another
depending on the kind passive income received by him. country is not sufficient to constitute him as transient.
Note: Estates and Trusts are taxable in the same manner as a An alien who has acquired residence in the Philippines retains his
resident citizen. status as a resident until
1. he abandons the same and
2. Actually departs from the Philippines.
2. Non- resident Citizens
(B) A nonresident citizen is taxable only

on income derived from sources within the Philippines;

Rules on taxation of a Resident Alien ―MOST OF THE TIME DURING THE TAXABLE YEAR‖
RR No. 01-79 states that to be physically present abroad most of the
All income derived during the taxable year from all sources time during the taxable year,
WITHIN THE PHILIPPINES shall be subject to the following rules: a contract worker must have been outside the Philippines
 for not less than 183 days during such taxable year.
1. REGULAR INCOME: schedular tax rates of 5-32%
2. subject to the applicable final withholding tax depending on BIR RULING 517-2011
the kind of income received by him BIR RULING 305-2016
BIR RULING 8-2018
5. Married Individuals
(4) BALIKBAYAN
(D) Husband and Wife. – A citizen
Married individuals, whether  who has been previously considered as nonresident citizen
1. citizens, and
2. resident or  who arrives in the Philippines
3. nonresident aliens,  at any time during the taxable year
who do not derive income purely from compensation,  to reside permanently in the Philippines
GENERAL RULE shall likewise be treated as a non-resident citizen

 shall file a return for the taxable year to include the income  for the taxable year in which he arrives in the Philippines
of both spouses (CONSOLIDATED INCOME TAX RETURN)  with respect to his income derived from sources abroad
 until the date of his arrival in the Philippines.
EXCEPTION
but where it is impracticable for the spouses to file one return, (5) NOTE MUST INCLUDE THIS IN EXAM ((Dean’s Fave)
 each spouse may file a separate return of income
 but the returns so filed The taxpayer shall submit proof to the Commissioner
 shall be consolidated by the Bureau  to show his intention of leaving the Philippines
 for purposes of verification for the taxable year. 1. to reside permanently abroad or
2. to return to and reside in the Philippines
NOTES: (Casasola) as the case may be for purpose of this Section.
 they are required to file a consolidated income tax return
 but they shall compute separately their individual income
tax on their income from employment based on their total ii. Aliens
taxable income
 if they have income from business which cannot be
attributed as exclusively earned by either spouse, the same RESIDENT ALIENS NON-RESIDENT ALIENS
shall be equally divided. (F) The term "resident alien" (G) The term "nonresident alien"
 If the spouses are only physically separated, they are still means an individual whose means an individual whose
required to file the consolidated returns residence is within the residence is not within the
Philippines and who is not a Philippines and who is not a
citizen thereof. citizen thereof
(E) Return of Parent to Include Income of Children. –
1. engaged in trade or
The income of unmarried minors derived from properly received from a business
living parent shall be included in the return of the parent, except 2. not engaged in trade or
(1) when the donor's tax has been paid on such property, or business
(2) when the transfer of such property is exempt from donor's tax.
NON-RESIDENT ALIENS CLASSIFICATION

(1) NON-RESIDENT CITIZENS SEC 25
The term "nonresident citizen" means:
Non-resident Alien Engaged in trade or Business Within the
A citizen of the Philippines who Philippines. –
 establishes to the satisfaction of the Commissioner
 the fact of his physical presence abroad In General. –
 with a definite intention to reside therein. A non-resident alien individual engaged in trade or business in the
Philippines
 shall be subject to an income tax in the same manner as
(2) PERMANENT EMPLOYEE 1. an individual citizen and
A citizen of the Philippines 2. a resident alien individual,
 who leaves the Philippines on taxable income received from all sources within the Philippines.
 during the taxable year
 to reside abroad, NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
either as A non-resident alien individual who shall come to the Philippines

a. an immigrant or  and stay therein for an aggregate period
b. for employment on a permanent basis.  of more than one hundred eighty (180) days during any
calendar year
 shall be deemed a 'non-resident alien doing business in the
(3) CONTRACT WORKER Philippines'. Section 22 (G) of this Code notwithstanding.
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.

Rules on Taxation of Non-resident Aliens NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS
Engaged in trade or Business within the Philippines
RULES ON TAXATION OF INCOME OF NON-RESIDENT ALIEN NOT
1. REGULAR INCOME: schedular rates of 5-32 % ENGAGED IN TRADE OR BUSINESS IN THE PHILLPINES
2. PASSIVE INVESTMENT INCOME DERIVED FROM The following income derived from all sources within the Philippines
SOURCES WITHIN THE PHILIPPINES shall be subject to the final withholding tax rates as follows:
On gross amounts of 25%

Currency bank deposits in 1. Interests
regular banking units in the 20 % 2. Cash/and or
Philippines property dividends
3. Rents
Yield on monetary benefit
4. Salaries
from trusts & similar
20% 5. Wages
arrangements from deposit
6. Premiums
substitute
7. Annuities
Interest income & yield from 8. Compensation
trust funds & similar 20% 9. Remuneration
arrangements 10. Emoluments
Royalties in any form 20% 11. Or other fixed
Royalties on books literary determinable
works & musical compositions 10% annual or periodic
or casual gains,
Prizes exceeding 10k 20% profits and income
Winnings except PCSO & lotto 12. And capital gains
winnings that are exempt 20% (other than capital
gains from sale of
shares of stock not
Gross income from all 25 %
traded or listed in
sources derived by non-
the stock
resident cinematographic film
exchange and CPG
owners, lessors or
from sale of
distributors
property located in
the Philippines)
Interest income from 5 long
On capital gains from sale of
term deposit
shares of stock of a domestic
corporation not listed and
traded in the stock
exchange, held as capital
Pretermination assets by individuals
1. 4 years to less than 1. 5% Not over 100k 5%
5 years 2. 12%
Any amount in excess of
2. 3 years to less than 3. 20% 10%
100k
4 years
3. Less than 3 years Presumed capital gains from
sale of real property located
6%
in the Philippines considered
Cash and or property as capital assets
dividends actually or
constructively received from 20%
domestic corporations
Net capital gains from shares

of stocks
iii. Special Class of Individual Employees
1. Not over 100k 5%
2. On any amount in For this purpose, a senior citizen whose salary is equivalent to SMW
excess of 100k 10 % shall also be considered as a MWE entitled to exemption from income
tax.
On the presumed capital
gains from sale of real Coverage of exemption:
property located in the 6% 1. holiday pay
Philippines considered as 2. overtime pay
capital assets 3. nightshift differential
Gross income derived from 4. hazard pay
income from contracts of
subcontractors, from service 8 % in lieu of any and all
contractors engaged in taxes, national and local However, employees who receives additional compensation such as
petroleum operations 1. commissions
2. honoraria
3. fringe benefits
benefits in excess of the allowable statutory amount of P 30, 000 shall

not enjoy the privilege of being an MWE, therefore his entire earnings
are not exempt from income tax, and consequently from withholding
tax.

MWE receiving income from FOREIGN CORPORATION DEFINED

1. conduct of trade & business
2. or practice of a profession Sec 22
3. except income subject to final tax in addition to (D) The term "foreign", when applied to a corporation, means a
compensation income corporation which is not domestic
are not exempted from income tax on their income earned during
the taxable year
This rule notwithstanding, CLASSIFICATION AS TO RESIDENCE

1. SMW
2. Holiday pay TSN: What determines residency is the conduct of the business and
3. overtime pay NOT the composition of its stockholders.
4. nightshift differential For purposes of taxation, we use the incorporation test.
5. hazard pay
Resident Foreign Non-resident Foreign Corporation
shall be exempt from withholding tax only, but said income shall be
Corporation
included in the gross income for the purposes of computing his income
tax. The term "resident foreign The term 'nonresident foreign
corporation" applies to a corporation' applies to a foreign
foreign corporation corporation not engaged in trade
b. Corporations engaged in trade or or business within the
business within the Philippines.
CORPORATION DEFINED Philippines
The term "corporation" shall include
1. partnerships, no matter how created or organized,
2. joint-stock companies, TRADE OR BUSINESS
3. joint accounts (cuentas en participacion), association, or The term "trade or business" includes the performance of the functions
4. insurance companies, of a public office
CORPORATIONS DO NOT INCLUDE ESTATES AND TRUSTS

but does not include Sec 22
1. general professional partnerships and The term "person" means an individual, a trust, estate or corporation
2. a joint venture or
3. consortium formed for the purpose of undertaking SEC. 60. Imposition of Tax. -
a. construction projects or
b. engaging in (A) Application of Tax. - The tax imposed by this Title upon
1. petroleum, individuals shall apply to the income of estates or of any kind
2. coal, of property held in trust, including:
3. geothermal and
4. other energy operations (1) Income accumulated in trust for the benefit
pursuant to an operating consortium agreement a. of unborn or
under a service contract with the Government b. unascertained person or
c. persons with contingent interests,
"General professional partnerships" d. and income accumulated or
 are partnerships formed by persons e. held for future distribution
 for the sole purpose f. under the terms of the will or trust;
 of exercising
 their common profession, (2) Income which is to be distributed currently by the fiduciary to
the beneficiaries, and income collected by a guardian of an infant
No part of the income of which which is to be held or distributed as the court may direct;
 is derived from engaging in any trade or business
(3) Income received by estates of deceased persons during the
CLASSIFICATION AS TO INCORPORATION period of administration or settlement of the estate; and
1. Domestic Corporation
2. Foreign Corporation (4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
A domestic corporation is taxable on all income derived from sources
1. within and
2. without the Philippines;
EXCEPTIONS
DOMESTIC CORPORATION DEFINED (B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a
Sec 22
(C) The term "domestic", when applied to a corporation, 1. pension,
means created or organized in the Philippines or under its 2. stock bonus or
laws 3. profit-sharing plan of an employer for the benefit of
a. some or
b. all of his employees
A foreign corporation, whether engaged or not in trade or business in (1) if contributions are made to the trust by such employer, or
the Philippines, is taxable only on income derived  employees, or
 from sources within the Philippines.  both
 for the purpose of distributing to such employees the
earnings and principal
 of the fund accumulated
 by the trust in accordance with such plan, and

(2) if under the trust instrument it is impossible, at any time

 prior to the satisfaction of all liabilities Income vs. Capital
 with respect to employees under the trust,
 for any part of the corpus or income to be (within the  Income is distinct from capital. Income means all the wealth
taxable year or thereafter) used for, which flows into the taxpayer other than a mere return on
 or diverted to, purposes other than for the exclusive capital while capital is a fund or property existing at one
benefit of his employees: distinct point in time while income denotes a flow of wealth
during a definite period of time.
Provided, that any amount actually distributed to any employee
 or distributee shall be taxable to him  Income is gain derived and severed from capital. (see
 in the year in which so distributed to the extent CHAMBER OF REAL ESTATE AND BUILDER’S
 that it exceeds the amount contributed ASSOCIATION, INC. V. ROMULO [MARCH 9, 2010]).
 by such employee or distributee.
 Income as contrasted with capital or property is to be the
test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property
Q: Is a co-ownership taxable as a corporation (PM Reyes) existing at an instant of time is called capital.
 No. The common ownership of property does not by itself  A flow of services rendered by that capital by the payment
create a partnership between the owners, though they may of money from it or any other benefit rendered by a fund of
use it for purposes of making gains. capital in relation to such fund through a period of time is
called an income.
 Article 1769(3) of the Civil Code provides that ―the sharing Capital is wealth, while income is the service of wealth. A tax on
of gross returns does not by itself establish a partnership income is not a tax on property. "Income," as here used, can be
whether or not the persons sharing them have a joint or defined as "profits or gains." (see MADRIGAL VS. RAFFERTY
common right or interest in any property from which the [AUGUST 7, 1918]).
returns are derived.
SUMMARY
INCOME CAPITAL
INCOME TAX PROPER Wealth or fund Profit or gain from the flow of
wealth
General Principles of Income Taxation
Wealth Service or flow of wealth
The tree The fruit
A. Income Defined
CONWI v CTA GR 48532 AUG 1922
DE LEON: Income is wealth that flows to the taxpayer other than a
mere return of capital.
It is an accumulation of wealth. CIR V BENEDICTO GR 191999 JULY 30 2014
Fisher v Trinidad
Income is the money coming from a person or a corporation within a

Income Tax Defined (Casasola)
specified time or a payment for
1. services
Income tax is a tax based on income, gross or net.
2. interest or
The term income tax refers to the tax on the earnings derived by the
3. profits from investment
taxpayer for each taxable year arising from
1. employment
Income is also the receipt salary especially the annual receipt of a
2. or services rendered
private person or corporation from a property.
3. for engaging in trade or business
4. for exercising a profession
It refers to all wealth which flows into the taxpayer other than as a
mere return on capital. (RR No.2) Thus, as stated in FISHER V.
TSN: Income
TRINIDAD [OCTOBER 30, 1922], mere advance in the value of
1. Pertains to gains
property or a corporation in no sense constitutes the income specified
2. Derived from 3
in the law. Such advance constitutes and can be treated merely as an
a. Services (either employment or services)
increase in capital.
b. Capital or business
c. Capital from exchanges on property
Revenue v Income (Valencia)
Revenue pertains to all funds accruing from the treasury of the
government derived from
C. When income is taxable
1. tax
2. donations
Existence of Income
3. grants
4. and any other source
SEC. 31Taxable Income Defined –
The term taxable income means
 the pertinent items of gross income specified in this Code,
B. Nature of Income  less
Income is that flow of services rendered by that capital by the 1. the deductions
payment of money from it or any other benefit rendered by a fund of 2. and/or personal
capital in relation to such fund through a period of time. 3. and additional exemptions, if any,
Income is the ―fruit‖ of capital or labor severed from the ―tree.‖ (see
MADRIGAL VS. RAFFERTY [AUGUST 7, 1918]). a. authorized for such types of income by this Code or
b. other special laws.

Non Taxable Income (Valencia)

It should be excluded by Law or Treaty. Methods of Accounting
Requisites of Taxability (PM Reyes) 1. Cash Method (Valencia)

1. There must be gain or profit (existence of income)
2. The gain or profit must be received or realized (realization of This method generally reports income upon cash collection and reports
income) expenses upon payment.
3. The gain or profit must not be excluded by law or treaty If earned from rendering of services, income is to be reported in the
year of collection whether earned or unearned.
Note: As to (1) – for tax purposes, income does not only refer to the
money a taxpayer receives but includes anything of value. PM Reyes: A method of accounting whereby
a) all items of gross income received during the year shall be
As to (2) – An income may have other elements but the law may accounted for in such taxable year and
specifically exclude the same from income for tax purposes i.e. certain b) that only expenses actually paid shall be claimed as
passive incomes excluded from income as they are already subject to deductions during the year
final taxes.
As to (3) – Even if there is material gain, not excluded by law, if the 2. Accrual Method
material gain is not yet realized by the taxpayer, then there is no
income to speak of. Generally reports income when earned and reports expense when
incurred.
Realization of Income If earned from sale of goods, income is to be reported in the year of
the sale, irrespective of collection.
1. Tests of Realization
The accrual method utilizes the all-events test which requires:
When is income generally recognized?
1. the fixing to a right to income or liability
When both conditions concur: 2. the availability of the reasonable accurate determination of
1. The earning process is complete or virtually complete such income or liability
(So there is already an agreement between the parties)
2. There must be an exchange that is taking place.
3. Installment Method
Q: When is income considered received for income tax
purposes? This is considered most appropriate when collections extends to a
relatively long periods of time and there is a possibility that collection
1. If actually or physically received by the taxpayer (actual will not be made.
receipt)
2. If constructively received by the taxpayer (constructive As customers make installment method, the seller(taxpayer) may
receipt) report income over the several taxable years in which collections are
made based on the terms of the payment.
2. Actual vs. Constructive Receipt
SEC. 49. Installment Basis. -
Q: Distinguish actual receipt from constructive receipt.
(A) Sales of Dealers in Personal Property. -
Actual receipt may be actual or physical receipt while constructive
receipt occurs when Under rules and regulations prescribed by the Secretary of Finance,
1. money consideration or  upon recommendation of the Commissioner,
2. its equivalent  a person who regularly sells or otherwise disposes of
is placed at the control of the person personal property on the installment plan
 who rendered the service without restriction by the payor  may return as income therefrom
(see Section 4.108-A, RR 16-2005).  in any taxable year
 that proportion of the installment payments actually
Q: What is the constructive receipt doctrine? received in that year,
 which the gross profit realized or to be realized
The constructive receipt doctrine provides than an item is treated as  when payment is completed, bears to the total contract
income when price.
1. it is credited to the account of the taxpayer, or
2. made unconditionally available to the taxpayer; (B) Sales of Realty and Casual Sales of Personality. –
3. without restriction to the payor
4. no physical possession is required. (see Section 52, RR No. In the case
2-40) (1) of a casual sale or other casual disposition of personal
property (other than property of a kind which would properly be
Income is received not only when it is actually handed to a taxpayer included in the inventory of the taxpayer if on hand at the close
but also when it is merely constructively received by him. of the taxable year),
 for a price exceeding One thousand pesos (P1,000), or

MONEY IS GIVEN TO AN AGENT; DEEMED CONSTRUCTIVE
RECEIPT (2) of a sale or other disposition of real property,
 if in either case
In LIMPAN INVESTMENT V. CIR [JULY 26, 1966], the lessees  the initial payments do not exceed twenty-five percent
opted to deposit their payments when the lessor refused to accept the (25%) of the selling price,
same in 1957. The lessor did not report these payments in his 1957
income tax return. the income may, under the rules and regulations prescribed by the
The Supreme Court held that the failure to report the said rental Secretary of Finance,
income is unjustified as, when the payments were deposited, the  upon recommendation of the Commissioner,
lessor was deemed to have constructive received such rentals.  be returned on the basis and in the manner above
Recognition of Income prescribed in this Section.

SEC. 48. Accounting for Long-Term Contracts. –

As used in this Section, the term "initial payments"
means the payments Income from long-term contracts shall be reported for tax purposes in
1. received in cash or the manner as provided in this Section.
2. property other than evidences of indebtedness of the
purchaser As used herein, the term 'long-term contracts' means
during the taxable period in which the sale or other disposition 1. building,
is made. 2. installation or
3. construction contracts
(C) Sales of Real Property Considered as Capital Asset by Individuals. covering a period in excess of one (1) year.
–
An individual who sells or disposes of real property, Persons whose gross income
 considered as capital asset, and  is derived in whole or in part
 is otherwise qualified to report the gain therefrom under  from such contracts
Subsection (B) [Sales of Realty and Casual Sales of  shall report such income
Personality]  upon the basis of percentage of completion.
 may pay the capital gains tax
 in installments under rules and regulations to be The return should be accompanied
promulgated by the Secretary of Finance,  by a return certificate of architects or engineers
 upon recommendation of the Commissioner.  showing the percentage of completion
 during the taxable year
(D) Change from Accrual to Installment Basis. –  of the entire work performed under contract.
If a taxpayer entitled to the benefits of Subsection (A) [Sales of There should be deducted from such gross income
Dealers in Personal Property] a) all expenditures made during the taxable year on account of
the contract,
 elects for any taxable year to report his taxable income on b) account being taken of the material and supplies on hand
the installment basis, a. at the beginning and
 then in computing his income for the year of change or b. end of the taxable period
 any subsequent year, for use in connection with the work
 amounts actually received during any such year under the contract but not yet so applied.
 on account of sales or other dispositions of property
 made in any prior year shall not be excluded. If upon completion of a contract,
 it is found that the taxable net income
 arising thereunder
 has not been clearly reflected for any year or years,
 the Commissioner may permit or require an amended return
4. Deferred Payment Method
Where the initial payments on installments exceed 25% of the selling

price but they may only be realized in the subsequent year, the Q: Can a taxpayer use a combination of two or more methods of
taxpayer is allowed to defer the reporting of the income. accounting? No.
Rules: The rule is that a taxpayer may use any one method of accounting but
1. The note evidencing the buyer’s obligations shall be not a combination of two or more methods of accounting for each type
converted to its cash equivalent (discounted value) of business during the taxable year. The use of a hybrid method of
accounting is not allowed (see CONSOLIDATED MINES VS. CTA
2. Previously reported income should reduce the current year’s [AUGUST 29, 1974])
reportable income
v. Test in Determining Whether Income is Earned for Tax

5. Percentage of Completion/ Long Term Contract Purposes
Refers to the earnings derived from construction of

1. Buildings 1. Realization/Severance Test
2. Bridges
There is no taxable income until there is a separation from capital of
3. Installation of the other construction something of exchangeable value, thereby supplying the realization or
transmutation which would result on the receipt of the income.
Usually covering a period of more than 1 year.
The income is not deemed realized until the fruit is plucked from the
When income is derived from long-term construction contract, the
tree (Eisner v Macomber 252 US 426)
income is generally reported on the basis of the % of completion made
every year that will be evidenced by the certificates of engineers or
architects.
2. Claim of Right Doctrine
Doctrine of ownership, command or control
The reportable income is calculated by deducting from the contract
price the actual cost of construction.
The power to dispose of income is equivalent to the ownership of it
2 methods are employed:
The exercise of that power to procure the payment of the income to
1. Completed contract method- recognition of revenue only
another is enjoyment
when the contract is finally completed
2. Percentage of Completion Method- requires recognition of
Hence the realization of the income by him who exercises it.
income based on the progress of work.
The dominant purpose of our revenue laws is the taxation of income to
those who earn or otherwise create a right to benefit of it when paid
(Helvering v Horst 311 US 112)

3. Economic Benefit Test DEDUCTION V EXEMPTIONS

Doctrine of proprietary interest where stock, options, shars of stock or DEDUCTION EXEMPTION
other assets are transferred by an employer to an employee to secure It is subtraction It is immunity or privilege, a freedom
better services, they are plainly compensation which is taxable income from a charge or burden to which
others are subjected to.
4. All Events Test
It is not a receipt but an It is generally receipt which is
expenditure which is to be excluded from taxable income
Income is reportable when all the events have occurred that fix the
permitted to be subtracted
taxpayer’s right to receive the income and amount to be determined
from income to determine
with reasonable accuracy (CIR v Isabela Cultural Corporation)
the amount subject of tax
5. Flow of Wealth Test Reduction of wealth which Personal exemption is theoretical

helped earned the income personal family and living expense of
The test of liability is the cource(the property, activity or the service subject of tax such as an individual, such as the personal
that produced the income determines whether the gain is derived from ordinary and necessary exemption of the head of the family
the transaction (Collector v Administratrix of the Estate of expenses
Escharri)
Q: How do you determine the net income tax payable? (PM

D. Gross Income Reyes)
In all cases, other than when a final tax is imposed or when the gross
i. Definition compensation income tax system applies, the income tax is imposed
on the net taxable income computed as follows:
SEC. 32 Gross Income. - (A) General Definition. - Except when
otherwise provided in this Title, gross income means all income (1) All income minus exclusions equals gross income;
derived from whatever source
(2) Gross income less allowable deductions equals net
income (in case of corporations, this is already the taxable
ii. Concept of Income From Whatever Source Derived net income)
(3) Net income less personal and additional exemptions

iii. Gross Income vs. Net Income (when applicable) equals taxable net income
Net Income (Casasola) (4) Taxable net income times income tax rates (on the
graduated basis or corporate tax rate as the case may be)
Also known as taxable income refers to the gross income less equals net income tax due
a) allowable deductions and or
b) personal and additional expenses (5) Income tax less creditable withholding tax and/or tax
credit equals net income tax payable.
iv. Normal Tax vs. Final Tax TSN: In general, there are 3 composition of gross income:
1. Compensation Income
Taxable Income (Casasola) 2. Business Income
 gross income less statutory deductions. 3. Other Income- it is possible that you will gain something
 The statutory deductions are in general, though not exclusive, even if you are not engaged in a specific business
expenditures other than capital expenditures, connected with
the production of income Two Types of Broad Income in the NIRC
(TSN)
Q: What are ―exclusions?‖
The term ―exclusions‖ refers to items that are not included in the 1. NORMAL/ REGULAR TAX
determination of gross income because: This is the schedular income tax on individuals or the normal
1. They represent return of capital or are not income, gain corporate income tax which is now 30%
or profit (e.g. life insurance)
2. They are subject to another kind of internal revenue tax 2. FINAL TAX
(e.g. gifts, bequests, devices) This is still income tax but imposed on specific income items
3. They are income, gain or profits that are expressly of individuals or corporations.
exempt from income tax under the Constitution, tax treaty,
Tax Code, or general or special law. (e.g. PEZA) It is called final tax because it is already the final tax that is
imposed on particular income.
Q: What are deductions?
 Deductions are items or amounts authorized by law to be It is final in a sense that there are no other tax implications
subtracted from the pertinent items of gross income to for that particular income subject of final tax.
arrive at taxable income.
v. Classification of Income as to Source
Q: What is meant by ―source of income‖?

The source of an income is the
1. property,
2. activity or
3. service that produced the income.
It is the physical source where the income came from. (see CIR VS.
BAIER-NICKEL [AUGUST 29, 2006]).

Sources of Income Subject to Normal Tax TAX TREATMENT FOR FIXED OR VARIABLE ALLOWANCE
1. Compensation Income Ordinary and necessary Expenses incurred by the employee in the
performance of his duties shall not be subject to withholding of 2
a. In General conditions are satisfied:
Except when otherwise provided in this Title, gross income means all 1. It is ordinary and necessary traveling and representation or
income derived from whatever source, including (but not limited to) entertainment expenses incurred by the employee in the
the following items: pursuit of trade and business
2. The employee is required to account/liquidate for the
Compensation for services expenses in connection to the requirements of substantiation
in whatever form paid, under Sec 34
including, but not limited to
a. fees, (b) Substantiation Requirements. –
b. salaries, No deduction from gross income shall be allowed under Subsection
c. wages, (A) hereof
d. commissions, and Part of Sec A:
e. similar items;
1. Ordinary and Necessary Trade, Business or Professional
Notes: Casasola Expenses
 the name by which the renumeration for services is 2. Expenses Allowable to Private Educational Institutions.
designated is immaterial
 eg. Honoraria, emoluments etc unless the taxpayer shall substantiate
 these are all subject to fringe benefit tax under Sec 33  with sufficient evidence, such as official receipts or other
 taxable pensions and retirement pay and other similar adequate records:
nature constitute compensation income (i) the amount of the expense being deducted, and
 remuneration for services constitutes compensation even if (ii) the direct connection or relation of the expense
the relationship of Er-Ee no longer exists at the time of being deducted to the
payment
1. development,
However, compensation or wage which is subject to final withholding 2. management,
tax on compensation does not include remuneration paid on the 3. operation and/or conduct of the trade, business or
following: profession of the taxpayer.
a. agricultural labor pain entirely in products of the farm where OTHER FORMS OF COMPENSATION
labor is performed Sec 32 7(e)
(e) 13th Month Pay and Other Benefits. –
b. domestic service in a private home
c. for casual labor not in the course of the employer’s trade or Gross benefits received by officials and employees of public and
private entities:
business
Provided, however, that the total exclusion under this subparagraph
d. services by a citizen or resident of the Philippines for a  shall not exceed Thirty thousand pesos (P90,000) which
shall cover:
foreign government or an international organization
(i) Benefits received by officials and employees of the
national and local government pursuant to
Compensation paid in cash Compensation paid other than Republic Act No. 6686;
cash
full amount received is the Based on the fair market value of (ii) Benefits received by employees pursuant to
measure of the income the thing taken in payment Presidential Decree No. 851, as amended by
subject to tax Memorandum Order No. 28, dated August 13,
If the services are rendered for a 1986;
price, in the absence of evidence to
the contrary, such price will be (iii) Benefits received by officials and employees not
presumed as the fair value of the covered by Presidential decree No. 851, as amended by
compensation Memorandum Order No. 28, dated August 13, 1986; and
If living quarters: the rental value
of such must be reported as (iv) Other benefits such as productivity incentives and
income Christmas bonus:
If shares of stock: the value of the
shares of stock Provided, further, That the ceiling of Thirty thousand pesos (P30,000)
 may be increased through rules and regulations issued by
Promissory notes received as the Secretary of Finance,
payment for services: amount of  upon recommendation of the Commissioner,
their market value  after considering among others, the effect on the same of
the inflation rate at the end of the taxable year.

NOTES:
 The gross benefits received by officials and employees of and paid in the same manner and subject to the same conditions as
public and private entities in the form of 13 th month pay and provided in Section 58 of this Code.
other benefits are excluded from the gross income to the
extent of P 30, 000.
RR 11-2018
 Any excess will be included in the gross income per income
(G) Fringe Benefits Granted to the Employee
tax return as part of compensation income
(Except Rank and File Employee). – [formerly under letter (J)] –
b. Fringe Benefits
On the grossed-up monetary value of the fringe benefits granted or
furnished by the employer to his employees (except rank-and-file as
defined in the Code). –
i. Definition and Concept
Employee is a
For purposes of this Section, the term "fringe benefit" means any
1. citizen/
a) good,
2. resident
b) service or
3. alien/
c) other benefit
4. non-resident alien engaged in trade or business within the
Philippines
furnished or granted
- Thirty-five percent (35%)
 in cash or in kind by an employer to an individual
employee (except rank and file employees as defined
herein)…
Employee is a
 non-resident alien not engaged in trade or business within
the Philippines
ii. Taxable and Non-taxable
- Twenty-five percent (25%)
SEC. 33. Special Treatment of Fringe Benefit. -
The grossed-up value of the fringe benefit shall be determined
(A) Imposition of Tax.- A final tax of
 by dividing the actual monetary value of the fringe benefit
 thirty-four percent (35%) effective January 1, 2018;
 by the difference between one hundred percent (100%)
thirty-three percent (33%) effective January 1, 1999;
 and the applicable rate of income tax.
 and thirty-two percent (32%) effective January 1, 2000 and
thereafter,
The actual monetary value of the fringe benefit
 shall be divided by sixty-five percent (65%) to get the
is hereby imposed
grossed-up value subject to 35% fringe benefit tax
 on the grossed-up monetary value of fringe benefit
(FBT);
furnished or granted to the employee
 while the divisor shall be seventy-five percent (75%) to get
the grossed-up value subject to 25% FBT.
 (except rank and file employees as defined herein) [meaning

only the managerial & supervisory worker is covered)
 by the employer, whether an individual or a corporation Notes:

The tax imposed on the fringe benefits received by
UNLESS 1. managerial
2. supervisory employees
CONVENIENCE OF THE EMPLOYER RULE shall be subject of FINAL tax on the employee but shall be withheld
and paid by the Employer on a calendar quarterly basis.
General Rule: ABOVE: Fringe Benefits subject to 32 % final tax
(now 35 except non-resident alien not engaged in trade or Who is legally required to pay the FBT?
business=25%)  The Employer
 The law places legal obligation upon the employer to remit
Exception: Convenience of the Employer Rule the tax such that when the tax is not paid, the legal
 the fringe benefit is required recourse of BIR is to go after the Er
1. by the nature of, or necessary to the trade, business or FBT are only given to Managerial and Supervisory Employee.
profession of the employer, or
Managerial Supervisory
2. when the fringe benefit is for the convenience or advantage one who is vested with powers or one who, in the interest of the
of the employer). prerogatives to employer,
The tax herein imposed is payable by the employer which tax 1. lay down and execute 1. effectively recommends
shall be paid in the same manner as provided for under Section management policies and/or such managerial actions
57 (A) of this Code. 2. to hire, 2. if the exercise of such
3. transfer, authority is not merely
SEC. 57. Withholding of Tax at Source. - 4. suspend, routinary or clerical in
5. lay-off, nature but requires the
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules 6. recall, 3. use of independent
and regulations the Secretary of Finance may promulgate, upon the 7. discharge, judgment
recommendation of the Commissioner, requiring the filing of income 8. assign or
tax return by certain income payees, the tax imposed or prescribed 9. discipline employees
by Sections
xxx Sec 33;

RANK AND FILE
shall be withheld by All employees who are holding neither managerial nor supervisory
position.
1. payor-corporation and/or
2. person

TAXATION OF FRINGE BENEFIT GRANTED TO NON-RESIDENT Provided, however,

ALIEN INDIVIDUALS That the same tax treatment shall apply
 25% of the grossed-up monetary value of the fringe benefit  to Filipinos employed and occupying the same positions
 The tax base shall be computed by dividing the monetary  as those of aliens employed by these offshore banking
value of the fringe benefit by 75% units.
FRINGE BENEFIT TAX OF 15 % SHALL BE IMPOSED ON THE

GROSSED-UP MONETARY VAUE OF THE FRINGE BENEFIT OF (E) Alien Individual Employed by Petroleum Service Contractor and
THE FOLLOWING ALIEN INDIVIDUAL Subcontractor –
Sec 25 (C) (D) (E) An Alien individual

1. who is a permanent resident of a foreign country
(C) Alien Individual Employed by Regional or Area Headquarters and 2. but who is employed and assigned in the Philippines
Regional Operating Headquarters of Multinational Companies. –
a. by a foreign service contractor or
*note the tax is based on gross b. by a foreign service subcontractor
There shall be levied, collected and paid for each taxable year engaged in petroleum operations in the Philippines
 upon the gross income received
 by every alien individual  shall be liable to a tax of fifteen percent (15%) of the
 employed salaries, wages, annuities, compensation, remuneration
 by and other emoluments, such as honoraria and allowances,
received from such contractor or subcontractor:
1. regional or area headquarters and
2. regional operating headquarters Provided, however,
 established in the Philippines That the same tax treatment shall apply
 by multinational companies as  to a Filipino employed and occupying the same position
 as an alien employed by petroleum service contractor and
1. salaries, subcontractor.
2. wages,
3. annuities, Q: What is meant by ―grossed-up monetary value of the fringe
4. compensation, benefit?‖
5. remuneration and other
6. emoluments, As defined in RR 3-98 [JANUARY 1, 1998], the grossed-up monetary
7. such as honoraria and value of the fringe benefit represents the
8. allowances, 1. whole amount of income received by the employee
2. which includes the net amount of money or net monetary
from such regional or area headquarters and regional operating value of property which has been received
headquarters, 3. plus the amount of the fringe benefit tax thereon otherwise
 a tax equal to fifteen percent (15%) of such gross income: due from the employee, but paid by the employer for and in
behalf of his employee.
Provided, however, In essence, the purpose of getting the grossed-up monetary value is to
 That the same tax treatment shall apply preserve the benefit to the employer as a whole.
 to Filipinos employed and occupying the same position
 as those of aliens employed by these multinational DETERMINATION OF THE GROSSED-UP MONETARY VALUE
companies.
The grossed-up monetary value of the fringe benefit shall be
For purposes of this Chapter, the term 'multinational company' determined
means 1. by dividing the actual monetary value of the fringe benefit
 a foreign firm or entity engaged in international trade with by sixty-six percent (66%) effective January 1, 1998;
1. affiliates or 2. sixty-seven percent (67%) effective January 1, 1999; and

2. subsidiaries or sixty-eight percent (68%) effective January 1, 2000 and
3. branch offices in the Asia-Pacific Region and thereafter:
4. other foreign markets.
Provided, however, That fringe benefit furnished to employees and
taxable under Subsections
(B), (C), (D) and (E) of Section 25 shall be taxed at the applicable
(D) Alien Individual Employed by Offshore Banking Units. – rates imposed thereat [15%] :
There shall be levied, collected and paid for each taxable year upon
the gross income Sec 25(B)
 received by every alien individual employed by offshore (B) Nonresident Alien Individual Not Engaged in Trade or Business
banking units Within the Philippines
 established in the Philippines as
(C) Alien Individual Employed by Regional or Area Headquarters and
1. salaries, Regional Operating Headquarters of Multinational Companies
2. wages,
3. annuities, (D) Alien Individual Employed by Offshore Banking Units.
4. compensation,
5. remuneration and (E) Alien Individual Employed by Petroleum Service Contractor and
6. other emoluments, Subcontractor
7. such as honoraria and allowances,
from such off-shore banking units, a tax equal to fifteen percent

(15%) of such gross income:

Provided, further,
That the grossed -Up value of the fringe benefit (1) Housing;
 shall be determined by dividing the actual monetary value of
the fringe benefit RR 3-98
 by the difference between one hundred percent (100%)
 and the applicable rates of income tax under Subsections For this purpose, the guidelines for valuation of specific types of
(B), (C), (D), and (E) of Section 25. fringe benefits and the determination of the monetary value of the
fringe benefits are given below.
RR 3-98
The taxable value shall be the grossed-up monetary value of
Determination of the Amount Subject to the Fringe Benefit Tax — In the fringe benefit.
general, the computation of the fringe benefits tax would entail
(a) valuation of the benefit granted and (1) Housing privilege —

(b) determination of the proportion or percentage of the benefit
which is subject to the fringe benefit tax. (a) LEASES FOR THE USE OF EMPLOYEE
If the employer
That the Tax Code allows for the cases  leases a residential property for the use of his
 where only a portion (i.e. less than 100 per cent) of the employee and
fringe benefit  the said property is the usual place of residence of
the employee,
 is subject to the fringe benefit tax is clearly stated in  the value of the benefit shall be the amount of rental paid
Section 33 (a) of R.A. 8424 which stipulates that thereon by the employer,
 as evidenced by the lease contract.
1. fringe benefits which are "required by the nature of, or
necessary to the trade, business or profession of the The monetary value of the fringe benefit
employer, or  shall be fifty per cent (50%) of the value of the
2. when the fringe benefit is for the convenience or benefit.
advantage of the employer"
 are not subject to the fringe benefit tax.
(b) OWNED BY ER & ASSIGNED FOR THE USE OF THE
Thus, in cases where the fringe benefits EMPLOYEE
 entail joint benefits to the employer and employee, If the employer owns a residential property
 the portion which shall be subject to the fringe benefits
tax and  and the same is assigned for the use of his employee
 the guidelines for the valuation of fringe benefits are as his usual place of residence,
defined under these rules and regulations.  the annual value of the benefit shall be five per cent (5%)
of the
Unless otherwise provided in these regulations, the valuation of
fringe benefits shall be as follows: 1. market value of the
a. land and
1. If the fringe benefit is granted in money, or is directly paid b. improvement,
for by the employer, then the value is the amount granted
or paid for. as declared in the Real Property Tax Declaration Form,
2. or zonal value as determined by the Commissioner

2. If the fringe benefit is granted or furnished by the pursuant to Section 6(E) of the Code (Authority of
employer in property other than money and ownership is the Commissioner to Prescribe Real Property
transferred to the employee, then the value of the fringe Values),
benefit shall be equal to the fair market value of the
property as determined in accordance with Sec. 6 (E) of whichever is higher.
the Code (Authority of the Commissioner to Prescribe Real
Property Values). The monetary value of the fringe benefit
 shall be fifty per cent (50%) of the value of the
3. If the fringe benefit is granted or furnished by the benefit.
employer in property other than money but ownership is
not transferred to the employee, the value of the fringe The monetary value of the housing fringe benefit is equivalent
benefit is equal to the depreciation value of the property. to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
Fringe Benefits FMV = FAIR MARKET VALUE
For purposes of this Section, the term "fringe benefit" means any
d) good, (c) PURCHASES AND ALLOWS EMPLOYEE TO USE
e) service or If the employer
f) other benefit  purchases a residential property on installment basis
and
furnished or granted  allows his employee to use the same as his usual
 in cash or in kind by an employer to an individual employee place of residence,
(except rank and file employees as defined herein) such as,  the annual value of the benefit
but not limited to, the following:  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) PURCHASES AND TRANSFERS OWNERSHIP IN THE NAME (h) TEMPORARY HOUSING:
OF EMPLOYEE
Temporary housing for an employee
If the employer purchases a residential property  who stays in a housing unit
 and transfers ownership thereof in the name of the  for three (3) months or less shall not be considered a
employee, taxable fringe benefit.
 the value of the benefit shall be
1. the employer's acquisition cost or (2) Expense account;

2. zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of (2) Expense account —
the Commissioner to Prescribe Real Property
Values), GENERAL RULE
 whichever is higher. (a) In general, expenses incurred by the employee
 but which are paid by his employer
The monetary value of the fringe benefit  shall be treated as taxable fringe benefits,
 shall be the entire value of the benefit.
EXCEPTION
except when the expenditures
(e) EMPLOYEE TRANSFERS OWNERSHIP AT A PRICE LESS
THAN THE ACQUISITION COST 1. are duly receipted for and in the name of the employer
and
If the employer purchases a residential property
 and transfers ownership thereof to his employee for 2. the expenditures do not partake the nature of a personal
the latter's residential use, expense attributable to the employee.
 at a price less than the employer's acquisition cost,
 the value of the benefit shall be the difference (b) REIMBURSED: Expenses paid for by the employee but
between reimbursed by his employer
 shall be treated as taxable benefits except only

1. the fair market value,
 as declared in the Real Property Tax Declaration 1. when the expenditures are duly receipted for and in the
Form, or name of the employer and
2. zonal value as determined by the Commissioner 2. the expenditures do not partake the nature of a personal
pursuant to Sec. 6(E) of the Code (Authority of the expense attributable to the said employee.
Commissioner to Prescribe Real Property Values),
(c) Personal expenses of the employee (like purchases of
whichever is higher, and the cost to the employee. groceries for the personal consumption of the employee and
his family members)
The monetary value of the fringe benefit
 shall be the entire value of the benefit. 1. paid for or
2. reimbursed by the employer to the employee
NON-TAXABLE FRINGE BENEFITS  shall be treated as taxable fringe benefits of the
employee
(f) HOUSING OF MILITARY OFFICIALS  whether or not the same are duly receipted for in the name
Housing privilege of military officials of the employer.
 of the Armed Forces of the Philippines (AFP)
 consisting of officials of (d) Representation and transportation allowances
1. the Philippine Army,
2. Philippine Navy and which are
3. Philippine Air Force 1. fixed in amounts
2. and are regular received by the employees
shall not be treated as taxable fringe benefit as part of their monthly compensation income
 in accordance with the existing doctrine
 that the State shall provide its soldiers  shall not be treated as taxable fringe benefits
 with necessary quarters
 which are within or accessible from the military camp  but the same shall be considered as taxable compensation
 so that they can be readily on call income subject to the tax imposed under Sec. 24 of the
 to meet the exigencies of their military service. Code.
(g) INSIDE/ADJACENT TO THE PREMISES OF BUSINESS
A housing unit which is situated

1. inside or
2. 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.

(3) Vehicle of any kind; years.
(3) Motor vehicle of any kind — The monetary value of the fringe benefit
 shall be fifty per cent (50%) of the value of the benefit.
(a) PURCHASES VEHICLE IN THE NAME OF THE EMPLOYEE:
The monetary value of the motor vehicle fringe benefit is
If the employer purchases the motor vehicle in the name of equivalent to the following:
the employee, MV = [(A)/5] X 50%
 the value of the benefit is the acquisition cost thereof. where:
The monetary value of the fringe benefit shall MV = Monetary value

 be the entire value of the benefit, A = acquisition cost
 regardless of whether the
 motor vehicle is used by the employee partly for his (f) LEASES AND MAINTAINS A FLEET OF VEHICLES
personal purpose
 and partly for the benefit of his employer. If the employer leases and maintains a fleet of motor vehicles
 for the use of the business and the employees,
(b) PROVIDES EMPLOYEE CASH FOR PURCHASE OF VEHICLE  the value of the benefit
 shall be the amount of rental payments for motor vehicles
If the employer provides the employee with cash for the  not normally used for sales, freight, delivery, service
purchase of a motor vehicle, and other non-personal use.
 the ownership of which is placed in the name of the
employee, The monetary value of the fringe benefit
 the value of the benefits shall be the amount of cash  shall be fifty per cent (50%) of the value of the
received by the employee. benefit.
The monetary value of the fringe benefit shall be (g) The use of aircraft (including helicopters)
 the entire value of the benefit
 regardless of whether the motor vehicle is used by  owned and maintained by the employer
the employee partly for his personal purpose  shall be treated as business use and not be subject
 and partly for the benefit of his employer, to the fringe benefits tax.
Unless (h) The use of yacht

 whether owned and maintained or leased by the
the same was subjected to a withholding tax as compensation employer
income under Revenue Regulations No. 2-98.  shall be treated as taxable fringe benefit.
(c) PURCHASE ON INSTALLMENT The value of the benefit shall be measured based on the depreciation
of a yacht at an estimated useful life of 20 years.
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 (4) Household personnel, such as maid, driver and others;
 shall be the acquisition cost exclusive of interest, divided
by five (5) years. (4) Household expenses — Expenses of the employee
which are borne by the employer for household personnel,
The monetary value of the fringe benefit shall such as
 be the entire value of the benefit
 regardless of whether the motor vehicle is used by the 1. salaries of household help,
employee partly for his personal purpose and 2. personal driver of the employee, or
 partly for the benefit of his employer. 3. other similar personal expenses (like payment for
homeowners association dues, garbage dues, etc.)
(d) SHOULDERS ONLY A PORTION OF THE PURCHASE PRICE
shall be treated as taxable fringe benefits.
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, (5) Interest on loan at less than market rate to the extent of
 the value of the benefit shall be the amount shouldered by the difference between the market rate and actual rate
the employer. granted;
The monetary value of (5) Interest on loan at less than market rate
 the fringe benefit shall be the entire value of the benefit
 regardless of whether the motor vehicle is used by the (a) If the employer lends money to his employee
employee  free of interest or at a rate lower than twelve per cent
 partly for his personal purpose (12%),
 and partly for the benefit of his employer.
1. such interest foregone by the employer
(e) ER MAINTAINS A FLEET OF MOTOR VEHICLES 2. or the difference of the interest assumed by the
employee and
If the employer owns and maintains a fleet of motor vehicles 3. the rate of twelve per cent (12%)
 for the use of the business and the employees,
 the value of the benefit  shall be treated as a taxable fringe benefit.
 shall be the acquisition cost of all the motor vehicles
 not normally used for
1. sales, (b) The benchmark interest rate of twelve per cent (12%) shall
2. freight, remain in effect until revised by a subsequent regulation.
3. delivery service and
4. other non-personal used divided by five (5)

(c) This regulation shall apply to installment payments or loans (8) Holiday and vacation expenses;
with interest rate lower than twelve per cent (12%) starting January
1, 1998. (8) Holiday and vacation expenses — Holiday and
vacation expenses of the employee borne by his employer
 shall be treated as taxable fringe benefits.
(6) Membership fees, dues and other expenses borne by the

employer for the employee in social and athletic clubs or (9) Educational assistance to the employee or his dependents;
other similar organizations; and
(9) Educational assistance to the employee or his

(7) Expenses for foreign travel; dependents —
(7) Expenses for foreign travel — GENERAL RULE

(a)The cost of the educational assistance to the employee
(a) Reasonable business expenses  which are borne by the employer shall, in general,
 which are paid for by the employer  be treated as taxable fringe benefit.
1. for the foreign travel of his employee EXCEPTIONS

2. for the purpose of attending business meetings or
conventions However, a scholarship grant to the employee by the employer
 shall not be treated as taxable fringe benefit
shall not be treated as taxable fringe benefits.  if the education or study involved is
In this instance, inland travel expenses (such as expenses for 1. directly connected with the employer's trade, business or
food, beverages and local transportation) profession,
 except lodging cost in a hotel (or similar establishments)
 amounting to an average of US$300.00 or less per day, 2. and there is a written contract between them that the
 shall not be subject to a fringe benefit tax. employee is under obligation to remain in the employ of
the employer
The expenses should be supported by documents
 for period of time that they have mutually agreed
 proving the actual occurrences of the meetings or upon.
conventions.
In this case, the expenditure shall be treated
The cost of economy and business class airplane ticket  as incurred for the convenience and furtherance of
 shall not be subject to a fringe benefit tax. the employer's trade or business.
(b) The cost of educational assistance extended by an

However, 30 percent of the cost of first class airplane ticket employer
 shall be subject to a fringe benefit tax.  to the dependents of an employee
 shall be treated as taxable fringe benefits of the employee
(b) In the absence of documentary evidence
 showing that the employee's travel abroad Unless
 was in connection with business meetings or the assistance was provided
conventions,  through a competitive scheme
 under the scholarship program of the company.
1. the entire cost of the ticket,
2. including cost of hotel accommodations and
3. other expenses incident thereto shouldered by the
employer, (10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
shall be treated as taxable fringe benefits. allows.
The business meetings shall be evidenced (10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law allows
 by official communications from business associates —
abroad
 indicating the purpose of the meetings. GR: Life Insurance: Taxable fringe benefit
The cost of life or health insurance and other non-life

Business conventions shall be evidenced by insurance premiums
 borne by the employer for his employee
 official invitations/communications  shall be treated as taxable fringe benefit, except the
 from the host organization or entity abroad. following:
Otherwise, the entire cost thereof (a) contributions of the employer for the benefit of the
 shouldered by the employer employee, pursuant to the provisions of existing
 shall be treated as taxable fringe benefits of the law, such as under the
employee.
1. Social Security System (SSS), (R.A. No. 8282, as
(c) Travelling expenses which are paid by the employer amended) or
 for the travel of the family members of the employee 2. under the Government Service Insurance System
 shall be treated as taxable fringe benefits of the employee. (GSIS) (R.A. No. 8291), or
3. similar contributions arising from the provisions

of any other existing law; and 7. LAUNDRY Laundry allowance not exceeding P300 per month;
(b) the cost of premiums borne by the employer for the
group insurance of his employees. 8. ACHIVEMENT AWARDS Employees achievement awards, e.g. for
length of service or safety achievement, with an annual monetary
value not exceeding P10,000;
GR: Fringe Benefits are Taxable
E: ENUMERATION PLUS DE MINIMIS BENEFITS
9. GIFTS Gifts given during Christmas and major anniversary
RR 3-98 celebrations not exceeding P5,000 per employee per annum;
AMENDING SEC 33 C
10. Daily meal allowance for overtime work and night/graveyard shift
(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, not exceeding 25% of the basic minimum wage per region basis.
the fringe benefits tax shall not be imposed on the following fringe
benefits:
Q: Is the enumeration of de minimis benefits exclusive?
(1) AUTHORIZED BY LAW: Fringe benefits which are
authorized and exempted from income tax under the Yes. As provided in RR No. 005-11 [March 16, 2011], all other benefits
Code or under any special law; given by employers which are not included in the enumeration shall
not be considered de minimis benefits, and, hence, shall be subject to
(2) RETIREMENT PLANS ET.A AL Contributions of the income tax as well as withholding tax on compensation income.
employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans; Notes:
 The amount of De Minimis conforming to the Ceiling herein
(3) RANK AND FILE BENEIFITS: Benefits given to the rank prescribed shall not be considered in determining the P30,
and file, whether granted under a collective bargaining 000 ceiling of ―other benefits‖ excluded from gross income
agreement or not; under Sec 32 (B) (7) (e)
Provided further that the MWE receiving ―other benefits‖ exceeding

(4) DE MINIMIS De minimis benefits as defined in these P30, 000 shall be taxable on the excess
Regulations; a) benefits
b) salaries
(5) NECESSARY FOR TRADE & BUSINESS: If the grant of c) wages and
fringe benefits to the employee is required by the nature d) allowances
of, or necessary to the trade, business or profession of
the employer; or just like the employee receiving compensation income beyond the
statutory minimum wage.
(6) CONVENIENCE TO THE ER RULE If the grant of the
fringe benefit is for the convenience of the employer. De Mimimis benefits are actually fringe benefits which are not
taxable.
CONFEDERATION V CIR
iii. De Minimis Benefits ISSUE: WON the allowances, bonuses and benefits Section III
of the assailed RMO are, in fact, fringe de minimis benefits
DE MINIMIS BENEFITS NOT SUBJECT TO INCOME TAX, HENCE NOT exempt from withholding tax
SUBJECT TO WITHOLDING TAX
RULING: NO. They are not exempt.
As provided in RR No. 005-11 [March 16, 2011], as amended
recently by RR No. 008-12 [MAY 11, 2012], the following shall be Determination of existence of fringe benefits is a question of
considered de minimis benefits not subject to income tax as well as fact.
withholding tax on compensation income of both
CONTENTION OF THE PETITIONERS:
a. managerial and
b. rank and file employees: Petitioners, nonetheless, insist that the allowances,
bonuses and benefits enumerated in Section III of the assailed RMO
1. UNUSED VACATION LEAVE: Monetized unused vacation leave are, in fact, fringe de minimis benefits exempt from withholding tax
credits of private employees not exceeding ten (10) days during on compensation.
the year;
The Court cannot, however, rule on this issue as it is
2. VACATION & SICK LEAVE: Monetized value of vacation and sick essentially a question of fact that cannot be determined in this
leave credits paid to government officials and employees; petition questioning the constitutionality of the RMO.
3. MEDICAL ALLOWANCE Medical cash allowance to dependents of To be sure, settled is the rule that exemptions from tax are
employees, not exceeding P750 per employee per semester or P125 construed strictissimi Juris against the taxpayer and liberally in favor
per month; of the taxing authority. 83 One who claims tax exemption must point
to a specific provision of law conferring, in clear and plain terms,
4. RICE SUBSIDY Rice subsidy of P1,500 or one (1) sack of 50 kg. exemption from the common burden and prove, through substantial
rice per month amounting to not more than P1,500; evidence, that it is, in fact, covered by the exemption so claimed.
5. UNIFORM & CLOTHING Uniform and clothing allowance not The determination, therefore, of the merits of petitioners'
exceeding P5,000 per annum; claim for tax exemption would necessarily require the resolution of
both legal and factual issues, which this Court, not being a trier of
6. MEDICAL ASSISTANCE: Actual medical assistance, e.g. medical facts, has no jurisdiction to do; more so, in a petition filed at first
allowance to cover medical and healthcare needs, annual medical instance.
check-up, maternity assistance, and routine consultations, not
exceeding P10,000 per annum; Among the factual issues that need to be resolved, at the
first instance, is the nature of the fringe benefits granted to

employees.
Furthermore, fringe benefits of relatively small value furnished by
The NIRC of 1997, as amended, does not impose income tax, and the employer to his employees (both managerial/supervisory and
consequently a withholding tax,on payments to employees which are rank and file) as a means of promoting health, goodwill,
either contentment, or efficiency, otherwise known as de minimis benefits,
that are exempt from both income tax on
(a) required by the nature of, or compensation and fringe benefit tax; hence, not subject to
necessary to, the business of the employer; or withholding tax, are limited and exclusive only to those enumerated
(b) for the convenience or advantage of the employer. under RR No. 3-98, as amended.93 All other benefits given by the
employer which are not included
This, however, requires proper documentation.
Without any documentary proof that the payment

ultimately redounded to the benefit of the employer, the same shall
be considered as a taxable benefit to c. Minimum Wage Earners
the employee, and hence subject to withholding taxes.
Legal Basis: RA 9504
Another factual issue that needs to be confirmed is the
recipient of the alleged fringe benefit. Fringe benefits furnished or "(GG) the term 'statutory minimum wage' earner shall refer
granted, in cash or in kind, by an employer to its managerial or  to rate fixed by the Regional Tripartite Wage and
supervisory employees, are not considered part of compensation Productivity Board,
income; thus, exempt from withholding tax on in the said list,  as defined by the Bureau of Labor and Employment
although of relatively small value, shall not be considered as de Statistics (BLES)
minimis benefits;  of the Department of Labor and Employment (DOLE)
"(HH) the term 'minimum wage earner' shall refer to
hence, shall be subject to income tax as well as
withholding tax on compensation income, for rank and file 1. a worker in the private sector paid the statutory minimum
employees, or fringe benefits tax for managerial and supervisory wage, or
employees, as the case may
be. 2. to an employee in the public sector
Based on the foregoing, it is clear that to completely  with compensation income of not more than the
determine the merits of petitioners' claimed exemption from statutory minimum wage
withholding tax on compensation, under Section 33 of the NIRC of  in the non-agricultural sector where he/she is
1997, there is a need to confirm several factual issues. assigned."
As such, petitioners cannot but first resort to the proper
courts and administrative agencies which are better equipped forsaid
task. All told, the Court finds Sections III and IV of the assailed RMO "Provided, That minimum wage earners as defined in Section
valid. 22 (HH) of this Code
 shall be exempt from the payment of income tax on their
The NIRC of 1997, as amended, is clear that all forms of taxable income:
compensation income received by the employee from his employer
are presumed taxable and subject to withholding taxes. Provided, further, That
The Government of the Philippines, its agencies, 1. the holiday pay,

instrumentalities, and political subdivisions, as an employer, is 2. overtime pay,
required by law to withhold and remit to the BIR the appropriate 3. night shift differential pay and
taxes due thereon. 4. hazard pay
Any claims of exemption from withholding taxes by an  received by such minimum wage earners
employee, as in the case of petitioners, must be brought and  shall likewise be exempt from income tax.
resolved in the appropriate administrative and judicial proceeding,
with the employee compensation.
Instead, these fringe benefits are subject to a fringe Rate of Tax of Purely Self-employed individuals and /or Professionals
benefit tax equivalent to 32% of the grossed-up monetary value of Whose Gross sales or gross receipts and other Operating Incomde
the benefit, which the employer is legally required to pay. does not exceed the VAT Threshold inSec 109(BB)
On the other hand, fringe benefits given to rank and file Self-employed individuals shall have the option to avail of an 8% tax
employees, while exempt from fringe benefit tax,90 form part of on
compensation income taxable under the regular income tax rates 1. gross sales
provided in Section 24(A)(2) of the NIRC, of 1997, as amended;91 2. or gross receipts
and consequently, subject to withholding tax on compensation. 3. and other non-operating income
Managerial & Rank And File in excess of 250,000 php

Supervisory
 Subject to FBT of 32 Exempt from Fringe in lieu of the graduated income tax rates under Subsection A(2)(a) of
% based on the Benefit Tax this Section and percentage tax under Sec 116 of this Code.
grossed up monetary
value Form Part of Compensation
Income
 Not part of
compensation income
 Witheld at source

SORIANO v Secretary of FINANCE CONDUCT OF TRADE AND BUSINESS
ISSUE: WON MWEs who earn purely compensation income (2) Gross income derived from the
SHOULD BE DISQUALIFIED from the privilege of the MWE a. conduct of trade or business or
exemption in case they receive bonuses and other b. the exercise of a profession;
compensation-related benefits exceeding the statutory ceiling
of P30,000 Notes: (Casasola)
Gross income derived from doing business=
RULING: They should not be disqualified from the exemption Gross Sales =(SDAC)
pertaining to MWE. - Sales return
- Discounts
The treatment of this excess cannot operate to - Allowances
disenfranchise the MWE from enjoying the exemption explicitly - Cost of goods sold
granted by R.A. 9504.
Cost of goods sold include:
The government's argument that the RR avoids a tax  Invoice cost of the goods
distortion has no merit.  Import duities
 Freight in transporting the goods
The government further contends that the "clarification"  Insurance when the goods are in transit
avoids a situation akin to wage distortion and discourages tax
evasion. They claim that MWE must be treated equally as other Cost of manufacturing
individual compensation income earners "when their compensation  Cost of production of finished goods
does not warrant exemption under R.A. No. 9504. Otherwise, there Including
would be gross inequity between and among individual income 1. Raw materials used
taxpayers."78 For illustrative purposes, respondents present three 2. Manufacturing overhead
scenarios: 3. Freight cost
4. Insurance premium
In the first scenario, a minimum wage earner in the
National Capital Region receiving P382.00 per day has an annual  Other costs to bring the raw materials to the factory or
salary of P119,566.00, while a non-minimum wage earner with a warehouse
basic pay of P385.00 per day has an annual salary of P120,505.00.
The difference in their annual salaries amounts to only P939.00, but Sale of service=gross income =
the non-minimum wage earner is liable for a tax of P8,601.00, while Gross receipts
the minimum wage earner is tax-exempt? -sales return
-allowances
In the second scenario, the minimum wage earner's "other -discounts
benefits" exceed the threshold of P30,000.00 by P20,000.00. The -cost of service
non-minimum wage earner is liable for P8,601.00, while the Cost of service
minimum wage earner is still tax-exempt.  All cost and expenses necessarily incurred to provide the
services required by the customers and clients including
In the third scenario, both workers earn "other benefits" at
P50,000.00 more than the P30,000 threshold. The non-minimum a. Salaries & employee benefits of personnel
wage earner is liable for the tax of P18,601.00, while the minimum b. Cost of facilities directly utilized in providing the service such
wage earner is still tax-exempt.79 (Underscoring in the original) as
1. Depreciation
Again, respondents are venturing into policy-making, a function. 2. Rental of equipment used
3. Cost of supplies
Dispositive Portion
Provided that in case of banks
(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus;  The cost of service shall include interest expense
and Summary
Engage in selling or Sale of services
(b) DECLARE NULL and VOID the following provisions of Revenue manufacture of goods
Regulations No. 10-2008: Based on gross sales Based on gross receipts
(i)
Sections 1 and 3, insofar as they disqualify MWEs who earn purely GAINS DERVIVED THE EXERCISE OF PROFESSION
compensation income from the privilege of the MWE exemption in Notes (Casasola)
case they receive bonuses and other compensation-related benefits
exceeding the statutory ceiling of P30,000;  Subject to income tax on the income tax derived from such
just like income derived from engaging in trade or business
 There must be no Er-Ee relationship between him and the
MWE including their supplementary benefits are excluded from client
income tax
General Professional Partnership
 The income of the GPP is not taxable on the part of the GPP
Conditions: (TSN)  This is because the GPP is only acting as a ―pass through‖
1. The MWE is not earning any other income from other entity where its income is ultimately taxed to the partners
employers comprising it
2. MWE is not engaged in trade or business  That is why under Sec 31 expenses for the practice of a
profession are allowed as deductions

SEC. 31 Taxable Income Defined – CAPITAL ASSETS
The term taxable income means the pertinent items of gross income Dealings in shares of stock of Philippine corporations
specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by Not traded in the Local Shares not listed and traded in the
this Code or other special laws. Stock exchange stock exchange
Legal Basis
Legal Basis Sec 39
SEC. 26. Tax Liability of Members of General Professional (1) Capital Assets. -
Partnerships. –
The term "capital assets" means property held by the taxpayer
A general professional partnership as such  (whether or not connected with his trade or business),
 shall not be subject to the income tax
 imposed under this Chapter. But does not include
1. stock in trade of the taxpayer or
Persons engaging in business as partners 2. other property of a kind which would properly be included
 in a general professional partnership in the inventory of the taxpayer
 shall be liable for income tax
 only in their separate and individual capacities.  if on hand at the close of the taxable year, or
For purposes of computing the distributive share of the partners, 3. property held by the taxpayer primarily for sale to
 the net income of the partnership shall be computed customers
 in the same manner as a corporation.  in the ordinary course of his trade or business,
or
Each partner shall report as gross income
 his distributive share, 4. property used in the trade or business,
 actually or constructively received,  of a character which is subject to the allowance
 in the net income of the partnership. for depreciation
 provided in Subsection (F) of Section 34;
5. or real property used in trade or business of the taxpayer.

GAINS
Sec 34 (F) Depreciation. - (1) General Rule. –
1. Stock(Domestic)
There shall be allowed as a depreciation deduction a reasonable
a. Stock Dealers (Ordinary Gain)
allowance for the
b. Non-Dealers
 Local Philippine Stock Exchange (3 kinds: not part 1. exhaustion,
of the inventory, non-dealers, capital asset) 2. wear and
 Not traded in PSE (direct selling) 3. tear (including reasonable allowance
2. Real Property for obsolescence)
3. Others
6. of property used in the trade or business.
a. Not domestic stocks
b. Not Real Property In the case of property held by one person
7. for life with remainder to another person,
8. the deduction shall be computed
(3) Gains derived from dealings in property; 9. as if the life tenant were the absolute owner of the
property and
2 Types of Gains: (TSN) 10. shall be allowed to the life tenant.
1. Ordinary
 Always forms part of your gross income In the case of property held in trust,
 the allowable deduction
2. Capital Gain  shall be apportioned between the income beneficiaries
 Derived from the sale or exchange of capital and the trustees in accordance with
assets
 Generally forms part of your gross income subject 1. the pertinent provisions of the instrument creating the
to regular tax except if trust, or
a. Excluded by law 2. in the absence of such provisions, on the basis of the
b. Subject to final tax trust income allowable to each.
Q: Distinguish ordinary gain from capital gain.

Ordinary gain Capital gain
any gain from the sale or The gains realized from the sale,
exchange of property which exchange, or other disposition of the Q: What are stocks classified as capital assets?(PM Reyes)
is not a capital asset or properties of a taxpayer classified as
property capital assets. Stocks classified as capital assets mean all stocks and securities held
Derived from property used Derived from property not used in by taxpayers
in trade or business trade or business whether or not  other than dealers in securities.
connected thereto

Q: Who are liable for capital gains tax on shares of stock? Q: How do you determine the tax base of disposition of stock?
1. Individual taxpayer, whether citizen or alien
2. Corporate taxpayer, whether domestic or foreign Listed and traded through FMV is the actual selling price
3. Other taxpayers other than (1) and (2) such as estates, PSE
trusts, trust funds, and pension funds, Sales of stock listed but not FMV is the closing price on the day
traded through the PSE when the shares were sold,
Q: Who are exempt from capital gains tax on shares of stock? transferred, etc (if no sale was made
1. Dealer in securities on that day in the PSE, then the
closing price on the day nearest to
2. Investors in shares of stock in a mutual fund company the date of sale ,transfer, or
in connection with the gains realized by said investor exchange of the said shares
upon redemption of the said shares of stock
Sales of stock not listed and The FMV is the book value of the
3. All other persons, whether natural or juridical, who are not traded through the PSE shares of stock as shown in the
specifically exempt from NIRC taxes under existing financial statements duly certified by
investment schemes and other special laws. an independent CPA nearest to the
date of sale.
(1) SHARES OF STOCKS OF DOMTESIC CORPORATIONS

Q: Is an assignment of deposits on stock subscriptions subject
A. Citizens & Resident Aliens Sec 24(c) to capital gains tax?
 Yes. The assignment of the deposits on stock subscriptions
Legal Basis Sec 24 (C) (2) NIRC as amended by the TRAIN Law results in a net gain.
(2) Capital Gains from the Sale of Shares of Stock Not Traded  A tax on the profit of sale on net capital gain is the very
in the Stock Exchange. – essence of the net capital gains tax law.
A final tax at the rate of 15 % shall be imposed on the net  To hold otherwise will ineluctably deprive the government of
capital gains its due and unduly set free from tax liability persons who
 realized during the taxable year from the profited from said transactions (see COMPAGNIE
FINANCIERE SUCRES ET DENREES VS. CIR [AUGUST
1. sale, 28, 2006])
2. exchange, or
3. disposition of property
Q: What is the effect of non-payment of capital gains tax on
of shares of stock in a domestic corporation
stock transactions?
Except shares
1. sold or  As provided in Section 11 of RR 06-2008, no sale, exchange,
2. disposed of through the stock exchange. transfer or similar transaction intended to convey ownership
of, or title to any share of stock shall be registered in the
books of the corporation unless the receipts of payment of
the tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation.
4. TRADED AND LISTED IN THE LOCAL STOCK EXCHANGE  RMC 37-2012 [AUGUST 3, 2012] clarified RR 06-2008 in
Q: If the share of stock is traded through the stock exchange, stating that a Certificate Authorizing Registration [CAR] is
what tax is applicable? still necessary before any transfer of shares of stock not
traded in the Stock Exchange may be transferred in the
A stock transaction tax of 6/10 of 1% is imposed books of a corporation
 on the gross selling price of shares of stock if they are
1. listed and sold, B. CAPITAL GAINS OF NON RESIDENT ALIEN ENGAGED

2. exchanged or
IN TRADE OR BUSINESS SEC 25 A(3) IN R/T SEC
3. transferred through the facilities of the local stock
exchange.(see Section 127(A) and RR 06-2008 [APRIL 22, 24(C)
2008])
Sec 25 A(3) Sec 24(C)
However, even if traded through the stock exchange, (3) Capital Gains. - Capital (2) Capital Gains from the Sale of
gains realized from sale, Shares of Stock Not Traded in the
 a sale of shares by companies not complying barter or exchange of shares Stock Exchange. –
 with the 10% minimum public float shall be subject to of stock in domestic
capital gain tax (see RR 16-2012 [November 7, 2012]) corporations not traded A final tax at the rate of 15 % shall
through the local stock be imposed on the net capital
exchange, and real gains
properties shall be subject to  realized during the taxable
NOTES: (Casasola) the tax prescribed under year from the
 if the shares of stocks are held as an ordinary asset Subsections (C) and (D) of
 and the sale is made by the dealer in securities Section 24. 5. sale,
 the resulting gain or loss is considered as ordinary income 6. exchange, or
subject to the schedular tax rates (5-32%) in case of 7. disposition of property
individuals and 30 % of corporations
of shares of stock in a domestic
corporation
Except shares
3. sold or
4. disposed of through the
stock exchange.

C. CAPITAL GAINS OF A NON RESIDENT ALIEN NOT REAL PROPERTIES

ENGAGED IN TRADE OR BUSINESS SEC 25(B)
Legal Basis Sec 24 A (D)
A. CITIZENS & RESIDENT ALIENS
(B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. –
(D) Capital Gains from Sale of Real Property. - (1) In General.
–
There shall be levied, collected and paid for each taxable year
The provisions of Section 39(B) notwithstanding,
 upon the entire income received
 from all sources within the Philippines
 a final tax of six percent (6%) based on the
 by every nonresident alien individual
 not engaged in trade or business
1. gross selling price or
 within the Philippines as
2. current fair market value as determined in accordance
with Section 6(E) of this Code,
1. interest,
2. cash and/or
3. whichever is higher, is hereby imposed
3. property dividends,
4. rents,
5. salaries,
 upon capital gains presumed to have been realized from
6. wages,
the
7. premiums,
8. annuities,
1. sale,
9. compensation,
2. exchange, or
10. remuneration,
3. other disposition of real property
11. emoluments, or
 located in the Philippines,
12. other fixed or determinable annual or
 classified as capital assets, including
13. periodic or
14. casual gains,
a. pacto de retro sales and
15. profits, and
b. other forms of conditional sales, by individuals,
16. income, and
including
17. capital gains, a tax equal to twenty-five
1. estates and
percent (25%) of such income.
2. trusts:
Capital gains realized
Provided, That the tax liability, if any, on gains from
1. by a nonresident alien individual not engaged in trade or
business in the Philippines
1. sales or
2. from the sale of shares of stock in any domestic
2. other dispositions of real property
corporation and
3. real property shall be subject to the income tax prescribed
a. to the government or
under Subsections (C) and (D) of Section 24
b. any of its political subdivisions or
c. agencies or
d. to government-owned or controlled corporations
Sec 24 (C) Sec 24( D)
shall be determined either under Section 24 (A)
(2) Capital Gains from the (D) Capital Gains from Sale of
 or under this Subsection,
Sale of Shares of Stock Not Real Property. - (1) In General.  at the option of the taxpayer.
Traded in the Stock –
Exchange. –
SEC. 24. Income Tax Rates -
The provisions of Section 39(B)
(A) Rates of Income Tax on Individual Citizen and Individual
A final tax at the rate of 15 notwithstanding, a final tax of
Resident Alien of the Philippines.
% shall be imposed on the six percent (6%) based on the
net capital gains gross selling price or current fair
Q: What is the special rule for disposition of real property
 realized during the market value as determined in
made by an individual to the government?
taxable year from accordance with Section 6(E) of
 As provided in RR 8-98, in case of disposition of real
the this Code, whichever is higher,
property made by an individual to the government or to
is hereby imposed upon capital
any of its political subdivisions or agencies or to
8. sale, gains presumed to have been
government-owned or controlled corporations, the seller
9. exchange, or realized from the sale,
may elect to:
10. disposition of exchange, or other disposition
property of real property located in the
1. compute the tax on the gain derived from such sale under the
Philippines, classified as capital
normal income tax rates; or
of shares of stock in a assets, including pacto de retro
2. under a final capital gains tax of 6%.
domestic corporation sales and other forms of
Except shares conditional sales, by individuals,
5. sold or including estates and trusts:
Sec 6(e)
6. disposed of Provided, That the tax liability,
through the stock if any, on gains from sales or
exchange. other dispositions of real (E) Authority of the Commissioner to Prescribe Real Property
Values –
property to the government or
The Commissioner is hereby authorized
any of its political subdivisions
 to divide the Philippines into different zones or areas
or agencies or to government-
and
owned or controlled
 shall, upon consultation with competent appraisers
corporations shall be
 both from the private and public sectors,
determined either under Section
 determine the fair market value of real properties
24 (A) or under this Subsection,
 located in each zone or area.
at the option of the taxpayer.
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 RULES FOR REAL PROPERTY (TSN)
Commissioner, or 1. the rule on capital gains taxation on real property is
essentially the same to all types of individuals whether
(2) the fair market value as shown in the schedule of citizens or resident and non-resident aliens(the final tax
values of the Provincial and City Assessors. imposed on them is 6%)
Note:  this also applies to estates and trust

The CGT is based on presumed gain. So even if you sell the 2. The rule on CGT applies only when real property is located in
property at a loss, the BIR will still tax you on the CGT of the the Philippines.
real property.
3. If the property is located abroad, it is considered as a capital
Actual Gain Presumed Gain asset and any gains will form part of gross income.
There is actual gain There is presumed gain
whenever an individual or whenever an individual sold 4. The property mentioned under the NIRC is the same
corporation sold shares of real property treated as a property under Art 415 of the NCC
stock treated as a capital capital asset located in the
asset Philippines or a corporation
sold land/building treated as For individuals 415 applies
a capital asset located in the
Philippines Art 415 NCC
Actual gain arrived at by Presumed gain does not Art. 415. The following are immovable property:
deducting the cost or consider the cost of the
adjusted basis of the property sold (1) Land, buildings, roads and constructions of all kinds adhered
property sold from the to the soil;
amount realized
(2) Trees, plants, and growing fruits, while they are attached to
the land or form an integral part of an immovable;
Note: (PM Reyes)
The tax base shall be the entire selling price. (3) Everything attached to an immovable in a fixed manner, in
such a way that it cannot be separated therefrom without
The capital gains tax must be paid within 30 days following each breaking the material or deterioration of the object;
sale or disposition.
(4) Statues, reliefs, paintings or other objects for use or
In case of installment sale, the return shall be filed within 30 ornamentation, placed in buildings or on lands by the owner of
days following the receipt of the first down payment and within the immovable in such a manner that it reveals the intention to
30 days following the subsequent installment payments. attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended

by the owner of the tenement for an industry or works which may
Net Capital Gain v Net Capital Loss be carried on in a building or on a piece of land, and which tend
directly to meet the needs of the said industry or works;
Net Capital Gain Net Capital Loss
means the excess of the means the excess of the losses from
(6) Animal houses, pigeon-houses, beehives, fish ponds or
gains from sales or sales or exchanges of capital assets
breeding places of similar nature, in case their owner has placed
exchanges of capital assets over the gains from such sales or
them or preserves them with the intention to have them
over the losses from such exchanges.
permanently attached to the land, and forming a permanent part
sales or exchanges
of it; the animals in these places are included;
(7) Fertilizer actually used on a piece of land;

Legal Basis Sec 40 NIRC
(8) Mines, quarries, and slag dumps, while the matter thereof
SEC. 40. Determination of Amount and Recognition of Gain or forms part of the bed, and waters either running or stagnant;
Loss. –
(9) Docks and structures which, though floating, are intended by
(A) Computation of Gain or Loss. - their nature and object to remain at a fixed place on a river, lake,
The gain from the sale or other disposition of property shall be or coast;
1. the excess of the amount realized therefrom (10) Contracts for public works, and servitudes and other real
 over the basis or adjusted basis for determining rights over immovable property. (334a)
gain, and
2. the loss shall be the excess of the basis or adjusted basis
 for determining loss over the amount realized.
The amount realized from the sale or other disposition of property
1. shall be the sum of money received

2. plus the fair market value of the property
(other than money) received;

Domestic Corporation Summary of the transactions included in the CGT (TSN)

Sec 27 7(5) amended 1. Sales and exchanges of real property
(5) Capital Gains Realized from the Sale, Exchange or 2. Barter of real property
Disposition of Lands and/or Buildings. – 3. Pacto de Retro Sales
4. Partition
A final tax of six percent (6%) is hereby imposed 5. Foreclosure or execution sale
 on the gain presumed to have been realized on the
When do you recognize the taxable transaction?
a. sale,  The tax begins when the final certificate of sale was issued
b. exchange or  Which means that the one year redemption period has
c. disposition of lapsed
1. lands and/or 6. Property sold to the government
2. buildings 7. Expropriation
which are Note: (1) The phrase ―sale, exchange, or other disposition‖ includes
taking by the government through expropriation GONZALES V.
1. not actually used in the business of a corporation and CTA [121 PHIL. 861]
2. are treated as capital assets,
based on the gross selling price of fair market value Notes: Casasola
 as determined in accordance with Section 6(E) of this Code,  Considering that there is material gain not excluded by law
 whichever is higher, of such lands and/or buildings. arising from expropriation of property which is realized out
(Emphasis supplied) of a closed and completed transaction, gains derived
therefrom are part of gross income
B. REAL PROPERTY LOCATED IN THE PHILIPPINES BY A

SMI_ED Philippines v CIR (November 2014) NONRESIDENT ALIEN ETB(SAME WITH CGT LEGAL
BASIS) SEC 25(A) IN R/T SEC 24(B)
Issues: C. SEC. 25. Tax on Nonresident Alien Individual-

1. WON the sale of the Properties is subject to Capital (A) Nonresident Alien Engaged in trade or Business Within the
Gains Tax(Yes) Philippines. –
2. For Corporations, what does the CGT cover?
 Lands and building only (1) In General. - A nonresident alien individual engaged in trade
 Excluding the machineries or business in the Philippines
 shall be subject to an income tax in the same manner as an
Imposition of capital gains tax
a. individual citizen and a
The Court of Tax Appeals found that petitioner’s sale of its properties b. resident alien individual,
is subject to capital gains tax.
on taxable income received from all sources within the
Philippines.
For corporations, the National Internal Revenue Code of 1997
treats the sale of land and buildings, and the sale of A nonresident alien individual
machineries and equipment, differently.  who shall come to the Philippines and
 stay therein for an aggregate period
Domestic corporations are imposed a 6% capital gains tax only on  of more than one hundred eighty (180) days
the presumed gain realized from the sale of lands and/or  during any calendar year
buildings. The National Internal Revenue Code of 1997 does  shall be deemed a 'nonresident alien doing business in
not impose the 6% capital gains tax on the gains realized from the Philippines'. Section 22 (G) of this Code notwithstanding.
the sale of machineries and equipment. Section 27(D)(5) of the
National Internal Revenue Code of 1997 provides: (D) Capital Gains from Sale of Real Property. –
(1) In General. -
SEC. 27. Rates of Income tax on Domestic Corporations. -
The provisions of Section 39(B) notwithstanding,
....  a final tax of six percent (6%) based on
(D) Rates of Tax on Certain Passive Incomes. - 1. the gross selling price or
2. current fair market value
....
as determined in accordance with Section 6(E) of this Code,
(5) Capital Gains Realized from the Sale, Exchange or Disposition of
Lands and/or Buildings. - A final tax of six percent (6%) is hereby  whichever is higher,
imposed on the gain presumed to have been realized on the sale,  is hereby imposed upon capital gains
exchange or disposition of lands and/or buildings which are not  presumed to have been realized from the
actually used in the business of a corporation and are treated as
capital assets, based on the gross selling price of fair market value as 1. sale,
determined in accordance with Section 6(E) of this Code, whichever is 2. exchange, or other
higher, of such lands and/or buildings. (Emphasis supplied) 3. disposition of real property
Therefore, only the presumed gain from the sale of petitioner’s  located in the Philippines,
land and/or building may be subjected to the 6% capital gains  classified as capital assets, including
tax. The income from the sale of petitioner’s machineries and
equipment is subject to the provisions on normal corporate income 1. pacto de retro sales and
tax. 2. other forms of conditional sales, by individuals,
3. including estates and trusts:

Provided, That the tax liability, if any,

 on gains from sales or other dispositions of real property 4. The historical cost or adjusted basis of his old principal residence
 to the sold, exchanged disposed
 shall be carried over to the cost basis of his new principal
1. government or residence
2. any of its political subdivisions or
3. agencies or 5. If there is no full utilization of the proceeds of sale, exchange or
4. to government-owned or controlled corporations disposition of his old principal residence,
 he shall be liable for deficiency capital gains tax of the
shall be determined either under Section 24 (A) or under this utilized portion.
Subsection, at the option of the taxpayer.
Note: The exemption applies to
(A) Rates of Income Tax on Individual Citizen and Individual 1. Resident citizens and
Resident Alien of the Philippines. 2. Resident aliens.
This is logical because if they are not residents, then there is no

principal place of residence.
D. REAL PROPERTY LOCATED IN THE PHILIPPINES BY A

NONRESIDENT ALIEN NOT ETB (SAME WITH CGT
LEGAL BASIS) SEC 25(B) Q: Define ―principal residence‖
 It is the dwelling house, where
EXCEPTION FROM CAPITAL GAINS TAX ON REAL PROPERTY 1. the husband or
2. wife or
1. Property is located abroad 3. unmarried individual residence;
2. Principal residence
actual occupancy is
 not interrupted or abandoned
Q: What are the conditions for the exemption of capital gains  by temporary absence
tax on the sale by a natural person of his principal residence?
OTHER PROPERTIES:
As provided in RR 13-99 [JULY 26, 1999], as amended by RR 14-2000 a. capital assets not situated in the Philippines
[NOVEMBER 20, 2000]:52 b. or not domestic shares of stock
1. The 6% capital gains tax due RULE: Capital gains will form part of gross income
 shall be deposited in an account
 with an authorized agent bank under an Notes: Casasola
Escrow Agreement.  normally gains realized from the sale of capital assets are
not to be reported as part of gross income of an individual
 It can only be released upon showing that the as they are already subject to final withholding tax of 6 %
proceeds have been fully utilized within 18
months.  However, capital gains derived from the sale of OTHER
capital assets of an individual taxpayer which are not
2. The proceeds from the sale, exchange or disposition subject to FWT should be part of gross income wherein the
 must be fully utilized in acquiring or taxable income shall be subject to the schedular rates
constructing his new principal residence
 within 18 calendar months from date of its
sale.
 Proof must be submitted. Q: Is the capital gain from the sale or exchange of a capital
asset always taxable in full? (Holding period)
3. The tax exemption may be availed of only once every
10 years  No. In the case of a taxpayer other than a corporation,51
the following percentages of the gain upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain:
52 RR 14-2000 added the escrow agreement requirement and
conditions relating thereto. 1. 100% if the capital asset has been held for not more than 12
months
53 To ensure compliance, he must 2. 50% if the capital asset has been held for more than 12
 within 30 days from the lapse of the said period months
 the required documents to prove full utilization.
2 Things you take into consideration:
If he fails
to submit the required documents 1. Holding period
 within 30 days 2. The capital loss involved
 after the lapse of the 18-month period,
 it shall be presumed that he did not fully utilize the
proceeds of the sale, exchange or disposition
 of his old principal residence, and
 shall be assessed deficiency capital gains tax.
The escrow shall be applied in payment of this.
If the same is insufficient to cover the entire amount assessed,

 he shall remain liable for the remaining balance of the
assessment.
The excess of the deposit in escrow, if any,

 shall be returned to him.

Legal Basis Sec 39(B) as amended Four (4) years to less than five (5) years - 5%;
(B) Percentage Taken Into Account. – Three (3) years to less than (4) years - 12%;
and Less than three (3) years - 20%
In the case of a taxpayer,
 other than a corporation,
 only the following percentages of the gain or loss Notes: Casasola
recognized  long-term deposit or investment certificate refers to
 upon the sale or exchange certificate of time deposit or investment in the form of
 of a capital asset savings, common or individual trust funds, deposit
 shall be taken into account substitutes, investment management accounts and other
 in computing investment with a maturity period of not less than 5 years,
the form of which shall be prescribed by the BSP and issued
1. net capital gain, in banks only (not by non-bank financial intermediaries and
2. net capital loss, and finance companies) to individuals with denominations of 10
3. net income: % and other denominations as may be prescribed by BSP.
(1) One hundred percent (100%) if the capital asset has been held Interest income from said long-term deposit or investment certificate
for not more than twelve (12) months; and shall be exempt from income tax, provided the following are present:
(2) Fifty percent (50%) if the capital asset has been held for more
than twelve (12) months
1. the depositor is an individual NOT a corporation (except NRA
NETB)
Note: (PM Reyes) 2. Said certificates should be under the name of the
 The holding period is material only if the capital asset is sold INDIVIDUAL and NOT under the name of the corporation or
by an individual. bank or the trust department/unit of the bank
 This does not apply to corporations 3. Said certificate must be in the form of:
a. Savings
b. Common trust funds
PASSIVE INCOME c. Individual trust funds
d. Investment management accounts
Notes: PM Reyes e. Deposit substitutes
Q: Define passive income f. Other investments evidenced by certificates in such
Passive income is income derived from any activity in which the forms as prescribed by BSP
taxpayer does not materially participate.
4. Said certificate must be issued by banks only and not by
Q: What is the tax treatment of passive income? other financial institutions
Passive income may be subject to: 5. Said certificates must
1. Schedular rates (e.g. dividend income received by a domestic 6. They must be in denominations of P10,000 and other
corporation from a foreign corporation) denominations as may be prescribed by BSP
2. Final tax (e.g. interest income from foreign currency bank 7. They should not be terminated by the original investor
deposits by before the 5th year, otherwise it shall be subjected to
graduated rates of 5%, 12% or 20% on interest income
earnings
(4) Interests; 8. Except those specifically exempted by law or regulation, any
Q: Define interest income other income such as gains from trading, foreign exchange
 Interest income means the amount of compensation paid for gain, shall not be covered by income tax exemption
the
Absent any characteristics/ conditions enumerated above, interest
a. Use of money or income from long term deposit or investment shall be subject to FWT
b. Forbearance from such use. at the rate of 20 %.
Interest income from long-term deposit investment that is pre-

Q: What is the tax treatment of interest income? terminated by the depositor or investor before the 5 th year shall be
 Interests received or credited to the account of the depositor subject to the following rate of FWT on the entire income shall be
or investors deducted from the proceeds of the long-term deposit or investment
 are included in their gross income, unless they are certificate based on the maturity thereof as follows:
1. exempt from tax or 4 years to less than 5 years 5%

2. subject to a final tax. 3 years to less than 4 years 12 %
Less than 3 years 20 %
What are the legal bases for the interest income?
1. Sec 24(B) Interest income from long-term deposit or investment shall be subject
(B) Rate of Tax on Certain Passive Income to a FWT at the rate of 25 % if received by a NRA NETB in the
Philippines.
(1) Interests, Royalties, Prizes, and Other Winnings. –
The same shall be subject to a FWT at the rate of 30 % ir received by
A final tax at the rate of twenty percent (20%) a non-resident foreign corporation.
 is hereby imposed upon the
The same shall be subject to the regular income tax at the rate of 30%
1. amount of interest from any currency bank deposit and if received by the domestic corporation and resident foreign
2. yield or corporation.
3. any other monetary benefit from
a. deposit substitutes and
b. from trust funds
c. and similar arrangements;

Interest corporation from a

depository bank
Sec 27 D(1) DEPOSITS & YEILD & OTHER MONETARY BENEFIT  under the expanded
foreign currency deposit
(D) Rates of Tax on Certain Passive Incomes. - system
(1) Interest from Income derived by a depository

a. Deposits and Yield or bank
b. any other Monetary Benefit  under the expanded
from system
10%
 from foreign currency
a. Deposit Substitutes and transactions
b. from Trust Funds and Similar Arrangements, and  with local commercial
Royalties – banks
A final tax at the rate of twenty percent (20%)

 is hereby imposed upon
 the amount of interest
Notes: Casasola
1. on currency bank deposit and INTEREST DERIVED FROM GOVT DEBTS SUBSTITUTES
2. yield or
3. any other monetary benefit from Deposit Substitute
 any alternative form of obtaining funds from the public
a. deposit substitutes and  other than deposits
b. from trust funds and  through issuance of
c. similar arrangements
a. endorsement
received by domestic corporations, b. or acceptance of debt instrument for the borrowers account
 and royalties, derived from sources within the Philippines: c. for the purpose of relending or repurchasing
FIND RR 14-2012
Provided, however, That interest income derived by a domestic Sec 27 D(3) EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
corporation
(3) Tax on Income Derived under the Expanded Foreign
 from a depository bank Currency Deposit System. -
 under the expanded foreign currency deposit system
 shall be subject to a final income tax at the rate of Income derived by a depository bank
fifteen percent 15 % of such interest income.  under the expanded foreign currency deposit system
 from foreign currency transactions
with local commercial banks,

KIND OF INTEREST RATE  including branches of foreign banks
Interests, Royalties, Prizes, and  that may be authorized by the Bangko Sentral ng Pilipinas
Other Winnings. – (BSP) to transact business
20 %
a. with foreign currency depository system units and
DEPOSITS & YEILD & OTHER b. other depository banks under the expanded foreign
20 %
MONETARY BENEFIT currency deposit system,
Expanded Foreign Currency Deposit system including interest income from foreign currency loans
DOMESTIC CORPORATION
That interest income derived by a  granted by such depository banks
 domestic corporation 15 % of such interest  under said expanded foreign currency deposit system to
 under the expanded income. residents,
system shall be subject to a final income tax at the rate of ten
percent (10%) of such income.
Income derived by a depository
bank
 under the expanded Any income of nonresidents,
10%  whether individuals or corporations,
system  from transactions with depository banks
 from foreign currency  under the expanded system
transactions  shall be exempt from income tax.
NON-RESIDENTS
Any income of non-residents,
 whether individuals or
corporations,
 from transactions with shall be exempt from
depository banks income tax.
 under the expanded
system
RESIDENT FOREIGN CORPORATION

That interest income derived by 15% of such interest
 a resident foreign income.

Sec 28 A(7)
(7) Tax on Certain Incomes Received by a Resident Foreign ii. financing their own needs or the needs of their agent
Corporation. – or dealer.
(a) Interest from Deposits and Yield or any other Monetary Benefit These instruments may include,
from Deposit Substitutes, Trust Funds and Similar Arrangements  but need not be limited to
and Royalties -
1. bankers' acceptances,
Interest from 2. promissory notes,
a. any currency bank deposit and yield or 3. repurchase agreements,
b. any other monetary benefit from 4. including reverse repurchase agreements
1. deposit substitutes and  entered into by and between the Bangko Sentral ng
2. from trust funds and Pilipinas (BSP) and
3. similar arrangements and  any authorized agent bank,
4. royalties derived from sources within the
Philippines 5. certificates of assignment or
6. participation and similar instruments with recourse:
shall be subject to a final income tax at the rate of twenty percent

(20%) of such interest: Provided, however, That debt instruments
 issued for interbank call loans with maturity
 of not more than five (5) days
Provided, however,  to cover deficiency in reserves
That interest income derived by  against deposit liabilities,
 a resident foreign corporation from a depository bank
 under the expanded foreign currency deposit system including those
 shall be subject to a final income tax at the rate of  between or among banks and quasi-banks,
fifteen percent (15%) of such interest income.  shall not be considered as deposit substitute debt
instruments.
(b) Income Derived under the Expanded Foreign Currency Deposit
System - Cases
Income derived by a depository bank Dumaguete Cathedral Credit Group v CIR

 under the expanded foreign currency deposit system Issues
 from foreign currency transactions 1. Is DCC exempt from the final withholding tax on interest
 with local commercial banks 2. Are the Coop Members Exempted based on their deposits
in the Coop?
including branches of foreign banks
 that may be authorized by the Bangko Sentral ng Ruling
Pilipinas (BSP)
 to transact business with foreign currency deposit Issue 1: Exemption from Final Withholding Tax
system units,
 including interest income from foreign currency loans There is nothing in the ruling to suggest that it applies only
 granted by such depository banks when deposits are maintained in a bank. Rather, the ruling clearly
 under said expanded foreign currency deposit system to states, without any qualification, that since interest from any
residents, Philippine currency bank deposit and yield or any other monetary
benefit from deposit substitutes are paid by banks, cooperatives
shall be subject to a final income tax at the rate of ten are not required to withhold the corresponding tax on the
percent (10%) of such income. interest from savings and time deposits of their members.
Any income of nonresidents, This interpretation was reiterated in BIR Ruling [DA-591-
 whether individuals or corporations, 2006] dated October 5, 2006, which was issued by Assistant
 from transactions with depository banks Commissioner James H. Roldan upon the request of the cooperatives
 under the expanded system shall be exempt from for a confirmatory ruling on several issues, among which is the
income tax. alleged exemption of interest income on members deposit (over and
above the share capital holdings) from the 20% final withholding tax.
In the said ruling, the BIR opined that:
Sec 22(Y) xxx

(Y) The term "deposit substitutes" shall mean
3. Exemption of interest income on members deposit (over
an alternative from of obtaining funds from the public and above the share capital holdings) from the 20% Final
Withholding Tax.
 (the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time)
The National Internal Revenue Code states that a final tax
other than at the rate of twenty percent (20%) is hereby imposed upon the
amount of interest on currency bank deposit and yield or any other
1. deposits, through the issuance, endorsement, or monetary benefit from the deposit substitutes and from trust funds
2. acceptance of debt instruments for the borrowers own and similar arrangement x x x for individuals under Section 24(B)(1)
account, and for domestic corporations under Section 27(D)(1).
i. for the purpose of relending or purchasing of Considering the members deposits with the cooperatives
are not currency bank deposits nor deposit substitutes, Section
a. receivables and 24(B)(1) and Section 27(D)(1), therefore, do not apply to members
b. other obligations, or of cooperatives and to deposits of primaries with federations,
respectively.

business with both members and non-members shall not be

Issue 2: Coop Members are Exempt subjected to tax on their transactions with members.
In relation to this, the transactions of members with the cooperative

Members of cooperatives deserve a preferential tax treatment shall not be subject to any taxes and fees, including but not limited
pursuant to RA 6938, as amended by RA 9520. to final taxes on members deposits and documentary tax.
Notwithstanding the provisions of any law or regulation to the

Given that petitioner is a credit cooperative duly registered contrary, such cooperatives dealing with non-members shall enjoy
with the Cooperative Development Authority (CDA), Section the following tax exemptions: (Underscoring ours)
24(B)(1) of the NIRC must be read together with RA 6938, as
amended by RA 9520. xxxx
Under Article 2 of RA 6938, as amended by RA 9520, it is a This amendment in Article 61 of RA 9520, specifically
declared policy of the State to foster the creation and growth of providing that members of cooperatives are not subject to
cooperatives as a practical vehicle for promoting self-reliance and final taxes on their deposits, affirms the interpretation of the
harnessing people power towards the attainment of economic BIR that Section 24(B)(1) of the NIRC does not apply to
development and social justice. Thus, to encourage the formation of cooperatives and confirms that such ruling carries out the
cooperatives and to create an atmosphere conducive to their growth legislative intent.
and development, the State extends all forms of assistance to them,
one of which is providing cooperatives a preferential tax treatment. Under the principle of legislative approval of administrative
interpretation by reenactment, the reenactment of a statute
substantially unchanged is persuasive indication of the adoption by
The legislative intent to give cooperatives a preferential tax Congress of a prior executive construction.
treatment is apparent in Articles 61 and 62 of RA 6938, which
read: Moreover, no less than our Constitution guarantees the protection of
cooperatives. Section 15, Article XII of the Constitution considers
cooperatives as instruments for social justice and economic
development.
ART. 61. Tax Treatment of Cooperatives. At the same time, Section 10 of Article II of the
Duly registered cooperatives under this Code which do not transact
any business with non-members or the general public shall not be All told, we hold that petitioner is not liable to pay the
subject to any government taxes and fees imposed under the assessed deficiency withholding taxes on interest from the savings
Internal Revenue Laws and other tax laws. Cooperatives not falling and time deposits of its members, as well as the delinquency interest
under this article shall be governed by the succeeding section. of 20% per annum.
(5) Rents;
ART. 62. Tax and Other Exemptions. Cooperatives transacting Q: Define rental income
business with both members and nonmembers shall not be subject to  Rental income refers to the amount or compensation paid
tax on their transactions to members. Notwithstanding the provision for the use or enjoyment of a thing or a right and implies a
of any law or regulation to the contrary, such cooperatives dealing fixed sum or property amounting to a fixed sum to be paid
with nonmembers shall enjoy the following tax exemptions; x x x. at a stated time for the use of the property. It includes all
amount or property received from the lease contract,
This exemption extends to members of cooperatives. It whether used in business or not.
must be emphasized that cooperatives exist for the benefit of their
members.
In fact, the primary objective of every cooperative is to Notes on Rental Income (Casasola)
provide goods and services to its members to enable them to attain  The amount paid for the use or lease or enjoyment of
increased income, savings, investments, and productivity. property (whether real or personal property is rental income
to the owner of the property
Therefore, limiting the application of the tax exemption to
cooperatives would go against the very purpose of a credit  Any additional amount paid, directly or indirectly by the
cooperative. Extending the exemption to members of cooperatives, lessee in consideration for the said lease is considered rental
on the other hand, would be consistent with the intent of the
legislature.  Therefore, if taxes are being paid by the lessee on the
leased property, the same shall form part of the rental
income of the lessor
Thus, although the tax exemption only mentions
cooperatives, this should be construed to include the members,  If the rented property is being used in business, said rental
pursuant to Article 126 of RA 6938, which provides: income shall be subjected to the expanded withholding tax
of 5 % to be withheld by the lessee.
ART. 126. Interpretation and Construction.
 Failure of the lessee to withhold and remit the said
In case of doubt as to the meaning of any provision of this Code or
withholding tax shall not entitle him to claim the rental
the regulations issued in pursuance thereof, the same shall be
expense as a deduction from gross income
resolved liberally in favor of the cooperatives and their members.
It is also worthy to note that the tax exemption in RA 6938

was retained in RA 9520. The only difference is that Article 61 of RA
9520 (formerly Section 62 of RA 6938) now expressly states that
transactions of members with the cooperatives are not subject to any
taxes and fees. Thus:
ART. 61. Tax and Other Exemptions. Cooperatives transacting

RENTAL INCOME OF CORPORATION FROM LEASED PROPERTY (4) Nonresident Owner or Lessor of Aircraft, Machineries and
 When a corporation has leased its property Other Equipment. -
 In consideration that the lessee shall pay in lieu of other
rental a. Rentals,
An amount equivalent to a certain rate of dividend b. charters and
c. other fees
1. On the lessor’s capital stock or
2. Interest on the lessor’s outstanding indebtedness derived by a nonresident lessor of
3. Together with taxes a. aircraft,
4. Insurance or b. machineries and
5. other fixed charges c. other equipment
such payments shall be considered as rental payments shall be subject to a tax of seven and one-half percent (7 1/2%)
 and shall be returned by the lessor corporation as income  of gross rentals or fees.
 notwithstanding the fact that the dividends and interest are
paid by the lessee Summary
 directly to the shareholders and bondholders of the lessor PERSONAL PROPERTY
Q: What is the tax treatment of income received from lease of

The fact that the corporation has conveyed or let its property and has personal property?
parted with its management and control or has ceased to engage in  Rental income on the lease of personal property located in
business for which it was originally organized will not relieve it from the Philippines and paid to a non-resident taxpayer shall be
liability to the tax. taxed as follows:
While payments made by the lessee directly to the bondholders or Non-resident Non-resident Alien
shareholders of the lessors are rentals both as to the lessee or lessor, foreign
such amounts are interest and dividend payments received as from the corporation
lessor as such shall be accounted for in their returns. Vessel 4.5 % 25%
Aircraft 7.5 % 25 %
Machineries
Tax treatment of Leasehold Improvements made by the Lessee Other Assets 32 % 32 %
When the buildings are erected or improvements made by a lessee in

Q: What is the tax treatment of income received from lease of
pursuance to an agreement with the lessor
real property?
 and such buildings are not subject to removal by the lessee
 the lessor may at his option report the income therefrom
 The lease of real property shall be considered as conduct of
either trade or business on the part of the lessor,
 hence, the rental income therefrom shall be considered
1. Outright method: the lessor may report income at the time
as business income
when such building or improvements are completed
 which shall be included in the computation of the year-
the fair market value of such buildings or
end gross income of the lessor, and
improvements subject to the lease
 not as a passive investment income subject to
withholding tax.
2. Spread-out method:
a. the lessor may spread over the life of the lease the Q: Are improvements made by lessees taxable as income on the
estimated depreciated value of such building or part of the lessor?
improvement at the termination of the lease
b. and report as income for each year of the lease an  Yes, provided that such buildings or improvements are
aliquot part thereof not subject to the removal by the lessee.
The lessor may either:

Helvering v Brunn
If the improvements are in lieu of the rent, the value thereof is income 1. report the improvements as income at the time
to the landlord only in the year of termination of the lease. when such improvements are completed based on its
fair market value; or
(2) spread over the life of the lease the estimated

Sec 28(3) Legal Basis depreciate value of the improvements at termination of the
(3) Nonresident Owner or Lessor of Vessels Chartered by lease and report as income for each year of the lease an
Philippine Nationals. - aliquot part thereof (Section 49, RR No. 2)
A nonresident owner or lessor of vessels

 shall be subject to a tax of four and one-half percent (4 Q: Should the improvement be capable of being separated from
1/2%) of the land in order to be considered a taxable gain?
 No. The US Supreme Court in HELVERING V. BRUUN [309
a. gross rentals, US 461] stated that it is not necessary to recognition of
b. lease or charter fees taxable gain that the lessor be able to sever the
improvement begetting the gain from his original capital.
 from leases or charters to Filipino citizens or
 corporations,
 as approved by the Maritime Industry Authority.

VAT ADDED TO THE RENTAL PAID BY THE LESSEE The return should be accompanied by
 not part of gross income if the lessor is VAT-registered but 1. a return certificate of architects or engineers
shall be considered as the output tax of the lessor 2. showing the percentage of completion
3. during the taxable year of the entire work performed under
 the law on VAT provides that the VAT may be passed on by contract.
the lessor to the lessee of the property
There should be deducted from such gross income all
The passed-on VAT shall be considered: 1. expenditures made during the taxable year on account of
Lessee is VAT-registered NOT VAT-registered the contract,
Considered as Input tax by the Part of the cost of the lease 2. account being taken of the material and supplies on hand
lessee  at the beginning and end of the taxable period
 for use in connection with the work
 under the contract but not yet so applied.
Q: What is the tax treatment of VAT added to rental or VAT paid If upon completion of a contract,
by the lessee?  it is found that the taxable net income
 arising thereunder has not been clearly reflected
 Any additional amount paid, directly or indirectly, by the  for any year or years,
lessee in consideration for the lease is considered rental.  the Commissioner may permit or require an amended
return.
 Therefore, taxes paid by the lessee on leased property are
part of rental income of the landlord.
(6) Royalties;
Prepaid or advance Rental
 shall not be considered as rental income by the lessor once Q: Define royalties.
the advanced rental is utilized by the lessee.  Royalties are any payment of any kind received as
consideration for the use of or right to use any
 Otherwise, it will be treated as a security deposit which is
not considered income a. patent,
b. trademark,
c. design or
Q: What is the tax treatment of advanced rental paid by the d. model,
lessee? e. secret formula or
f. process,
Prepaid or advance rental g. industrial commercial or
 is taxable income to the lessor h. scientific equipment,
 in the year received, i. information concerning industrial, commercial or scientific
experience.
1. if so received under a claim of right and
2. without restriction as to its use, Sec 24 B(1)
3. and regardless of method of accounting employed. Royalties,
 except on books,
SECURITY DEPOSITS APPLIED TO RENTAL
as well as other literary works
Security deposit applied to the rental of the and musical compositions,
1. terminal month or
2. period of contract which shall be imposed a final tax of ten percent (10%);
must be recognized as income at the time it is applied.
Note: If the security deposit is merely to ensure compliance with the Provided, however, that royalties on books as well as other literary
contract (security deposit with acceleration clause), it is not income to works, and royalties on musical compositions shall be subject to a
the lessor until the lessee violates any provision of the contract. final tax of ten percent (10%) on the total amount thereof:
LONG-TERM CONTRACT
 Taxable for the period in which the income is determined
 Such determination depending upon the nature & terms of a PASSIVE v ACTIVE ROYALTIES
particular contract
SEC 25 A(2)
SEC. 48. Accounting for Long-Term Contracts. - Income from
long-term contracts shall be reported for tax purposes in the manner (2) Cash and/or Property Dividends from a
as provided in this Section.
a. Domestic Corporation or
b. Joint Stock Company, or
c. Insurance or Mutual Fund Company or
As used herein, the term 'long-term contracts' means d. Regional Operating Headquarters or
e. Multinational Company, or
1. building, f. Share in the Distributable Net Income of a Partnership
2. installation or (Except a General Professional Partnership),
3. construction contracts covering a period in excess of one (1) g. Joint Account,
year. h. Joint Venture Taxable as a Corporation or
i. Association.,
Persons whose gross income is derived in whole or in part from such
contracts
 shall report such income upon the basis of percentage of
completion.

Interests, Royalties, Prizes, and Other Winnings. – Notes on Royalty Income(Casasola)
Cash and/or property dividends from a  royalty means payment or portion of the proceeds paid to
1. domestic corporation, or the owner of the right for the use of such rights
2. from a joint stock company, or
3. from an insurance or
4. mutual fund company or  the definition covers both payments under a license and
5. from a regional operating headquarters of multinational compensation when a person would be obliged to pay for
company, or fraudulently copying or infringing the right
6. the share of a nonresident alien individual in the
distributable net income after tax of a partnership  Royalty is a valuable property that can be developed and
sold on a regular basis for a consideration. Thus any gain
 (except a general professional partnership) of which he is a therefrom is considered as an active business income
partner, subject to the normal income tax.
7. or the share of a nonresident alien individual in the net  (above) It is a special form of rental income for the use of
income intangible property
 after tax of an association,

 a joint account, or
 a joint venture taxable as a corporation of But if a person pays royalty to another for the use of its intellectual
 which he is a member or property such as
 a co-venturer;
1. Copyright
2. Patents
3. Trademarks
Sec 27 D(1)
Such royalty is a PASSIVE INCOME subject to withholding tax.
(D) Rates of Tax on Certain Passive Incomes. - When is royalty payable?
(1) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes and from Trust Funds and Similar  The payor is required to deduct and withhold final taxes on
Arrangements, and Royalties – royalty payments when the royalty is paid or payable
A final tax at the rate of twenty percent (20%)  After which the corresponding return and remittance must
 is hereby imposed be made within 10 days after the end of each month
 upon the amount of interest on
1. currency bank deposit and

2. yield or (7) Dividends
3. any other monetary benefit from
a. deposit substitutes and SEC. 73. Distribution of dividends or Assets by Corporations. -
b. from trust funds (A) Definition of Dividends. -
c. and similar arrangements
The term "dividends" when used in this Title means
received by domestic corporations,  any distribution made by a corporation to its shareholders
 out of its earnings or profits
4. and royalties, derived from sources within the Philippines:  and payable to its shareholders, whether in money or in
other property.
Provided, however, That interest income derived by a domestic
corporation What are considered taxable dividends?
 from a depository bank
 under the expanded foreign currency deposit system Where a corporation distributes all of its assets in complete
 shall be subject to a final income tax liquidation or dissolution,
 at the rate of fifteen percent (15 %) of such interest  the gain realized or loss
income  sustained by the stockholder,
 whether individual or corporate,
 is a taxable income or a deductible loss, as the case
may be.
Summary
Sec 72(c)
Royalties in Royalties on
general excluding books and literary (C) Dividends Distributed are Deemed Made from Most Recently
books and literary works Accumulated Profits. –
works Any distribution made to the shareholders or members of a corporation
Citizens other
20% 10%  shall be deemed to have been made
than NRANETB
NRANETB 25% 25%  from the most recently accumulated profits or surplus,
Non-Resident 30%  and shall constitute a part of the annual income
foreign Corp Shall form part of  of the distributee for the year in which received.
gross income

Cash dividends Dividends paid in cash corporation tax

Property dividends Dividends paid in securities or Non-resident foreign 1. Tax Treaty Rate if
other property (other than its corporation available
own stock) in which earnings of 2. 15% if no tax treaty
the corporation have been satisifies the tax
invested sparring provision
Script dividends subject to tax in the year in which 3. 30% if no tax treaty
the warrants are issued and does not comply
with tax-sparring
provision
Note: To simplify matters – If the distribution is in money, it is called
a cash dividend. If it is in property, it is called a property dividend. If it
is in stock, it is called a stock dividend. If it results from the What is a tax-sparing provision?
distribution by a corporation of all its property or assets in complete
liquidation or dissolution, it is called a liquidating dividend. As explained in the case of CIR V. PROCTER & GAMBLE
PHILIPPINES [DECEMBER 2, 1999]:
 A more general way of mitigating the impact of double

taxation is to recognize the foreign tax as a tax credit.
Q: When is dividend income subject to tax?
 However, the principal defect of the tax credit system is
 It is taxable at the time of their declaration by the when low tax rates or special tax concessions are granted in
corporation, and a country for the obvious reason of encouraging foreign
 not at the time of actual payment of dividends, since investments.
dividend income is taxable whether actually or constructively
 For instance, if the usual tax rate is 35 percent but a
received.
concession rate accrues to the country of the investor rather
than to the investor himself.
Sec 24 B(2)
 To obviate this, a tax sparing provision may be stipulated.
(2) Cash and/or Property Dividends - With tax sparing, taxes exempted or reduced are considered
as having been fully paid.
A final tax at rate of 10 % shall be imposed upon the
 In the Philippines, the 15% tax on dividends received by a
1. cash and/or non-resident foreign corporation from a domestic
2. property dividends corporation is imposed subject to the condition that the
a. actually or country in which the nonresident foreign corporation is
b. constructively received domiciled shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been
by an individual from paid in the Philippines equivalent to 15%, which represents
the different between the regular income tax of 30% and the
1. a domestic corporation or 15% tax on dividends.107
2. from a joint stock company,
3. insurance or mutual fund companies Q: What is the proper tax treatment on dividends from foreign
4. and regional operating headquarters of multinational corporations?
companies, or
 The income shall form part of the gross income of the
on the share of an individual corporation but the situs of the income becomes material
d. in the distributable net income after tax of a except for a resident citizen and domestic corporation which
partnership is taxed on worldwide income.
e. (except a general professional partnership)
f. of which he is a partner, or  Note: In other words, only resident citizens and domestic
corporations would be subject to tax on dividends received
on the share of an individual in the net income from foreign corporations as they taxable on income without
 after tax of an association, the Philippines.
 a joint account, or
 a joint venture or consortium taxable as a corporation of Types of Dividends
which he is a member or co-venturer: 1. Cash dividends
2. Stock Dividends
Q: Are property dividends taxable?

 Yes. As provided in Section 251, RR No. 2, dividends paid in
Q: What is the proper tax treatment on dividends from securities or other property (other than its own stock),
domestic corporations?
 in which the earnings of a corporation have been invested,
are income to the recipients
Citizens 10%
Resident Aliens
INDIVIDUALS  to the amount of the full market value of such property
NRA ETB 20% when receivable by individual stockholders.
NRA NETB 25 flat rate imposed on gross
Q: Are stock dividends subject to income tax?
income
CORPORATIONS
 No.
Domestic Tax-exempt
 As discussed earlier, a stock dividend only represents the
(treated as intercorporated
transfer of surplus to capital account and, as such, is
dividends)
not subject to income tax.
Resident foreign 15 % branch profit remittance

INTERCORPORATE DIVIDENDS
Q: What are the exceptions to the rule that stock dividends are Sec 27(4)
not subject to income tax? (4) Intercorporate Dividends. -
Dividends received by a domestic corporation from another domestic
1. Change in the stockholder’s equity, right or interest in the corporation shall not be subject to tax.
net assets of the corporation
2. Recipient is other than the shareholder Note:

 dividends received by a domestic corporation from a foreign
3. Cancellation or redemption of shares of sock corporation is included in the computation of gross income
and subject to income tax
4. Distribution of treasury stocks
 because no law is exempting this type of dividend
5. Dividends declared in the guise of treasury stock dividend to
avoid the effects of incometaxation INCOME CONSTRUCTIVELY RECEIVED
 income which is credited to the account of or set aside for a
6. Different classes of stocks were issued. taxpayer and which may be drawn upon him at any time
 is subject to tax for the year
Stock dividends constitute as income if a corporation redeems stock  during which so credited or set apart although not then
issued so as to make a distribution. actually reduced to possession
This is essentially equivalent to the distribution of a taxable dividend To constitute receipt:

the amount so distributed in the redemption considered as taxable 1. the income must be credited to the taxpayer receipt in such
income. (see COMMISSIONER VS. MANNING [AUGUST 7, 1975]) case without any substantial limitation or restriction as to
the
The redemption converts into money the stock dividends which a. time or
become a realized profit or gain and consequently, the stockholder's b. manner of payment is to be made
separate property. Profits derived from the capital invested cannot
escape income tax. Notes:
 mere increase in or appreciation in the value of shares of
As realized income, the proceeds of the redeemed stock stock not considered as taxable income
dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. (see CIR VS. CA
[JANUARY 20, 1999]) LIQUIDATING DIVIDENDS
 share of each stockholder in the assets upon liquidation
 As provided in Section 252, RR No. 2: A stock dividend
constitutes income if its gives the shareholder an Q: Are liquidating dividends subject to income tax?
interest different from that which is former stock
holdings represented.  Yes. Where a corporation distributes all of its property or
assets in complete liquidation or dissolution,59 the gain
 A stock dividend does not constitute income if the new realized from the transaction by the stockholder, whether
shares confer no different rights or interests that did individual or corporate, is taxable income or a deductible
the old. loss,60 as the case may be.
 Note: Previously, the CIR has ruled in BIR RULING 039-02

Legal Basis for Stock Dividend [NOVEMBER 11, 2002] and other previous rulings that the
Sec 73 (B) transfer by a liquidating corporation of its remaining assets
(B) Stock Dividend. - A stock dividend representing the transfer of to its stockholders and the receipt of the shares surrendered
surplus to capital account shall not be subject to tax. by the shareholder are not subject to income tax. However,
in BIR RULING 479-11 [DECEMBER 5, 2011], the CIR
However, if a corporation reversed and set aside the above-cited ruling and all
1. cancels or previous rulings to that effect. The rule now is that they are
2. redeems stock issued as a dividend subject to income tax.
a. at such time and

b. in such manner Q: What are disguised dividends?
c. as to make the distribution and cancellation or redemption,
d. in whole or in part,  Casasola: those income payments made by a domestic
e. essentially equivalent to the distribution of a taxable corporation which is a subsidiary of a NRFC, to the latter
dividend, ostensibly for services rendered by the latter to the former
but which payments are disproportionately larger than the
the amount so distributed in redemption or cancellation of the stock actual value of the services rendered
shall be considered as taxable income to the extent that it  In such case, the amount over and above the true value of
represents a distribution of earnings or profits. the services rendered shall not be treated as a dividend and
shall be subjected to
Notes: 1. the corresponding tax rate of 30 % on the Philippine

GR: stock dividend not subject to income tax sourced gross income or
2. such other preferential rate as may be provided under
Taxable; constitutes income Not taxable the corresponding tax treaty
if it gives the shareholder interest the new shares confer no
different from that which his different rights or interest than  These are payments, usually for services, made in the form
former shareholdings represented the old- the new certificates plus of dividends in order to evade the higher taxes imposed on
the old representing the same gross income.
proportionate interest in the net
assets in the corporation as did  They are not dividends in legal contemplation because
the old they are not return from investments.

The capital cannot be distributed in the form of redemption

of stock dividends without violating the trust fund doctrine — wherein
 They are payment for services rendered and as such, they the capital stock, property and other assets of the corporation are
are taxable as part of compensation income or income regarded as equity in trust for the payment of the corporate creditors.
derived from self-employment or exercise of a profession. Once capital, it is always capital. That doctrine was intended for the
protection of corporate creditors.
CIR v Soriano Corp xxxx
Issue: Is the redemption of the shares of stock in this case a EXCHANGE OF COMMON WITH PREFERRED SHARES 121
taxable transaction
Exchange is an act of taking or giving one thing for another
YES 122 involving reciprocal transfer 123 and is generally considered as a
taxable transaction.
Here, the shares were merely reclassified; deemed only as
return of capital; hence, no income to be subject of tax The exchange of common stocks with preferred stocks, or
preferred for common or a combination of either for both, may not
REDEMPTION AND CANCELLATION produce a recognized gain or loss, so long as the provisions of Section
83(b) is not applicable.
For the exempting clause of Section 83(b) to apply, it is indispensable
that: This is true in a trade between two (2) persons as well as a trade
between a stockholder and a corporation.
(a) there is redemption or cancellation;
(b) the transaction involves stock dividends and In general, this trade must be parts of merger, transfer to
(c) the "time and manner" of the transaction makes it controlled corporation, corporate acquisitions or corporate
"essentially equivalent to a distribution of taxable reorganizations. No taxable gain or loss may be recognized on
dividends." exchange of property, stock or securities related to
reorganizations.
Of these, the most important is the third.
Both the Tax Court and the Court of Appeals found that
Redemption is repurchase, a reacquisition of stock by a ANSCOR reclassified its shares into common and preferred, and
corporation which issued the stock in exchange for property, whether that parts of the common shares of the Don Andres estate and all of
or not the acquired stock is cancelled, retired or held in the treasury. Doña Carmen’s shares were exchanged for the whole 150,000
90 preferred shares.
Essentially, the corporation gets back some of its stock, Thereafter, both the Don Andres estate and Doña
distributes cash or property to the shareholder in payment for the Carmen remained as corporate subscribers except that their
stock, and continues in business as before. subscriptions now include preferred shares.
The redemption of stock dividends previously issued is used as a veil There was no change in their proportional interest
for the constructive distribution of cash dividends. after the exchange. There was no cash flow. Both stocks had
the same par value.
In the instant case, there is no dispute that ANSCOR redeemed shares Under the facts herein, any difference in their market value
of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 would be immaterial at the time of exchange because no income is yet
common shares). realized — it was a mere corporate paper transaction. It would have
been different, if the exchange transaction resulted into a flow of
But where did the shares redeemed come from? wealth, in which case income tax may be imposed.
If its source is the original capital subscriptions upon Reclassification of shares does not always bring any
establishment of the corporation or from initial capital substantial alteration in the subscriber’s proportional interest.
investment in an existing enterprise, its redemption to the
concurrent value of acquisition may not invite the application of Sec. But the exchange is different — there would be a shifting of
83(b) under the 1939 Tax Code, as it is not income but a mere the balance of stock features, like priority in dividend declarations or
return of capital. absence of voting rights.
On the contrary, if the redeemed shares are from stock Yet neither the reclassification nor exchange per se, yields
dividend declarations other than as initial capital investment, the realized income for tax purposes.
proceeds of the redemption is additional wealth, for it is not merely
a return of capital but a gain thereon.
A common stock represents the residual ownership interest
It is not the stock dividends but the proceeds of its redemption in the corporation. It is a basic class of stock ordinarily and usually
that may be deemed as taxable dividends. issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits.
Here, it is undisputed that at the time of the last
redemption, the original common shares owned by the estate were Preferred stocks are those which entitle the shareholder to
only 25,247.5. 91 some priority on dividends and asset distribution.
Both shares are part of the corporation’s capital stock.
This means that from the total of 108,000 shares redeemed
from the estate, the balance of 82,752.5 (108,000 less 25,247.5) Both stockholders are no different from ordinary investors
must have come from stock dividends. who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the
Besides, in the absence of evidence to the contrary, the Tax profits and losses of the enterprise. 128 Moreover, under the doctrine
Code presumes that every distribution of corporate property, in whole of equality of shares — all stocks issued by the corporation are
or in part, is made out of corporate profits, 92 such as stock presumed equal with the same privileges and liabilities, provided that
dividends. the Articles of Incorporation is silent on such differences.

In this case, the exchange of shares, without more, Wise v Meer

produces no realized income to the subscriber. There is only a
modification of the subscriber’s rights and privileges — which is not a 1. TAXATION; INCOME TAX; LIQUIDATING DIVIDENDS;
flow of wealth for tax purposes. DISTRIBUTION NOT A DIVIDEND, THOUGH SO-CALLED. —
Although the various resolutions mentioned in the decision speak of
The issue of taxable dividend may arise only once a distributions of dividends when referring to those alluded to therein, ’ a
subscriber disposes of his entire interest and not when there is distribution does not necessarily become a dividend by reason of the
still maintenance of proprietary interest. fact that it is called a dividend by the distributing corporation."cralaw
virtua1aw library
2. ID.; ID.; ID.; CONNOTATION OF. —

CIR v Manning "The ordinary connotation of liquidating dividend involves the
distribution of assets by a corporation to its stockholders upon
ISSUE 1: dissolution." (Klein, Federal Income Taxation, 253-254.)
Is the purchase of the Holding taxable-YES
3. ID.; ID.; ID.; ID. —
ID.; ID.; PURCHASE OF HOLDING RESULTING IN
DISTRIBUTION OF EARNINGS TAXABLE. — The determining element therefore is whether the distribution
was in the ordinary course of business and with intent to
Where by the use of a trust instrument as a convenient maintain the corporation as a going concern, or after deciding to
technical device, respondents bestowed unto themselves the full worth quit with intent to liquidate the business. Proceedings actually begun
and value of a deceased stockholder’s corporate holding acquired with to dissolve the corporation or formal action taken to liquidate it are but
the very earnings of the companies, such package device which evidentiary and not indispensable.
obviously is not designed to carry out the usual stock dividend purpose
of corporate expansion reinvestment, e.g., the acquisition of additional 4. ID.; ID.; ID.; ID.; DISTINGUISHED FROM ORDINARY
facilities and other capital budget items, but exclusively for expanding DIVIDEND. —
the capital base of the surviving stockholders in the company, cannot
be allowed to deflect the latter’s responsibilities toward our income tax "The distinction between a distribution in liquidation and an
laws. ordinary dividend is factual; the result in each case depending on the
particular circumstances of the case and the intent of the parties. If
The conclusion is ineluctable that whenever the company the distribution is in the nature of a recurring return on stock it is an
parted with a portion of its earnings "to buy" the corporate holdings of ordinary dividend.
the deceased stockholders, it was in ultimate effect and result making
a distribution of such earnings to the surviving stockholders. All these However, if the corporation is really winding up its business
amounts are consequently subject to income tax as being, in truth and or recapitalizing and narrowing its activities, the distribution may
in fact, a flow of cash benefits to the surviving stockholders. properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock. The
Issue 2 corporation is, in the latter instances, wiping out all or Part of the
stockholders’ interest in the company . . ."cralaw virtua1aw library
Will the nullity of resolution authorizing the distribution of
earning affect its taxability?-NO 5. ID.; ID.; ID.; TAXABILITY OF. —
Payments for surrendered or relinquished stock in a
corporation in complete liquidation, sometimes called liquidating
TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY dividends, are taxable income under the Income Tax Law. Act
AND IMPOSITION OF INTEREST CHARGES IN ACCORDANCE No. 2833, section 25 (a), as amended by section 4 of Act No.
WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING 3761.
DISTRIBUTION OF EARNINGS. —
6. ID; ID.; ID.; ID.; STATUTORY CONSTRUCTION;
The fact that the resolution authorizing the distribution of earnings is CONSTRUCTION IN SOURCE OF LOCAL LAW AUTHORITATIVE. —
null and void is of no moment. The judicial construction attached to the sources of statutes
adopted in a jurisdiction are of authoritative value in the interpretation
Under the National Internal Revenue Code, income tax is assessed on of such local laws.
income received from any property, activity or service that produces
income. 7. ID.; ID.; ID.; ID.; NO DOUBLE TAXATION. —
"The gains realized by the stockholders from the distribution of the
The Tax Code stands as an indifferent, neutral party on the assets in liquidation were subject to the normal tax in like manner as if
matter of where the income comes from. The action taken by the they had sold their stock to third persons.
Commissioner of assessing fraud penalty and imposing interest
charges pursuant to the provisions of the Tax Code is in accordance The objection that this results in double taxation of the accumulated
with law. earnings and profits is no more available in the one case than it would
have been in the other.
8. ID.; ID.; ID.; ID.; INDIVIDUAL OR CORPORATION LIABLE TO

TAX. — Gains resulting from distributions made in complete liquidation
or dissolution of a corporation as specifically contemplated in section
25 (a) of the former Income Tax Law, are taxable as income,
whether the stockholder happens to be an individual or a
corporation.
9. ID.; ID.; ID.; SUBJECT TO NORMAL AND ADDITIONAL TAX. —

Payments for surrendered stock, or so-called liquidating
dividends, provided for in section 25 (a) of the former Income Tax Law
were subject to both the normal and the additional tax.
10. ID.; ID.; ID.; GAIN ’TAXABLE IRRESPECTIVE OF SOURCE OF

DISTRIBUTION. —

Section 25 (a) of the law, far from limiting the taxability, provides that Sec 32 A(7)d
the gain thus realized is a "taxable income" — under the law so long as Sec 32 (B) Exclusions from Gross Income. - The following items
a gain is realized, it will be a taxable income whether the distribution shall not be included in gross income and shall be exempt from
comes from the earnings or profits of the corporation or from the sale taxation under this title
of all of its assets in general, so long as the distribution is made "in xxx
complete liquidation or dissolution."
(c) Prizes and Awards - Prizes and awards made primarily in
recognition of
1. religious,
SUMMARY ON DIVIDENDS 2. charitable,
3. scientific,
Type of Dividend Taxability 4. educational,
Cash Yes 5. artistic,
Property Yes 6. literary, or
Stock No 7. civic achievement
Liquidating No
but only if:
from Coops No
(i) The recipient was selected without any action on
his part to enter the contest or proceeding; and
Tax
(ii) The recipient is not required to render substantial
Treatment
future services as a condition to receiving the prize or
From Individuals Resident
award.
Domestic Citizen 10% FT
corporation
(d) Prizes and Awards in Sports Competition. -
Resident Alien 10% FT
NRA ETB 20% FT All prizes and awards granted to athletes in
NRA NETB 25% BASED a. local and
ON GROSS b. international sports competitions and
Corporations c. tournaments
Domestic Exempt
RFC Exempt whether held in the Philippines or abroad
NRFC 15% subject to and sanctioned by their national sports associations.
Tax Sparring
Rule if not
subject to NCIT
(9) PENSIONS AND ANNUTIES
Art 2021 of the CC

(8) PRIZES AND WININGS Art. 2021.
The aleatory contract of life annuity binds the debtor to pay an annual
Q: What are prizes and awards for purposes of income pension or income during the life of one or more determinate persons
taxation? (PM Reyes) in consideration of a capital consisting of money or other property,
whose ownership is transferred to him at once with the burden of the
 It refers to the amount of money in cash or in kind received income. (1802a)
by chance or through luck. Prizes and awards are generally
taxable except if specifically mentioned under the exclusions
from the computation of gross income
Legal Basis Sec 24 B(1) Q: What is an annuity for purposes of income taxation?
B(1) Prizes  An annuity refers to the periodic installment payments of

 (except prizes amounting to Ten thousand pesos (P10,000) income or pension by insurance companies during the life of
 or less a person or for a guaranteed fixed period of time, whichever
 which shall be subject to tax under Subsection (A) of is longer, in consideration of capital paid by him.
Section 24; and
 other winnings (except Philippine Charity Sweepstakes  The portion of proceeds from insurance that represent a
and Lotto winnings), derived from sources within the mere return of the premiums is not taxable while the portion
Philippines that represents the interests is taxable.
Notes: (Casasola)
Sec 24(a) When annuities are income to the annuitant?
(A) Rates of Income Tax on Individual Citizen and Individual Resident  Annuities paid to religious, charitable and educational
Alien of the Philippines. corporations are subject to tax to the extent that the
aggregate amount of the payments to the annuitant exceeds
the amount paid by him as consideration for the contract
Proceeds from life insurance or other types of insurance
GR: proceeds from life insurance received by beneficiaries or other

types of insurance are not subject to income tax if they are just a
mere return of capital
However, if such proceeds are held by the insurer under an agreement

to pay interest, the interest payments must be included in gross
income.

The proceeds of life insurance received upon death of the insured BAD DEBTS
constitute compensation for the loss of life, hence a return of capital, Sec 34(e)
beyond the scope of income taxation. (E) Bad Debts. - (1) In General. –
Debts due to the taxpayer
OTHERS  actually ascertained to be worthless
 and charged off within the taxable year
Forgiveness
except those
Q: May cancellation or forgiveness of indebtedness amount to a
gain subject to income tax? 1. not connected with profession, trade or business and
2. those sustained in a transaction entered into between
Yes. If, for example, an individual performs services for a parties mentioned under Section 36 (B) of this Code:
creditor, who, in consideration thereof cancels the debt, income to that
amount is realized by the debtor as compensation for his services. If, Provided, That recovery of bad debts previously allowed as deduction
however, a creditor merely desires to benefit a debtor and without any
consideration therefor cancels the debt, the amount of the debt is a  in the preceding years shall be included as part of the gross
gift. If a corporation to which a stockholder is indebted forgives the income
debt, the transaction has the effect of the payment of a dividend. (see  in the year of recovery
Section 50, RR No. 2).  to the extent of the income tax benefit of said deduction.
Q: What is the Tax Benefit Rule in relation to recovery of

accounts previously written off?
Sec 36(B)
Under the Tax Benefit Rule or Equitable Doctrine of Tax (B) Losses from Sales or Exchanges of Property –
Benefit, the recovery of amounts deducted in previous years
shall be included as part of the gross income in the year of In computing net income, no deductions shall in any case be allowed
recovery to the extent of the income tax benefit of said deduction. in respect of losses from sales or exchanges of property directly or
indirectly –
If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on (1) Between members of a family.
account of said deduction, his subsequent recovery thereof from
his debtor shall be treated as a receipt of realized taxable For purposes of this paragraph, the family of an individual shall
income. include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
Conversely, if the said taxpayer did not benefit from the
deduction if the said bad debt written-off, then his subsequent (2) Except in the case of distributions in liquidation, between an
recovery shall be treated as a mere recovery or a return of capital, individual and corporation more than fifty percent (50%) in value
hence, not treated as receipt of realized taxable income. of the outstanding stock of which is owned, directly or indirectly,
by or for such individual; or
(3) Except in the case of distributions in liquidation, between two

Q: Should taxes previously claimed and allowed as deductions corporations more than fifty percent (50%) in value of the
but subsequently refunded or granted as tax credit be outstanding stock of which is owned, directly or indirectly, by or for
considered part of gross income? the same individual if either one of such corporations, with respect
to the taxable year of the corporation preceding the date of the
Yes. RMC No. 13-80 [April 10, 1980] provides if a taxpayer sale of exchange was under the law applicable to such taxable
receives a tax credit certificate or refund for erroneously paid tax year, a personal holding company or a foreign personal holding
which was claimed as a deduction from his gross income that resulted company;
in a lower net taxable income or a higher net operating loss that was
carried over to the succeeding taxable year, he realizes taxable income (4) Between the grantor and a fiduciary of any trust; or
that must be included in his income tax return in the year of the
receipt. (5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with
Note: However, taxes which are not allowable as deductions, when respect to each trust; or
refunded or credited, are not declarable for income tax purposes
(income tax, estate tax, donor’s tax, and special assessments) (6) Between a fiduciary of a trust and beneficiary of such trust.

EXCLUSIONS FROM GROSS INCOME
LIFE INSURANCE COMPENSATION FOR INJURIES OR SICKNESS

SEC 32 B(4)
Sec 32 B(1)
(B) Exclusions from Gross Income. – Sec 32 (B) Exclusions from Gross Income. - The following items
The following items shall not be included in gross income and shall not be included in gross income and shall be exempt from
shall be exempt from taxation under this title: taxation under this title
(1) Life Insurance - (4) Compensation for Injuries or Sickness -

amounts received, through
The proceeds of life insurance policies paid to the heirs or beneficiaries a. Accident or
b. Health Insurance or
 upon the death of the insured, c. under Workmen's Compensation Acts,
 whether in a single sum or otherwise,
as compensation for
But if such amounts are held by the insurer a. personal injuries or
 under an agreement to pay interest thereon, b. sickness,
 the interest payments shall be included in gross c. plus the amounts of any damages received,
income.
 whether by suit or agreement,
 on account of such injuries or sickness.
RETURN OF PREMIUMS
Sec 32 B(2)
INCOME EXEMPT UNDER A TREATY
(B) Exclusions from Gross Income. – SEC 32 B(5)
The following items shall not be included in gross income and shall
be exempt from taxation under this title: Sec 32 (B) Exclusions from Gross Income. - The following items
shall not be included in gross income and shall be exempt from
taxation under this title
(2) Amount Received by Insured as Return of Premium -
(5) Income Exempt under Treaty. –
The amount received by the insured, Income of any kind, to the extent required by any treaty obligation
 as a return of premiums paid by him under binding upon the Government of the Philippines.
1. life insurance,
2. endowment, or RETIREMENT BENEFITS
3. annuity contracts, either SEC 32 B (6)
a. during the term or
b. at the maturity of the term Sec 32 (B) Exclusions from Gross Income. - The following items
mentioned in the contract or upon surrender of the contract. taxation under this title
There are 6 exclusions under this Section:

GIFTS BEQUEST AND DEVICES
Sec 32 B(3)
(6) Retirement Benefits, Pensions, Gratuities, etc. -
Sec 32 (B) Exclusions from Gross Income. - The following items
shall not be included in gross income and shall be exempt from (a) Retirement benefits received under
1. Republic Act No. 7641 and those
(3) Gifts, Bequests, and Devises. - 2. received by officials and employees of private firms, whether
The value of property acquired by
a. gift, a. individual or
b. bequest, b. corporate,
c. devise, or in accordance with a reasonable private benefit plan
d. descent: maintained by the employer:
Provided, however, Provided,

 That income from such property,
 as well as gift, bequest, devise or descent 1. That the retiring official or employee has been in the service
 of income from any property, of the same employer for at least ten (10) years and
 in cases of transfers of divided interest, 2. is not less than fifty (50) years of age at the time of his
 shall be included in gross income. retirement:

Provided, further, That the benefits granted under this subparagraph
3. shall be availed of by an official or employee only once.
For purposes of this Subsection, the term 'reasonable private benefit

plan' means a
a. pension,
b. gratuity,
c. stock bonus or
d. profit-sharing plan

maintained by an employer As used in this Act, the term "reasonable private benefit plan" means a
for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the 1. pension,
2. gratuity,
1. officials or employees, or 3. stock bonus or
2. both, 4. profit sharing plan
for the purpose of distributing to such officials and employees maintained by an employer for the benefit of
the earnings and principal of the fund thus accumulated, a. some or

and wherein it is provided in said plan that b. all of his officials and employees,
at no time shall any part of the corpus or income of the fund wherein contributions are made by
a. such employer or
1. be used for, or b. officials and employees, or
2. be diverted to, any purpose c. both,
3. other than for the exclusive benefit of the said officials and
employees. for the purpose of distributing to such officials and employees
 the earnings and principal of the fund thus accumulated,
RA 4917  and wherein it is provided in said plan that
REPUBLIC ACT No. 4917 at no time shall any part of the corpus or income of the fund be
a. used for, or
AN ACT PROVIDING THAT RETIREMENT BENEFITS OF b. be diverted to,
EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO
ATTACHMENT, LEVY, EXECUTION, OR ANY TAX WHATSOEVER. any purpose other than for the exclusive benefit of the said officials
and employees.
Section 1.
Any provision of law to the contrary notwithstanding,
 the retirement benefits received by RA 7641
 officials and employees of private firms,
 whether Republic of the Philippines
Congress of the Philippines
a. individual or Metro Manila
b. corporate,
Ninth Congress
in accordance with a reasonable private benefit plan
 maintained by the employer
Republic Act No. 7641 December 9, 1992
1. shall be exempt from all taxes and
2. shall not be liable to AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE
a. attachment, NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR
b. garnishment, CODE OF THE PHILIPPINES, BY PROVIDING FOR RETIREMENT
c. levy or PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN THE
d. seizure by or ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT
e. under any legal or equitable process whatsoever
Be it enacted by the Senate and House of Representatives of the
Except Philippines in Congress assembled::
a. to pay a debt of the official or employee concerned to the
private benefit plan or Section 1. Article 287 of Presidential Decree No. 442, as amended,
b. that arising from liability imposed in a criminal action: otherwise known as the Labor Code of the Philippines, is hereby
amended to read as follows:
Provided,
That the retiring official or employee "Art. 287. Retirement. –
Any employee may be retired
1. has been in the service of the same employer for at least ten  upon reaching the retirement age
(10) years and  established in the collective bargaining agreement or
2. is not less than fifty years of age at the time of his  other applicable employment contract.
retirement:
"In case of retirement, the employee
Provided, further,  shall be entitled to receive such retirement benefits
3. That the benefits granted under this Act shall be availed of
by an official or employee only once: 1. as he may have earned under existing laws and
2. any collective bargaining agreement and
Provided, finally, 3. other agreements:
4. That in case of separation of an official or employee from the
service of the employer due to Provided, however,
a. death,
b. sickness or That an employee's retirement benefits
c. other physical disability or  under any collective bargaining and other
d. for any cause beyond the control of the said official agreements
or employee,  shall not be less than those provided herein.
any amount received by him or by his heirs from the employer "In the absence of a retirement plan or agreement
 as a consequence of such separation  providing for retirement benefits of employees in the
 shall likewise be exempt as hereinabove provided. establishment,
 a. an employee upon reaching the age of sixty (60) years or
more,

b. but not beyond sixty-five (65) years withholding agents are hereby authorized not to deduct the
 which is hereby declared the compulsory retirement withholding taxes in the immediately succeeding payroll periods
age, corresponding to the amount previously withheld from the benefits.
1. who has served at least five (5) years in the said Sec. 3. The Secretary of Finance shall, upon the recommendation of
establishment, the Commissioner of Internal Revenue, promulgate the necessary
2. may retire and shall be entitled to retirement pay equivalent rules and regulations for the effective implementation of the provision
to of this Act.
 at least one-half (1/2) month salary for every year
of service, Sec. 4. All laws, decrees, orders, rules and regulations and other
 a fraction of at least six (6) months being issuances inconsistent with this Act are hereby repealed or amended
considered as one whole year. accordingly.
"Unless the parties provide for broader inclusions, the term one-half
(1/2) month salary shall mean
 fifteen (15) days plus one-twelfth (1/12) of the 13th month CASE UNDER RETIREMENT BENEFIT
pay and
 the cash equivalent of not more than five (5) days of service Inre Atty Zialcita October 18, 1990
incentive leaves.
Issue: Won the money value of the terminal leave pay of Atty.
1. "Retail, Bernardo Zialcita are taxable (NO)
2. service and agricultural establishments or
3. operations employing not more than (10) employees or Ruling
workers are
 exempted from the coverage of this provision. After careful deliberation, the Court resolved to deny the motion for
reconsideration and hereby holds that the money value of the
"Violation of this provision is hereby declared unlawful and subject to accumulated leave credits of Atty. Bernardo Zialcita are not taxable
the penal provisions provided under Article 288 of this Code." for the following reasons:
Section 2. Nothing in this Act shall deprive any employee of benefits to 1) Atty. Zialcita opted to retire under the provisions of Republic Act
which he may be entitled under existing laws or company policies or 660, which is incorporated in Commonwealth Act No. 186. Section
practices. 12(c) of CA 186 states:
... Officials and employees retired under this Act shall be entitled to
RA 7833 the commutation of the unused vacation leave and sick leave,
based on the highest rate received, which they may have to their
REPUBLIC ACT NO. 7833 credit at the time of retirement.
Section 28(c) of the same Act, in turn, provides:

REPUBLIC ACT NO. 7833 - AN ACT TO EXCLUDE THE BENEFITS
MANDATED PURSUANT TO REPUBLIC ACT NO. 6686 AND (c) Except as herein otherwise provided, the Government Service
PRESIDENTIAL DECREE NO. 851, AS AMENDED, AND OTHER Insurance System, all benefits granted under this Act, and all its forms
BENEFITS FROM THE COMPUTATION OF GROSS and documents required of the members shall be exempt from all
COMPENSATION INCOME FOR PURPOSES OF DETERMINING types of taxes, documentary stamps, duties and contributions, fiscal
TAXABLE COMPENSATION INCOME, AMENDING FOR THE or municipal, direct or indirect, established or to be established; ...
PURPOSE Sec. 28(B)(8) OF THE NATIONAL INTERNAL REVENUE (Emphasis supplied)
CODE, AS AMENDED
Applying the two aforesaid provisions, it can be concluded that the
amount received by Atty. Zialcita as a result of the conversion
Section 1. A new sub-paragraph to be known as sub-paragraph (F) is of these unused leaves into cash is exempt from income tax.
hereby inserted at the end of Sec. 28(b)(8) of the National Internal
Revenue Code, as amended, which shall read as follows: 2) The commutation of leave credits is commonly known as terminal
leave. (Manual on Leave Administration Course for Effectiveness,
"(F) 13th month pay and other benefits. published by the Civil Service Commission, p. 17) Terminal leave is
applied for by an officer or employee who retires, resigns or is
"(i) Benefits received by officials and employees of the national and separated from the service through no fault of his own. (supra, p. 16)
local governments pursuant to Republic Act No. 6686;
Since terminal leave is applied for by an officer or employee who has
"(ii) Benefits received by employees pursuant to Presidential Decree already severed his connection with his employer and who is no longer
No. 851, as amended by Memorandum Order No. 28, dated August 13, working, then it follows that the terminal leave pay, which is the
1986; cash value of his accumulated leave credits, is no longer
compensation for services rendered. It can not be viewed as
"(iii) Benefits received by officials and employees not covered by salary.
Presidential Decree No. 851, as amended; and
3) Executive Order No. 1077, Section 1, provides:
"(iv) Other benefits such as productivity incentives and Christmas
bonus in an amount not exceeding Twelve thousand pesos (P12,000) Any officer or employee of the government who retires or voluntarily
which shall be integrated in the 13th month pay solely for purposes of resigns or is separated from the service through no fault of his own
this Act." and whose leave benefits are not covered by special law, shall be
entitled to the commutation of all the accumulated vacation and/or
"Provided, however, that the exclusion shall only apply to the first sick leaves to his credit, exclusive of Saturdays, Sundays and holidays,
Thirty thousand pesos (P30,000)." without litigation as to the number of days of vacation and sick leaves
that he may accumulate. (Emphasis supplied)
Sec. 2. The exclusion herein provided shall cover benefits paid or
accrued beginning January 1, 1994. Meanwhile, Section 28(b) 7(b) of the National Internal Revenue Code
(NIRC) states:
For purposes of reimbursing the officials or employees who may have
received the benefits covered by this Act before its effectivity, the

Sec. 28 (b) — Exclusions from gross income. — The following items CIR V CA MAR 23, 1992
taxation under this title:
To begin with, it is significant to note that the GCL Plan was qualified
xxx xxx xxx as exempt from income tax by the Commissioner of Internal Revenue
in accordance with Rep. Act No. 4917 approved on 17 June 1967. This
(7) Retirement benefits, pensions, gratuities, etc. law specifically provided:
(b) Any amount received by an official or employee or by his heirs Sec. 1. Any provision of law to the contrary notwithstanding, the
from the employer as a consequence of separation of such official retirement benefits received by officials and employees of private
or employee from the service of the employer due to death, firms, whether individual or corporate, in accordance with a reasonable
sickness or other physical disability or for any cause beyond the private benefit plan maintained by the employer shall be exempt from
control of the said official or employee. (Emphasis supplied) all taxes and shall not be liable to attachment, levy or seizure by or
under any legal or equitable process whatsoever except to pay a debt
CASE AT BAR of the official or employee concerned to the private benefit plan or that
arising from liability imposed in a criminal action; . . . (emphasis ours).
In the case of Atty. Zialcita, he rendered government service from
March 13, 1962 up to February 15, 1990. The next day, or on In so far as employees' trusts are concerned, the foregoing
February 16, 1990, he reached the compulsory retirement age of provision should be taken in relation to then Section 56(b) (now 53[b])
65 years. of the Tax Code, as amended by Rep. Act No. 1983, supra, which took
effect on 22 June 1957. This provision specifically exempted
Upon his compulsory retirement, he is entitled to the commutation of employee's trusts from income tax and is repeated hereunder for
his accumulated leave credits to its money value. Within the purview emphasis:
of the above-mentioned provisions of the NLRC, compulsory
retirement may be considered as a "cause beyond the control Sec. 56. Imposition of Tax. — (a) Application of tax. — The taxes
of the said official or employee". imposed by this Title upon individuals shall apply to the income of
estates or of any kind of property held in trust.
Consequently, the amount that he received by way of commutation of
his accumulated leave credits as a result of his compulsory xxx xxx xxx
retirement, or his terminal leave pay, fags within the
enumerated exclusions from gross income and is therefore not (b) Exception. — The tax imposed by this Title shall not apply to
subject to tax. employee's trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his
4. The terminal leave pay of Atty. Zialcita may likewise be employees . . .
viewed as a "retirement gratuity received by government
officials and employees" which is also another exclusion from gross The tax-exemption privilege of employees' trusts, as distinguished
income as provided for in Section 28(b), 7(f) of the NLRC. from any other kind of property held in trust, springs from the
foregoing provision. It is unambiguous. Manifest therefrom is that the
A gratuity is that paid to the beneficiary for past services rendered tax law has singled out employees' trusts for tax exemption.
purely out of generosity of the giver or grantor. (Peralta v. Auditor
General, 100 Phil. 1051 [1957]) And rightly so, by virtue of the raison de'etre behind the
creation of employees' trusts. Employees' trusts or benefit plans
It is a mere bounty given by the government in consideration or in normally provide economic assistance to employees upon the
recognition of meritorious services and springs from the appreciation occurrence of certain contingencies, particularly, old age retirement,
and graciousness of the government. (Pirovano v. De la Rama death, sickness, or disability. It provides security against certain
Steamship Co., 96 Phil. 335, 357 [1954]) hazards to which members of the Plan may be exposed. It is an
independent and additional source of protection for the working group.
When a government employee chooses to go to work rather than What is more, it is established for their exclusive benefit and for no
absent himself and consume his leave credits, there is no doubt that other purpose.
the government is thereby benefited by the employee's uninterrupted
and continuous service. It is in cognizance of this fact that laws were The tax advantage in Rep. Act No. 1983, Section 56(b), was
passed entitling retiring government employees, among others, to the conceived in order to encourage the formation and establishment of
commutation of their accumulated leave credits. such private Plans for the benefit of laborers and employees outside of
the Social Security Act. Enlightening is a portion of the explanatory
That which is given to him after retirement is out of the Government's note to H.B. No. 6503, now R.A. 1983, reading:
generosity and an appreciation for his having continued working when
he could very well have gone on vacation. Section 286 of Revised Considering that under Section 17 of the social Security Act,
Administrative Code, as amended by RA 1081, provides that all contributions collected and payments of sickness, unemployment,
"whenever any officer, employee or laborer of the Government retirement, disability and death benefits made thereunder together
of the Philippines shall voluntarily resign or be separated from with the income of the pension trust are exempt from any tax,
the service through no fault of his own, he shall be entitled to assessment, fee, or charge, it is proposed that a similar system
the commutation of all accumulated vacation and/or sick leave providing for retirement, etc. benefits for employees outside the Social
to his credit: ..." (Emphasis supplied) Executive Order No. 1077, Security Act be exempted from income taxes. (Congressional Record,
mentioned above, later amended Section 286 by removing the House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3,
limitation on the number of leave days that may be accumulated and 1957; cited in Commissioner of Internal Revenue v. Visayan Electric
explicitly allowing retiring government employees to commute their Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715); emphasis
accumulated leaves. supplied.
The commutation of accumulated leave credits may thus be It is evident that tax-exemption is likewise to be
considered a retirement gratuity, within the import of Section enjoyed by the income of the pension trust. Otherwise, taxation
28(b), 7(f) of the NLRC, since it is given only upon retirement and of those earnings would result in a diminution accumulated income and
in consideration of the retiree's meritorious services. reduce whatever the trust beneficiaries would receive out of the trust
fund. This would run afoul of the very intendment of the law.
It is clear that the law expresses the government's appreciation for
many years of service already rendered and the clear intention to The deletion in Pres. Decree No. 1959 of the provisos
reward faithful and often underpaid workers after the official regarding tax exemption and preferential tax rates under the
relationship had been terminated. old law, therefore, can not be deemed to extent to employees'
trusts.

Said Decree, being a general law, can not repeal by

implication a specific provision, Section 56(b) now 53 [b]) in relation The Court of Tax Appeals found for private respondent
to Rep. Act No. 4917 granting exemption from income tax to Castaneda and ordered the Commissioner of Internal Revenue to
employees' trusts. Rep. Act 1983, which excepted employees' trusts in refund Castaneda the sum of P12,557.13 withheld as income tax.
its Section 56 (b) was effective on 22 June 1957 while Rep. Act No. (,Annex "C", petition).
4917 was enacted on 17 June 1967, long before the issuance of Pres.
Decree No. 1959 on 15 October 1984. Petitioner appealed the above-mentioned Court of Tax
Appeals decision to this Court, which was docketed as G.R. No. 80320.
A subsequent statute, general in character as to its terms In turn, we referred the case to the Court of Appeals for resolution.
and application, is not to be construed as repealing a special or specific The case was docketed in the Court of Appeals as CA-G.R. SP No.
enactment, unless the legislative purpose to do so is manifested. This 20482.
is so even if the provisions of the latter are sufficiently comprehensive
to include what was set forth in the special act (Villegas v. Subido, On 26 September 1990, the Court of Appeals dismissed the
G.R. No. L-31711, 30 September 1971, 41 SCRA 190). petition for review and affirmed the decision of the Court of Tax
Appeals. Hence, the present recourse by the Commissioner of Internal
Notably, too, all the tax provisions herein treated of come Revenue.
under Title II of the Tax Code on "Income Tax." Section 21 (d), as
amended by Rep. Act No. 1959, refers to the final tax on individuals The Solicitor General, acting on behalf of the Commissioner
and falls under Chapter II; Section 24 (cc) to the final tax on of Internal Revenue, contends that the terminal leave pay is income
corporations under Chapter III; Section 53 on withholding of final tax derived from employer-employee relationship, citing in support of his
to Returns and Payment of Tax under Chapter VI; and Section 56 (b) stand Section 28 of the National Internal Revenue Code; that as part
to tax on Estates and Trusts covered by Chapter VII, Section 56 (b), of the compensation for services rendered, terminal leave pay is
taken in conjunction with Section 56 (a), supra, explicitly excepts actually part of gross income of the recipient. Thus —
employees' trusts from "the taxes imposed by this Title." Since the
final tax and the withholding thereof are embraced within the title on . . . It (terminal leave pay) cannot be viewed as salary for purposes
"Income Tax," it follows that said trust must be deemed exempt which would reduce it. . . . there can thus be no "commutation of
therefrom. Otherwise, the exception becomes meaningless. salary" when a government retiree applies for terminal leave because
he is not receiving it as salary. What he applies for is a "commutation
There can be no denying either that the final withholding tax of leave credits." It is an accumulation of credits intended for old age
is collected from income in respect of which employees' trusts or separation from service. . . .
are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The
application of the withholdings system to interest on bank deposits or The Court has already ruled that the terminal leave pay
yield from deposit substitutes is essentially to maximize and expedite received by a government official or employee is not subject to
the collection of income taxes by requiring its payment at the source. withholding (income) tax. In the recent case of Jesus N. Borromeo vs.
If an employees' trust like the GCL enjoys a tax-exempt status from The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July
income, we see no logic in withholding a certain percentage of that 1991, the Court explained the rationale behind the employee's
income which it is not supposed to pay in the first place. entitlement to an exemption from withholding (income) tax on his
terminal leave pay as follows:
Petitioner also relies on Revenue Memorandum Circular 31-
84, dated 30 October 1984, and Bureau of Internal Revenue Ruling . . . commutation of leave credits, more commonly known as terminal
No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for leave, is applied for by an officer or employee who retires, resigns or is
the argument that Pres. Decree No. 1959 withdrew the exemption of separated from the service through no fault of his own. (Manual on
employees' trusts from the withholding of the final tax on interest Leave Administration Course for Effectiveness published by the Civil
income. Said Circular and Ruling pronounced that the deletion of the Service Commission, pages 16-17). In the exercise of sound personnel
exempting and preferential tax treatment provisions by Pres. Decree policy, the Government encourages unused leaves to be accumulated.
No. 1959 is a clear manifestation that the single 15% tax rate is The Government recognizes that for most public servants, retirement
imposable on all interest income regardless of the tax status or pay is always less than generous if not meager and scrimpy. A modest
character of the recipient thereof. nest egg which the senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the same time but also
But since we herein rule that Pres. Decree No. 1959 did not for the same policy considerations governing retirement benefits.
have the effect of revoking the tax exemption enjoyed by employees'
trusts, reliance on those authorities is now misplaced. In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit,
terminal leave pay is not subject to income tax.
CIR V CA OCT 17 1991
ISSUE: WON terminal leave is subject to income tax
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the

government service as Revenue Attache in the Philippine Embassy in
London, England, on 10 December 1982 under the provisions of
Section 12 (c) of Commonwealth Act 186, as amended. Upon
retirement, he received, among other benefits, terminal leave pay
from which petitioner Commissioner of Internal Revenue withheld
P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with petitioner for a

refund of the P12,557.13, contending that the cash equivalent of his
terminal leave is exempt from income tax. To comply with the two-
year prescriptive period within which claims for refund may be filed,
Castaneda filed on 16 July 1984 with the Court of Tax Appeals a
Petition for Review, seeking the refund of income tax withheld from his
terminal leave pay.

DEATH SICKNESS DISABILITY OR SEPARATION OF AN SSS

EMPLOYEE WITHOUT FAULT ON HIS OWN Sec 32 (B) Exclusions from Gross Income. - The following items
SEC 32(B)
Sec 32 (B) Exclusions from Gross Income. - The following items (e) SSS
shall not be included in gross income and shall be exempt from Benefits received from or enjoyed
taxation under this title  under the Social Security System
 in accordance with the provisions of Republic Act No. 8282.
(b) SEPARATION BEYOND CONTROL OF SAID EMPLOYEE
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 Sec 32 (B) Exclusions from Gross Income. - The following items
 from the service of the employer shall not be included in gross income and shall be exempt from
 because of taxation under this title
1. death (f) GSIS

2. sickness or Benefits received from
3. other physical disability or  the GSIS under Republic Act No. 8291,
 including retirement gratuity
for any cause beyond the control of the said official or  received by government officials and employees.
employee.
MISCELLANEOUS ITEMS
Sec 32 7(B)
(7) Miscellaneous Items. –
BENEFITS OF RESIDENT,NON-RESIDENT CITIZENS/ALIENS (a) Income Derived by Foreign Government –
WHO RESIDE HERE PERMANENTLY
Income derived from investments in the Philippines in
Sec 32 (B) Exclusions from Gross Income. - The following items 1. loans,
shall not be included in gross income and shall be exempt from 2. stocks,
taxation under this title 3. bonds or
4. other domestic securities, or
(c) BENEFITS OF RESIDENT,NON-RESIDENT CITIZENS/ALIENS 5. from interest on deposits in banks in the Philippines by
WHO RESIDE HERE PERMANENTLY (i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying
The provisions of any existing law to the contrary notwithstanding, refinancing from foreign governments, and
(iii) international or regional financial institutions
1. social security benefits, established by foreign governments.
2. retirement gratuities,
3. pensions and (b) Income Derived by the Government or its Political Subdivisions. -
4. other similar benefits Income derived from any
received by 1. public utility or

2. from the exercise of any essential governmental function
1. resident or
2. nonresident citizens of the Philippines or accruing to the Government of the Philippines or to any political
3. aliens who come to reside permanently in the Philippines subdivision thereof.
 from foreign government agencies

 and other institutions, private or public.
CASES ON WITHDRAWAL FROM TAX EXEMPTION
PAGCOR V BIR DEC 10, 2014
ISSUES
UNITED STATES VETERANS ASSOCIATION 1.Whether PAGCOR’s tax privilege of paying 5% franchise tax in
Sec 32 (B) Exclusions from Gross Income. - The following items lieu of all other taxes with respect to its gaming income, pursuant
shall not be included in gross income and shall be exempt from to its Charter – P.D. 1869, as amended by R.A. 9487, is deemed
taxation under this title repealed or amended by Section 1 (c) of R.A. 9337.
(d) VETERANS
2.If it is deemed repealed or amended, whether PAGCOR’s gaming
Payments of benefits due or to become income is subject to both 5% franchise tax and income tax.
 due to any person residing in the Philippines
 under the laws of the United States
 administered by the United States Veterans Administration. 3.Whether PAGCOR’s income from operation of related services is
subject to both income tax and 5% franchise tax.
4.Whether PAGCOR’s tax privilege of paying 5% franchise tax

inures to the benefit of third parties with contractual relationship
with PAGCOR in connection with the operation of casinos.11
In our Decision dated March 15, 2011, we have already

declared petitioner’s income tax liability in view of the
withdrawal of its tax privilege under R.A. No. 9337.

However, we made no distinction as to which income is SECTION 13. Exemptions. –

subject to corporate income tax, considering that the issue raised
therein was only the constitutionality of Section 1 of R.A. No. 9337, xxxx
which excluded petitioner from the enumeration of GOCCs exempted
from corporate income tax. (2) Income and other taxes. — (a) Franchise Holder: No tax of any
kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and
For clarity, it is worthy to note that under P.D. 1869, as amended, collected under this Franchise from the Corporation; nor shall any form
PAGCOR’s income is classified into two: of tax or charge attach in any way to the earnings of the Corporation,
(1) income from its operations conducted under its Franchise, except a Franchise Tax of five (5%) percent of the gross revenue or
pursuant to Section 13(2) (b) thereof (income from gaming earnings derived by the Corporation from its operation under this
operations); and Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or
(2) income from its operation of necessary and related assessments of any kind, nature or description, levied, established or
services under Section 14(5) thereof (income from other related collected by any municipal, provincial, or national government
services). In RMC No. 33-2013, respondent further classified the authority.13
aforesaid income as follows:chanroblesvirtuallawlibrary
Indeed, the grant of tax exemption or the withdrawal
thereof assumes that the person or entity involved is subject to tax.
1. PAGCOR’s income from its operations and licensing of gambling This is the most sound and logical interpretation because petitioner
casinos, gaming clubs and other similar recreation or amusement could not have been exempted from paying taxes which it was not
places, gaming pools, includes, among others: liable to pay in the first place. This is clear from the wordings of P.D.
1869, as amended, imposing a franchise tax of five percent (5%) on
its gross revenue or earnings derived by petitioner from its
a) Income from its casino operations; operation under the Franchise in lieu of all taxes of any kind or
form, as well as fees, charges or levies of whatever nature,
b) Income from dollar pit operations; which necessarily include corporate income tax.
c) Income from regular bingo operations; and In other words, there was no need for Congress to grant tax
exemption to petitioner with respect to its income from gaming
d) Income from mobile bingo operations operated by it, with operations as the same is already exempted from all taxes of
agents on commission basis. Provided, however, that the agents’ any kind or form, income or otherwise, whether national or
commission income shall be subject to regular income tax, and local, under its Charter, save only for the five percent (5%)
consequently, to withholding tax under existing regulations. franchise tax.
The exemption attached to the income from gaming operations exists

2. Income from ―other related operations‖ includes, but is not limited independently from the enactment of R.A. No. 8424. To adopt an
to: assumption otherwise would be downright ridiculous, if not deleterious,
a) Income from licensed private casinos covered by authorities to since petitioner would be in a worse position if the exemption was
operate issued to private operators; granted (then withdrawn) than when it was not granted at all in the
first place.
b) Income from traditional bingo, electronic bingo and other bingo
variations covered by authorities to operate issued to private Moreover, as may be gathered from the legislative records of the
operators; Bicameral Conference Meeting of the Committee on Ways and Means
dated October 27, 1997, the exemption of petitioner from the payment
c) Income from private internet casino gaming, internet sports of corporate income tax was due to the acquiescence of the Committee
betting and private mobile gaming operations; on Ways and Means to the request of petitioner that it be exempt from
such tax. Based on the foregoing, it would be absurd for
d) Income from private poker operations; petitioner to seek exemption from income tax on its gaming
operations when under its Charter, it is already exempted from
e) Income from junket operations; paying the same.
Second. Every effort must be exerted to avoid a conflict between

f) Income from SM demo units; and statutes; so that if reasonable construction is possible, the laws must
be reconciled in that manner.14chanRoblesvirtualLawlibrary
g) Income from other necessary and related services, shows and
entertainment.12 As we see it, there is no conflict between P.D. 1869, as amended, and
R.A. No. 9337. The former lays down the taxes imposable upon
petitioner, as follows:
After a thorough study of the arguments and points raised
by the parties, and in accordance with our Decision dated March 15, (1) a five percent (5%) franchise tax of the gross revenues or
2011, we sustain petitioner’s contention that its income from earnings derived from its operations conducted under the Franchise,
gaming operations is subject only to five percent (5%) which shall be due and payable in lieu of all kinds of taxes, levies,
franchise tax under P.D. 1869, as amended, while its income fees or assessments of any kind, nature or description, levied,
from other related services is subject to corporate income tax established or collected by any municipal, provincial or national
pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is government authority;15
demonstrable.
(2) income tax for income realized from other necessary and related
First. Under P.D. 1869, as amended, petitioner is services, shows and entertainment of petitioner.16 With the
subject to income tax only with respect to its operation of enactment of R.A. No. 9337, which withdrew the income tax
related services. Accordingly, the income tax exemption ordained exemption under R.A. No. 8424, petitioner’s tax liability on income
under Section 27(c) of R.A. No. 8424 clearly pertains only to from other related services was merely reinstated.
petitioner’s income from operation of related services.
It cannot be gainsaid, therefore, that the nature of taxes imposable is
Such income tax exemption could not have been well defined for each kind of activity or operation. There is no
applicable to petitioner’s income from gaming operations as it is inconsistency between the statutes; and in fact, they complement
already exempt therefrom under P.D. 1869, as amended, to wit: each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as It is settled that where a statute is susceptible of more than one
amended, which expressly provides the tax treatment of petitioner’s interpretation, the court should adopt such reasonable and beneficial
income prevails over R.A. No. 9337, which is a general law. It is a construction which will render the provision thereof operative and
canon of statutory construction that a special law prevails over a effective, as well as harmonious with each
general law — regardless of their dates of passage — and the special other.23chanRoblesvirtualLawlibrary
is to be considered as remaining an exception to the general.17 The
rationale is:chanroblesvirtuallawlibrary Given that petitioner’s Charter is not deemed repealed or amended by
R.A. No. 9337, petitioner’s income derived from gaming operations is
subject only to the five percent (5%) franchise tax, in accordance with
Why a special law prevails over a general law has been put by the P.D. 1869, as amended. With respect to petitioner’s income from
Court as follows: operation of other related services, the same is subject to income tax
xxxx only. The five percent (5%) franchise tax finds no application with
respect to petitioner’s income from other related services, in view of
x x x The Legislature consider and make provision for all the the express provision of Section 14(5) of P.D. 1869, as amended, to
circumstances of the particular case. The Legislature having specially wit:chanroblesvirtuallawlibrary
considered all of the facts and circumstances in the particular case in
granting a special charter, it will not be considered that the
Legislature, by adopting a general law containing provisions repugnant Section 14. Other Conditions.
to the provisions of the charter, and without making any mention of its
intention to amend or modify the charter, intended to amend, repeal, xxxx
or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151;
Philippine Railway Co. vs. Nolting 34 Phil., 401.)18 (5) Operation of related services. — The Corporation is authorized to
operate such necessary and related services, shows and
In this regard, we agree with petitioner that if the lawmakers had entertainment. Any income that may be realized from these related
intended to withdraw petitioner’s tax exemption of its gaming services shall not be included as part of the income of the Corporation
income, then Section 13(2)(a) of P.D. 1869 should have been for the purpose of applying the franchise tax, but the same shall be
amended expressly in R.A. No. 9487, or the same, at the very considered as a separate income of the Corporation and shall be
least, should have been mentioned in the repealing clause of R.A. No. subject to income tax.24
9337.21
However, the repealing clause never mentioned petitioner’s Thus, it would be the height of injustice to impose franchise tax upon
Charter as one of the laws being repealed. On the other hand, the petitioner for its income from other related services without basis
repeal of other special laws, namely, Section 13 of R.A. No. 6395 as therefor.
well as Section 6, fifth paragraph of R.A. No. 9136, is categorically
provided under Section 24(a) (b) of R.A. No. 9337, to wit: For proper guidance, the first classification of PAGCOR’s
income under RMC No. 33-2013 (i.e., income from its operations and
licensing of gambling casinos, gaming clubs and other similar
SEC. 24. Repealing Clause. - The following laws or provisions of laws recreation or amusement places, gambling pools) should be
are hereby repealed and the persons and/or transactions affected interpreted in relation to Section 13(2) of P.D. 1869, which pertains to
herein are made subject to the value-added tax subject to the the income derived from issuing and/or granting the license to operate
provisions of Title IV of the National Internal Revenue Code of 1997, casinos to PAGCOR’s contractees and licensees, as well as earnings
as amended: derived by PAGCOR from its own operations under the Franchise.
(A) Section 13 of R.A. No. 6395 on the exemption from value- On the other hand, the second classification of PAGCOR’s
added tax of the National Power Corporation (NPC); income under RMC No. 33-2013 (i.e., income from other related
operations) should be interpreted in relation to Section 14(5) of P.D.
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT 1869, which pertains to income received by PAGCOR from its
rate imposed on the sales of generated power by generation contractees and licensees in the latter’s operation of casinos, as well
companies; and as PAGCOR’s own income from operating necessary and related
services, shows and entertainment.
(C) All other laws, acts, decrees, executive orders, issuances and
rules and regulations or parts thereof which are contrary to and In fine, we uphold our earlier ruling that Section 1 of R.A. No.
inconsistent with any provisions of this Act are hereby repealed, 9337, amending Section 27(c) of R.A. No. 8424, by excluding
amended or modified accordingly.22 petitioner from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional. In addition, we
hold that:
When petitioner’s franchise was extended on June 20, 2007
without revoking or withdrawing its tax exemption, it effectively 1.Petitioner’s tax privilege of paying five percent (5%) franchise tax in
reinstated and reiterated all of petitioner’s rights, privileges and lieu of all other taxes with respect to its income from gaming
authority granted under its Charter. operations, pursuant to P.D. 1869, as amended, is not repealed or
amended by Section 1(c) of R.A. No. 9337;
Otherwise, Congress would have painstakingly enumerated
the rights and privileges that it wants to withdraw, given that a 2.Petitioner’s income from gaming operations is subject to the
franchise is a legislative grant of a special privilege to a person. five percent (5%) franchise tax only; and
Thus, the extension of petitioner’s franchise under the same

terms and conditions means a continuation of its tax exempt status 3.Petitioner’s income from other related services is subject to
with respect to its income from gaming operations. Moreover, all laws, corporate income tax only.
rules and regulations, or parts thereof, which are inconsistent with the
provisions of P.D. 1869, as amended, a special law, are considered
repealed, amended and modified, consistent with Section 2 of R.A. No.
9487, thus:
SECTION 2. Repealing Clause. – All laws, decrees, executive orders,

proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are
hereby repealed, amended and modified.

BLOOMBERY V CIR AUG 10 2016 could not have been exempted from paying taxes which it was not
liable to pay in the first place.
ISSUES
This is clear from the wordings of P.D. No. 1869, as
i) whether or not the assailed provision of RMC No. 33- amended, imposing a franchise tax of five percent (5%) on its gross
2013 subjecting the contractees and licensees of revenue or earnings derived by [PAGCOR] from its operation under the
PAGCOR to income tax under the NIRC of 1997, as Franchise in lieu of all taxes of any kind or form, as well as fees,
amended, was issued by respondent CIR with grave charges or levies of whatever nature, which necessarily include
abuse of discretion amounting to lack or excess of corporate income tax.
jurisdiction; and
ii) whether or not said provision is valid or constitutional In other words, there was no need for Congress to grant tax
considering that Section 13(2)(b) of PD No. 1869, as exemption to [PAGCOR] with respect to its income from gaming
amended (PAGCOR Charter), grants tax exemptions to operations as the same is already exempted from all taxes of any kind
such contractees and licensees. or form, income or otherwise, whether national or local, under its
Charter, save only for the five percent (5%) franchise tax.
Our Ruling The exemption attached to the income from gaming

operations exists independently from the enactment of R.A. No. 8424.
The determination of the submissions of petitioner will have to To adopt an assumption otherwise would be downright ridiculous, if
follow the pilot case of PAGCOR v. The Bureau of Internal not deleterious, since [PAGCOR] would be in a worse position if the
Revenue, et al.,18 where this Court clarified its earlier ruling in exemption was granted (then withdrawn) than when it was not
G.R. No. 17208719 involving the same parties, and expressed granted at all in the first place.20 (Emphasis supplied) Furthermore,
that: Second. Every effort must be exerted to avoid a conflict between
(i) Section 1 of RA No. 9337, amending Section 27(C) of statutes; so that if reasonable construction is possible, the laws must
the NIRC of 1997, as amended, which excluded be reconciled in the manner.
PAGCOR from the enumeration of GOCCs exempted
from corporate income tax, is valid and constitutional; As we see it, there is no conflict between P.D. No. 1869, as
amended, and R.A. No. 9337. The former lays down the taxes
(ii) PAGCOR's tax privilege of paying five percent (5%) imposable upon [PAGCOR], as follows: (1) a five percent (5%)
franchise tax in lieu of all other taxes with respect to its franchise tax of the gross revenues or earnings derived from its
income from gaming operations is not repealed or operations conducted under the Franchise, which shall be due and
amended by Section l(c) of R.A. No. 9337; payable in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any
(iii) PAGCOR's income from gaming operations is subject to municipal, provincial or national government authority; and (2) income
the 5% franchise tax only; and (iv) PAGCOR's income tax for income realized from other necessary and related services,
from other related services is subject to corporate shows and entertainment of [PAGCOR]. With the enactment of R.A.
income tax only. No. 9337, which withdrew the income tax exemption under R.A. No.
8424, [PAGCOR's] tax liability on income from other related services
The Court sitting En Banc expounded on the matter in this wise: was merely reinstated.
After a thorough study of the arguments and points raised It cannot be gainsaid, therefore, that the nature of taxes
by the parties, and in accordance with our Decision dated March 15, imposable is well defined for each kind of activity or operation. There
2011, we sustain [PAGCOR's] contention that its income from gaming is no inconsistency between the statutes; and in fact, they
operations is subject only to five percent (5%) franchise tax under complement each other.
P.D. No. 1869, as amended, while its income from other related
services is subject to corporate income tax pursuant to P.D. No. 1869, Third. Even assuming that an inconsistency exists, P.D. No.
as amended, as well as R.A. No. 9337. This is demonstrable. 1869, as amended, which expressly provides the tax treatment of
[PAGCOR's] income prevails over R.A. No. 9337, which is a general
First. Under P.D. No. 1869, as amended, [PAGCOR] is law. It is a canon of statutory construction that a special law prevails
subject to income tax only with respect to its operation of related over a general law regardless of their dates of passage and the special
services. Accordingly, the income tax exemption ordained under is to be considered as remaining an exception to the general. x x x
Section 27(c) of R.A. No. 8424 clearly pertains only to [PAGCOR's]
income from operation of related services. Such income tax exemption x x x x Where a general law is enacted to regulate an industry, it is
could not have been applicable to [PAGCOR's] income from gaming common for individual franchises subsequently granted to restate the
operations as it is already exempt therefrom under P.D. No. 1869, as rights and privileges already mentioned in the general law, or to
amended, to wit: amend the later law, as may be needed, to conform to the general
SECTION 13. Exemptions. law. However, if no provision or amendment is stated in the franchise
to effect the provisions of the general law, it cannot be said that the
XXXX same is the intent of the lawmakers, for repeal of laws by implication
is not favored.
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind
or form, income or otherwise, as well as fees, charges or levies of In this regard, we agree with [PAGCOR] that if the
whatever nature, whether National or Local, shall be assessed and lawmakers had intended to withdraw [PAGCOR's] tax exemption of its
collected under this Franchise from the Corporation; nor shall any form gaming income, then Section 13(2)(a) of P.D. 1869 should have been
of tax or charge attach in any way to the earnings of the Corporation, amended expressly in R.A. No. 9487, or the same, at the very least,
except a Franchise Tax of five (5%) percent of the gross revenue or should have been mentioned in the repealing clause of R.A. No. 9337.
earnings derived by the Corporation from its operation under this However, the repealing clause never mentioned [PAGCOR's] Charter as
Franchise. one of the laws being repealed. On the other hand, the repeal of other
special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6,
Such tax shall be due and payable quarterly to the National fifth paragraph of R.A. No. 9136, is categorically provided under
Government and shall be in lieu of all kinds of taxes, levies, fees or Section 24(a) (b) of R.A. No. 9337, x x x.
assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government xxxx
authority.
Indeed, the grant of tax exemption or the withdrawal

thereof assumes that the person or entity involved is subject to tax.
This is the most sound and logical interpretation because [PAGCOR]

When [PAGCOR's] franchise was extended on June 20, 2007 and prevailing jurisprudence.
without revoking or withdrawing its tax exemption, it effectively
reinstated and reiterated all of [PAGCOR's] rights, privileges and Section 13 of PD No. 1869 evidently states that payment of the 5%
authority granted under its Charter. Otherwise, Congress would have franchise tax by PAGCOR and its contractees and licensees exempts
painstakingly enumerated the rights and privileges that it wants to them from payment of any other taxes, including corporate income
withdraw, given that a franchise is a legislative grant of a special tax, quoted hereunder for ready reference:
privilege to a person. Sec. 13. Exemptions.
xxxx
Thus, the extension of [PAGCOR's] franchise under the same
terms and conditions means a continuation of its tax exempt status (2) Income and other taxes. (a) Franchise Holder: No tax of any kind
with respect to its income from gaming operations. Moreover, all laws, or form, income or otherwise, as well as fees, charges or levies of
rules and regulations, or parts thereof, which are inconsistent with the whatever nature, whether National or Local, shall be assessed and
provisions of P.D. 1869, as amended, a special law, are considered collected under this Franchise from the Corporation; nor shall any form
repealed, amended and modified, consistent with Section 2 of R.A. No. of tax or charge attach in any way to the earnings of the Corporation,
9487, thus: except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this
SECTION 2. Repealing Clause. All laws, decrees, executive orders, Franchise. Such tax shall be due and payable quarterly to the National
proclamations, rules and regulations and other issuances, or parts Government and shall be in lieu of all kinds of taxes, levies, fees or
thereof, which are inconsistent with the provisions of this Act, are assessments of any kind, nature or description, levied, established or
hereby repealed, amended and modified. collected by any municipal, provincial, or national government
It is settled that where a statute is susceptible of more than one authority.
interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and (b) Others: The exemptions herein granted for earnings derived from
effective, as well as harmonious with each other. the operations conducted under the franchise specifically from the
payment of any tax, income or otherwise, as well as any form of
Given that [PAGCOR's] Charter is not deemed repealed or charges, fees or levies, shall inure to the benefit of and extend to
amended by R.A. No. 9337, [PAGCOR's] income derived from gaming corporation(s), association(s), agency(ies), or individual(s) with whom
operations is subject only to the five percent (5%) franchise tax, in the Corporation or operator has any contractual relationship in
accordance with P.D. 1869, as amended. With respect to [PAGCOR's] connection with the operations of the casino(s) authorized to be
income from operation of other related services, the same is subject to conducted under this Franchise and to those receiving compensation or
income tax only. The five percent (5%) franchise tax finds no other remuneration from the Corporation or operator as a result of
application with respect to [PAGCOR's] income from other related essential facilities furnished and/or technical services rendered to the
services, in view of the express provision of Section 14(5) of P.D. No. Corporation or operator. (Emphasis and underlining supplied)
1869, as amended, x x x.21 (Emphasis supplied) The Court through
Justice Diosdado M. Peralta, categorically followed what was simply As previously recognized, the above-quoted provision
provided under the PAGCOR Charter (PD No. 1869, as amended by RA providing for the said exemption was neither amended nor repealed by
No. 9487), by proclaiming that despite amendments to the NIRC of any subsequent laws (i.e. Section 1 of R.A. No. 9337 which amended
1997, the said Charter remains in effect. Section 27(C) of the NIRC of 1997); thus, it is still in effect. Guided by
the doctrinal teachings in resolving the case at bench, it is without a
Thus, income derived by PAGCOR from its gaming doubt that, like PAGCOR, its contractees and licensees remain
operations such as the operation and licensing of gambling casinos, exempted from the payment of corporate income tax and other taxes
gaming clubs and other similar recreation or amusement places, since the law is clear that said exemption inures to their benefit.
gaming pools and related operations is subject only to 5% franchise
tax, in lieu of all other taxes, including corporate income tax. The We adhere to the cardinal rule in statutory construction that
Court concluded that the CIR committed grave abuse of discretion when the law is clear and free from any doubt or ambiguity, there is
amounting to lack or excess of jurisdiction when it issued RMC No. 33- no room for construction or interpretation. As has been our consistent
2013 subjecting both income from gaming operations and other ruling, where the law speaks in clear and categorical language, there is
related services to corporate income tax and 5% franchise tax no occasion for interpretation; there is only room for
considering that it unduly expands the Court's Decision dated 15 application.23chanrobleslaw
March 2011 without due process, which creates additional burden upon
PAGCOR. As the PAGCOR Charter states in unequivocal terms that
exemptions granted for earnings derived from the operations
Noticeably, however, the High Court in the abovementioned conducted under the franchise specifically from the payment of any
case intentionally did not rule on the issue of whether or not PAGCOR's tax, income or otherwise, as well as any form of charges, fees or
tax privilege of paying only the 5% franchise tax in lieu of all other levies, shall inure to the benefit of and extend to corporation(s),
taxes inures to the benefit of third parties with contractual relationship association(s), agency(ies), or individual(s) with whom the PAGCOR or
with it in connection with the operation of casinos, such as petitioner operator has any contractual relationship in connection with the
herein. The Court sitting En Bane simply stated that: operations of the casino(s) authorized to be conducted under this
Franchise, so it must be that all contractees and licensees of PAGCOR,
The resolution of the instant petition is limited to clarifying the tax upon payment of the 5% franchise tax, shall likewise be exempted
treatment of [PAGCOR's] income vis-a-vis our Decision dated March from all other taxes, including corporate income tax realized from the
15, 2011. This Decision (dated 10 December 2014) is not meant to operation of casinos.
expand our original Decision (dated 15 March 2011) by delving into
new issues involving [PAGCOR's] contractees and licensees. For the same reasons that made us conclude in the 10
December 2014 Decision of the Court sitting En Banc in G.R. No.
For one, the latter are not parties to the instant case, and may not 215427 that PAGCOR is subject to corporate income tax for "other
therefore stand to benefit or bear the consequences if this resolution. related services", we find it logical that its contractees and licensees
For another, to answer the fourth issue raised by [PAGCOR] relative to shall likewise pay corporate income tax for income derived from such
its contractees and licensees would be downright premature and "related services."
iniquitous as the same would effectively countenance sidesteps to
judicial process.22 Simply then, in this case, we adhere to the principle that
since the statute is clear and free from ambiguity, it must be given its
Bearing in mind the parties involved and the similarities of the issues literal meaning and applied without attempted interpretation. This is
submitted in the present case, we are now presented with the prospect the plain meaning rule or verba legis, as expressed in the maxim index
of finally resolving the confusion caused by the amendments animi sermo or speech is the index of intention.24chanrobleslaw
introduced by RA No. 9337 to the NIRC of 1997, and the subsequent
issuance of RMC No. 33-2013, affecting the tax regime not only of
PAGCOR but also its contractees and licensees under the existing laws

Plainly, too, upon payment of the 5% franchise tax, included in gross income and shall be exempt from taxation under this
petitioner's income from its gaming operations of gambling casinos, Title:
gaming clubs and other similar recreation or amusement places, and
gaming pools, defined within the purview of the aforesaid section, is "xxx
not subject to corporate income tax.
"(7) Miscellaneous Items. — "xxx
"(e) 13th Month Pay and Other Benefits. — Gross benefits received by
PRIZES AND AWARDS officials and employees of public and private entities: Provided,
Sec 32 (B) Exclusions from Gross Income. - The following items however, That the total exclusion under this subparagraph shall not
shall not be included in gross income and shall be exempt from exceed eighty-two thousand pesos (P82,000) (NOW 90,000
taxation under this title UNDER TRAIN LAW) which shall cover:
xxx
"xxx
(c) Prizes and Awards - Prizes and awards made primarily in
recognition of "(iv) Other benefits such as productivity incentives and Christmas
i. religious, bonus: Provided, That every three (3) years after the effectivity of this
ii. charitable, Act, the President of the Philippines shall adjust the amount herein
iii. scientific, stated to its present value using the Consumer Price Index (CPI), as
iv. educational, published by the National Statistics Office (NSO)."
v. artistic,
vi. literary, or Section 2. Implementing Rules and Regulations. — The Secretary of
vii. civic achievement Finance shall promulgate the necessary rules and regulations for the
faithful and effective implementation of the provisions of this Act:
but only if: Provided, That, the failure of the Secretary of Finance to promulgate
the said rules and regulations shall not prevent the implementation of
1. The recipient was selected without any action on this Act upon its effectivity.
his part to enter the contest or proceeding; and
Section 3. Repealing Clause. — All laws, orders, issuances, circulars,
2. The recipient is not required to render substantial rules and regulations or parts thereof which are inconsistent with the
future services as a condition to receiving the prize or provisions of this Act are hereby repealed or modified accordingly.
award.
(d) Prizes and Awards in Sports Competition. - INCOME TAX RATES
All prizes and awards granted to athletes in PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS
1. local and SEC 27(B)
2. international sports competitions and
3. tournaments (B) Proprietary Educational Institutions and Hospitals. –
whether held in the Philippines or abroad Proprietary educational institutions and hospitals
and sanctioned by their national sports associations.  which are nonprofit
 shall pay a tax of ten percent (10%)
 on their taxable income
CHARITY SWEEPSTAKES EXEMPTION AMENDED BY TRAIN
except those covered by Subsection (D) hereof:
Sec 25(B) as amended
and other winnings amounting to P 10,000 or less from Philippine Provided, that if the gross income from
Charity Sweepstakes and Lotto winnings shall be exempt, 1. unrelated trade,
derived from sources within the Philippines 2. business or
3. other activity exceeds fifty percent (50%)
 of the total gross income
13th MONTH PAY RA 10653  derived by such educational institutions or
hospitals
REPUBLIC ACT No. 10653  from all sources,
AN ACT ADJUSTING THE 13th MONTH PAY AND OTHER the tax prescribed in Subsection (A) hereof shall be imposed on the
BENEFITS CEILING EXCLUDED FROM THE COMPUTATION OF entire taxable income.
GROSS INCOME FOR PURPOSES OF INCOME TAXATION,
AMENDING FOR THE PURPOSE SECTION 32(B), CHAPTER VI OF For purposes of this Subsection, the term
THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED 'unrelated trade, business or other activity' means
 any trade, business or other activity,
Be it enacted by the Senate and House of Representatives of the  the conduct of which is not substantially related
Philippines in Congress assembled:  to the exercise or performance
 by such educational institution or hospital of its primary
Section 1. Section 32(B), Chapter VI of the National Internal Revenue purpose or function.
Code of the Philippines (Republic Act No. 8424) is hereby amended as
follows: A "Proprietary educational institution" is
 any private school maintained and administered
 by private individuals or groups
"SEC. 32. Gross Income. —  with an issued permit to operate from the
"x x x a. Department of Education,

b. Culture and Sports (DECS), or
"(B) Exclusions from Gross Income. — The following items shall not be c. the Commission on Higher Education (CHED), or
d. the Technical Education and Skills Development Authority

(TESDA), as the case may be, in accordance with existing  for the purpose of marketing the products of its members
laws and regulations 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;
EXEMPTIONS FROM TAX ON CORPORATIONS Notwithstanding the provisions in the preceding paragraphs,
SEC 30  the income of whatever kind and character
SEC. 30 Exemptions from Tax on Corporations –  of the foregoing organizations from any of their properties,
The following organizations shall not be taxed under this Title in 1. real or
respect to income received by them as such: 2. personal, or
(A) Labor, agricultural or horticultural organization not organized 3. from any of their activities conducted for profit
principally for profit;
regardless of the disposition made of such income,
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock shall be subject to tax imposed under this Code.
organized and operated for mutual purposes and without
profit;
(C) A beneficiary society, order or association, operating for the CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26, 2012]
exclusive benefit of the members such as a
DOCTRINE: A proprietary non-profit hospital is subject to 10% tax
1. fraternal organization operating under the lodge under Section 27(B) of the Tax Code. FACTS: St. Lukes Medical Center
system, or is a hospital organized as a non-stock and non-profit corporation.
2. mutual aid association or a
3. nonstock corporation organized by employees providing It admits both paying and non-paying patients.
for the
 payment of life, The CIR claimed that St. Lukes was liable for income tax at 10% as
 sickness, provided under Section 27(B)10 of the NIRC. St. Lukes argues that it
 accident, or is a non-stock, non-profit institution for charitable and social welfare
purposes exempt from income tax under Section 30(E) and (G) of the
other benefits exclusively to the members of such society, NIRC.11
 order, or
 association, or ISSUE:
 nonstock corporation or their dependents; WON St Lukes can claim full tax exemption under Sec 30(NO)
(D) Cemetery company owned and operated exclusively for the HELD: St. Lukes cannot claim full tax exemption under Section 30
benefit of its members; because it has paying patients and this is notwithstanding the fact that
it is a non-profit hospital. For Section 27(B) to apply, the hospital
(E) Nonstock corporation or association organized and operated must be non-profit which means that no net income or asset
exclusively for religious, charitable, scientific, athletic, or accrues to or benefits any member or specific person and all
cultural purposes, or for the rehabilitation of veterans, no the activities of the hospital are non-profit.
part of its net income or asset shall belong to or inures to
the benefit of any member, organizer, officer or any specific On the other hand, Section 30(E) and (G), while providing for an
person; exemption is qualified by the last paragraph which, in turn, provides
that activities conducted for profit shall be taxable. Section 30(E) and
(F) Business league chamber of commerce, or board of trade,
not organized for profit and no part of the net income of (G) requires that an institution be operated exclusively for charitable
which inures to the benefit of any private stock-holder, or purposes to be completely exempt from income tax. In this case,
individual; however, St. Lukes is not operated exclusively for charitable purposes
insofar as its revenues from paying patients are concerned. Such
(G) Civic league or organization not organized for profit but revenue is subject to income tax at 10% under Section 27(B).
operated exclusively for the promotion of social welfare
(H) A nonstock and nonprofit educational institution;

With regard to income taxation, the statement of the Court must be
(I) Government educational institution;
noted: ―Non-profit does not necessarily mean charitable.‖
(J)
This is affirmed in the constitutional provision with regard to non-
stock, non-profit educational institutions.
1. Farmers' or other mutual typhoon or fire insurance
company,
For their income to be exempt, their revenues and assets must be
2. mutual ditch or irrigation company,
used
3. mutual or cooperative telephone company, or
1. actually,
4. like organization
2. directly, and
3. exclusively for educational purposes.
of a purely local character, the income of which consists solely of
 assessments,
The rule now can be laid down as follows:
 dues, and
1. For the income of a non-stock, non-profit corporation to be
 fees collected from members
totally exempt, it must be organized and operated
 for the sole purpose of meeting its expenses; and
exclusively for educational or charitable purposes.
(K)
2. In such case, it will fall within the coverage of Section
1. Farmers', fruit growers', or
30(E) and (G) of the Tax Code.
2. like association
 organized and operated as a sales agent

3. However, if it conducts for-profit activities, like the

admission of paying patients, it will not be exempt with Thus, as a matter of efficiency, the government forgoes
regard to that particular income. taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is the
4. Section 27(B) will apply and the income will be taxed at the rationale for the tax exemption of charitable institutions. The loss of
preferential rate of 10%. taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the
Treasury.
CIR V ST LUKES 2017 CASE
Charitable institutions, however, are not ipso facto entitled
SLMC is liable for income tax under to a tax exemption. The requirements for a tax exemption are
Section 27(B) of the 1997 NIRC insofar specified by the law granting it. The power of Congress to tax implies
as its revenues from paying patients are the power to exempt from tax. Congress can create tax exemptions,
concerned subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all
The issue of whether SLMC is liable for income tax under the Members of Congress.' The requirements for a tax exemption are
Section 27(B) of the 1997 NIRC insofar as its revenues from paying strictly construed against the taxpayer because an exemption restricts
patients are concerned has been settled in G.R. Nos. 195909 and the collection of taxes necessary for the existence of the government.
195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.),39 where the Court ruled that: The Court in Lung Center declared that the Lung Center of
the Philippines is a charitable institution for the purpose of exemption
from real property taxes. This ruling uses the same premise as
x x x We hold that Section 27(B) of the NIRC does not remove the Hospital de San Juan and Jesus Sacred Heart College which says that
income tax exemption of proprietary non-profit hospitals under Section receiving income from paying patients does not destroy the charitable
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) nature of a hospital.
on the other hand, can be construed together without the removal of
such tax exemption.
As a general principle, a charitable institution does not lose
The effect of the introduction of Section 27(B) is to subject its character as such and its exemption from taxes simply because it
the taxable income of two specific institutions, namely, proprietary derives income from paying patients, whether outpatient, or confined
non-profit educational institutions and proprietary non-profit hospitals, in the hospital, or receives subsidies from the government, so long as
among the institutions covered by Section 30, to the 10% preferential the money received is devoted or used altogether to the charitable
rate under Section 27(B) instead of the ordinary 30% corporate rate object which it is intended to achieve; and no money inures to the
under the last paragraph of Section 30 in relation to Section 27(A)(l). private benefit of the persons managing or operating the institution.
Section 27(B) of the NIRC imposes a 10% preferential tax For real property taxes, the incidental generation of income
rate on the income of (1) proprietary non-profit educational is permissible because the test of exemption is the use of the property.
institutions and (2) proprietary non-profit hospitals. The only The Constitution provides that '[c]haritable institutions, churches and
qualifications for hospitals are that they must be proprietary and non- personages or convents appurtenant thereto, mosques, non-profit
profit. 'Proprietary' means private, following the definition of a cemeteries, and all lands, buildings, and improvements, actually,
'proprietary educational institution' as 'any private school maintained directly, and exclusively used for religious, charitable, or educational
and administered by private individuals or groups' with a government purposes shall be exempt from taxation.' The test of exemption is not
permit. 'Non-profit' means no net income or asset accrues to or strictly a requirement on the intrinsic nature or character of the
benefits any member or specific person, with all the net income or institution. The test requires that the institution use property in a
asset devoted to the institution's purposes and all its activities certain way, i.e., for a charitable purpose. Thus, the Court held that
conducted not for profit. the Lung Center of the Philippines did not lose its charitable character
when it used a portion of its lot for commercial purposes. The effect of
'Non-profit' does not necessarily mean 'charitable.' In failing to meet the use requirement is simply to remove from the tax
Collector of Internal Revenue v. Club Filipino, Inc. de Cebu, this Court exemption that portion of the property not devoted to charity.
considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily The Constitution exempts charitable institutions only from
funded by membership fees and dues. If it had profits, they were used real property taxes. In the NIRC, Congress decided to extend the
for overhead expenses and improving its golf course. The club was exemption to income taxes. However, the way Congress crafted
non-profit because of its purpose and there was no evidence that it Section 30(E) of the NIRC is materially different from Section 28(3),
was engaged in a profit-making enterprise. Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the
The sports club in Club Filipino, Inc. de Cebu may be non- other hand, Section 28(3), Article VI of the Constitution does not
profit, but it was not charitable. Tue Court defined 'charity' in Lung define a charitable institution, but requires that the institution
Center of the Philippines v. Quezon City as 'a gift, to be applied 'actually, directly and exclusively' use the property for a charitable
consistently with existing laws, for the benefit of an indefinite number purpose.
of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish Section 30(E) of the NIRC provides that a charitable institution must
themselves in life or [by] otherwise lessening the burden of be:
government.' A nonprofit club for the benefit of its members fails this
test. An organization may be considered as non-profit if it does not (1) A non-stock corporation or association;
distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such (2) Organized exclusively for charitable purposes;
institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30. (3) Operated exclusively for charitable purposes; and
To be a charitable institution, however, an organization must (4) No part of its net income or asset shall belong to or inure
meet the substantive test of charity in Lung Center. The issue in Lung to the benefit of any member, organizer, officer or any
Center concerns exemption from real property tax and not income tax. specific person.
However, it provides for the test of charity in our jurisdiction. Charity
is essentially a gift to an indefinite number of persons which lessens
the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would
otherwise fall on the shoulders of government.

Thus, both the organization and operations of the charitable Services to Patients' in contrast to its 'Free Services' expenditure of
institution must be devoted 'exclusively' for charitable purposes. The ₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed
organization of the institution refers to its corporate form, as shown by the following 'calculation' to support its claim that 65.20% of its
its articles of incorporation, by-laws and other constitutive documents. 'income after expenses was allocated to free or charitable services' in
Section 30(E) of the NIRC specifically requires that the corporation or 1998.
association be non-stock, which is defined by the Corporation Code as
'one where no part of its income is distributable as dividends to its In Lung Center, this Court declared:
members, trustees, or officers' and that any profit 'obtain[ed] as an
incident to its operations shall, whenever necessary or proper, be used '[e]xclusive' is defined as possessed and enjoyed to the exclusion of
for the furtherance of the purpose or purposes for which the others; debarred from participation or enjoyment; and 'exclusively' is
corporation was organized.' defined, 'in a manner to exclude; as enjoying a privilege exclusively.' .
. . The words 'dominant use' or 'principal use' cannot be substituted for
However, under Lung Center, any profit by a charitable the words 'used exclusively' without doing violence to the Constitution
institution must not only be plowed back 'whenever necessary or and thelaw. Solely is synonymous with exclusively.
proper,' but must be 'devoted or used altogether to the charitable
object which it is intended to achieve.' The Court cannot expand the meaning of the words
'operated exclusively' without violating the NIRC. Services to paying
The operations of the charitable institution generally refer to patients are activities conducted for profit. They cannot be considered
its regular activities. Section 30(E) of the NIRC requires that these any other way. There is a 'purpose to make profit over and above the
operations be exclusive to charity. There is also a specific requirement cost' of services. The ₱l.73 billion total revenues from paying patients
that 'no part of [the] net income or asset shall belong to or inure to is not even incidental to St. Luke's charity expenditure of ₱2l8,187,498
the benefit of any member, organizer, officer or any specific person.' for non-paying patients.
The use of lands, buildings and improvements of the institution is but a
part of its operations. St. Luke's claims that its charity expenditure of
₱218,187,498 is 65.20% of its operating income in 1998. However, if
There is no dispute that St. Luke's is organized as a non- a part of the remaining 34.80% of the operating income is reinvested
stock and non-profit charitable institution. However, this does not in property, equipment or facilities used for services to paying and
automatically exempt St. Luke's from paying taxes. This only refers to non-paying patients, then it cannot be said that the income is 'devoted
the organization of St. Luke's. Even if St. Luke's meets the test of or used altogether to the charitable object which it is intended to
charity, a charitable institution is not ipso facto tax exempt. achieve.'
To be exempt from real property taxes, Section 28(3), The income is plowed back to the corporation not entirely for
Article VI of the Constitution requires that a charitable institution use charitable purposes, but for profit as well. In any case, the last
the property 'actually, directly and exclusively' for charitable purposes. paragraph of Section 30 of the NIRC expressly qualifies that income
To be exempt from income taxes, Section 30(E) of the NIRC requires from activities for profit is taxable 'regardless of the disposition made
that a charitable institution must be 'organized and operated of such income.'
exclusively' for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution
be 'operated exclusively' for social welfare. XXX
The Court finds that St. Luke's is a corporation that is not 'operated
However, the last paragraph of Section 30 of the NIRC qualifies the exclusively' for charitable or social welfare purposes insofar as its
words 'organized and operated exclusively' by providing that: revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption,
Notwithstanding the provisions in the preceding paragraphs, the but also on the clear and plain text of Section 30(E) and (G).
income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their Section 30(E) and (G) of the NIRC requires that an
activities conducted for profit regardless of the disposition made of institution be 'operated exclusively' for charitable or social welfare
such income, shall be subject to tax imposed under this Code. purposes to be completely exempt from income tax. An institution
under Section 30(E) or (G) does not lose its tax exemption if it earns
In short, the last paragraph of Section 30 provides income from its for-profit activities. Such income from for-profit
that if a tax exempt charitable institution conducts 'any' activities, under the last paragraph of Section 30, is merely subject to
activity for profit, such activity is not tax exempt even as its income tax, previously at the ordinary corporate rate but now at the
not-for-profit activities remain tax exempt. This paragraph preferential 10% rate pursuant to Section 27(B).
qualifies the requirements in Section 30(E) that the '[n]on-stock
corporation or association [must be] organized and operated A tax exemption is effectively a social subsidy granted by
exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the State because an exempt institution is spared from sharing in the
the requirement in Section 30(G) that the civic organization must be expenses of government and yet benefits from them. Tax exemptions
'operated exclusively' for the promotion of social welfare. for charitable institutions should therefore be lin1ited to institutions
beneficial to the public and those which improve social welfare. A
Thus, even if the charitable institution must be 'organized profit-making entity should not be allowed to exploit this subsidy to
and operated exclusively' for charitable purposes, it is nevertheless the detriment of the government and other taxpayers.
allowed to engage in 'activities conducted for profit' without losing its
tax exempt status for its not-for-profit activities. The only consequence St. Luke's fails to meet the requirements under Section
is that the 'income of whatever kind and character' of a charitable 30(E) and (G) of the NIRC to be completely tax exempt from all its
institution 'from any of its activities conducted for profit, regardless of income. However, it remains a proprietary non-profit hospital under
the disposition made of such income, shall be subject to tax.' Prior to Section 27(B) of the NIRC as long as it does not distribute any of its
the introduction of Section 27(B), the tax rate on such income from profits to its members and such profits are reinvested pursuant to its
for-profit activities was the ordinary corporate rate under Section corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
27(A). With the introduction of Section 27(B), the tax rate is now entitled to the preferential tax rate of 10% on its net income from its
10%. for-profit activities.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services

to paying patients. It cannot be disputed that a hospital which receives
approximately ₱l.73 billion from paying patients is not an institution
'operated exclusively' for charitable purposes. Clearly, revenues from
paying patients are income received from 'activities conducted for
profit.' Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱l,730,367,965 as 'Revenues from

 A minimum corporate income tax of 2% of gross income

St. Luke's is therefore liable for deficiency income tax in shall be imposed on a domestic corporation and resident
1998 under Section 27(B) of the NIRC. However, St. Luke's has good foreign corporation beginning on the fourth taxable year
reasons to rely on the letter dated 6 June 1990 by the BIR, which immediately following the year in which such corporation
opined that St. Luke's is 'a corporation for purely charitable and social commenced its business operations when:
welfare purposes' and thus exempt from income tax. In Michael J 1. the MCIT is greater than the RCIT for the
Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that taxable year.
'good faith and honest belief that one is not subject to tax on the basis 2. such operation has zero or negative taxable
of previous interpretation of government agencies tasked to implement income
the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'40 (see Section 27(E), Section 28(A)(2), Tax Code and RR 9-98 [August
5, 1998], as amended by RR 12-2007 [October 10, 2007])
A careful review of the pleadings reveals that there is no
countervailing consideration for the Court to revisit its aforequoted
ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Q: Which corporate taxpayers can be subject to MCIT?
Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine 1. Domestic corporation
of stare decisis, which states that "[o]nce a case has been decided in 2. Resident Foreign corporation
one way, any other case involving exactly the same point at issue x x
x should be decided in the same manner,"41 the Court finds that SLMC Q: Which corporate taxpayers are exempted from MCIT?
is subject to 10% income tax insofar as its revenues from paying 1. Resident foreign corporations engaged in business as
patients are concerned. international carriers
2. Resident foreign corporations engaged as OBUs
To be clear, for an institution to be completely exempt 3. Resident foreign corporations engaged in business as
from income tax, Section 30(E) and (G) of the 1997 NIRC ROHQs
requires said institution to operate exclusively for charitable or 4. Firms that are taxed under a special income tax regime.
social welfare purpose. But in case an exempt institution under
Section 30(E) or (G) of the said Code earns income from its for- Legal Basis Sec 27(e)
profit activities, it will not lose its tax exemption. (E) Minimum Corporate Income Tax on Domestic Corporations.
-
However, its income from for-profit activities will be subject to (1) Imposition of Tax –
income tax at the preferential 10% rate pursuant to Section
27(B) thereof. A minimum corporate income tax of
 two percent (2%0 of the gross income as of the end of the
taxable year, as defined herein,
Review on the definition of a charitable institution (Lung Center Case)  is hereby imposed on a corporation taxable under this Title,
 beginning on the fourth taxable year immediately
To determine whether an enterprise is a charitable institution/entity or  following the year in which such corporation commenced its
not, the elements which should be considered include business operations,
1. the statute creating the enterprise,  when the minimum income tax is greater than the tax
2. its corporate purposes, computed under Subsection (A) of this Section for the
3. its constitution and by-laws, taxable year.
4. the methods of administration,
5. the nature of the actual work performed,
6. the character of the services rendered, (2) Carry Forward of Excess Minimum Tax. -
7. the indefiniteness of the beneficiaries, and Any excess of the minimum corporate income tax
8. the use and occupation of the properties.  over the normal income tax as computed
 under Subsection (A) of this Section
 shall be carried forward and credited against the normal
In the legal sense, income tax for the three (3) immediately succeeding taxable
years.
a charity may be fully defined as

• a gift, to be applied consistently with existing
laws, (3) Relief from the Minimum Corporate Income Tax Under
• for the benefit of an indefinite number of persons, Certain Conditions. -
either
The Secretary of Finance is hereby authorized to suspend the
1. by bringing their minds and hearts under the influence of imposition of the minimum corporate income tax on
education or religion,
2. by assisting them to establish themselves in life or a. any corporation which suffers losses on account of
3. otherwise lessening the burden of government. prolonged labor dispute, or
b. because of force majeure, or because of legitimate
It may be applied to almost anything that tend to promote the well- business reverses.
doing and well-being of social man. It embraces the improvement and
promotion of the happiness of man. The word charitable is not The Secretary of Finance is hereby authorized to promulgate,
restricted to relief of the poor or sick.  upon recommendation of the Commissioner,
 the necessary rules and regulation
The test of a charity and a charitable organization are in law the same.  that shall define the terms and conditions
The test whether an enterprise is charitable or not is whether it exists  under which he may suspend the imposition of the minimum
to carry out a purpose reorganized in law as charitable or whether it is corporate income tax in a meritorious case.
maintained for gain, profit, or private advantage.
MINIMUM CORPORATE INCOME TAX
Q: What is the minimum corporate income tax (MICT?)

Prolonged labor losses arising from a strike staged

by the employees which lasted for  The Supreme Court noted there is a distinction between
more than 6 moths within a taxable taxable income, which is the basis for basic corporate
period income tax; and gross income, which is the basis for the
MCIT under Section 27(E).
which has caused the temporary
shutdown of the business operations  The two terms have their respective technical meanings, and
force majeure cause due to an act of irresistible cannot be used interchangeably. Hence, the basic corporate
force as by income tax cannot cover MCIT since the basis for the first is
1. ―act of God like the annual net taxable income; while the basis for the
a. Lightning second is gross. Thus, MCIT is included in ―all other taxes‖
b. Earthquake from which PAL is exempted.
c. Storm Q: For purposes of MCIT, what is gross income?
d. Flood and the lije
As provided in RR 9-98 [August 5, 1998], as amended by RR 12-2007
this term shall include armed [October 10, 2007]:
conflicts like war or insurgency  For purposes of MCIT, the term "gross income" means gross
Legitimate business include substantial losses sustained sales less sales returns, discounts, and allowances and cost
reverses due to of goods sold, in case of sale of goods, or gross revenue less
1. Fire sales returns, discounts, allowances and cost of
2. Robbery services/direct cost, in case of sale of services.
3. Theft
4. Embezzlement  Note: ―Cost of goods sold‖ shall include all business
5. For other economic reason expenses directly incurred to produce the merchandise to
bring them to their present location and use while ―cost of
as determined by the secretary of services‖ shall mean all direct costs and expenses
Finance necessarily incurred to provide the services required by the
customs and clients.102
 As noted by the Supreme Court in COMMISSIONER VS. PAL

[JULY 7, 2009], inclusions and exclusions/deductions from
FROM PM REYES gross income for MCIT purposes are limited to those directly
arising from the conduct of the taxpayer’s business. It is
Q: What is the purpose of MCIT? thus more limited than the gross income used in the
 As held in the case of CHAMBER OF REAL ESTATE AND computation of basic corporate income tax.
BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH 9,
2010]), the primary purpose of any legitimate business is to
earn a profit. Q: What if apart from the income from core business activities,
other items of gross income are realized or earned by the
 Continued and repeated losses after operations of a corporation, are these items included as part of gross income?
corporation or consistent reports of minimal net income
render its financial statements and its tax payments suspect.  Yes. If apart from deriving income from these core business
For sure, certain tax avoidance schemes resorted to by activities there are other items of gross income realized or
corporations are allowed in our jurisdiction. earned by the taxpayer during the taxable period which are
subject to the normal corporate income tax, the same items
 The MCIT serves to put a cap on such tax shelters. As a tax must be included as part of the taxpayer's gross income for
on gross income, it prevents tax evasion and minimizes tax computing MCIT
avoidance schemes achieved through sophisticated and
artful manipulations of deductions and other stratagems. Q: Discuss the applicability of the MCIT where the corporation
Since the tax base was broader, the tax rate was lowered. is governed by both under the regular income tax system and
special tax income tax system.
Q: Is MCIT a tax on capital and an additional tax  In the case of a domestic corporation whose operations or
imposition?(NO) activities are partly covered by the regular income tax
 The Supreme Court in CHAMBER OF REAL ESTATE AND system and partly covered under a special income tax
BUILDER’S ASSOCIATION, INC. V. ROMULO [MARCH 9, system, the MCIT shall apply on operations covered by the
2010] answered this in the negative. regular income tax system. (see Section 2.27(E)(1), RR No.
9-98)
 The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by the corporation in the sale of Note: So, in the case of a BOI-registered enterprise, its ―registered‖
its goods, i.e. the cost of goods and other direct expenses activity shall be subject to the special tax regime tax while its
from gross sales. Thus, the capital is not being taxed. ―unregistered‖ activity shall be subject to the RCIT.
Furthermore, the MCIT is not an additional tax imposition. It
is imposed in lieu of the RCIT.
Q: What is the difference between RCIT and MCIT?

 The tax base of RCIT is taxable income while the tax base of
MCIT is gross income.
 In COMMISSIONER VS. PAL [JULY 7, 2009], PAL under PD

1590 (its franchise) was liable only for basic corporate
income tax or franchise tax, whichever is lower and this is in
lieu of all other taxes, except real property.
 The CIR contends that PAL is subject to MCIT while it was

the contention of PAL that the MCIT was included in the ―in
lieu of all other taxes‖ provision.

FOREIGN CARRIERS CASES UNDER INTERNATIONAL CARRIERS

a. INTERNATIONAL CARRIERS
SOUTH AFRICAN AIRWAYS V CIR FEB 16, 2010
SEC 28 A(3)
(3) International Carrier. - Moreover, an examination of the subject provisions of the law would
show that petitioners interpretation of those provisions is erroneous.
An international carrier doing 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: Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(a) International Air Carrier. -
(A) Tax on Resident Foreign Corporations. -
"Gross Philippine Billings" refers to the (1) In General. - Except as otherwise provided in this Code, a
1. amount of gross revenue derived from corporation organized, authorized, or existing under the laws of any
a. carriage of persons, foreign country, engaged in trade or business within the Philippines,
b. excess baggage, shall be subject to an income tax equivalent to thirty-five percent
c. cargo and (35%) of the taxable income derived in the preceding taxable year
d. mail from all sources within the Philippines: provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent
originating from the Philippines (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%), and effective January 1, 2000 and thereafter, the rate
1. in a continuous and uninterrupted flight, shall be thirty-two percent (32%).
2. irrespective of the place of sale or issue
3. and the place of payment of the ticket or passage xxxx
document:
(3) International Carrier. - An international carrier doing business in
Provided, That tickets the Philippines shall pay a tax of two and one-half percent (2 1/2%) on
a. revalidated, its Gross Philippine Billings as defined hereunder:
b. exchanged and/or
c. indorsed to another international airline
(a) International Air Carrier. Gross Philippine Billings refers to the
form part of the Gross Philippine Billings if the passenger amount of gross revenue derived from carriage of persons, excess
boards a plane in a port or point in the Philippines: baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or
Provided, further, That issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to
1. for a flight which originates from the Philippines, another international airline form part of the Gross Philippine Billings if
2. but transshipment of passenger takes place the passenger boards a plane in a port or point in the Philippines:
3. at any port outside the Philippines on another airline, Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port
only the aliquot portion of the cost of the ticket outside the Philippines on another airline, only the aliquot portion of
 corresponding to the leg flown from the Philippines to the the cost of the ticket corresponding to the leg flown from the
point of transshipment Philippines to the point of transshipment shall form part of Gross
 shall form part of Gross Philippine Billings. Philippine Billings.
(b) International Shipping. - Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign
"Gross Philippine Billings" means corporations are liable for 32% tax on all income from sources within
 gross revenue whether for the Philippines. Sec. 28(A)(3) is an exception to this general rule.
a. passenger,
b. cargo or An exception is defined as that which would otherwise be
c. mail included in the provision from which it is excepted. It is a clause which
exempts something from the operation of a statue by express
originating from the Philippines up to final destination, regardless of words.[9] Further, an exception need not be introduced by the words
except or unless. An exception will be construed as such if it removes
1. the place of sale or something from the operation of a provision of law.[10]
2. payments of the passage or
3. freight documents. CASE AT BAR
In the instant case, the general rule is that resident foreign

corporations shall be liable for a 32% income tax on their income from
within the Philippines, except for resident foreign corporations
that are international carriers that derive income from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines which shall be taxed at 2 1/2% of their Gross Philippine
Billings. Petitioner, being an international carrier with no flights
originating from the Philippines, does not fall under the exception. As
such, petitioner must fall under the general rule. This principle is
embodied in the Latin maxim, exception firmat regulam in casibus non
exceptis, which means, a thing not being excepted must be regarded
as coming within the purview of the general rule.[11]
To reiterate, the correct interpretation of the above

provisions is that, if an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from
other activities in the country will be taxed at the rate of 32% of such
income.

CIR V BRITISH OVERSEAS APRIL 30, 1987 intend the enumeration to be exclusive. It merely directs that the
types of income listed therein be treated as income from sources
ISSUE within the Philippines. A cursory reading of the section will show that it
1. Whether or not the revenue derived by private does not state that it is an all-inclusive enumeration, and that no other
respondent British Overseas Airways Corporation kind of income may be so considered. " 10
(BOAC) from sales of tickets in the Philippines for air
transportation, while having no landing rights here, BOAC, however, would impress upon this Court that income
constitute income of BOAC from Philippine sources, and, derived from transportation is income for services, with the result that
accordingly, taxable. the place where the services are rendered determines the source; and
since BOAC's service of transportation is performed outside the
Philippines, the income derived is from sources without the Philippines
and, therefore, not taxable under our income tax laws. The Tax Court
Next, we address ourselves to the issue of whether or not upholds that stand in the joint Decision under review.
the revenue from sales of tickets by BOAC in the Philippines
constitutes income from Philippine sources and, accordingly, taxable The absence of flight operations to and from the Philippines
under our income tax laws. is not determinative of the source of income or the site of income
taxation. Admittedly, BOAC was an off-line international airline at the
The Tax Code defines "gross income" thus: time pertinent to this case. The test of taxability is the "source"; and
the source of an income is that activity ... which produced the income.
"Gross income" includes gains, profits, and income derived
from salaries, wages or compensation for personal service of whatever Unquestionably, the passage documentations in these cases
kind and in whatever form paid, or from profession, vocations, trades, were sold in the Philippines and the revenue therefrom was derived
business, commerce, sales, or dealings in property, whether real or from a activity regularly pursued within the Philippines. business a And
personal, growing out of the ownership or use of or interest in such even if the BOAC tickets sold covered the "transport of passengers and
property; also from interests, rents, dividends, securities, or the cargo to and from foreign cities", 12 it cannot alter the fact that
transactions of any business carried on for gain or profile, or gains, income from the sale of tickets was derived from the Philippines. The
profits, and income derived from any source whatever (Sec. 29[3]; word "source" conveys one essential idea, that of origin, and the origin
Emphasis supplied) of the income herein is the Philippines. 13
The definition is broad and comprehensive to include It should be pointed out, however, that the assessments
proceeds from sales of transport documents. "The words 'income from upheld herein apply only to the fiscal years covered by the questioned
any source whatever' disclose a legislative policy to include all income deficiency income tax assessments in these cases, or, from 1959 to
not expressly exempted within the class of taxable income under our 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No.
laws." Income means "cash received or its equivalent"; it is the 69, promulgated on 24 November, 1972, international carriers are now
amount of money coming to a person within a specific time ...; it taxed as follows:
means something distinct from principal or capital. For, while capital is
a fund, income is a flow. As used in our income tax law, "income" ... Provided, however, That international carriers shall pay a tax of 2-
refers to the flow of wealth. 6 ½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax
Code).
The records show that the Philippine gross income of BOAC for the
fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7 Presidential Decree No. 1355, promulgated on 21 April, 1978, provided
a statutory definition of the term "gross Philippine billings," thus:
Did such "flow of wealth" come from "sources within the Philippines",
... "Gross Philippine billings" includes gross revenue realized from
The source of an income is the property, activity or service uplifts anywhere in the world by any international carrier doing
that produced the income. 8 For the source of income to be considered business in the Philippines of passage documents sold therein, whether
as coming from the Philippines, it is sufficient that the income is for passenger, excess baggage or mail provided the cargo or mail
derived from activity within the Philippines. In BOAC's case, the sale of originates from the Philippines. ...
tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made The foregoing provision ensures that international airlines
here in Philippine currency. The site of the source of payments is the are taxed on their income from Philippine sources. The 2-½ % tax on
Philippines. The flow of wealth proceeded from, and occurred within, gross Philippine billings is an income tax. If it had been intended as an
Philippine territory, enjoying the protection accorded by the Philippine excise or percentage tax it would have been place under Title V of the
government. In consideration of such protection, the flow of wealth Tax Code covering Taxes on Business.
should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When

issued by a common carrier, it constitutes the contract between the IMPROPERLY ACCUMULATED EARNINGS
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding Q: What is an improperly accumulated earnings tax?
obligation of the carrier to transport the passenger upon the terms and  This is the income tax imposed on a corporation if its
conditions set forth thereon. The ordinary ticket issued to members of earnings and profits are accumulated (undistributed) instead
the traveling public in general embraces within its terms all the of being divided and distributed to its stockholders.
elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9  An improperly accumulated earnings tax (IAET) equal to
10% is imposed for each taxable year on the improperly
True, Section 37(a) of the Tax Code, which enumerates items of gross accumulated taxable income of each corporation.
income from sources within the Philippines, namely: It is imposed on domestic corporations which are classified as closely-
(1) interest, held corporations
(2) dividends,
(3) service,
(4) rentals and royalties,
(5) sale of real property, and
(6) sale of personal property, does not mention income from the sale
of tickets for international transportation.
However, that does not render it less an income from

sources within the Philippines. Section 37, by its language, does not

Legal Basis SEC 29 Q: Define ―improperly accumulated taxable income.‖

SEC. 29. Imposition of Improperly Accumulated Earnings Tax – The term ―improperly accumulated taxable income‖ means taxable
income adjusted by:
(A) In General. -
1. Income exempt from tax
In addition to other taxes imposed by this Title, there is hereby 2. Income excluded from gross income
imposed for each taxable year 3. Income subject to final tax; and
 on the improperly accumulated taxable income of each 4. The amount of net operating loss carry-over deducted; and
corporation described in Subsection B hereof, an improperly 5. Reduced by the sum of:
accumulated earnings tax equal to ten percent (10%) of the
improperly accumulated taxable income. cralaw a. dividends actually or constructively paid; and
(B) Tax on Corporations Subject to Improperly Accumulated Earnings b. income tax paid for the taxable year
Tax. - c. amount reserved for the reasonable needs of the
(1) In General - The improperly accumulated earnings tax imposed in business117
the preceding Section shall apply to
 every corporation formed or availed In relation to 5(c), RMC 35-2011 [March 14, 2011] states that the
 for the purpose of avoiding the income tax amount that may be retained, taking into consideration the reasonable
 with respect to its needs of the business shall be 100% of the paid-up capital or the
amount contributed to the corporation representing the par value of
a. shareholders or the shares of stock. Any excess capital over and above the par shall be
b. the shareholders of any other corporation, excluded.
by permitting earnings and profits to accumulate instead of being

divided or distributed. Q: What is the purpose and nature of IAET?
 The imposition of IAET discouraged tax avoidance through
(2) Exceptions - The improperly accumulated earnings tax as corporate surplus accumulation. When corporations do not
provided for under this Section shall not apply to:. declare dividends, income taxes are not paid on the
(a) Publicly-held corporations; undeclared dividends received by the shareholders.
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.  The tax on improper accumulation of surplus is essentially a
(C) Evidence of Purpose to Avoid Income Tax. – penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could, in
(1) Prima Facie Evidence. - the fact that any corporation is a mere turn, be taxed (see CYNAMID PHILIPPINES INC VS. CA
holding company or investment company shall be prima facie evidence [JANUARY 20, 2000])
of a purpose to avoid the tax upon its shareholders or members.
(2) Evidence Determinative of Purpose. -  The IAET is being imposed in the nature of a penalty to the
The fact that the earnings or profits of a corporation are permitted to corporation for the improper accumulation of its earnings,
accumulate and as a form of deterrent to the avoidance of tax upon
 beyond the reasonable needs of the business shareholders who are supposed to pay dividends tax on the
 shall be determinative of the purpose to avoid the tax earnings distributed to them by the corporation (see RR 2-
 upon its shareholders or members 01 [FEBRUARY 12, 2001]).
 unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.
Q: What corporations are subject to IAET?
_________________________________________
(D) Improperly Accumulated Taxable Income - For purposes of 117 Added by RR 2-01.
this Section, the term 'improperly accumulated taxable income' means
taxable income' adjusted by:  As a general rule, the IAET shall apply to every corporation
formed or availed for the purpose of avoiding the income tax
(1) Income exempt from tax; with respect to its shareholders or the shareholders of any
(2) Income excluded from gross income; other corporation, by permitting earnings and profits
(3) Income subject to final tax; and accumulate instead of being divided or distributed.
(4) The amount of net operating loss carry-over deducted; And
reduced by the sum of:  As provided in RR 2-01, this refers to all domestic
corporations which are classified as closely held
corporations. A closely held corporation are those at least
(1) Dividends actually or constructively paid; and 50% in value of the outstanding capital stock or at least
(2) Income tax paid for the taxable year 50% of the total combined voting power of all classes of
stock is owned directly or indirectly by not more than 20
Provided, however, That for corporations using the calendar year individuals.
basis, the accumulated earnings under tax shall not apply on
improperly accumulated income as of December 31, 1997.
As exceptions, the IAET shall not apply to:
In the case of corporations adopting the fiscal year accounting period, 1. Publicly-held corporations
the improperly accumulated income not subject to this tax, 2. Banks and other non-bank financial intermediaries; and
 shall be reckoned, as of the end of the month 3. Insurance companies
 comprising the twelve (12)-month period of fiscal year 4. GPPs
1997-1998. 5. Non-taxable joint ventures
6. Enterprises registered under SEZs (see RR 2-01
(E) Reasonable Needs of the Business - [FEBRUARY 12, 2001]).
For purposes of this Section, the term 'reasonable needs of the
business'
 includes the reasonably anticipated needs of the business.

Q: What is the main factor to consider in holding a corporation 3. Earnings reserved for compliance with any loan or
liable for IAET? obligation established under a legitimate business
 The touchstone of the liability is the purpose behind the agreement
accumulation of the income and not the consequences of the 4. In case of subsidiaries of foreign corporations in the
accumulation Philippines, all undistributed earnings intended or
reserved for investments in the Philippines.
 Thus, if the failure to pay dividends is due to some other 5. Earnings required by law to be retained
causes, such as the use of undistributed earnings and profits
for the reasonable needs of the business, such purpose 6. Anticipated losses or reserves in business.
would not generally make the accumulated or undistributed
earnings subject to the tax.
Q: What is the ―Immediacy Test?‖
 However, if there is a determination that a corporation has  The Immediacy Test is used to determine the ―reasonable
accumulated income beyond the reasonable needs of the needs‖ of business‖ in order to justify an accumulation of
business, the 10% improperly accumulated earnings tax earnings.
shall be imposed. [see RR 2-01 [FEBRUARY 12, 2001]).
 Under this test, the term "reasonable needs of the business"
are hereby construed to mean the immediate needs of the
Q: What circumstances are indicative of a purpose to avoid the business, including reasonably anticipated needs.
income tax with respect to shareholders?
 The fact that any corporation is a mere holding company or  The corporation should be able to prove an immediate need
investment company shall be prima facie evidence of a for the accumulation of the earnings and profits, or the
purpose to avoid the tax upon its shareholders or members. direct correlation of anticipated needs to such accumulation
(see Section 29(C)(1), Tax Code) of profits.
 Moreover, the fact that the earnings or profits of a  Otherwise, such accumulation would be deemed to be not
corporation are permitted to accumulate beyond the for the reasonable needs of the business, and the penalty
reasonable needs (including reasonably anticipated needs) tax would apply.
of the business shall be determinative of the purpose to
avoid the tax upon its shareholders or members unless the
 In MANILA WINE MERCHANTS V. CIR [FEBRUARY 20,
corporation, by the clear preponderance of evidence shall
1984], Manila Wine Merchants (MWM) invested in several
prove the contrary (see Section 29(C)(2), Tax Code)
companies and bought shares in Wack Wack Golf and
Country Club and likewise acquired US Treasury Bills. CIR
RR 2-01 adds three more instances, namely:
found that MWM had unreasonably accumulated a surplus.
1. Investment of substantial earnings in unrelated business
On appeal, the CTA ruled that the purchase of shares were
or in stock or securities of an unrelated business
harmless.
2. Investment in bonds and other long term securities
3. Accumulation of earnings in excess of 100% of paid up
 However, the CTA also ruled that the purchase of US
capital
Treasury Bills was in no way related to the business of
 In CIR v. TUASON [MAY 15, 1989], the CIR assessed importing and selling wines and ordered MWM to pay IAET
Tuason, Inc. for IAET. The CIR presumed that when Tuason, on the said treasury bills.
Inc. accumulated profits, the purpose was to avoid the
income tax on its shareholders on the finding that it was a  One of the contentions of MWM was that it will be used to
mere holding or investment company. aid its importations The Supreme Court ruled against MWM.
It noted that the bonds were bought in 1951 and until 1961;
it was never used to aid MWM’s importations.
 Tuason contended it was for the purpose of expanding their  To justify an accumulation of earnings and profits for the
business as a real estate broker. The Supreme Court ruled reasonably anticipated future needs, such accumulation
that Tuason was liable for IAET. Tuason was a mere holding must be used within a reasonable time after the close of the
company as it was not involved itself in the development of taxable year.
the subdivisions but merely subdivided its own lots and sold  In CYNAMID V. CA [JANUARY 20, 2000], Cynamid argued
them for bigger profits. that the increase of working capital by a corporation justifies
accumulating income. It invoked the Bardahl Formula which
 It derived its income from interest, dividends, and rental allowed retention, as working capital reserve, sufficient
from the sale of realty. The touchstone of liability is the amounts of liquid assets to carry the company though one
purpose behind the accumulation of the income and not the operating cycle and pay all of its current liabilities and any
consequences of the accumulation. extraordinary expenses reasonably anticipated.
 The Supreme Court ruled that, as stressed by American

 The company's failure to distribute dividends to its
stockholders was clearly for reasons other than the authorities, the formula is used only for administrative
reasonable needs of the business. convenience and not a precise rule.
 The Court found that in companies where the formula was

applied, they had operating cycles shorten than that of
Q: What is meant by ―reasonable needs‖?
Cynamid. The ratio of current assets to current liabilities
Reasonable needs means the immediate needs of the business.
Examples of what can be considered reasonable needs include: should be used to determine the sufficiency of working
1. Allowance for the increase of accumulated earnings up capital which ideally should be 2:1. Cyanamid’s ratio is
to 100% of the paid-up capital 2.21:1 and, thus, there was no need to infuse working
capital.
2. Earnings reserved for building, plant or equipment
acquisitions

Q: In determining if profits are reasonably accumulated for
“Real knowledge is to know the extent of

business needs, the intention of the taxpayer is reckoned at
what time?
 It is reckoned at the time of accumulation. In MANILA WINE

MERCHANTS V. CIR [FEBRUARY 20, 1984], one of the
contentions of MWM was that it held on to said bonds for
several years to wait for 60% of its stock to be owned by
one’s ignorance.”
Filipinos so it can purchase its own lot and building.
 The Supreme Court stated that to determine if profits are

reasonably accumulated for business needs, the controlling
-CONFUCIUS
intention is that manifested at the time of accumulation and
not later ones.
 The second reason given by MWM was too indefinite and was
a mere afterthought.
Q: Are there ways by which to avoid liability from IAET?
 Yes, when the accumulation is justified by reasonable needs

of the business such as:
1. Accumulation up to 100% of the paid-up capital
2. For definite corporate expansion projects or
programs
3. For buildings, plants or equipment acquisitions
4. For compliance with a loan covenant or pre-existing
obligation under a legitimate business agreement
5. When there is a legal prohibition for its distribution
6. In the case of Philippine subsidiaries of foreign
corporations, undistributed earnings intended or
reserved for investments within the Philippines
Q: Abbot-Phils, a domestic corporation, is a wholly owned

subsidiary of Abbot-US, a non-resident foreign corporation.
Abbot-Phils claims that by virtue of this, it is exempt from the
IAET. Is this contention correct?
 Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR ruled
that Abbot-Phils was exempt from IAET. Since Abbott-Phils.
is a wholly-owned subsidiary of Abbott-US, such shares will
be considered as being owned proportionately by the
Abbott-US shareholders.
 The ownership of a domestic corporation for purposes of

determining whether it is a closely held corporation or a
publicly held corporation is ultimately traced to the
individual shareholders of the parent company.
 Thus, where at least 50% of the outstanding capital stock or

at least 50% of the total combined voting power of all
classes of stock entitled to vote in a corporation is owned
directly or indirectly by at least 21 or more individuals, the
corporation is considered publicly-held corporation.
 As of the year-end 2000, Abbott-US had 101,272

shareholders holding a combined 1,545,934,133 shares of
common stock and the twenty largest shareholders of
Abbott-US as of September 30, 2001 own an aggregate of
30.1 percent of Abbott-US' issued and outstanding shares.
Thus, Abbot-Phils is a publicly-held corporation exempt from
IAET.

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Income Taxation Notes 2018 :)

PRELIMINARIES In case of resident citizens, they are subject to income tax

b. Nature of Income (Tax) b. Residence

a. Global Tax System This follows the territoriality principle.

This also follows the territoriality principle.

III. Features of Philippine Income Tax Law

a) Direct Tax V. Types of Income Tax

c) Progressive (A) General Definition. -

a. Citizenship 3. Presumptive Income

1 CHANYEE GWAPA NOTES 

4. Composite Tax If a taxpayer, other than an individual,

 No. Individual taxpayers cannot use the fiscal period. They

FISCAL TO CALENDAR YEAR

2 CHANYEE GWAPA NOTES 

 The general rule is that the taxable period is always 12

Rule on Taxation for Non-resident Citizens

(A) The term "person" means an (I,T,E,C)

2. Non- resident Citizens

(B) A nonresident citizen is taxable only

3 CHANYEE GWAPA NOTES 

GENERAL RULE shall likewise be treated as a non-resident citizen

NON-RESIDENT ALIENS CLASSIFICATION

either as A non-resident alien individual who shall come to the Philippines

4 CHANYEE GWAPA NOTES 

On gross amounts of 25%

Net capital gains from shares

benefits in excess of the allowable statutory amount of P 30, 000 shall

5 CHANYEE GWAPA NOTES 

MWE receiving income from FOREIGN CORPORATION DEFINED

This rule notwithstanding, CLASSIFICATION AS TO RESIDENCE

CORPORATIONS DO NOT INCLUDE ESTATES AND TRUSTS

6 CHANYEE GWAPA NOTES 

(2) if under the trust instrument it is impossible, at any time

Income is the money coming from a person or a corporation within a

7 CHANYEE GWAPA NOTES 

Non Taxable Income (Valencia)

Requisites of Taxability (PM Reyes) 1. Cash Method (Valencia)

 for a price exceeding One thousand pesos (P1,000), or

8 CHANYEE GWAPA NOTES 

SEC. 48. Accounting for Long-Term Contracts. –

Where the initial payments on installments exceed 25% of the selling

v. Test in Determining Whether Income is Earned for Tax

Refers to the earnings derived from construction of

9 CHANYEE GWAPA NOTES 

3. Economic Benefit Test DEDUCTION V EXEMPTIONS

5. Flow of Wealth Test Reduction of wealth which Personal exemption is theoretical

Q: How do you determine the net income tax payable? (PM

(3) Net income less personal and additional exemptions

Q: What is meant by ―source of income‖?

10 CHANYEE GWAPA NOTES 

11 CHANYEE GWAPA NOTES 

 by the employer, whether an individual or a corporation Notes:

xxx Sec 33;

12 CHANYEE GWAPA NOTES 

TAXATION OF FRINGE BENEFIT GRANTED TO NON-RESIDENT Provided, however,

FRINGE BENEFIT TAX OF 15 % SHALL BE IMPOSED ON THE

Sec 25 (C) (D) (E) An Alien individual

1. affiliates or 2. sixty-seven percent (67%) effective January 1, 1999; and

from such off-shore banking units, a tax equal to fifteen percent

13 CHANYEE GWAPA NOTES 

(a) valuation of the benefit granted and (1) Housing privilege —

2. or zonal value as determined by the Commissioner

The monetary value of fringe benefit

14 CHANYEE GWAPA NOTES 