Income Tax Syllabus Notes I

II.
INCOME TAX
A. GENERAL PRINCIPLES ON INCOME TAXATION
1. General Situs Rules:
Sec. 23 of the NIRC:
A. Resident Citizen
E. Domestic Corporation Taxable on all income derived from
sources within and outside the
Philippines
B. Non-Resident Citizen
C. Overseas Contract Worker Taxable only on income derived from
D. Resident Alien sources within the Philippines
D. Non-Resident Alien
F. Foreign Corporation
2. Specific Situs Rules:
a. Sec. 42 of the NIRC: Source of income rules in the Philippines
INTERESTS – The source of an interest payment is the place of residence of the person
obligated to make that payment (residence-of-the-obligor/debtor rule)
it is income within the PH if the obligor resides therein;
DIVIDENDS – General Rule: residence of the corporation paying the dividend.

if a dividend is received from a domestic corporation; it is income within the
Philippines
Exception: when a foreign corporation derives 50% of its gross income from sources
within the Philippines for a three-year period
SERVICES – Income from services is sourced in the country where the services are
performed.
it is income within the PH if the services are performed in the PH;
RENTS AND ROYALTIES – Incomes from rents and royalties are sourced where the
property is used or located.
it is income within the PH if rents and royalties are derived from property located in
the PH;
SALE OF REAL PROPERTY – Income from sale of real property is sourced in the
country where the property is located.
it is income within the PH if the property is located in the PH;
SALE OF PERSONAL PROPERTY – it depends: (1) Personal property produced, wholly

or partly, by the taxpayer within the PH and sold without or produced, wholly or partly,
by the taxpayer without and sold within the PH – income shall be treated as derived
1 | INCOME TAXATION REVIEW

partly from sources within PH and partly from sources outside PH; (2) Purchase of
personal property within and its sale without the PH or purchase of personal property
without and its sale within the PH – income shall be treated as derived entirely from
sources within the country in which sold; and (3) Shares of stock in a domestic
corporation – gains from sale of the same shall be treated as derived entirely from
sources within the PH regardless of where the said shares are sold.
b. NDC vs CIR: Residence of Obligor who pays the interest determined the source of interest
income.
FACTS: The National Development Company (NDC) entered into contracts in Tokyo with
several Japanese shipbuilding companies for the construction of 12 ocean-going vessels.
The purchase price was to come from the proceeds of bonds issued by Cental Bank. Initial
payments were made in cash and through irrevocable letters of credit. 14 promissory notes
were signed for the balance by NDC and , as required by the shipbuilders, guaranteed by
the Republic of The Phils. When the vessels were completed and delivered to the NDC in
Tokyo, the latter remitted to the shipbuilders the amount of US$ 4,066,580.70 as interest
on the balance of the purchase price. No tax was withheld. The Commissioner then held
the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but
failed. NDC went to CTA. BIR was sustained by CTA. BIR was sustained by CTA. Hence, this
petition for certiorari. ISSUE: Is NDC liable for tax?
RULING: Yes. The Japanese shipbuilders were liable to tax on the interest remitted to them
under Section 37 of the Tax Code. Thus: SEC. 37. Income from sources within the Philippines.
— (a) Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise;
NDC is not the one taxed but the Japanese shipbuilders who were liable on the interest
remitted to them under Section 37 of the Tax Code. The imposition of the deficiency taxes
on NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders.
Such liability is imposed by Section 53c of the Tax Code. NDC was remiss in the discharge of
its obligation as the withholding agent of the government and so should be liable for the
omission.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on
the interest remitted because of the undertaking signed by the Secretary of Finance in each
of the promissory notes that. There is nothing in the PN guaranteed by the state exempting
the interests from taxes. Petitioner has not established a clear waiver therein of the right to
tax interests. Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed. Any doubt concerning this question must be resolved in favor of
the taxing power.
c. CIR vs British Overseas Airways Corporation: Sale Of The Tickets Taxable As Income
From Sources Within The Philippines.
FACTS: BOAC is a British Government-owned corporation organized and existing under the
laws of the UK. It is engaged in the international airline business but did not carry
passengers or cargo to or from the Philippines, although during the period covered by the

assessments, it maintained a general sales agent in the PH — Wamer Barnes and Company,
Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets covering
passengers and cargoes. It is admitted that BOAC had no landing rights for traffic purposes
in the Philippines, and was not granted a Certificate of public convenience, except for a
nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary
landing permit. Petitioner assessed BOAC for deficiency income taxes covering the years
1959 to 1963. BOAC paid the assessment under protest.
CTA DECISION: The Tax Court held that the proceeds of sales of BOAC passage tickets in
the Philippines do not constitute BOAC income from Philippine sources "since no service of
carriage of passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax.
RESPONDENT’S MAIN ARGUMENT: 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.
ISSUES: Whether the revenue derived by BOAC from sales of tickets in the Philippines for
air transportation, while having no landing rights here, constitute income of BOAC from
Philippine sources, and, accordingly, taxable.
RULING :YES. Sales of tickets in the Philippines is taxable.
The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. The absence of flight operations to and
from the Philippines is not determinative of the source of income or the site of income
taxation.
In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income:
1. The tickets exchanged hands and payments for fares were also made in
Philippine currency.
2. The site of the source of payments is the Philippines.
3. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government.
4. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.
The definition of gross income under section 32 of tax code is broad and comprehensive to
include proceeds from sales of transport documents.
d. CIR vs Juliane Baier-Nickel: NRA are subject to Philippine Income Tax on their income
derived from sources within the PH
FACTS: Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of

JUBANITEX, Inc., a domestic corporation engaged in manufacturing and marketing textile
products. The General Manager, Marina Q. Guzman, is the commission agent. It was agreed
that respondent will receive 10% sales commission on all sales actually concluded and
collected through her efforts. In 1995, respondent received the 10% sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax and
remitted the same to the BIR.

On April 14, 1998, respondent filed a claim to refund for the withheld tax remitted to the
BIR alleging mistake on the part of JUBANITEX. Later, she filed a petition for review with
the CTA contending that no action was taken by the BIR on her claim for refund. The CTA
rendered a decision denying her claim holding that the commissions received by the
respondent were actually her remuneration in the performance of her duties as President
of JUBANITEX and not as a mere sales agent thereof.
ISSUES: whether or not respondent's sales commission income is taxable in the

Philippines.
RULING: Yes, the sales commission income is taxable in the Philippines. The NIRC provides
that non-resident aliens, whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all sources within the
Philippines. The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In this case,
Respondent’s sales commission is an income derived within the Philippines.
B. INDIVIDUAL INCOME TAXATION
1. Resident Citizens vs Non-Resident Citizen
Resident Citizen – a citizen of the PH who stays therein without the intention of transferring his
physical existence abroad, whether to stay permanently or temporarily as overseas worker.
Taxable on all income derived from worldwide sources.
Non-Resident Citizen – it means a citizen of the Philippines:

1. Who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with intention to reside therein;
2. Who leaves the PH during the taxable year to reside abroad either as an immigrant, or
for an employment on a permanent basis;
3. One 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;
or
4. Who has been previously considered as a NRC and who arrives in the PH at any time
during the taxable year to reside permanently in the PH with respect to his income
derived from sources abroad. (Sec. 22 (E) NIRC)
*to be physically present abroad most of the time during the taxable year, a contract
worker must have been outside the PH for at least 183 days during such taxable year.
(RR No. 01-79, this applies to contract workers)
2. Non-Resident Citizens vs Overseas Contract Workers

a. Sec. 22 (E) of the NIRC (see above definition of NRC)
b. BIR Ruling No. 033-00 dated September 5, 2000: CIR held that for overseas contract
workers, the time spent abroad is not material as all that is required is for the worker’s
employment contract to pass through and be registered with the POEA.
c. RR No. 1-2011 dated February 24, 2011: An OCW or OFW's income arising out of his
overseas employment is exempt from Income Tax. However, if an OCW or OFW has income
earnings from business activities or properties within the Philippines, such income
earnings are subject to Philippine Income Tax.

3. Non-Resident Aliens Engaged in Trade or Business vs Non-Resident Aliens Not Engaged in
Trade or Business
a. Sec. 25(a)(1) of the NIRC: A nonresident alien individual engaged in trade or business
in the Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources within
the Philippines.
A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year
shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of
this Code notwithstanding.
The test to determine whether the alien is a non-resident alien engaged in trade or
business is whether his total aggregate stay for a taxable year exceeds 180 days.
b. BIR Ruling No. DA-056-05 dated February 16, 2005: ruled that “any calendar year”
covers all the months in the calendar year covered by the period of assignment of the
expatriate in the PH. Hence, an alien who stays in the Philippines for more than 180 days in
any calendar year would be taxed at the graduated rates of 5%-32% not only during the
year that he exceeds the 180-day period, but also during the other years of assignment,
even if such stay did not exceed 180 days.
4. Minimum Wage Earners

a. Sec. 22(HH) of the NIRC: the term 'minimum wage earner' shall refer to a worker in the
private sector paid the statutory minimum wage or to an employee in the public sector
with compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned.
b. Sec. 2.78.1(B)(13) of RR No. 11-2018 dated January 31, 2018: Compensation during the
year not exceeding Two hundred fifty thousand pesos (₱250,000) (Tax exempt)
c. Sec. 3(B) of RR No. 8-2018 dated January 25, 2018: Minimum wage earners shall be
exempt from the payment of income tax based on their statutory minimum wage rates. The
holiday pay, overtime pay, night shift differential pay, and hazard pay received by such
earner are likewise exempt.
d. Q10-13/A10-13 of Revenue Memorandum Circular (“RMC”) No. 50-2018:

(Q10) How do we determine if a government employee is a Minimum Wage Earner?
(A10) The Government Entity/Employer must be aware of the Statutory Minimum
Wage prescribe of a particular region. If the wage of the employee is equal or below
to the said SMW, then the employee working is considered as Minimum Wage
Earner;
(Q11) Is the MWE exempt from income tax?

(A11) The MWE is exempt from income tax on his basic SMW, overtime pay, holiday
pay, night shift differential pay, and hazard pay. However, income other than those
mentioned is subject to income tax;
(Q12) What if the MWE receives service charge which is not included in the
enumerated exemptions such as holiday pay, overtime pay, etc., will he still be
exempt from income tax? If not, how ill his income be computed?

(A12) The MWE will still be exempt from income tax on his SMW including the
other income earned specifically enumerated under the law. However, income other
than those in the enumeration shall already be taxable. The taxable income shall be
computed by deducting the non-taxable/exempt portion and other deductions from
gross compensation income. Then, the resulting taxable income shall be multiplied
to the applicable income tax rate using the prescribed tax table to get the amount of
income tax due
(Q13) For those whose basic pay is more than the SMW but does not exceed
P250,000, are other income like holiday pay, overtime, etc., also tax exempt?
(A13) The employee is no longer considered a MWE since his basic pay is more than
the SMW. Thus, the amount of basic pay, OT pay, etc., shall be subject to income tax
and, consequently, to the withholding tax on compensation.
e. Soriano vs Sec. of Finance: MWEs are exempt from taxation together with the other
benefits they receive since the law does not provide for other qualification aside from that
of a MWE.
FACTS: RA 9504 amended certain sections of the NIRC. The said law granted MWEs
exemption from payment of income tax on their minimum wage, holiday pay, overtime pay,
night shift differential pay and hazard pay. Petitioner Trade Union Congress of the
Philippine contends that R.A. 9504 provides for the unqualified tax exemption of the
income of MWEs regardless of the other benefits they receive. Petitioners Senator
Escudero, the Tax Management Association of the Philippines, Inc., and Ernesto Ebro allege
that R.A. 9504 unconditionally grants MWEs exemption from income tax on their taxable
income, They note that RR 10-2008 provides that those MWEs who received "other
benefits" in excess of P30,000 are not exempt from income taxation. Petitioners believe this
RR is a "patent nullity" and therefore void.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of
₱30,000 is no longer entitled to the exemption provided by R.A. 9504
ISSUE: W/N Secs. 1 & 3 of RR 10-2008 are consistent with the law in providing that an
MWE who receives other benefits in excess of the statutory limit of P30,000 is no longer
entitled to the exemption provided by RA 9504
RULING: No, Secs. 1 & 3 of RR 10-2008 is inconsistent with the law and hereby declared by
the SC as null and void.
Nowhere in the provisions of RA. 9504 would one find the qualifications prescribed by the
assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they
leave no room for interpretation - they do not provide or require any other qualification as
to who are MWEs. To be exempt, one must be an MWE, a term that is clearly defined in
Section 22(HH). Therefore, MWEs are exempt from taxation regardless of the other
benefits they receive.

5. Option to be taxed at 8% on Gross Sales/Receipts
a. Sec. 24(A)(2)(b) of the NIRC (as amended by RA 10963): Rate of Tax on Income of Purely
Self-Employed Individuals and/or Professionals Whose Gross Sales or Gross Receipts and
Other Non-Operating Income Does Not Exceed the VAT threshold – Self-employed
individuals and/or professionals shall have the option to avail an 8% tax on gross
sales/gross receipts and other non-operating income in excess of Php 250,000 in lieu of the
graduated income tax rates under subsection (A)(2)(a) of this section and the percentage
tax under sec 116 of this code.
b. Sec. 3(C) of the RR No. 8-2018 dated January 25, 2018: Self-employed individuals earning
income purely from self-employment or practice of profession: individuals earning income
from self-employment or practice of profession whose gross sales/receipts and other non-
operating income does not exceed the VAT threshold of Php 3,000,000 shall have the
option to avail of:
 An 8% tax on gross sales or receipts and other non-operating income in

excess of Php 250,000 in lieu of the graduated income tax rates and the
percentage tax; or
 The graduated income tax rates under Sec (24)(A)(2)(a)
A taxpayer shall automatically be subject to the graduated rates under Section

24(A)(2)(a) even if the flat 8% income tax rate option is initially selected when
taxpayer’s gross sales or receipts and other non-operating income exceeds the
VAT threshold during the taxable year. In such case, his income tax shall be
computed under the graduated income tax rates and shall be allowed a tax credit
for the previous quarter/s income tax payment/s under the 8% income tax rate
option.
c. Sec. 3(D) of the RR No. 8-2018 dated January 25, 2018: Individuals Earning Income Both
from Compensation and from Self-employment (business or practice of profession) -- those
who are earning income both from compensation and from self-employment, business or
practice of profession, the tax liabilities are: (1) the compensation income shall be subject
to the graduated tax rates; and (2) the income from business or practice of profession shall
be subject to:
a. If the gross sales/receipts and other non-operating income do not exceed the VAT
threshold, the individual has the option to be taxed at: (a.1) Graduated income tax
rates prescribed; OR (a.2) 8% income tax rate based on gross sales/receipts and
other non-operating income in lieu of graduated income tax rates and percentage
tax; or
b. If the gross sales/receipts and other non-operating income exceeds the VAT
threshold, the individual shall be subject to the graduated income tax rate as
prescribed under the tax code.
The total tax due shall be the sum of: (1) tax due from compensation, computed using the
graduated income tax rates; and (2) tax due from self-employment/practice of profession,
resulting from the multiplication of the 8% income tax rate with the total of the gross
sales/receipts and other non-operating income

d. Relevant portions of RMC No. 50-2018 dated May 11, 2018:
(Q16): Who are not qualified to avail of the 8% Income Tax rate?
(A16): The following individuals are not qualified to avail of the 8% Income Tax rate:
a) Purely compensation income earners;
b) VAT-registered taxpayers whose gross sales/receipts and other non-operating
income exceeded the Php 3,000,000 VAT threshold;
c) Non-VAT taxpayers whose gross sales/receipts and other non-operating income
exceeded the Php 3,000,000 VAT threshold;
d) Taxpayers who are subject to other percentage taxes under section 116 of the
Tax code;
e) Partners of GPP since their distributive share from GPP is already net of costs
and expenses; and
f) Individuals enjoying income tax exemption such as those registered under the
Barangay Micro Business Enterprises (BMBEs), etc., since taxpayers are not
allowed to avail of double or multiple tax exemptions under different laws,
unless specifically provided by law.
Particulars Graduated IT Rates 8% IT Rates

Applicability In general, applicable to all individual May be availed by qualified
taxpayers individuals engaged in
business/practice of profession
whose gross sales/receipts and other
non-operating income did not exceed
Php 3,000,000
Basis of IT Net taxable income Gross sales/receipts and other non-
operating income
Allowed Deductions Allowable itemized deductions or Allowed reduction of Php 250,000
Optional Standard Deduction from the gross, only for individual
whose income comes purely from
business/practice of profession;
otherwise, no reduction/deduction
allowed
Business Tax Percentage Tax (PT) or VAT If qualified: Not subject to PT
Required financial 1. If itemized: If qualified: No FS required
statements FS – if gross is less than Php
3M;
Audited FS – if gross is more
than Php 3M;
2. If OSD: no FS required
(Q18) What are the salient features of both the graduated and the 8% income tax rates?
(A18) The features of Graduated Income Tax (IT) rates and 8% IT rate as follows:
(Q19) How can individual taxpayers avail of the option of 8% income tax rate in lieu of the
graduated income tax and percentage tax?
(A19) The taxpayers who are qualified for the option to be taxed at 8% income tax rate can
avail of the 8% income tax rate by signifying his intention to avail of the same as soon as
possible through the filing of any of the following:

1. For New Business Registrant (Individual)
1.a- BIR Form No. 1901 (Percentage Tax type shall still be registered but shall be
suspended or end-dated in the BIR tax system); or
1.b- Initial quarterly percentage or income tax return after the commencement of a new
business/practice of profession
2. For Existing Individual Business Taxpayers

2.a- BIR Form No. 1905
2.b- 1st Quarterly Percentage Tax Return; and/or
2.c- 1st Quarterly Income Tax Return.
The option to avail of the 8% income tax rate must be signified annually on or before May
15. Such election shall be irrevocable and no amendment of option shall be made for the
said taxable year, unless the gross sales/receipts and other non-operating income exceeded
the VAT threshold of Php 3,000,000 in which case taxpayer shall automatically be subject
to the graduated income tax rate
(Q20) What is the income tax regime of a taxpayer who is otherwise qualified to avail of
the 8% income tax rate but failed to signify this selection?
(A20) An individual taxpayer who is qualified to avail of the 8% income tax rate but failed
to signify his intention to avail of the same shall be subject to the graduated income tax
rates
(Q21) In the case of a purely self-employed/professional individual taxpayer who opted for
the 8% income tax, does he/she still need to file and pay the 3% percentage tax?
(A21) No, he/she is no longer required to file and pay the 3% percentage tax. The 8%
income tax rate is in lieu of the graduated income tax rates and the percentage tax under
sec 116
(Q22) What is the base amount of the 8% income tax rate?

(A22) The 8% income tax rate shall be based on the gross sales/receipts and other non-
operating income, net of returns and cash discounts. However, if the individual earns
income purely from business or practice of profession, he/she is entitled to the reduction of
P250,000 before computing for the 8% income tax
(Q23) Who are entitled to reduce their taxable gross sales/receipts and other non-
operating income by the amount of Php 250,000 for purposes of computing the income tax
due under the 8% income tax rate?
(A23) Only individuals earning income purely form self-employment and practice of
profession are entitled to the amount allowed as reduction of Php 250,000 under Sec
24(A)(2)(b) of the Tax Code, for the purpose of computing the 8% income tax. Thus, mixed
income earners shall no longer be entitled to the Php 250,000 reduction on their income
from business/practice of profession since said amount has already been applied in
computing the income tax on compensation
(Q24) For filing a quarterly ITR for individuals earning purely from practice of profession
who opted for 8% income tax, how can the Php 250,000 be deducted. Is it gross receipts for
the quarter less Php 62,500 (Php 250,000/4) equals taxable income?

(A24) There is no need to divide the amount of Php 250,000 allowed as reduction into four
quarters. The said amount was considered in the design of the revised quarterly income tax
returns which reflect a cumulative quarterly computation
(Q25) When tax rates are applicable for individuals who are earning income from both
compensation and self-employment (business or practice of profession)?
(A25) Compensation income shall be subject to the graduated income tax rates under Sec
24(A)(2)(a) of the Tax Code. The income from business or practice of a profession shall be
subject to the graduated income tax rates or if qualified, at taxpayer’s option, be subject to
the 8% income tax rate based on gross sales/receipts
(Q26) Are returnable deposits or deposits held in trust like security deposits under lease
agreements part of the definition of gross receipts?
(A26) In general, all deposits received are included in the definitions of Gross Receipts
under Sectio 2(g) of RR 8-2018. However, returnable deposits or deposits held in trust and
recorded as liability are excluded
(Q27) When does a taxpayer use the graduated income tax rates or the option of 8%
income tax rate?
(A27) Applicability of IT Rates per Individual Taxpayer’s Income Classification
Classification Graduated IT Rates &/or 8% IT rates

a. Purely
Compensation ✔ n/a Not applicable
b. Purely Business/Practice of Profession:

b.1 If gross
sales/receipts ✔ ✔
and other non-
operating income subject to applicable OR -if qualified, taxable
did not exceed business tax/es on gross
Php3M in a sales/receipts and
taxable year (at other non-
taxpayer’s operating income
option) in excess of Php
250k; in lieu of
graduated rates
and percentage
taxes
b.2 If gross
sales/receipts & ✔
other non- n/a n/a
operating income subject to applicable
exceed Php3M in business tax/es
a taxable year
c. Mixed Income (both compensation and business/practice of profession)
c.1 Compensation ✔ n/a n/a
c.2 Engage in

business/practice
of profession
c.2.i if gross ✔ OR ✔
sales/ receipts -if qualified: taxable
& other non- on gross: in lieu of
operating graduated rates
income did not subject to applicable and percentage tax
exceed Php3M business tax/es
in a taxable
year (at
taxpayer’s
option)
✔
c.2.ii If gross subject to applicable n/a n/a
sales/ receipts business tax/es
& other non-
operating Under the graduated IT Under the 8% IT
income exceed regime: regime:
Php3M in a 1. Allowed
taxable year deductions are Total IT due =
the itemized Income tax due
deduction or the from compensation
OSD (40%) to (using graduated
get taxable net rates) plus income
income tax due from
2. Total IT due = business/practice
sum of both the of profession (8%
taxable income of gross
from sales/receipts and
compensation other non-
and operating income)
business/profes
sion multiply by
graduated IT
rate
6. Compensation Income
a. Definition: Compensation Income means all remuneration for services performed by an

employee for his employer under an EE-ER relationship unless specifically excluded by the
Tax code.
b. Exempt Compensation Income: (1) For agricultural labor paid entirely in products of the
farm where the labor is performed; (2) For domestic service in a private home; (3) For
casual labor not in the course of the employer’s trade or business
c. Confederation for Unity, Recognition, and Advancement of Government Employees vs
Commissioner – BIR (Ma’am noted that this may be asked in the bar): FACTS: Two separate
petitions are filed by (1) organization/unions of government employees; and (2) by the
President of the RTC Judges Association of Manila and by the President of PH Association of

Court Employees — Manila Chapter imputing grave abuse of discretion on the part of the
CIR in issuing RMO No. 23-2014 that classified as taxable compensation, the allowances,
bonuses, compensation for services granted to government employees, which they alleged
to be considered by law as non-taxable fringe and de minimis benefits. CIR asserted that the
allowances and benefits mentioned are not fringe benefits which are exempt from taxation
under Section 33 of the Tax Code, nor de minimis benefits excluded from employees'
taxable basic salary. They explain that the Special Allowance Judiciary (SAJ) under RA No.
9227 and Additional COLA under PD No. 1949 are additional allowances which form part of
the employee's basic salary; thus, subject to withholding taxes. W/N the BIR is correct in
imposing taxes on the said allowances, thus, RMO No 23-2014 is valid.
RULING: Yes, the BIR is correct in imposing taxes on the said allowances, thus, the assailed
RMO is valid.
Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an EE-ER relationship. Under the NIRC, every form of compensation
for services, whether paid in cash or in kind, is generally subject to income tax and
consequently to withholding tax. The name designated to the compensation income
received by an employee is immaterial. Thus, salaries, wages, emoluments and honoraria,
allowances, commissions, fees, bonuses, fringe benefits (except those subject to the fringe
benefits tax under Section 33 of the Tax Code), pensions, retirement pay, and other income
of a similar nature, constitute compensation income that are taxable and subject to
withholding.
Here, the assailed RMO do not charge any new or additional tax. On the contrary, they
merely mirror the relevant provisions of the NIRC and its IRR on the withholding tax on
compensation income. The assailed RMO simply reinforce the rule that every form of
compensation for personal services received by all employees arising from EE-ER
relationship is deemed subject to income tax and, consequently, to withholding tax, unless
specifically exempted or excluded by the Tax Code. The RMO articulate in a general and
broad language the provisions of the NIRC on the forms of compensation income deemed
subject to withholding tax and the allowances, bonuses and benefits exempted therefrom.
Thus, the RMO cannot be said to have been issued by the CIR with grave abuse of discretion
as these are fully in accordance with the provisions of the NIRC and its implementing rules.
C. CORPORATE INCOME TAXATION
1. Definition of corporations for tax purposes
a. Sec. 22(B) of the NIRC: The term 'corporation' shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract
with the Government. 'General professional partnerships' are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.

2. Partnerships taxed as corporation
Kinds of Partnerships under the Tax Code:

(1) Taxable partnerships – these are business partnerships or partnerships which are organized
for the purpose of engaging to trade or business. They are subject to income tax as if they were
corporations whether or not registered with the SEC as a partnership; and
(2) Exempt partnership – these are partnerships not considered as taxable entities for income tax
purposes i.e GPP
How to determine of a partnership is taxable? The following are the elements of a taxable
partnership, to wit:
(1) An intent to form the same (emphasized ni Ma’am ni nga element);
(2) Generally participating in both profits and losses; and
(3) Such community of interest, as far as third persons are concerned as enables each party to
make contract, manage the business and dispose of the whole property
a. CIR vs Batangas Transportation Co: (1) A joint venture need not be undertaken in any of
the standard form, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for the purposes of the tax on
corporations.
(2) Although no legal personality may have been created by the Joint Emergency Operation,
nevertheless, said Joint Emergency Operation, joint venture, or joint management operated
the business affairs of the two companies as though they constituted a single entity,
company or partnership, thereby obtaining substantial economy and profits in the
operation.
FACTS: Respondent bus companies are 2 distinct and separate corporations, namely
Batangas Transpo and Laguna Bus, engaged in the business of land transportation by
means of motor busses and operating distinct and separate lines.
During the war, the two companies lost their respective businesses. Post-war, they were
able to acquire 56 auto busses from the US Army which they divided equally.Two years
later, Martin Olsen resigned as manager and Joseph Benedict was appointed as Manager
of both companies by their respective BOD. According to Benedict, the purpose of the joint
management called “Joint Emergency Operation” was to economize in overhead expenses.
At the end of each calendar year, all gross receipts and expenses of both companies are
determined and the net profit were divided 50-50 then transferred to the book of accounts
of each company, and each company prepares its own income tax return from their 50%
share.
The CIR theorizes that the 2 companies pooled their resources in the establishment of the
Joint Emergency Operation thereby forming a joint venture. He believes that a corporation
exists, distinct from the 2 respondent companies. However, the CTA held that the Joint
Emergency Operation is not a corporation within the contemplation of the NIRC, much less
a partnership, association or insurance company, and therefore was not subject to income
tax separately and independently of respondent companies.
ISSUE: W/N the 2 transportation companies involved are liable to the payment of income
tax as a corporation on the theory that the joint emergency operation organized and
operated by them is a corporation within the meaning of NIRC.

RULING: YES, although no legal personality may have been created by the Joint Emergency
Operation, nevertheless said joint venture or joint management operated the business
affairs of the 2 companies as though they constituted a single entity, company or
partnership, thereby obtaining substantial economy and profits in the operation.
The Court ruled on this issue by citing the case of Eufemia Evangelista, et. al v. CIR: This
involved the 3 sisters who borrowed from their father money which they invested in land
and then improved upon and later sold. The sisters also hired their brother to oversee
the buy-and-sell of land. Contrary to their claim that said operation was merely a co-
ownership, the Court ruled that the 3 sisters had purpose to engage in real estate
transactions for monetary gain and then divide the profits among themselves, making them
co-partners. When the Tax Code included “partnerships” among the entities subject to the
tax on corporations, it must refer to organizations which are not necessarily partnerships
in the technical sense of the term, and that furthermore, said law defined the term
"corporation" as including partnerships no matter how created or organized.
Further, from the standpoint of income tax law, the procedure and practice of the 2 bus
companies in determining the net income of each was arbitrary and unwarranted. After all,
the 2 companies operates in 2 different lines, in different provinces or territories, with
different equipment and personnel it cannot possibly be true and correct to say that the
end of each year, the gross receipts and income in the gross expenses of two companies are
exactly the same for purposes of the payment of income tax.Thus, the Court held that the
Joint Emergency Operation or sole management or joint venture in this case falls under the
provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to
income tax provided for in section 24 of the same code. But they were exempted from
paying 25% surcharge for failure to file a tax return, because of their honest belief (based
on advice of their attorneys and accountants) that they are not required to do so
b. Ona vs CIR
FACTS: A and B inherited properties. They did not partition the same and instead invested
them to a common fund and divide the profits therefrom. Should they be classified as an
unregistered partnership subject to corporate income tax?
RULING: Yes. The income from inherited properties may be considered as individual
income of the respective heirs only as long as the inheritance or estate is not distributed,
or, at least, partitioned. But the moment their respective known shares are used as part of
the common assets of heirs to be used in making profits, it is but proper that the income
from such shares should be considered as part of the taxable income of an unregistered
partnership.
Thus, a distinction must be made. Before the partition of property, the income of the co-
ownership arising from the death of a decedent is not subject to income tax, if the activities
of the co-owners are limited to the preservation of the property and the collection of the
income therefrom. However, after partition, should the co-owners invest the income of the
co-ownership in any income-producing properties, they would be constituting themselves
into an unregistered partnership which is consequently subject to income tax as a
corporation.

c. Obillos vs CIR
FACTS: A bought two lots. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The Torrens titles issued to them
showed that they were co-owners of the two lots. Later, the petitioners resold them to C
and D. They derived from the sale a profit and they treated the profit as a capital gain and
paid an income tax on one-half thereof.
The CIR required the petitioners to pay corporate income tax on the profit derived from the
sale of the lands. The petitioners are being held liable for deficiency income taxes and
penalties in addition to the tax on capital gains already paid by them. The Commissioner
acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture.
ISSUE: Whether or not the petitioners had indeed formed a partnership or joint venture
and thus liable for corporate tax.
HELD: No, the petitioners should not be considered to have formed a partnership just
because they allegedly contributed money to buy the two lots, resold the same and divided
the profit among themselves. To regard so would result in oppressive taxation and confirm
the dictum that the power to tax involves the power to destroy. That eventuality should be
obviated.
As testified by A, they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found
it not feasible to build their residences then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state. It had
to be terminated sooner or later.
They did not contribute or invest additional capital to increase or expand the properties,
nor was there an unmistakable intention to form partnership or joint venture.
d. Pascual vs CIR
FACTS: A and B, co-owners, bought 3 parcels of land in one transaction and bought 2 more
parcels of land in another. They decided to sell the 3 parcels to C and the 2 parcels to D.
They realized a net profit gain and paid CGT. CIR assessed them for deficiency corporate
income tax. Is the co-ownership taxable as a corporation?
RULING: No. A co-ownership who own properties which produce income should not
automatically be considered partners of an unregistered partnership, or a corporation,
within the purview of the income tax law. The essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. Here, there is no
evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves.
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a
clear intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.

e. AFISCO vs CA
FACTS: A group of insurance companies in the Philippines decided to form a pool and
entered into a reinsurance treaty with a non- resident reinsurance company. Is such a pool
subject to corporate taxes and withholding taxes on dividends paid to the non-resident
reinsurance company?
RULING: Yes. Where several local insurance ceding companies enter into a Pool Agreement
or an association that would handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance treaty with a non-resident foreign
reinsurance company, the resulting pool having a common fund, and functions through an
executive board and its work is indispensable, beneficial and economically useful to the
business of the ceding companies and the foreign firm, such circumstances indicate a
partnership or an association taxable as a corporation
3. Joint ventures engaged in construction projects – GR: Joint ventures are taxable. EXC: JVs or
consortium undertaking construction projects or engaged in petroleum operations with an
operating contract with the government are not liable for income tax
a. Secs. 2 and 3 of RR No. 10-2012 dated June 1, 2012: a joint venture or consortium formed
for the purpose of undertaking construction projects which is not considered as a taxable
corporation should be: (a) for the undertaking of a construction project; (b) should involve
joining or pooling of resources by licensed local contracts; that is, licensed as general
contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI); (c) the local contractors are engaged in construction business;
and d. the Joint Venture itself must likewise be duly licensed as such by the PCAB of the
DTI.
4. General Professional Partnerships vs Regular Partnerships
a. Sec. 26 of the NIRC: persons engaging in business as partners in a GPP shall be liable for
income tax only in their separate and individual capacities computed on their respective
distributive shares of the partnership profit.
b. RMC No. 3-2012 dated January 11, 2012: income payments made periodically or at the
end of the taxable year by a GPP to the partners, such as drawings, advances, sharings,
allowances, stipends and the like, are subject to the 15% creditable withholding tax, if the
payments to the partner for the current year exceeds P720,000.00; and 10% creditable
withholding tax, if otherwise.
c. Sec. 73(D) of the NIRC: The taxable income declared by a partnership for a taxable year
which is subject to tax under Section 27 (A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not
d. Q58/A58 of RMC No. 50-2018 dated May 11, 2018: (Q58): Are the partners in GPP
required to register as professionals? Can they opt to choose 8%? Is there any special
registration re quired? (A58) Yes, they are required to register. However, there is no
option to avail the 8% income tax rate since their distributive share in the net income of the
GPP is already net of cost and expenses. No special registration is required

5. Resident Foreign Corporation vs Non-resident Foreign Corporation
RESIDENT FOREIGN CORPORATION – a foreign corporation engaged in trade or business within

the Philippines or having an office or place of business therein
NON-RESIDENT FOREIGN CORPORATION – a foreign corporation not engaged in trade or

business within the Philippines and not having any office or place of business therein
a. Marubeni Corporation vs CIR

FACTS: ABC Corporation, a foreign corporation in Japan and licensed to do engage in
business in the Philippines (hence, a resident foreign corporation) has equity investments
in XYZ Company, a domestic corporation. XYZ declared and paid cash dividends to ABC.
XYZ directly remitted the cash dividends to ABC’s head office in Japan (hence, a non-
resident foreign corporation) net not only of the 10% final dividend tax but also of the
withheld 15% profit remittance tax based on the remittable amount after deducting the
final withholding tax of 10%. ABC argues that following the principal-agent relationship
theory, ABC is a resident foreign corporation subject only to the 10 % intercorporate final
tax on dividends received from a domestic corporation. Is ABC correct?
RULING: No. The general rule that a foreign corporation is the same juridical entity as its
branch office in the Philippines cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted through its branch office, following the
principal agent relationship theory. It is understood that the branch becomes its agent
here. So that when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is
the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if
the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation.
6. Private Educational Institutions and Non-Profit Hospitals
a. Sec. 27(B) of the NIRC: proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable income
b. Sec. 34(A)(2) of the NIRC: In addition to the expenses allowable as deductions under this
Chapter, a private educational institution, referred to under Section 27 (B) of this Code,
may at its option elect either: (a) to deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof
c. Obiter in CIR vs St. Luke’s Medical Center: A proprietary non-profit hospital is subject to
10% tax under Section 27(B) of the Tax Code.
FACTS: St. Luke’s Medical Center is a hospital organized as a non-stock and non-profit
corporation. It admits both paying and non-paying patients. The CIR claimed that St. Luke’s
was liable for income tax at 10% as provided under Section 27(B) of the NIRC. St. Luke’s
argues that it 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 NIRC.

HELD: St. Luke’s cannot claim full tax exemption under Section 30 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 must be non-profit which means that no net income or asset
accrues to or benefits any member or specific person and all the activities of the hospital
are non-profit. On the other hand, Section 30(E) and (G), while providing for an exemption
is qualified by the last paragraph which, in turn, provides that activities conducted for
profit shall be taxable. Section 30(E) and (G) requires that an institution be operated
exclusively for charitable purposes to be completely exempt from income tax. In this case,
however, St. Lukes is not operated exclusively for charitable purposes insofar as its
revenues from paying patients are concerned. Such revenue is subject to income tax at 10%
under Section 27(B)
d. Obiter in CIR vs DLSU

FACTS: The BIR assessed DLSU and found deficiency taxes on (1) its income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus; (2) VAT
on business income; and (3) DST on loans and lease contracts.
DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU
filed a petition for review with the CTA Division contending that it is a non-stock, non-
profit educational institution, citing Article XIV, Section 4 (3) of the Constitution its basis.
W/N DLSU is liable for 10% preferential tax as provided in Sec 27 of the NIRC.
RULING: No, because DLSU’s income and revenues proven to have been used actually,
directly, and exclusively for educational purposes. Thus, exempt from duties and taxes.
While a non-stock, non-profit educational institution is classified as a tax-exempt entity

under Section 30 of the Tax Code, a proprietary educational institution is covered by
Section 27. To be specific, Section 30 provides that exempt organizations like non-stock,
non-profit educational institutions shall not be taxed on income received by them as such.
Section 27 (B), on the other hand, provides that a proprietary educational institution is
entitled only to the reduced rate of 10% corporate income tax. And it is applicable only if:
(1) the proprietary educational institution is nonprofit and (2) its gross income from
unrelated trade, business or activity does not exceed 50% of its total gross income.
Thus, the SC declared that the last paragraph of Section 30 of the Tax Code without force
and effect for being contrary to the Constitution insofar as it subjects to tax the income and
revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose. We make this declaration in the exercise of and
consistent with our duty to uphold the primacy of the Constitution.
Finally, we stress that our holding here pertains only to non-stock, non-profit educational
institutions and does not cover the other exempt organizations under Section 30 of the Tax
Code. For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes.

7. International Carriers
a. Sec. 28(A)(3) of the NIRC: Intentional Carrier. – An international carrier doing business
in the Philippines shall pay a tax of two and one-half percent (2 ½%) on its Gross
Philippine Billings as defined hereunder:
(a) International Air Carrier. – Gross Philippine Billings refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, that tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further, that
for a flight which originates from the Philippines, but transshipment of passenger
takes place at any part outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from the Philippines
to the point of transshipment shall form part of Gross Philippine Billings.
(b) International Shippng. – ‘Gross Philippine Billings’ means gross revenue

whether for passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight
documents
b. Sec. 1 of RA No. 10378 dated March 7, 2013: Provided, that international carriers doing
business in the Philippines may avail of a preferential rate or exemption from the tax
herein imposed on their gross revenue derived from the carriage of persons and their
excess baggage on the basis of an applicable tax treaty or international agreement to which
the Philippines is a signatory or on the basis of reciprocity such that an international
carrier, whose home country grants income tax exemption to Philippine carriers, shall
likewise be exempt from the tax imposed under this provision.
c. Secs.1-4 of RR No. 15-2013 dated September 20, 2013:
Section 1: Background: RA 10378 entitled “An Act Recognizing the Principle of Reciprocity
as Basis for the Grant of Income Tax Exemptions to International carriers and Rationalizing
other Taxes Imposed thereon by amending Sections 28(A)(3)(a), 109, 118 and 236 of the
National Internal Revenue Code (NIRC), as amended, and for other Purposes” was signed
into law. The policy behind the rationalization of taxes on international carriers is to
improve the competitiveness of the Philippine Tourism Industry by encouraging more
international carriers to maintain flight and shipping operations in the country and by the
eventual reduction of international plane and ship fares. These are intended to facilitate the
movement of goods and services and to attract more foreign tourists and investments.
Section 2: Scope: Pursuant to Section 244 of the National Internal Revenue Code of 1997
(NIRC), as amended, and Section 5 of RA No. 10378, these Regulations are hereby
promulgated to implement RA No. 10378, amending Sections 28(A)(3)(a), 109, 118 and
236 of the NIRC.
Section 3: Definition of Terms: (those terms lang nga murag alien kaayo and related sa
topic akoang gi-include)

On-line flights or voyages — refer to flight or voyage operations carried out or maintained
by an international carrier between ports or points in the territorial jurisdiction of the
Philippines and any port or point outside the Philippines.
Off-line flights or voyages — refer to flight or voyage operations carried out or maintained
by an international carrier between ports or points outside the territorial jurisdiction of the
Philippines, without touching a port or point situated in the Philippines, except when in
distress or due to force majeure.
Originating from the Philippines — shall include the following:

A) Where passengers, their excess baggage, cargo and/or mail originally commence
their flight or voyage from any Philippine port to any other port or point outside the
Philippines;
B) Chartered flights or voyages of passengers, their excess baggage, cargo and/or
mail originally commencing their flights or voyages from any foreign port and
whose stay in the Philippines is for more than forty-eight (48) hours prior to
embarkation save in cases where the flight of the airplane belonging to the same
airline company or the voyage of the vessel belonging to the same international sea
carrier failed to depart within forty-eight (48) hours by reason of force majeure;
C) Chartered flights of passengers, their excess baggage, cargo and/or mail
originally commencing their flights or voyages from any Philippine port to any
foreign port; and
D) Where a passenger, his excess baggage, cargo and/or mail originally commencing
his flight or voyage from a foreign port alights or is discharged in any Philippine
port and thereafter boards or is loaded on another airplane owned by the same
airline company or vessel owned by the same international sea carrier, the flight or
voyage from the Philippines to any foreign port shall not be considered originating
from the Philippines, unless the time intervening between arrival and departure of
said passenger, his excess baggage, cargo and/or mail from the Philippines exceeds
forty-eight (48) hours,except, however, when the failure to depart within forty-eight
(48) hours is due to reasons beyond his control, such as, when the only next
available flight or voyage leaves beyond forty-eight (48) hours or by force majeure.
Provided, however, that if the second aircraft belongs to a different airline company,
or the second vessel belongs to a different international sea carrier, the flight or
voyage from the Philippines to any foreign port shall be considered originating from
the Philippines regardless of the intervening period between the arrival and
departure from the Philippines by said passenger, his excess baggage, cargo and/or
mail.
Continuous and Uninterrupted Flight or Voyage — refers to a flight or voyage in the carrier
of the same company from the moment a passenger, excess baggage, cargo, and/or mail is
lifted from the Philippines up to the point of 4 final destination of the passenger, excess
baggage, cargo and/or mail. The flight or voyage is not considered continuous and
uninterrupted if transshipment of passenger, excess baggage, cargo and/or mail takes place
at any port outside the Philippines on another aircraft or vessel belonging to a different
company.
Section 4:

d. South African Airways vs CIR: If an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2 ½%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 regular
rate of 32% (now 30%) of such income.
FACTS: South African Airways is a foreign corporation organized and existing under and by
virtue of the laws of the Republic of South Africa. In the Philippines, it is an internal air
carrier having no landing rights in the country. South African Airways, however, has a
general sales agent in the Philippines, Aerotel. Aerotel sells passage documents for
compensation or commission for South African Airways’ off-line flights for the
carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines. South African Airways filed income tax returns and paid tax
on its Gross Philippine Billings (GPB). South African Airways, however, subsequently claim
for refund contending that it was not liable to pay tax on its GPB. CTA denied the claim on
the ground that South African Airways is liable to pay the 32% (now 30%) regular
corporate income tax.
ISSUE: W/N South African Airways engaged in trade or business in the Philippines
subject to the regular corporate income tax? YES. 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 ½% of their Gross Philippine Billings. South
African Airways being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, it must fall under the general rule 
Hence, it is liable for regular corporate income tax.
e. Air Canada vs CIR (Tax Treaty Issue)

FACTS: Air Canada is a foreign corporation organized and existing under the laws of
Canada. It was granted an authority to operate as an offline carrier. As an off-line carrier,
Air Canada does not have flights originating from or coming to the Philippines and does not
operate any airplane in the Philippines. Air Canada engaged the services of Aerotel Ltd.,
Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel sells Air Canada’s
passage documents in the Philippines.
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings. Later, Air Canada filed a written claim for refund of
alleged erroneously paid income taxes.
ISSUES & HELD: 1) Whether Air Canada is subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3).
NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section
28(A)(3). The tax attaches only when the carriage of persons, excess baggage, cargo, and
mail originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold. Not having flights to and from the Philippines,
petitioner is clearly not liable for the Gross Philippine Billings tax. However, Petitioner falls

within the definition of resident foreign corporation under Section 28(A)(1), thus, it may be
subject to 32% tax on its taxable income.
Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the

Philippines. In the case at hand, Aerotel performs acts or works or exercises functions that
are incidental and beneficial to the purpose of petitioner’s business. The activities of
Aerotel bring direct receipts or profits to petitioner. Further, petitioner was issued by the
Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a
period of five years. Petitioner is, therefore, a resident foreign corporation that is taxable
on its income derived from sources within the Philippines.
2) Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on
its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a
maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to petitioner as a “foreign corporation
organized and existing under the laws of Canada.”
Our Constitution provides for adherence to the general principles of international law as
part of the law of the land. The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on the part of the states that
enter into the agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More importantly, treaties have
the force and effect of law in this jurisdiction. (Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue).
8. Exempt Corporations
a. Sec. 27(C) as amended by RA 10963: GOCCs, Agencies, or Instrumentalities. –The

provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government,
except the GSIS, SSS, PHIC, and the local water districts shall pay such rate of tax upon
their taxable income as are imposed by this section upon corporations or associations
engaged in a similar business, industry, or activity
b. Sec. 30 of the NIRC – Enumeration: Exemptions from Tax on Corporations. - The

following organizations shall not be taxed under this Title in respect to income received
by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for
profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes
and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit
and no part of the net income of which inures to the benefit of any private stock-
holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(H) A non-stock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization of
a purely local character, the income of which consists solely of assessments, dues, and
fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers’, fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
c. RMC No. 35-2012 on taxability of clubs operated exclusively for pleasure, recreation, and
other non-profit purposes: prescribes that clubs organized and operated exclusively for
pleasure, recreation, and other non-profit purposes are subject to income tax and VAT on
their membership fees, assessment dues, rental income, and service fees
d. CIR vs Club Filipino de Cebu: (on definition of “Non-profit” discussed in St. Luke’s case):
The club was non-profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise.
FACTS: The Club Filipino, is a civic corporation organized under the laws of the Philippines
and is operated mainly with the funds derived from membership fees and dues, whatever
profits it had were used to defray its overhead expenses and to improve its golf course. The
Club owns and operates a club house, a bowling alley, a golf course and a bar-restaurant
where it sells wines and liquors, soft drinks, meals and short orders to its members and
their guests. Later, a BIR agent discovered that the Club has never paid percentage tax on
the gross receipts of its bar and restaurant, although it secured licenses. In a letter, the
Collector assessed against and demanded from the Club fixed and percentage taxes,
surcharge and compromise penalty. Also, the Collector denied the Club’s request to cancel
the assessment.
On appeal, the CTA reversed the Collector and ruled that the Club is not liable for the
assessed tax liabilities allegedly due from it as a keeper of bar and restaurant as it is a non-
stock
ISSUE: W/N the Club is liable for the payment of fixed and percentage taxes and surcharges
prescribed in the Tax Code, in connection with the operation of its bar and restaurant.

HELD: NO. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal,
civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and
patent, which is not the case here. The liability for fixed and percentage taxes does
not ipso facto attach by mere reason of the operation of a bar and restaurant. For the
liability to attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur.
In this case, the Club derived profit from the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant
are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom
are necessarily incidental to the primary object of developing and cultivating sports for the
healthful recreation and entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. Thus, it is not liable for payment
of fixed and percentage taxes and surcharges.
e. Non-stock, non-profit educational institutions
i. Sec. 4(3) Art XIV of the Constitution: All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of
the corporate existence of such institutions, their assets shall be disposed of in the
manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may

likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for reinvestment
ii. DOF Order No. 137-1987 dated December 16, 1987: The following are some of the
highlights of the DOF order governing the tax exemption of non-stock, non-profit
educational institutions:
1. The tax exemption is not only limited to revenues and assets derived from strictly
school operations like income from tuition and other miscellaneous feed such as
matriculation, library, ROTC, etc. fees, but it also extends to incidental income
derived from canteen, bookstore and dormitory facilities;
2. In the case, however, of incidental income, the facilities mentioned must not only
be owned and operated by the school itself but such facilities must be located inside
the school campus. Canteens operated by mere concessionaires are taxable;
3. Income which is unrelated to school operations like income from bank deposits,
trust fund and similar arrangements, royalties, dividends and rental income are
taxable; and
4. The use of the school’s income or assets must be in consonance with the purposes
for which the school is created; in short, use must be school-related, like the grant of
scholarships, faculty development, and establishment of professional chairs, school
building expansion, library and school facilities.
iii. DOF Order No. 149-1995 dated November 24, 1995:

SUBJECT: Amending Department Order No. 137-87 as Amended by Department
Order No. 92-88 Implementing Section 4(3), Article XIV of the New Constitution
SECTION 1. Section 2(2.1) of Department Order No. 137-87 as amended Order No.
92-88 is hereby amended to read as follows:

"2.1 NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS ARE EXEMPT
FROM TAXES ON ALL THEIR REVENUES AND ASSETS USED ACTUALLY, DIRECTLY,
AND EXCLUSIVELY FOR EDUCATIONAL PURPOSES. They shall, however, be subject
to internal revenue taxes on income from trade, business or other activity the
conduct of which is not related to the exercise or performance by such educational
institution of its educational purpose or function."
"2.1.1 To ensure that the exempt interest income from Philippine currency deposits
and yield from deposit substitute instruments are used actually, directly, and
exclusively for educational purposes, the said educational institutions shall, on
annual basis submit to the Revenue District Officer, together with the annual
information return and duly audited financial statement, the following:
a) Certification from their depository banks as to the amount of interest income
earned from passive investments not subject to the 20% final withholding tax
imposed by Section 24(e) of the Tax Code, as amended;
b) Certification of actual utilization of the said income; and
c) Board Resolution by the school administration on proposed projects. (i.e.
construction and/or improvement of school building and facilities; acquisition of
equipments, books and the like) to be funded out of money deposited in banks or
placed in money markets.
The RDO shall conduct an audit of the annual information return filed to determined
compliance with the conditions set forth in the Certificate of exemption and the tax
liabilities, if any.
iv. Sec. 30 of RR No. 2-1940 on what may be considered income exempt from income
tax: Religious, charitable, scientific, athletic, cultural, and educational corporations.
— A corporation falling among those enumerated in subsection (e) of Section 27 is
exempt from tax on its income (other than income of whatever kind and character
from its properties, real or personal) if such corporation meets two tests: (a) It must
be organized and operated for one or more of the specified purposes; and (b) no
part of its net income must inure to the benefit of private stockholders or
individuals.
The income of such corporation which is considered as income from their

properties, real or personal, generally consists of income from corporate dividends,
rentals received from their properties, interests received from such capital loaned to
other persons, income from agricultural lands owned by such corporations, profits
from the sale of property, real or personal, and other similar income.
Income not derived from their properties, real or personal, are exempt. For example,
in the case of a religious corporation, income from the conduct of strictly religious
activities, such as fees received for administering baptismals, solemnizing
marriages, attending burials, holding masses, and other like income, is exempt. In
the case of an educational corporation, income from the holding of an educational
fair or exhibit is exempt. However, if such exempt income is invested by the
corporation, the income from such investment, as interests from the capital where
the capital has been loaned or dividends on stock where the capital has been
invested in shares of stock, will constitute taxable income. Donations and other
similar contributions received by such corporation from other persons are exempt.

The clause "except income expressly exempt by this Title" appearing in subsection
(e) of Section 27 refers to those classes of income which, in accordance with
subsection (b) of Section 29, are exempt from taxation under Title II.
Charitable corporations include an association for the relief of the families of

clergymen, even though the latter make a contribution to the fund established for
this purpose; or for furnishing the services of trained nurses to persons unable to
pay for them; or for aiding the general body of litigants by improving the efficient
administration of justice. Educational corporations may include associations whose
sole purpose is the instruction of the public. But associations formed to disseminate
controversial or partisan propaganda are not educational within the meaning of the
law. Scientific corporations include an association for the scientific study of law with
a view to improving its administration.
It does not prevent exemption that private individuals, for whose benefit a charity is
organized, receive the income of the corporation or association. The law refers to
individuals having a personal and private interest in the activities of the
corporation, such as stockholders. If, however, a corporation issues "voting shares",
which entitle the holders upon the dissolution of the corporation to receive the
proceeds of its property, including accumulated income, the right to exemption
ceases to exist, even though the by-laws provide that the shareholders shall not
receive any dividend or other return upon their shares.
v. CIR vs VG Sinco Educational Corporation

FACTS: V. G. Sinco Educational Institution was a non-stock corporation and was
capitalized by V. G. Sinco and members of his immediate family. Since its operation,
this college derived gross profits by way of tuition fees. The CIR assessed against the
college an income tax that was paid by the college. Two years thereafter, the
corporation filed a petition for the refund of its previous payment of income tax
alleging that it is exempt from income tax under the NIRC because it is organized
and maintained exclusively for the educational purposes and no part of its net
income inures to the benefit of any private individual.
ISSUE: W/N a non-stock, non-profit educational institution that charges tuition and
other fees for the different services it renders loses its tax-exempt status? No, it does
not lose its tax-exempt status. It is not denied that the institution charges tuition
fees and other fees for the different services it renders to the students and in fact it
is its only source of income but such fact does not in itself make the school a profit-
making enterprise that would place it beyond the purview of the law.
The amount of fees charged by a school, college or university depends, ultimately,

upon the policy and a given administration, at a particular time. It is not conclusive
of the purposes of the institution. Otherwise, such purpose would vary with the
particular persons in charge of the administration of the organization. Thus, the
institution did not lose its tax-exempt status.
vi. CIR vs St. Luke’s Medical Center (2017 case but same ra sa St. Luke’s sa ibabaw og
ruling)
FACTS: The respondent St. Luke’s Medical Center, Inc. (SLMC) received a tax
payment assessment from the BIR where it found a deficiency of its income tax
under Section 27 (B) of the NIRC. In response to the received assessment SLMC filed

with the CIR an administrative protest assailing the assessments alleging that they
are exempted from paying the income tax since they are a non-stock, non-profit,
charitable and social welfare organization under Section 30 (E) and (G) of the NIRC.
W/N SLMC is liable for income tax under Section 27 (B) of the NIRC.
RULING: Yes, SMLC is liable for income tax. Sec. 27 (B) of the NIRC imposes 10%
preferential tax rate on the income of (1) proprietary non-profit educational
institutions; and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are they must be proprietary and non-profit. Furthermore, Sections 30(E)
and (G) require that an institution be operated exclusively for charitable purposes
to be completely exempt from income tax. In this case, SLMC is not operated
exclusively for charitable purposes insofar as its revenues from paying patients are
concerned. Such revenue is subject to income tax at 10% under Section 27(B)
vii. CIR vs DLSU

FACTS: DLSU was assessed by the BIR and it found deficiencies on its income tax
from its rental earnings, VAT, and DST. DLSU protested the assessment. The
Commissioner submits the following arguments: DLSU's rental income is taxable
regardless of how such income is derived, used, or disposed of. DLSU's operations of
canteens and bookstores within its campus even though exclusively serving the
university community do not negate income tax liability.
The Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from
property. Thus, DLSU's income from the leases of its real properties is not exempt
from taxation even if the income would be used for educational purposes.
DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets
and revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purposes are exempt from taxes and duties.
ISSUE: W/N DLSU's income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.
RULING: YES, DLSU’s income proved to have been used ADE for educational
purposes are exempt from taxes.
The following are the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly and exclusively for educational purposes.
A plain reading of the Constitution would show that it does not require that the
revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues. Thus, so long as
the revenues and income are used actually, directly and exclusively for educational
purposes, then said revenues and income shall be exempt from taxes and duties.
Thus, when a non-stock, non-profit educational institution proves that it uses

its revenues actually, directly, and exclusively for educational purposes, it shall be

exempted from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational purposes, it shall
be exempted from RPT.
D. INCOME TAX APPLICABLE TO CORPORATIONS

1. Minimum Corporate Income Tax
a. Secs. 27(E) and 28 (A)(2) of the NIRC (Summary of both provisions)
A minimum corporate income tax of 2% of gross income shall be imposed on a domestic

corporation and resident foreign corporation beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business
operations when:
1. The MCIT is greater than the RCIT for the taxable year.
2. Such operation has zero or negative taxable income
b. RR No. 9-1998 dated August 25, 1998: For purposes of MCIT, the term "gross income"
means gross sales less sales returns, discounts, and allowances and cost of goods sold, in
case of sale of goods, or gross revenue less sales returns, discounts, allowances and cost of
services/direct cost, in case of sale of services.
c. CREBA vs Romulo: MCIT not unconstitutional; its purpose is to prevent tax evasion and
tax avoidance schemes.
FACTS: CREBA assails the imposition of the MCIT as being violative of the due process
clause as it levies income tax even if there is no realized gain (mao ra gyud ni ang relevant
fact sa fulltext). Are the impositions of the MCIT on domestic corporations
unconstitutional?
RULING: NO, the impositions of MCIT are not unconstitutional. MCIT does not tax capital
but only taxes income as shown by the fact that the MCIT is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales. Besides, there are sufficient safeguards that exist for the MCIT:
(1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of
any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can
suspend the imposition of MCIT in justifiable instances.
Furthermore, the primary purpose of any legitimate business is to earn a profit. Continued
and repeated losses after operations of a corporation or consistent reports of minimal net
income render its financial statements and its tax payments suspect. For sure, certain tax
avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion
and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax
rate was lowered.
d. Manila Banking Corporation vs CIR: The intent of the Congress regarding MCIT is to
grant a 4-year suspension of tax payment to newly formed corporations. Corporations still
starting their business operations have to stabilize their venture in order to obtain a
stronghold in the industry.
FACTS: Manila Bank (MB) ceased operations and its assets and liabilities were placed

under charge of a receiver due to insolvency. Later, Tax Reform Act imposed a MCIT on
domestic and resident foreign corporations. Its IRR states that the law allows a 4-year
period from the time the corporations were registered with the BIR during which the MCIT
should not be imposed. In 1999, BSP authorized MB reopen as a thrift bank. MB then wrote
to BIR requesting a ruling on whether it is entitled to the 4 year grace period under IRR to
which the BIR ruled in its favor— MB is entitled to the 4-yr grace period. Since it reopened
in 1999, the MCIT may be imposed not earlier than 2002. It stressed that although it had
been registered with the BIR before 1994, but it ceased operations 1987-1999 due to
involuntary closure. MB then filed with BIR for the refund. W/N MB is entitled to a refund
of its MCIT paid to BIR for 1999.
RULING: Yes, MB is entitled to a refund of its MCIT. Let it be stressed that the IRR imposed
the MCIT on corporations, the date when business operations commence is the year in
which the domestic corporation registered with the BIR. But under RR 4-95, the date of
commencement of operations of thrift banks, is the date of issuance of certificate by
Monetary Board or registration with SEC, whichever comes later. Clearly then, RR 4-95
applies to Manila banks, being a thrift bank. 4-year period, counted from June 1999. Thus,
they are entitled to a refund.
2. Branch Profit Remittance Tax

a. Sec. 28(A)(5) of the NIRC: Any profit remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof (except
those activities which are registered with the Philippine Economic Zone Authority). The tax
shall be collected and paid in the same manner as provided in Sections 57 and 58 of this
Code: Provided, that interests, dividends, rents, royalties, including remuneration for
technical services, salaries, wages premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and capital gains received by
a foreign corporation during each taxable year from all sources within the Philippines shall
not be treated as branch profits unless the same are effectively connected with the conduct
of its trade or business in the Philippines.
b. Bank of America NT & SA vs CA: In the 15% remittance tax, the law specifies its own tax
base to be on the “profit remitted abroad.” There is absolutely nothing equivocal or
uncertain about the language of the provision. The tax is imposed on the amount sent
abroad, and the law calls for nothing further.
FACTS: Bank of America (BA) is a foreign corporation licensed to engage in business in the
Philippines. BA paid 15% branch profit remittance tax from its REGULAR UNIT
OPERATIONS and tts FOREIGN CURRENCY DEPOSIT OPERATIONS. The tax was based on
net profits after income tax without deducting the amount corresponding to the 15% tax.
BA thereafter filed a claim for refund with the BIR for the portion the corresponds with the
15% branch profit remittance tax. They claimed that BIR should tax them based on the
profits actually remitted, and NOT on the amount before profit remittance tax. The basis
should be the amount actually remitted abroad. CIR contends otherwise and holds that in
computing the 15% remittance tax, the tax should be inclusive of the sum deemed remitted.
W/N the branch profit remittance tax should be based on the amount actually remitted?
RULING: YES, the branch profit remittance tax should be based on the amount actually
remitted not what was applied for. There is nothing in Section 24 which indicates that the
15% tax or branch profit remittance is on the total amount of profit; where the law does

NOT qualify that the tax is imposed and collected at source, the qualification should not be
read into law. Rationale of 15%: To equalize/ share the burden of income taxation with
foreign corporations
3. Improperly Accumulated Earnings Tax -- The term “improperly accumulated taxable income”
means taxable income adjusted by:
1. Income exempt from tax;
2. Income excluded from gross income;
3. Income subject to final tax; and
4. The amount of net operating loss carry-over deducted; and
5. Reduced by the sum of: (a) dividends actually or constructively paid; and (b) income tax
paid for the taxable year; (c) amount reserved for the reasonable needs of the business
a. Sec. 29 of the NIRC: This is the income tax imposed on a corporation if its earnings and
profits are accumulated (undistributed) instead of being divided and distributed to its
stockholders.
An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable
year on the improperly accumulated taxable income of each corporation.
It is imposed on domestic corporations which are classified as closely-held corporations.
b. RR No. 2-01 dated February 12, 2001: The IAET is being imposed in the nature of a
penalty to the corporation for the improper accumulation of its earnings, and as a form of
deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax
on the earnings distributed to them by the corporation
GR: the IAET shall apply to every corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits accumulate instead of being divided or
distributed.
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 50% in value of the
outstanding capital stock or at least 50% of the total combined voting power of all classes
of stock is owned directly or indirectly by not more than 20 individuals.
EXC: the IAET shall not apply to:

1. Publicly-held corporations;
2. Banks and other non-bank financial  intermediaries; and
3. Insurance companies;
4. GPPs;
5. Non-taxable joint ventures; and
6. Enterprises registered under Special Economic Zones (SEZs) 
c. Clarification by RMC No. 35-2011: In relation to amount reserved for the reasonable
needs of the business (5c under definition of IAET), the RMC states that the amount that
may be retained, taking into consideration the reasonable needs of the business shall be
100% of the paid-up capital or the amount contributed to the corporation representing the
par value of the shares of stock. Any excess capital over and above the par shall be
excluded.

d. Cyanamid Phils Inc vs CA: In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon the shareholders, it must be
shown that the controlling intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere afterthoughts.
FACTS: Petitioner is a corporation organized under Philippine laws and is a wholly owned
subsidiary of American Cyanamid Co. based in USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods and an
imported/indentor. The CIR assessed on petitioner a deficiency income tax for the year
1981. Cyanamid protested the assessments particularly the 25% surtax for undue
accumulation of earnings. It claimed that said profits were retained to increase petitioner’s
working capital and it would be used for reasonable business needs of the company. The
CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It
claimed that there was not legal basis for the assessment because 1) it accumulated its
earnings and profits for reasonable business requirements to meet working capital needs
and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid
Company, a foreign corporation, and its shares are listed and traded in the NY Stock
Exchange. The CTA denied the petition stating that the law permits corporations to set
aside a portion of its retained earnings for specified purposes under Sec. 43 of the
Corporation Code but that petitioner’s purpose did not fall within such purposes. It found
that there was no need to set aside such retained earnings as working capital as it had
considerable liquid funds. Those corporations exempted from the accumulated earnings
tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those
exempted. The CA affirmed the CTA’s decision. W/N the accumulation of income was
justified.
RULING: No. In order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon the shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The accumulated profits must be
used within reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish by clear and convincing evidence that such accumulated was
for the immediate needs of the business.
 To determine the reasonable needs of the business, the United States Courts have
invented the “Immediacy Test” which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and it is held that if the corporation
did not prove an immediate need for the accumulation of earnings and profits such was not
for reasonable needs of the business and the penalty tax would apply. The working capital
needs of a business depend on the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the
availability of credit and other similar factors. The Tax Court opted to determine the
working capital sufficiency by using the ration between the current assets to current
liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the
petitioner’s failure to prove the CIR incorrect, clearly and conclusively, the Tax Court’s
ruling is upheld.
The Immediacy Test is used to determine the “reasonable needs” of business” in order to justify an
accumulation of earnings. Under this test, the term "reasonable needs of the business" are hereby
construed to mean the immediate needs of the business, including reasonably anticipated needs.
The corporation should be able to prove an immediate need for the accumulation of the earnings

and profits, or the direct correlation of anticipated needs to such accumulation of profits.
Otherwise, such accumulation would be deemed to be not for the reasonable needs of the
business, and the penalty tax would apply. (asked by Ma’am sa recit)
E. SPECIFIC ITEMS OF INCOME  

1. Final Tax Rates amended by RA 10963
a. Tax Tables (to be provided – must be memorized verbatim): For passive income derived
from sources within the Philippines, the revised rates are as follows:
1. Cash and/or Property Dividends – 10%;
2. Interest or yield of bank deposits, deposit substitutes – 20%;

and from trust funds
3. Interest received by a resident individual taxpayer under the – 15%;

expanded foreign currency deposit system
4. Interest or yield from a long-term (at least 5 years) deposit or – tax exempt;
investment
5. Interest of yield from a pre-terminated long-term deposit or investment:

With remaining maturity of 4 to less than 5 years – 5%;
With remaining maturity of 3 to less than 4 years – 12%;
With a remaining maturity of less than 3 years – 20%;
6. Royalties. except from books, literary works and – 20%;

musical compositions
7. Royalties from books, literary works and musical compositions – 10%;
8. Prizes up to Php 10,000 – tax exempt under Section 24 as

amended on new graduated tax
rates;
9. Prizes exceeding Php 10,000 – 20%;
10. Winnings other than Sweepstakes and Lotto winnings – 20%;
11. Sweepstakes prizes and Lotto winnings less than Php 10k – tax exempt;
12. Sweepstakes prizes and Lotto winnings mor then Php 10k – 20%
2. Royalties: Tax treatment: a sale of royalty on a regular basis for a consideration is considered an
active business and any gain therefrom shall be subject to normal corporate income tax. Where a
person pays royalty to another for the use of its intellectual property, such royalty is passive
income of the owner and is therefore subject to final withholding tax.
a. Iconic Beverages, Inc. vs. CIR, CTA Case No. 860 7 dated August 14, 2015
FACTS: Petitioner San Miguel Corporation (SMC), in exchange for 100% ownership of
Iconic Beverages Inc’s (IBI) shares of stocks transferred its trademark and other
intellectual property rights to IBI on Feb 2009. Eventually, SMC’s shares of stocks in IBI
were sold to San Miguel Brewery Inc (SMBI) but IBI retains ownership of the IP Rights

but later the same were licensed out in furtherance of its business to SMBI. CIR argued
that the royalty fees received by the IBI are in the nature of active income arising from
pursuit of its business and must be subject to regular corporate income tax. IBI sought
for the cancellation of the assessment issued against it for the alleged deficiency of the
income tax relating to the royalty income received for 2009. Later, ICI filed its protest
arguing that it properly declared its royalties as passive income subject to the final
withholding tax of 20% on the gross amount. The CIR in its decision denied the protest
then upheld the alleged income tax deficiencies of petitioner relating to the royalty
income. Thus, ICI filed the present Petition for Review before the CTA. W/N IBI’s royalty
income is subject to 20% FWT
RULING: No, because the royalty income earned by IBI is an active income, not a
passive income. To be subject to the 20% FWT, the royalties must be in the nature of a
passive income. In the case of CREBA vs Romulo, it was ruled that if the income is
generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income. In other words, passive income is income
generated by the taxpayer’s assets. In this case, the Audited Financial Statements of IBI
for the year 2009 indicate that the income from royalties is the main source of income
of IBI for the year of 2009. All the foregoing only leads the CTA to conclude that IBI’s
income from licensing out its IP rights is income generated in active pursuit and
performance of IBI’s primary purpose and thus, is not passive income.
3. Interest: Tax treatment: interest received or credited to the account of the depositor or
investors are included in their gross income, unless they are exempt from tax or subject to a final
tax
a. Compare with gains relative to bonds

b. BDO vs. Republic of the Philippines, GR No. 198756 dated January 13, 2015 and dated
August 16, 2016 (motion for reconsideration)
FACTS: Bureau of Treasury (BTR) held a public offering of treasury bonds denominated
as the Poverty Eradication and Alleviation Certificates (PEACE Bonds) announcing that
Php 30B worth of 10-yr-Zero-Coupon-Bonds will be auctioned. RCBC participated in the
auction on behalf of CODE-NGO and was declared as the winning bidder. Later, BIR
issued a two Rulings: (1) imposing 20% FWT on the Government Bonds and directing
BTR to withhold said FT at the maturity thereof; and (2) clarifying that the FWT due on
the discount or interest earned on the PEACE Bonds should be imposed and withheld
not only on RCBC/CODE-NGO but also on all subsequent holders of the Bonds. BDO filed
a petition to the SC contending that the BIR Ruling that ruled all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders was in clear disregard of the
requirement of twenty (20) or more lenders mandated under the NIRC. CIR countered
that the word “any” in Sec 22 (Y) of the NIRC plainly indicates that the period
contemplated is the entire term of the bond and not merely the point of issuance. W/N
the 10-year-zero-coupon treasury bonds issued by the BTR is subject to 20% FWT?
RULING: It depends. Under the NIRC, the rate of 20% is imposed on interest on any
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements. Under Section 22(Y), deposit substitute
is an alternative form of obtaining funds from the public (the term 'public' means
borrowing from twenty (20) or more individual or corporate lenders at any one time).
Hence, the number of lenders is determinative of whether a debt instrument should be
considered a deposit substitute and consequently subject to the 20% FWT.

Furthermore, the phrase “at any one time” for purposes of determining the “20 or more
lenders” would mean every transaction executed in the primary or secondary market
relating to the purchase or sale of securities. In the case at bar, it may seem that there
was only one lender, RCBC on behalf of CODE-NGO. However, a reading of the
underwriting agreement and RCBC term sheet reveals that the settlement dates for the
sale and distribution by RCBC Capital of the PEACE Bonds to various undisclosed
investors. At this point, the SC do not know as to how many investors the PEACE Bonds
were sold to by RCBC. Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACE Bonds are deemed deposit substitutes within the
meaning of Section 22(Y) of the NIRC and RCBC Capital/CODE - NGO would have been
obliged to pay the 20% FWT on the interest or discount from the PEACE Bonds.
c. CIR vs. Filinvest Development Corporation, GR No. 16353 dated July 19, 2011
FACTS: Filinvest Development Corporation extended advances in favor of its affiliates
and supported the same with instructional letters and cash and journal vouchers. The
BIR assessed Filinvest for deficiency income tax by imputing an “arm’s length” interest
rate on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the
authority to impute theoretical interest and that the rule is that interests cannot be
demanded in the absence of a stipulation to the effect. W/N the CIR can impute
theoretical interest on the advances made by Filinvest to its affiliates?
RULING: NO. Despite the seemingly broad power of the CIR to distribute, apportion and
allocate gross income under (now) Section 50 of the Tax Code, the same does not
include the power to impute theoretical interests even with regard to controlled
taxpayers’ transactions. This is true even if the CIR is able to prove that interest expense
(on its own loans) was in fact claimed by the lending entity. The term in the definition of
gross income that even those income “from whatever source derived” is covered still
requires that there must be actual or at least probable receipt or realization of the item
of gross income sought to be apportioned, distributed, or allocated. Finally, the rule
under the Civil Code that “no interest shall be due unless expressly stipulated in
writing” was also applied in this case.
d. Rule on OCWs
i. RR No. 1-2011 dated February 24, 2011: An OCW or OFW's income arising out of his
overseas employment is exempt from Income Tax. However, if an OCW or OFW has
interest income earnings from business activities or properties within the Philippines,
such interest income earnings are subject to 20% Final Tax on Interest Income from
any currency bank deposit and yield or any monetary benefit from deposit substitutes
and from trust funds and similar arrangements.
4. Dividends are subject to tax at the time of their declaration by the corporation, and not at the
time of actual payment of dividends since dividend income is taxable whether actually or
constructively received.
a. Stock Dividends – any distribution, by means of stocks, made by a corporation to its

shareholders out of its earnings or profits and payable to its shareholders
i. Sec. 73(B) of the NIRC: Stock Dividend. - A stock dividend representing the transfer
of surplus to capital account shall not be subject to tax.

However, if a corporation cancels or redeems stock issued as a dividend at such time
and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent that it represents a distribution of earnings or
profits.
GR: Stock Dividends are not subject to income tax because it only represents the
transfer of surplus to capital account and, as such, is not subject to income tax.
EXC: The following are the exceptions to the rule that stock dividends are not
subject to income tax, to wit:
1. Change in the stockholder’s equity, right or interest in the net assets of the
corporation;
2. Recipient is other than the shareholder;
3. Cancellation or redemption of shares of stock;
4. Distribution of treasury stocks;
5. Dividends declared in the guise of treasury stock dividend to avoid the
effects of income taxation; and
6. Different classes of stocks were issued
ii. CIR vs. Manning, GR No. L-28398 dated August 6, 1975

FACTS: Reese, the majority stockholder of Mantrasco, executed a trust agreement
between him, Mantrasco, Ross, Selph, Carrascoso & Janda law firm and the minority
stockholders, Manning, McDonald and Simmons (MMS). Said agreement was
entered into because of Reese’s desire that Mantrasco and its 2 subsidiaries to
continue under the management of MMS upon his [Reese] death. When Reese died,
Mantrasco paid Reese’s estate the value of his shares. When said purchase price has
been fully paid, 24,700 shares, which were declared as dividends, were
proportionately distributed to MMS. Because of this, the BIR issued assessments on
MMS for deficiency income tax for 1958. MMS opposed this assessment but the BIR
still found them liable. MMS appealed to the CTA, which absolved them from any
liability. W/N MMS should pay for the deficiency taxes.
RULING: Yes, MMS should pay the deficiency taxes. Stock dividends constitute as
income if a corporation redeems stock issued so as to make a distribution. This is
essentially equivalent to the distribution of a taxable dividend the amount so
distributed in the redemption considered as taxable income.
Here, the intention of the parties to the trust agreement was, in sum and substance,
to treat the 24,700 shares of Reese as absolutely outstanding shares of Reese's
estate until they were fully paid. Such being the true nature of the 24,700 shares,
their declaration as treasury stock dividend in 1958 was a complete nullity and
plainly violative of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings. A stock dividend always involves a transfer of surplus (or profit) to capital
stock, which is distributed to stockholders in lieu of a cash dividend.
iii. CIR vs. CA, GR No. 108576 dated January 20, 1999: The redemption converts into
money the stock dividends which become a realized profit or gain and consequently,

the stockholder's separate property. Profits derived from the capital invested
cannot escape income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence of any
business purpose for the redemption.
FACTS: Don Andres Soriano, a citizen and resident of the USA formed in the 1930's
the corporation "A Soriano Y Cia," predecessor of ANSCOR. A day after Don Andres
died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to
P30M. In the same year, stock dividends were respectively received by the Don
Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings. Pursuant to a Board Resolution, ANSCOR redeemed its common
shares. About a year later ANSCOR again redeemed another common shares from
Don Andres' estate, further reducing the latter's common shareholdings. ANSCOR's
business purpose for both redemptions of stock is to partially retire said stocks as
treasury shares in order to reduce the company's foreign exchange remittances in
case cash dividends are declared. Years later, ANSCOR was assessed by the BIR
which they subsequently assailed particularly on the redemptions and exchange of
stocks. W/N ANSCOR’s redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as “essentially
equivalent to the distribution of taxable dividend” making the proceeds thereof
taxable under the provisions of the Sec 83(b)
RULING: Yes, because the redemption of stocks in this case is essentially equivalent
to a distribution of tax dividends making the proceeds thereof taxable income.
GR, a stock dividend representing the transfer of surplus to capital account shall not
be subject to tax because stock dividends represent capital and do not constitute
income to its recipient. As capital, it is not yet subject to income tax. EXC: if a
corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated
after March first, nineteen hundred and thirteen.
The redemption or cancellation of stock dividends, depending on the “time” and

“manner” it was made, is essentially equivalent to a distribution of tax dividends,
making the proceeds thereof “taxable income” to the extent it represents profits.
The proceeds of redemption of stock dividends are essentially distribution of cash
dividends, which when paid becomes the absolute property of the stockholder.
Having realized gain from that redemption, the income earner cannot escape
income tax.
b. Cash and/or Property Dividends / Tax Sparing Rule
Cash Dividend – any distribution, by means of cash, made by the corporation to its
shareholders out of its earnings or profits and payable to its shareholders; taxable
Property Dividend – any distribution, by means of property, made by the

corporation to its shareholders out of its earnings or profits and payable to its
shareholders; taxable

i. Marubeni Corporation vs. CIR, GR No. 76573 dated September 15, 1989
FACTS: Marubeni Corporation is a Japanese corporation licensed to engage in
business in the Philippines. When the profits on Marubeni’s investments in Atlantic
Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld
from it, and another 15% profit remittance tax based on the remittable amount after
the final 10% withholding tax were paid to the Bureau of Internal Revenue.
Marubeni Corp. now claims for a refund or tax credit for the amount which it has
allegedly overpaid the BIR. At what rate should Marubeni be taxed, 10% or 15%?
RULING: 15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in
conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is
taxed at 35% of its gross income from all sources within the Philippines. However, a
discounted rate of 15% is given to Marubeni Corporation on dividends received
from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state,
extends in favor of Marubeni Corporation a tax credit of not less than 20% of the
dividends received. This 15% tax rate imposed on the dividends received under
Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.
Note: Each tax has a different tax basis. Under the Philippine-Japan Tax Convention,
the 25% rate fixed is the maximum rate, as reflected in the phrase “shall not
exceed.” This means that any tax imposable by the contracting state
concerned hould not exceed the 25% limitation and said rate would apply only if
the tax imposed by our laws exceeds the same.
ii. CIR vs. Goodyear Philippines, Inc., GR No. 216130 dated August 3, 2016 (Perlas-
Bernabe)
FACTS: The authorized capital stock of a domestic corporation Goodyear
Philippines Inc (GPI) was increased from P400M to P1.7B. Consequently, all the
preferred shares were solely and exclusively subscribed by Goodyear Tire and
Rubber Company (GTRC), a foreign company organized and existing under the laws
of US and is unregistered in the Philippines. Later, the BOD of GPI authorized the
redemption of GTRC’s preferred shares which resulted to accrued and unpaid
dividends. GPO filed an application for relief before the BIR that the redemption was
not subject to Philippine income tax pursuant to the PH-US tax treaty. Despite of
this, BPI still withheld and remitted FWT to the BIR by using the 15% FWT rate
computed based on the difference of the redemption price and aggregate par value
of the shares. On 2010, GPI filed a claim for refund for the payment of FWT. W/N the
gain derived by GTRC from the redemption of its preferred shares was subject to
15% FWT on dividends.
RULING: No. It must be noted that GTRC is a non-resident foreign corporation and
pursuant to the cardinal principle that treaties have the force and effect of law in
this jurisdiction, the PH-US Tax Treaty complementarily governs the tax
implications of respondent's transactions with GTRC. Under the tax treaty, the term
dividends should be understood according to the PH— NIRC. Section 73 (A) of the
NIRC provides that dividends means any distribution made by a corporation to
its shareholders out of its earnings or profits and payable to its shareholders,
whether in money or in other property.

Here, the redemption price received by GTRC could not be treated as accumulated
dividends in arrears that could be subjected to 15% FWT. Verily, GPI’s financial
statements covering the years 2003 to 2009 show that it did not have unrestricted
retained earnings, and in fact, operated from a position of deficit. Thus, absent the
availability of unrestricted retained earnings, the BOD of GPI had no power to
issue dividends. All told, the amount received by GTRC from respondent for the
redemption of its preferred shares were not accumulated dividends in arrears, thus,
it is not subject to 15% FWT on dividends in accordance with the NIRC.
iii. CIR vs. Wander Philippines, Inc., GR No. 68375 dated April 15, 1988
FACTS: Wander Philippines, Inc. (wander) is a domestic corporation who wholly-
owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in
trade for business in the Philippines. Wander filed it's withholding tax return for
1975 and 1976 and remitted to its parent company Glaro dividends from which
35% withholding tax was withheld and paid to the BIR. In 1977, Wander filed with
the BIR a claim for reimbursement, contending that it is liable only to 15%
withholding tax in accordance with sec. 24 (b) (1) of the Tax code, and not on the
basis of 35% which was withheld ad paid to and collected by the government. W/N
Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.
RULING: Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from
a domestic corporation is liable to a 15% withholding tax, provided that the
country in which the foreign corporation is domiciled shall allow a tax credit
(equivalent to 20% which is the difference between the 35% tax due on regular
corporations and the 15% tax due on dividends) against the taxes due to have been
paid in the Philippines. Here, Switzerland did not impose any tax on the dividends
received by Glaro thus it should be considered as a full satisfaction of the given
condition. To deny respondent the privilege to withhold 15% would run counter to
the spirit and intent of the law and will adversely affect the foreign corporations’
interest and discourage them from investing capital in our country
iv. CIR vs. Procter & Gamble Philippine Manufacturing Corp., GR No. 66838 dated
December 2, 1991
FACTS: Procter and Gamble Philippines declared dividends payable to its parent
company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M.
P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php
8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a
refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National
Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable
rate of withholding tax on the dividends remitted was only 15%. W/N P&G is
entitled to15% FWT on dividends, hence, its entitlement for refund.
RULING: Yes, P&G is entitled to 15% FWT on dividends, thus, entitled for refund.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation “shall allow” such foreign corporation a tax credit
for “taxes deemed paid in the Philippines,” applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax
credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an

amount equivalent to 20 percentage points which represents the difference
between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the
test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the
Philippines” applicable against the US taxes of P&G USA, and such tax credit must
reach at least 20 percentage points. In the case at bar, the requirements were met,
thus P&G is only entitled to 15% FWT.
c. Liquidating Dividends – when a corporation distributes all its properties or assets in

complete liquidation, the gain realized from this is taxable.
i. Sec. 73(A) of the NIRC: Where a corporation distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss sustained by the stockholder,
whether individual or corporate, is a taxable income or a deductible loss, as the case
may be
ii. Sec. 8 of RR No. 6-2008 dated April 22, 2008: TAXATION OF SURRENDER OF
SHARES BY THE INVESTOR UPON DISSOLUTION OF THE CORPORATION AND
LIQUIDATION OF ASSETS AND LIABILITIES OF SAID CORPORATION - Upon
surrender by the investor of the shares in exchange for cash and property
distributed by the issuing corporation upon its dissolution and liquidation of all
assets and liabilities, the investor shall recognize either capital gain or capital loss
upon such surrender of shares computed by comparing the cash and fair market
value of property received against the cost of the investment in shares. The
difference between the sum of the cash and the fair market value of property
received and the cost of the investment in shares shall represent the capital gain or
capital loss from the investment, whichever is applicable. If the investor is an
individual, the rule on holding period shall apply and the percentage of taxable
capital gain or deductible capital loss shall depend on the number of months or
years the shares are held by the investor. Section 39 of the Tax Code, as amended,
shall herein apply in all possible situations.
The capital gain or loss derived therefrom shall be subject to the regular income tax
rates imposed under the Tax Code, as amended, on individual taxpayers or to the
corporate income tax rate, in case of corporations.
iii. Wise & Co., Inc. vs. Meer, GR No. L-48231 dated June 30, 1947: When a corporation
was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a
transaction took place, which was no different in its essence from a sale of the same
stock to a third party who paid therefore.
FACTS: Manila Wine Merchants, Ltd., a company based on HK, was liquidated and its
capital stock was distributed to its stockholders, one of which is the Petitioner Wise
and Co Inc (WISE). As part of its liquidation, the corporation was sold to Manila
Wine Merchants., Inc. The said earnings, declared as dividends, were distributed to
its stockholders. The HK company then paid the income tax for the entire earnings.
As a result of the sale of its business and assets, a surplus was realized by the HK
company after deducting the dividends. This surplus was also distributed to its
stockholders. The HK company also paid the income tax for the said surplus. WISE

then filed their respective ITRs. CIR then made a deficiency assessment charging the
individual stockholders for taxes on the shares distributed to them despite the fact
that income tax was already paid by the HK company. The petitioners paid the
assessed amount in protest. The lower courts ruled in favor of the CIR, hence, this
action. Whether the amount received by the petitioners were ordinary dividends or
liquidating dividends.
RULING: The dividends are liquidating dividends or payments for surrendered or

relinquished stock in a corporation in complete liquidation. It was stipulated in the
deed of sale that the sale and transfer of the corporation shall take effect on June 1,
1937 while distribution took place on June 8. They could not consistently deem all
the business and assets of the corporation sold as of June 1, 1937, and still say that
said corporation, as a going concern, distributed ordinary dividends to them
thereafter.
Notes: Liquidating dividend v Ordinary dividend: The distinction between a

distribution in liquidation and an 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 distribution is in the nature of a recurring return on stock it is an
ordinary dividend. However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may properly be treated
as in complete or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company
5. Sale of Shares of Stock

a. Unlisted Shares (Secs. 24 to 28 of the NIRC, as amended by RA 10963) – unlisted shares
refer to those sale of shares of stock not traded in the stock exchange
Sec. 24 (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. -
The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.
Sec. 25 (A) (3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares
of stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section
24.
Sec. 27 (D) (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains
realized during the taxable year from the sale, exchange or other disposition of shares of
stock in a domestic corporation except shares sold or disposed of through the stock
exchange: (1) Not over Php 100k— 5%; and (2) Amount in excess of Php 100k— 10%
b. Net Capital Gains-- means the excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges
i. Jardine Davies, Inc. vs. CIR, CTA Case No. 5738 dated August 1, 2000:

FACTS: Jardine Davies Inc (JDI) is a corporation organized and existing under and by
virtue of the laws of the Philippines. JDI owned shares of stock in some other
corporations also organized under the laws of the PH but alleged that none of its shares
of stocks are listed and traded in the Philippine Stock Exchange. On 1997, JDI sold some
of its shares of stock in UTS Transport Co and Jardine CMG Life Insurance Inc to various
entities which resulted to capital gain. But on the same year, JDI also suffered a capital
loss when it sold its shares in Cargoswift, Aerotel, and JD Transport Services Inc. On
various occasions, JDI filed with the BIR separate Capital Gains Tax (CGT) Returns for
each stock transaction consummated by them in 1997. On 1998, JDI filed with the BIR
consolidated return reporting all of its stock transactions. The return indicated an
overpayment by JDI of CGT on its capital gains derived from its sale or exchange of
shares of stock not traded through local stock exchange in the amount of Php17.8M.
However, BIR did not issue a Certification/Tax Clearance to allow Jardine CMG Life
Insurance of the transfer of the shares in the name of the buyer thereof alleging that JDI
may not deduct from the capital gain it derived from the sale of its shares of stock in
Jardine CMG Life Insurance the capital losses it sustained during 1997 when it sold its
share of stock in Cargoswift, Aerotel, and JD Transport Services Inc. As a consequence,
BIR demanded payment by the JDI deficiency capital gains tax in the amount of
Php4.9M. W/N capital losses sustained from sales of shares of stock may be deducted
currently from capital gains derived from sales of shares of stock (offsetting).
RULING: Yes, the capital losses sustained from sales of shares of stock may be deducted
currently from its capital gains.
Net Capital Gain as defined by the Tax Code means the excess of the gains from sales of
capital assets over the losses from such sales while Net Capital Loss means the excess of
the losses from sales of capital assets over gains from such sales. It is also clear from the
law that what is being taxed is only the net capital gains realized from the sale or other
disposition of shares of stock not traded through a local stock exchange. If the
legislature had intended to impose the tax on capital gains, it would not have added the
word “net” before “capital gains” in the Tax Code. Conformably, JDI’s capital losses
sustained during the taxable year from sales of shares of stock may be deducted from
its capital gains.
c. Listed Shares (Sec. 127 of the NIRC, as amended by RA 10963)
Sec. 127 (A): if the shares of stock is traded in the stocks exchange, a percentage tax of six-
tenths of one percent (6/10 of 1%) of the gross selling price of shares of stock if they are
listed and sold, exchanged or transferred through the facilities of the local stock exchange.
d. Redemption of Shares vs. Treasury Shares
Treasury Shares are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption which is not
for cancellation, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
Redeemed Shares are shares bought back by the issuing corporation for the purpose of
retirement or cancellation.

i. Sec. 9 of RR No. 6-2008 dated April 22, 2008: TAXATION OF SHARES REDEEMED FOR
CANCELLATION OR RETIREMENT. When preferred shares are redeemed at a time
when the issuing corporation is still in its “going-concern” and is not contemplating in
dissolving or liquidating its assets and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the difference between the
amount/value received at the time of redemption and the cost of the preferred shares.
Similarly, the capital gain or loss derived shall be subject to the regular income tax rates
imposed under the Tax Code, as amended, on individual taxpayers or to the corporate
income tax rate, in case of corporations.
This section, however, does not cover situations where a corporation voluntarily buys
back its own shares, in which it becomes treasury shares. In such cases, the stock
transaction tax under Sec. 127(A) of the Tax Code shall apply if the shares are listed and
executed through the trading system and/or facilities of the Local Stock Exchange.
Otherwise, if the shares are not listed and traded through the Local Stock Exchange, it is
subject to the 5% and 10% net capital gains tax.
6. Sale of Real Property

a. Secs. 24 to 27 of the NIRC: Summary: The rate of 6% shall be imposed on capital gains
presumed to have been realized by the seller from the sale, exchange, or other
disposition of real properties located in the Philippines classified as capital assets,
including lacto de retro sales and other forms of conditional sales based on the gross
selling price or fair market value as determined by the CIR, whichever is higher.
The tax base shall be the entire selling price.
The capital gains tax must be paid within 30 days following each sale or disposition. In
case of installment sale, the return shall be filed within 30 days following the receipt of
the first down payment and within 30 days following the subsequent installment
payments.
b. SMI-ED Technology Corporation, Inc. vs. CIR, GR No. 175410 dated November 12, 2014
FACTS: SMI-Ed Philippines is a PEZA-registered corporation authorized to engage in
the business of manufacturing ultra high-density microprocessor unit package. After its
registration, SMI-Ed Philippines constructed buildings and purchased machineries and
equipment but eventually failed to commence operations. Its factory was temporarily
closed. Later, it sold its buildings and some of its installed machineries and equipment
to Ibiden Philippines, Inc., another PEZA-registered enterprise. SMI-Ed Philippines was
thereafter dissolved. In its quarterly ITR, SMI-Ed Philippines subjected the entire gross
sales of its properties to 5% final tax on PEZA registered corporations. However, after a
year, SMI-Ed Philippines filed an administrative claim for the refund with the BIR
alleging that the amount was erroneously paid. The BIR did not act on the claim which
prompted the SMI-ED to file a petition for review before the CTA which denied their
claim for refund. CTA found that the properties sold by SMI-ED were capital assets,
hence, subject to 6% capital gains tax (CGT). W/N CTA erred in imposing the CGT on the
sale of SMI-Ed’s buildings, equipments, and machineries.

RULING: With respect to the sale of buildings and land, the CTA was correct in imposing
CGT but with respect to the sale of machineries and equipments, CTA erred of its
imposition of CGT.
For SMI-ED’s properties to be subjected to CGT, the properties must form part of SMI-
ED’s capital assets. The properties involved in this case are buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section 39(A)(1) of the
NIRC. None of the properties were used in SMI-ED’s trade or ordinary course of
business because petitioner never commenced operations. They were not part of the
inventory. None of them were stocks in trade. Based on the definition of capital assets
under Section 39 of the NIRC, they are capital assets.
As regards machineries and equipments, these should not be subjected to the capital
gains tax since these are not real properties. Only the presumed gain from the sale of
petitioner’s land and/or building may be subjected to the 6% capital gains tax. The
income from the sale of petitioner’s machineries and equipment is subject to the
provisions on normal corporate income tax.
c. Republic vs. Spouses Salvador, GR No. 205428 dated June 7, 2017
FACTS: Respondents Sps. Salvador (SALVADORS) are the registered owners of a parcel
of land with a total land area of 229 sqms at Valenzuela City. The Republic, represented
by the DPWH filed a complaint for the expropriation of 83 square meters of said parcel
of land (subject property), as well as the improvements thereon, for the construction of
the C-5 Northern Link Road Project Phase 2 (Segment 9) from the NLEX to McArthur
Highway. A year later, The Salvadors received two checks from the DPWH representing
100% of the zonal value of the subject property and the cost of the one-story semi-
concrete residential house erected on the property. The RTC thereafter issued the
corresponding Writ of Possession in favor of the Republic. On the same day, the
Salvadors signified in open court that they recognized the purpose for which their
property is being expropriated and interposed no objection thereto and manifested that
they have already received money from the DPWH and are therefore no longer
intending to claim any just compensation. RTC likewise directed the DPWH to pay
respondents consequential damages equivalent to the value of the capital gains tax
(CGT) and other taxes necessary for the transfer of the subject property in the
Republic's name. DPWH moved for partial reconsideration specifically on the issue
relating to the payment of the CGT, but was denied. The RTC also found no justifiable
basis to reconsider its award of Consequential damages in favor of respondents as the
payment of CGT and other transfer taxes is but a consequence of the expropriation
proceedings. W/N the capital gains tax on the transfer of the expropriated property can
be considered as consequential damages that may be awarded to respondents.
RULING: No, the RTC seriously erred when it directed DPWH to pay consequential
damages equivalent to the value of CGT and other taxes necessary for the transfer of the
subject property. It is settled that the transfer of property through expropriation
proceedings is a sale or exchange within the meaning of the NIRC and profit from the
transaction constitutes capital gain. Since CGT is a tax on passive income, it is the seller,
or respondents in this case, who are liable to shoulder the tax. In fact, DPWH is
authorized by the BIR as a withholding agent for the expropriation of real property for
infrastructure projects. Consequential damages are only awarded if as a result of the
expropriation, the remaining property of the owner suffers from an impairment or
decrease in value. In this case, no evidence was submitted to prove any impairment or
decrease in value of the subject property as a result of the expropriation.

d. Foreclosure Sales
i. RR No. 4-99 dated March 9, 1999: provides that in case the mortgagor exercises his
right of redemption within one year from the issuance of the certificate of sale,56 no
capital gains tax shall be imposed because no capital gains has been derived by the
mortgagor and no sale or transfer of real property was realized. If the mortgagor does
not exercise his right of redemption, capital gains tax on the foreclosure sale shall
become due. In such case, the capital gains tax due will be based on the bid price of the
highest bidder.
To summarize, no capital gains taxes if foreclosed properties is redeemed. If there is non-

redemption, capital gains must be paid.
ii. RMC No. 058-08 dated August 15, 2008 – who should pay/statutory seller: the
mortgagee banks, quasi-banks, and trust companies are considered the statutory sellers
in the foreclosure sales of these foreclosed real properties, and are thus, expected to
have paid the aforesaid taxes within the period provided therefor, once the redemption
period has expired, hence, without need to further wait for another or subsequent
buyer before taxes on said foreclosed property shall be paid.
iii. RR No. 9-2012 dated May 31, 2012: In case of non-redemption of properties sold
during involuntary sales, regardless of the type of proceedings and personality of
mortgagees/selling persons or entities, the Capital Gains Tax (CGT), if the property is a
capital asset; or the Creditable Withholding Tax (CWT), if the property is an ordinary
asset; the Value-Added Tax (VAT) and the Documentary Stamp Tax (DST) shall become
due.
e. Sale of Principal Residence: Principal residence – It is the dwelling house, where the
husband or wife or unmarried individual residence; actual occupancy is not interrupted
or abandoned by temporary absence
i. RR No. 13-99 dated July 26, 1999: The following are the conditions for the exemption
of capital gains tax on the sale by a natural person of his principal residence:
1. The 6% capital gains tax due shall be deposited in an account with an

authorized agent bank under an Escrow Agreement. It can only be released
upon showing that the proceeds have been fully utilized within 18 months;
2. The proceeds from the sale, exchange or disposition must be fully utilized
in acquiring or constructing his new principal residence within 18
calendar months from date of its sale. Proof must be submitted;
3. The tax exemption may be availed of only once every 10 years;
4. The historical cost or adjusted basis of his old principal residence

sold, exchanged disposed shall be carried over to the cost basis of his new
principal residence; and
5. If there is no full utilization of the proceeds of sale, exchange or

disposition of his old principal residence, he shall be liable for deficiency
capital gains tax of the utilized portion.

Note: The exemption applies to resident citizens and aliens. This is logical
because if they are not residents, then there is no principal place of residence
ii. RR No. 14-00 dated November 20, 1999: The seller/transferor's compliance with
the preliminary conditions for exemption from the 6% capital gains tax will be a
sufficient basis for the Revenue District Officer to approve and issue the
Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of
the principal residence sold, exchanged or disposed by the aforesaid taxpayer.
Said CAR or TCC shall state that the said sale, exchange or disposition of the
taxpayer's principal residence is exempt from capital gains tax pursuant to Sec.
24 (D)(2) of the Tax Code, but subject to compliance with the post-reporting
requirements.
7. Others – Tax Benefit Rule is where if a taxpayer has recovered an expense or loss written off
for last years tax, the recovered amount must be included in this years gross income.
a. Refunded Taxes
i. Sec. 34(C)(1) of the NIRC: In General. - Taxes paid or incurred within the taxable year
in connection with the taxpayer's profession, trade or business, shall be allowed as
deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction
shall be allowed in the case of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph (3) of this subsection (relating
to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction.
b. Recovered Bad Debts

i. Sec. 34(E)(1) of the NIRC: In General. - Debts due to the taxpayer actually
ascertained to be worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in a transaction
entered into between parties mentioned under Section 36 (B) of this Code: Provided,
That recovery of bad debts previously allowed as deduction in the preceding years shall
be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
ii. Sec. 4 of RR No. 5-99 dated March 10, 1999: The requisites for valid deduction of bad
debts from gross income are: a) there must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable; b) the same must be connected
with the taxpayer's trade, business or practice of profession; c) the same must not be
sustained in a transaction entered into between related parties enumerated under
Section 36(B) of the Tax Code of 1997; d) the same must be actually charged off the
books of accounts of the taxpayer as of the end of the taxable year; and e) the same
must be actually ascertained to be worthless and uncollectible as of the end of the

taxable year. The recovery of bad debts previously allowed as deduction in the
preceding year or years will be included as part of the taxpayer's gross income in the
year of such recovery to the extent of the income tax benefit of said deduction.

Income Tax Syllabus Notes I

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Income Tax Syllabus Notes I

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II.

A. GENERAL PRINCIPLES ON INCOME TAXATION

1. General Situs Rules:

Sec. 23 of the NIRC:

2. Specific Situs Rules:

a. Sec. 42 of the NIRC: Source of income rules in the Philippines

DIVIDENDS – General Rule: residence of the corporation paying the dividend.

SALE OF PERSONAL PROPERTY – it depends: (1) Personal property produced, wholly

1 | INCOME TAXATION REVIEW

2 | INCOME TAXATION REVIEW

RESPONDENT’S MAIN ARGUMENT: BOAC's service of transportation is performed

RULING :YES. Sales of tickets in the Philippines is taxable.

FACTS: Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of

3 | INCOME TAXATION REVIEW

ISSUES: whether or not respondent's sales commission income is taxable in the

B. INDIVIDUAL INCOME TAXATION

1. Resident Citizens vs Non-Resident Citizen

Non-Resident Citizen – it means a citizen of the Philippines:

2. Non-Resident Citizens vs Overseas Contract Workers

4 | INCOME TAXATION REVIEW

4. Minimum Wage Earners

d. Q10-13/A10-13 of Revenue Memorandum Circular (“RMC”) No. 50-2018:

(Q11) Is the MWE exempt from income tax?

5 | INCOME TAXATION REVIEW

6 | INCOME TAXATION REVIEW

 An 8% tax on gross sales or receipts and other non-operating income in

A taxpayer shall automatically be subject to the graduated rates under Section

7 | INCOME TAXATION REVIEW

Particulars Graduated IT Rates 8% IT Rates

8 | INCOME TAXATION REVIEW

2. For Existing Individual Business Taxpayers

(Q22) What is the base amount of the 8% income tax rate?

9 | INCOME TAXATION REVIEW

Classification Graduated IT Rates &/or 8% IT rates

b. Purely Business/Practice of Profession:

10 | INCOME TAXATION REVIEW

a. Definition: Compensation Income means all remuneration for services performed by an

11 | INCOME TAXATION REVIEW

C. CORPORATE INCOME TAXATION

1. Definition of corporations for tax purposes

12 | INCOME TAXATION REVIEW

Kinds of Partnerships under the Tax Code:

13 | INCOME TAXATION REVIEW

14 | INCOME TAXATION REVIEW

15 | INCOME TAXATION REVIEW

4. General Professional Partnerships vs Regular Partnerships

16 | INCOME TAXATION REVIEW

RESIDENT FOREIGN CORPORATION – a foreign corporation engaged in trade or business within

NON-RESIDENT FOREIGN CORPORATION – a foreign corporation not engaged in trade or

a. Marubeni Corporation vs CIR

6. Private Educational Institutions and Non-Profit Hospitals

17 | INCOME TAXATION REVIEW

d. Obiter in CIR vs DLSU

While a non-stock, non-profit educational institution is classified as a tax-exempt entity

18 | INCOME TAXATION REVIEW

(b) International Shippng. – ‘Gross Philippine Billings’ means gross revenue

c. Secs.1-4 of RR No. 15-2013 dated September 20, 2013:

19 | INCOME TAXATION REVIEW

Originating from the Philippines — shall include the following:

20 | INCOME TAXATION REVIEW

e. Air Canada vs CIR (Tax Treaty Issue)

21 | INCOME TAXATION REVIEW

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the

2) Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

E. SPECIFIC ITEMS OF INCOME  