Professional Documents
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Imperial Rome Traditions of tribute through human bondage revived, however, with
Imperial Rome used tribute extracted from colonized peoples to the triangular slave trade between Africa, Europe and the Americas.
multiply the bounty of empire. Julius Caesar imposed a one-percent
sales tax; Augustus instituted an inheritance tax to provide retirement In Britain, a disagreement on the rights of taxation between
funds for the military. However, human bondage remained the most Parliament and King Charles I in 1629 led to civil war.
lucrative form of tribute for both Greece and Rome.
Nation States
The Price of Faith French Revolution
Resentment of tax fuelled the French Revolution between 1789 and
With the decline of Rome in Europe, ‗spiritual‘ and ‗temporal‘ powers 1799. Thereafter, Napoleon centralized the tax system and employed
were not always easy to distinguish. Religious institutions rivalled – private collectors who could keep a proportion of their takings.
and sometimes surpassed – political ones in their material power. To
secure this, they imposed forms of taxation. Formation of the United States
Revolt against taxation – levied from imperial Britain – also fuelled the
Christians formation of the United States, though an independent Congress soon
For Christians it was a ‗tithe‟, or a tenth of what the faithful produced, enacted the Federal Property Tax in 1798.
usually paid to the Church in kind. Tithe barns for the receipt and
storage of such payments were lesser in size only to churches in Representation
villages and towns. By now, no aspiring nation, in Europe or elsewhere, could dispense
with the machinery of a state or the taxes to pay for it. At the same
Islam time, the principle of ‗no taxation without representation‘ was
The expansion of Islam was accompanied by the ‗Islamic Tax‘, becoming more firmly established – though representation was still
the khums, or ‗one twentieth‘ – more modest by half than the tithe. largely limited to the wealthy.
There are direct references to it in the Qu‘ran, which requires its use
for specified purposes, such as the relief of the poor. In India, Islamic Promises, Promises
rulers imposed a tax called jizya in the 11th century. Income Tax
As the power of monarchies declined and of industrial capitalism
Other Cultures increased, a new settlement was required. This was pioneered in
In Latin America the Aztec, Olmec, Maya and Inca cultures all seem to Britain.
have raised forms of taxation, usually in association with ritual
observance. Income tax was first imposed on personal wealth in Britain in 1798,
to pay for the wars with Napoleon. It was billed as a ‗temporary‘
measure, renewable annually by Parliament – and has remained so Corporate globalization was, in any event, making it more difficult for
ever since (it still expires on 5 April every year). A year after the Battle nation states to exercise control (or collect taxes), rather than compete
of Waterloo in 1815 it was repealed. with each other to offer the most favourable rates.
In the general election of 1841 Sir Robert Peel opposed income tax, In Russia, the tax rap became a nationalist tool against oligarchs and
but once elected he reimposed it, reducing customs duties at the same foreign businesses. Everywhere, the ‗neoliberal‘ process has continued,
time. Tax ‗commissioners‘ (who came from the landed gentry) were but its outcome is increasingly uncertain.
transformed into the Board of Inland Revenue in 1849 to produce an
efficient bureaucracy. Public expenditure as a proportion of national wealth has not fallen in
rich countries. Private or corporate wealth still relies on governments
In the general election of 1871, both Gladstone and Disraeli opposed to provide (or, more often, finance) a vast range of services –
income tax. Disraeli won, but the tax stayed. including ‗bail-outs‘ when free-market orthodoxy turns out to be
flawed, as in the recent ‗credit crunch‘.
In 1908, Lloyd George as Chancellor introduced non-contributory old-
age pensions, and – in the ‗People‘s Budget‘ of 1909 – plans for a Military expenditures have still not been reduced significantly. In poor
super-tax on the rich. The rejection of this by the House of Lords led countries, revenues for desperately needed public services remain
to the 1911 Parliament Act which removed the Lords‘ power of veto. minimal. A ‗global consensus‘ agrees, as the saying goes, that „only
the little people pay tax‟.
As taxation increased, so the right to vote and the principle of
democratic consent were extended, culminating in universal adult HISTORICAL BACKGROUND
suffrage.
Taxes to Beat the Axis
World War I EGYPT
At the start of World War One in 1914, the standard rate of income tax
in Britain was 6 per cent; by the end of the war in 1918 it was 30 per Tax on cooking oil
cent. An Excess Profits Tax was levied on companies benefiting from During the reign of the Egyptian pharaohs, tax collectors were known
war production. The total tax ‗take‘ was 17 times higher than it had as scribes. The scribes imposed taxes on cooking oil and to ensure that
been in 1905. This continued after the war, when government was the people were not avoiding said tax, the scribes would audit the
expected to provide homes and public services in ‗a land fit for heroes‘. households.
Government borrowing soared. In the US, the ‗New Deal‘ in response GREECE
to mass unemployment during the Great Depression of the 1930s
relied heavily on the Federal Government‘s ability to borrow against Taxes for wartime expenditure
future tax revenues. The Athenians would impose a tax in times of war, known as eisphora
which was used to pay for wartime expenditure. They were the first
World War II ones to introduce the concept of tax refund/credit/carry-over, because
It was only after Pearl Harbor, and the US entry into World War Two, when additional resources were gained by the war effort, such were
that the Revenue Act of 1942 subjected millions of new taxpayers to used to refund the tax to the citizens.
income tax and gave rise to a whole new taxpaying culture.
Monthly poll tax
The Federal Government launched an all-out campaign to market the Athenians imposed a monthly poll tax on foreigners, or those who did
changes, including Disney animated shorts featuring Donald Duck not have both an Athenian mother and father. One drachma for men
touting the importance of ‗taxes to beat the Axis!‘ Asked in February and a half drachma for women. The tax was referred to as metoikion.
1944 whether they considered the amount of income tax they paid to
be ‗fair‘, 90 per cent answered ‗yes‘. ROMAN EMPIRE
However, the Cold War between the ‗West‘ and the Soviet Union Inheritance tax
ensured that vast military machines continued to operate at public Caesar Augustus, the most brilliant tax strategist of the Roman Empire,
expense, and ‗defence‘ loomed large in the finances of the new states virtually eliminated the publicani as tax collectors for the central
right from the outset. government. During this period, cities were given the responsibility for
collecting taxes. Augustus instituted a 5% inheritance tax to provide
Public Service for retirement funds for the military.
Meanwhile, demand for public services gave rise to such things as the
National Health Service in Britain and new forms of taxation to pay for Sales tax
them. Scandinavia led the way as the proportion of national wealth Also, a 1 percent sales tax was imposed.
devoted to public expenditure and services rose towards a half. The
use of taxation to redistribute wealth and even out the inequalities of GREAT BRITIAN
capitalism in the West became an ideological weapon in the Cold War.
Income tax
Global Consensus Great Britain was the first to introduce income tax. The first tax
Control Taxes assessed in England was during the occupation by the Roman Empire.
As the Cold War came to an end, triumphant free-market orthodoxy
demanded ‗small‘ government, privatization and cuts in taxes on the Legend has it that Leofric, Earl of Mercia, imposed very high taxes. His
wealth of private individuals and corporations. wife, Lady Godiva, asked him that the taxes be reduced. He obliged,
on the condition that Lady Godiva roam the town naked while riding a
horse. Lady Godiva did so, hence the tax was minimized.
PHILIPPINES Taxes
In the Philippines, taxation can be traced during the Spanish era where Taxes are the enforced proportional contributions from properties and
several taxes and monopolies were established. persons levied by the State by virtue of its sovereignty for the support
of the government and all public needs.
Resident tax
The resident tax during the Spanish times were known as tribute. It Taxation refers to the power to collect money, while tax is the money
may be paid in cash or kind. In 1884, however, the tribute was itself.
replaced by the cedula personal or personal identity paper, which is
equivalent to the present community tax certificate. Q: Can LGU validly enact a law imposing amusement tax on local
swimming pools not provided in the LGC or other laws?
Bandala system
A form of direct taxes that the Spaniards implemented where the A: No. Cebu City is not sovereign, thus, there is no inherent power of
natives were coerced to sell their products to the government at very taxation. It can impose only those taxes delegated to it by the
low prices. The collection of taxes were specific in a particular area legislative branch of the national government. Only Congress has an
rebellious to the Spaniards. unlimited power to exercise the power to tax.
Cedula Personal Q: May a legislative body enact laws to raise revenue in the absence of
A legal identity document issued by cities and municipalities to all a constitutional provision granting such body the power to tax?
persons that have reached the age of majority and upon payment of a
community tax. The cedula served as an identification card that had to A: Yes. Taxation is inherent in the State, being an attribute of
be carried at all times. One who cannot present the same could be sovereignty. Thus, the legislature can enact laws to raise revenues
detained for being indocumentado. even without the grant of said power in the Constitution. It must be
noted that Constitutional provisions relating to taxation do not operate
TN: Andres Bonifacio and other Katipuneros tore their cedulas in as grants of power to the Government, but merely constitute as
August 1896, sparking the start of the Philippine Revolution. limitations upon a power which would otherwise be practically without
limit.
Community tax
This was imposed by the Americans when CA No. 465 took effect, Paseo Realty v. CA
mandating the imposition of a base resident tax of 50 cents and an Re: How tax refunds are construed
additional tax of one peso based on factors such as income and real
estate holdings. The payment of this tax merits the issue of a Taxation is a destructive power which interferes with the personal and
residence certificate. property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what
Eventually, Philippines passed the Local Government Code, after we pay for civilized society, or are the lifeblood of the nation, the law
gaining independence, mandating the payment of community tax and frowns against exemptions from taxation and statutes granting tax
proof of entries is the community tax certificate. exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority.
Polo y servicio
Forced labor for 40 days of men ranging from 16 to 60 years old who A claim of refund or exemption from tax payments must be clearly
were obligated to give personal services to the community projects. shown and be based on language in the law too plain to be mistaken.
One could be exempted from the polo by paying a fee called falla. Elsewise stated, taxation is the rule, exemption therefrom is the
exception.
DIFFERENT TAXES UNDER THE NIRC
Case discussion: The confusion as to petitioner‘s entitlement to a
refund could altogether have been avoided had it presented its tax
TAXES UNDER THE NATIONAL INTERNAL REVENUE CODE return for 1990. The grant of a refund is founded on the assumption
that the tax return is valid, i.e., that the facts stated therein are true
A. Income tax and correct. Without the tax return, it is error to grant a refund since it
A. Individuals would be virtually impossible to determine whether the proper taxes
B. Corporation have been assessed and paid.
C. Other persons
B. Business taxes Pelizloy Realty v. Province of Benguet
A. Value-added tax Re: Scope of authority of a province to impose amusement tax
B. Other percentage taxes
C. Transfer taxes The power to tax is an attribute of sovereignty, and as such, inheres in
A. Donor‘s tax the State. Such, however, is not true for provinces, cities,
B. Estate tax municipalities and barangays as they are not the sovereign. Rather,
they are mere territorial and political subdivisions of the Republic of
TN: Taxation is a destructive power of the State which interferes with the Philippines.
personal and property rights of the people and takes a portion of their
property from them for the support of the government. Being a A municipal corporation, unlike a sovereign state, is clothed with no
destructive power, it can be used to kill an activity or business if it inherent power of taxation. The charter or statute must plainly show
wants to. Thus, it must be exercised with caution. an intent to confer that power or the municipality cannot assume it.
And the power when granted is to be construed strictissimi juris. Any
DEFINITION OF TAXATION doubt or ambiguity arising out of the term used in granting that power
must be resolved against the municipality. Therefore, the power of a
province to tax is limited to the extent that such power is delegated to
TAXATION it either by the Constitution or by statute.
Taxation is the inherent power of the State exercised by the legislature Case discussion: Resorts, swimming pools, bath houses, hot springs
to demand enforced contributions from the people to raise revenue in and tourist spots do not belong to the same category or class as
order to defray the necessary expenses of the Government. theatres, cinemas, concert halls, circuses, and boxing stadia. It follows
that they cannot be considered as among the ‗other places of LEGISLATIVE IN CHARACTER
amusement‘ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes.
LEGISLATIVE IN CHARACTER
NATURE OF THE POWER OF TAXATION
The power to tax is peculiarly and exclusively legislative and cannot be
exercised by the executive or judicial branch of the government.
NATURE OF THE POWER OF TAXATION Hence, only Congress, our national legislative body, can impose taxes.
However, the levy of a tax may also be made by a local legislative
A. Inherent attribute of sovereignty body, subject to such limitations as may be provided by law.
B. Legislative in character
C. Subject to constitutional and inherent limitations Reason: The power is granted by the people to the legislature, the
representative of the people.
INHERENT ATTRIBUTE OF SOVEREIGNTY
GR: The power to tax is essentially a legislative function and which the
central legislative body cannot delegate to other branches.
INHERENT ATTRIBUTE OF SOVEREIGNTY
EXC: (Permissive delegation of the power to tax)
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent A. Local governments in respect to matters of local concern
government. It exists apart from constitutions and without being TN: Through the Local Government Code of 1991
expressly conferred by the people. Hence, it can be exercised by the
government even if the Constitution is entirely silent on the subject. B. When allowed by the Constitution
TN: To the President with respect to tariff rates, import and
Basis – Lifeblood theory export quotas, flexible tariff clause, etc.
The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist C. Administrative regulations (Assessment and Collection)
without the means to pay its expenses, and for those means, it has the
right to compel all citizens and property within its limit to contribute. Q. What are the two tests of a valid delegation?
B. Subjects and objects of taxation – refer to the coverage and D. Progressive system of taxation
the kind or nature of the tax. They may be persons, property, E. Exemption of religious, charitable and education entities, non-
businesses, transactions, or the exercise of rights or privileges. profit cemeteries, and churches from property taxation
F. Exemption is non-stock, non-profit education institution from
A state is free to select the subject of taxation and it has been taxation
repeatedly held that the inequalities which result from the G. Non-imprisonment for non-payment of a poll tax
singling out of one particular class for taxation or exemption H. Non-impairment of the jurisdiction of the SC in tax cases
infringe no constitutional limitation so long as such is reasonable I. Prohibition on the use of special purpose fund
and not arbitrary. J. Power of the President to veto any particular items in a revenue
or tariff bill
C. Amount and rate of tax – as a general rule, the legislature
may levy a tax of any amount or rate it sees fit. If the taxes are Indirect Constitutional limitations
oppressive or unjust, the only remedy is the ballot box and the
election of new representatives. However, the tax must be A. Due process of law
reasonable, one that would not go against the deprivation of B. Equal protection of the laws
property without due process of law. C. Non-impairment of the obligations of contracts
D. Non-infringement of religious freedom
D. Manner and mode of enforcement and collection – these E. No appropriation for religious purposes
refer to the administration of the tax or the implementation of F. Non-infringement of the freedom of the press
tax laws. The legislature possesses the sole power to prescribe
the mode or method by which the tax shall be collected, and to THEORIES OF TAXATION
designate the officers through whom its will shall be enforced.
Congress should provide sufficient standards on how taxes are THEORIES OF TAXATION
supposed to be collected.
Examples: withholding tax, creditable, etc. A. Lifeblood theory
B. Necessity theory
E. Situs of taxation – refers to the place of taxation. In C. Benefits received or compensation theory
determining the same, the nature of the taxes must be
considered. LIFEBLOOD THEORY
Examples: Community tax – residence of the taxpayer
Real property tax – location of the property
LIFEBLOOD THEORY
F. Apportionment of the tax – refers to the determination of
which portion of the society gets to be benefited by the tax. It Taxes are the lifeblood of the government and their prompt and
could either of general or limited application. certain availability is an imperious need. Without taxes, the
government would be paralyzed for lack of motive power to activate
G. Grant tax exemption or condonation – The power to tax and operate it.
carries with it the power to grant exemption therefrom.
Exemptions are interpreted strictly against the taxpayer and CIR v. Metro Star Superama
liberally in favor of the government. Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. On the other hand, such collection
H. Kind of tax to be collected – it can be based on income, should be made in accordance with law as any arbitrariness will negate
sales, import or export, etc. the very reason for government itself.
Provision of administrative and judicial remedies that may be availed But even as we concede the inevitability and indispensability of
by the taxpayers and the government taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed procedure.
SUBJECT TO CONSTITUTIONAL & INHERENT LIMITATIONS If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can
CONSTITUTIONAL AND INHERENT LIMITATIONS demonstrate that the law has not been observed.
These limitations are those provided in the fundamental law or implied Case discussion: The Tax Code requires that the taxpayer must first be
therefrom, while the rest spring from the nature of the taxing power informed that he is liable for deficiency taxes through the sending of a
itself although they may or may not be provided in the Constitution. Preliminary Assessment Notice. He must be informed of the facts and
the law upon which the assessment is made. To proceed heedlessly
Inherent limitations with tax collection without first establishing a valid assessment is
A. Public purpose evidently violative of the cardinal principle in administrative
B. Exemption from taxation of government entities investigations – that taxpayers should be able to present their case
C. Non-delegation of the legislative power to tax and adduce supporting evidence.
D. International comity
E. Territorial jurisdiction
NECESSITY THEORY
Constitutional limitations
Direct Constitutional limitations NECESSITY THEORY
A. Revenue bill must originate exclusively in the House but the The power to tax proceeds upon the theory that the existence of a
Senate may propose with amendments government is a necessity. No sovereign State can continue to exist
B. Concurrence of a majority of all the members of Congress for without the means to pay its expenses, and for those means, it has the
the passage of a law granting tax exemption right to compel all citizens and property within its limit to contribute.
C. Rule of uniformity and equity in taxation
A law which has for its intention the raising of revenue is an exercise
BENEFITS RECEIVED THEORY /
of the power of taxation.
COMPENSATION THEORY / RECIPROCITY THEORY /
SYMBIOTIC RELATIONSHIP DOCTRINE
Of the three inherent powers of the State, only the power of taxation
has for its purpose the raising of revenue.
BENEFITS RECEIVED OR COMPENSATION THEORY
This theory is the basis of taxation and is founded on the reciprocal SECONDARY PURPOSE OF TAXATION
duties of protection and support between the State and its inhabitants.
NON-REVENUE RAISING
TN: Inhabitants and not citizens because even aliens are taxed. TN: Also known as the sumptuary purpose of taxation.
Concurring and Dissenting Opinion of Justice Leonen in Manila A. Regulation –Taxes can be used to curtail or improve a
Memorial v. Sec of DSWD particular industry. Taxes can be levied with a regulatory
It is said that taxes are what we pay for civilized society. Without purpose to provide means for the rehabilitation and stabilization
taxes, the government would be paralyzed for lack of the motive of a threatened industry which is affected with public interest.
power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard-earned income to the taxing Example: to protect local industries, higher taxes is imposed on
authorities, every person who is able to must contribute his share in foreign investors in order to level the playing field and prevent
the running of the government. unfair competition; re-pricing.
The government, for its part, is expected to respond in the form of Tio v. Videogram Regulatory Board
in/tangible benefits intended to improve the lives of the people and The public purpose of a tax may legally exist even if the motive
enhance their moral and material values. This symbiotic relationship is which impelled the legislature to impose the tax was to favor
the rationale of taxation and should dispel the erroneous notion that it one industry over another.
is an arbitrary method of exaction by those in the seat of power.
It is inherent in the power to tax that a state be free to select
Take Note: the subjects of taxation, and it has been repeatedly held that
Theory of Taxation – Lifeblood/Necessity inequities which result from a singling out of one particular class
Theory Basis of Taxation – Benefits Received Theory for taxation or exemption infringe no constitutional limitation.
Taxation has been made the implement of the state's police
PURPOSE AND OBJECTIVE OF TAXATION power.
THE FOUR (4) R‟S OF TAXATION Case discussion: The levy of the 30% tax is for a public
purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the
THE FOUR (4) R‟S OF TAXATION: rampant film piracy, the flagrant violation of intellectual property
TN: According to Atty. Amago, these refer more to the effects of rights, and the proliferation of pornographic video tapes. And
taxation. while it was also an objective of the decree to protect the movie
A. Revenue – purpose of taxation is to raise revenue in order to industry, the tax remains a valid imposition.
defray the expenses of the government.
B. Promotion of general welfare – Taxation can be used as an
B. Redistribution – people who earn more, pay more taxes, so implement of police power for the purpose of promoting general
their wealth is used for the benefit of everyone, including the welfare. But sometimes, the use of the power of taxation as an
less wealthy individuals. implement of taxation can destroy industry.
TN: This is the justification of estate tax. Example: 20% Senior Citizen Discount
Reason: Those who earn more are given more opportunities by
the State, so they should give more to the Government. Panhandle Oil v. Mississipi
Re: Marshall Dictum
C. Re-pricing – higher taxes are imposed on articles which are
considered dangerous to the health of the people, i.e. alcoholic ―The power to tax involves the power to destroy.‖
drinks, cigarettes, etc. To address externalities and prevent
citizens from using such dangerous products, higher taxes may McCulloch v. Maryland
be imposed to curtail such practice. The end goal is to change Re: Holmes Dictum
the behavior of the citizens or to promote a certain policy.
―The power of taxation does not involve the power to destroy as
D. Representation – Our representatives are the ones imposing long as this court sits.‖
the tax, but since the people are the ones putting them in
power, the people can demand something from them – efficient Reyes v. Almanzor
and effective government service. There is the sense of Re: How were the doctrines reconciled?
accountability.
―No taxation without representation‖ While taxation is plenary and unlimited, it has restrictions. Both
the due process of law and equal protection clauses of the
TN: The purpose of taxation to raise revenue to defray the expenses of Constitution may be invoked to invalidate revenue measures. It
the Government has evolved to include social justice. is the Court‘s role to see to it that the exercise of the power
does not transgress these limitations.
PRIMARY PURPOSE OF TAXATION
How to reconcile
The power to tax can be used to destroy only if it used as an
REVENUE RAISING implement of police power such as when you try to regulate a
particular act to the extent that industries can really close down.
The primary purpose of taxation has always been to raise revenue.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 6 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
Plenary – the legislative body has the power to impose taxes as they C. Administrative feasibility – It means that tax laws should be
may deem expedient. After all, they can determine the subjects and capable of convenient, just and effective administration. One
objects of taxation. which can be easily implemented to assure smooth flow of funds
to the Treasury, in such a way that it can be enforced uniformly
Tio v. Videogram Regulatory Board by the government, convenient as to time and manner, and not
A tax does not cease to be valid merely because it regulates, unduly burdensome upon, or discouraging to business activity.
discourages, or even definitely deters the activities taxed. The power
to impose taxes is one so unlimited in force and so searching in extent, D. Economic efficiency – A combination of fiscal adequacy and
that the courts scarcely venture to declare that it is subject to any administrative feasibility. The cost of collecting taxes should not
restrictions whatever, except such as rest in the discretion of the be higher than the benefits derived from it.
authority which exercises it.
DISTINGUISHED FROM OTHER INHERENT POWERS intent and purpose behind the law requiring owners of vehicles to pay
for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the
TAXATION V. POLICE POWER
operating expenses of the administering agency. Fees may be properly
Taxation Police Power regarded as taxes even though they also serve as an instrument of
regulation.
Promotion of general
Purpose Raise Revenue
welfare Taxation may be made the implement of the state's police power/ If
Limited to the cost of the purpose is primarily revenue, or if revenue is, at least, one of the
Amount of exaction Unlimited real and substantial purposes, then the exaction is properly called a
regulation
tax. Such is the case of motor vehicle registration fees.
Non-impairment of Inferior to the non- Superior to the non-
contracts impairment clause impairment clause TN: Motor vehicle registration fee and chauffeur‘s license fee are
powers of taxation, whereas the special permit fee and additional fee
Scope for charge of registration is an exercise of police power because such
(Rights which cannot fees are very minimal to be revenue-raising.
Liberty and
be taken away Property rights
Property rights
without due process CIR v. Central Luzon Corp.
of law) The privilege enjoyed by senior citizens does not come directly from
Can be bargained or the State, but rather from the private establishments concerned.
compromised and be Accordingly, the tax credit benefit granted to these establishments can
Bargain be deemed as their just compensation for private property taken by
subject to Cannot be bargained
(Surrender) the State for public use. The taxation power can also be used as an
abatement
Ex. Tax amnesty implement for the exercise of the power of eminent domain. Tax
measures are but enforced contributions exacted on pain of penal
Altruistic feeling of
Compensation Enjoyment of sanctions and clearly for a public purpose.
contributing to society‘s
(Benefits) government services
welfare
Carlos Superdrug v. DSWD
Property taken Generally money Any kind of property In this case, the Congress changed the tax credit scheme to a mere
tax deduction. The Court held that the Expanded Senior Citizens Act is
a legitimate exercise of police power and not eminent domain. The
basic reason for the passage of the law is social justice and general
TAXATION V. EMINENT DOMAIN
welfare of the senior citizens. Hence, property rights must bow to the
primacy of police power because property rights, though sheltered by
Taxation Eminent Domain due process, must yield to general welfare.
The main purpose of police power is the regulation of a behavior or The enforced proportional contributions, generally payable in money
conduct, while taxation is revenue generation. The ―lawful subjects‖ and paid at regular periods or intervals, levied from persons and
and ―lawful means‖ tests are used to determine the validity of a law property or the exercise of a right or privilege, by the State which has
enacted under the police power. The power of taxation, on the other jurisdiction over the subject or object of taxation, through the
hand, is circumscribed by inherent and constitutional limitations. legislative body of the State, for the support of the government and for
all public needs.
The imposition of the levy was an exercise by the State of its taxation TN: All taxes are revenues, but not all revenues are taxes.
power. While it is true that the power of taxation can be used as an
implement of police power, the primary purpose of the levy is revenue A. Internal Revenue taxes – Provided under the NIRC
generation. If the purpose is primarily revenue, or if revenue is at a. Income tax
least, one of the real and substantial purposes, then the exaction is b. Business tax
properly called a tax. c. Transfer tax
d. Donors and estate tax
Philippine Airlines v. Edu e. Percentage tax
The imposition of a vehicle registration fee is not an exercise by the f. Excise tax
State of its police power, but of its taxation power. The legislative g. Documentary stamp tax
CLASSIFICATION OF TAXES
B. Local/Municipal taxes – Provided under the LGC
C. Tariff and customs duties – Provided under the TCC AS TO SUBJECT MATTER OR OBJECT
Taxes and tax incentives under special laws A. Personal, Poll, or Capitation – tax imposed on persons
Common example is the PEZA law which provides 5% tax in lieu of all residing within a specified territory, whether citizens or not,
taxes for businesses catered within its territory. without regard to their property or the occupation or business in
which they may be engaged.
Ex: Community tax
ESSENTIAL CHARACTERISTICS OF TAXES
B. Property – tax levied on property, real or personal, in
ESSENTIAL CHARACTERISTICS OF TAXES proportional to its value or in accordance with some rule of
apportionment.
A. Enforced contribution – Not dependent upon the will or Ex: Real estate tax
contractual assent of the person taxed. Hence, whether the
taxpayer likes it or not, he is compelled to pay taxes. It is a legal C. Excise – tax imposed upon the performance of an act, the
and mandatory obligation. enjoyment of a privilege, or the engagement in an occupation or
business.
B. Generally payable in money – Tax is a pecuniary burden Ex: Income tax, donor‘s tax, estate tax.
payable in money.
AS TO BURDEN OR INCIDENCE
Exceptions:
1. Tax credit certificate or backpay certificate – When A. Direct – tax demanded from the very person who, as intended
taxes are paid in excess of that due, the government issues should pay the tax which he cannot shift to another.
a certificate where said excess in taxes will be deducted Ex: Income tax, estate tax, donor‘s tax, community tax
from the taxes payable the following year.
B. Indirect – tax demanded in the first instance from one person
2. Tax liens – Forfeiture of property by reason of failure to with the expectation that he can shift the burden to someone
pay real property tax – but this property will be sold and else, not as taxes, but as part of the purchase price.
the proceeds shall be used to satisfy the tax obligation. Ex: VAT, percentage tax, excise tax, customs duties
F. Levied by the lawmaking body of the State – The power to C. Mixed – Basis of the tax is the value of the article and weight.
tax is a legislative power but is also granted to local Example: Customs duties
governments, subject to such guidelines and limitations as law
may provide. AS TO PURPOSE
G. Levied for public purpose – The public purpose of the A. General, Fiscal or Revenue – tax levied for the general or
imposition is implied in the levy of tax. A tax levied for a private ordinary purposes of the government, i.e. raise revenue for
purpose constitutes taking of property without due process of governmental and public needs. These funds can be used for
law. whatever purpose.
Ex: Income tax, VAT, and almost all taxes.
REQUISITES OF A VALID TAX
B. Special or Regulatory – tax levied for special purposes, i.e. to
achieve some social or economic ends, irrespective of whether
REQUISITES OF A VALID TAX? [PUJ-DL] revenue is actually raised or not.
TN: These funds can be used only for the specific purpose
1. It must be for a public purpose which the law creating it indicated.
2. The rule on taxation should be uniform
3. Subject taxed must be within the jurisdiction of the taxing AS TO SCOPE OR AUTHORITY IMPOSING THE TAX
authority
4. The assessment and collection must be in consonance with the A. National – taxes imposed by the national government
due process clause Ex: NIR taxes, customs duties, national taxes imposed by
5. The tax must not infringe the inherent and constitutional laws
limitations of the power of taxation
B. Municipal or Local – taxes provided in the LGC and imposed
by local governments.
Ex: Business taxes imposed under the LGC
B. Progressive – rate of which increases as the tax base or Fees may be regarded as taxes
bracket increases. Fees may be properly regarded as taxes even though they also serve
Ex: Income tax as an instrument of regulation. If the revenue is the primary purpose,
or if revenue is at least one of the real and substantial purposes, then
C. Regressive – tax rate decreases as the tax base or bracket the exaction is properly called a tax.
increases.
Ex: VAT (regressive as to its effect) Lutz v. Araneta
Police power may be exercised for the purpose of requiring licenses for
A regressive tax must not be confused with regressive system of which license fees may have to be paid. The amount of the license
taxation. In a society where the majority of the people have low fees for the regulation of useful occupations should only be sufficient
incomes, it exists when there are more indirect taxes imposed than to pay for the cost of the license & the necessary expense of police
direct taxes. Since the low-income sector of the population as a whole surveillance and regulation. For non-useful occupations, the license fee
buys more consumption goods on which the indirect taxes are may be sufficiently high to discourage the activity sought to be
collected, the burden of indirect taxes rests more on them than on the regulated.
more affluent groups.
TAX V. TOLL FEE
TAX DISTINGUISHED FROM OTHER IMPOSITIONS
Toll is a sum of money for the use of something, generally applied to
Importance of distinguishing taxes from other impositions the consideration which is paid for the use of a road, bridge or the like,
The different kinds of impositions mentioned below are not considered of a public nature.
taxes. Hence, if they are not considered taxes, the requirements for a
valid tax (PUJ-DL) need not be complied with. Tax Toll Fee
A demand of
TAX V. LICENSE FEE Basis A demand of sovereignty
proprietorship
License is in the nature of a special privilege, or authority to do what Depends upon the cost of
is within its terms. It makes lawful an act which would otherwise be construction or
Amount Unlimited
unlawful. A license granted by the State is always revocable. maintenance of the public
improvement used
License fee – charge imposed under the police power for regulation. For the use of the
Purpose For raising revenue
property of another
Tax License Fee
Imposed by the
Imposed by the
Purpose Revenue-raising Regulation Authority Government or private
Government
individuals or entities
Basis Power of Taxation Police Power
Time of Paid after the start of the
Limited to the cost of the Paid before and after use
Payment business
Amount Unlimited license and expenses of
regulation Effect of
Business is suspended Use is prohibited
Non-payment
Paid before the
Time of Paid after the start of the
commencement of the Can be bargained through
Payment business
business Surrender a substantial consideration Can be waived
(with compensation)
Effect of Non- Does not make the
Makes the business illegal
payment business illegal
Primary purpose test (To be considered a license fee) Perpetual Succour vs. CIR
Compromise penalties are amounts collected by the BIR in lieu of
A. The imposition must relate to an occupation or activity that so criminal prosecution for violations committed by taxpayers, the
engages the public interest in health, morals, development and payment of which is based on a compromise agreement validly
safety, as to require regulation for the protection and promotion entered into between the taxpayer and the CIR.
of such public interest.
Limited or Exceptional as Tax is not given or granted by the government, but rather collected
Scope General application to the time and place by the government from its people
(specific area for 5 years
Republic v. Bacolod
Revenue refers to all funds or income derived by the government,
The purpose of a special assessment is to finance the improvement
whether from tax or from whatever source and whatever manner.
of particular properties, with the benefits of the improvements
accruing or inuring to the owners thereof, who, after all, pay the
Tax is a type of revenue.
assessment. The purpose of an ordinary tax on the other hand, is to
TN: All taxes are revenues, but not all revenues are taxes.
provide the Government with revenues needed for the financing of
state affairs. Thus, while the refusal of a citizen to pay his ordinary
taxes may not indeed be sanctioned because it would impair TAXATION V. INTERNAL REVENUE
government functions, the same would not hold true in the case of a
refusal to comply with a special assessment.
Internal Revenue refer to taxes imposed by the legislature other
than duties on imports and exports.
TAX V. DEBT
TTax is broader than internal revenue.
Tax Debt
TAX V. CUSTOMS DUTIES
Based on contract or
Basis Based on law
judgment
Customs Duties is a tax levied on imports (and, sometimes, on
Assignability Not assignable Generally assignable exports) by the customs authorities of a country to raise state
revenue, and/or to protect domestic industries from more efficient or
Mode of May be paid in money or predatory competitors from abroad.
Generally paid in money
Payment in kind
Customs duty is based generally on the value of goods or upon the
Set-off Not subject to set-off Subject to set-off
weight, dimensions, or some other criteria of the item (such as the size
Can be imprisoned for of the engine, in case of automobiles).
Effect of Non- Cannot be imprisoned for
non-payment of tax,
payment non-payment of debt
except poll tax Tax Customs Duties
Imposed by public Imposed by private Type National and Local National
Authority
authority individuals
Scope General or Specific Specific in Scope
NIRC governs the Civil Code governs the
Prescription Authority BIR or LGU Bureau of Customs
prescriptive periods prescriptive periods
Tariff is a tax imposed on imported goods and services. Tariffs are Case discussion: the LOI provides that the imposition of the P10 levy
used to restrict trade, as they increase the price of imported goods was conditional and dependent upon PPI becoming financially viable.
and services, making them more expensive to consumers. They are This suggests that the levy was actually imposed to benefit PPI.
one of several tools available to shape trade policy. Worse, the levy was used to pay the corporate debts of PPI (Planters
Products Inc). The letter of understanding and the plain text of the LOI
Tax Tariffs clearly indicate that the levy was exacted for the benefit of a private
corporation.
Type National and Local National
TEST TO DETERMINE PUBLIC PURPOSE
Scope General or Specific Specific in Scope
The tax is levied with a regulatory purpose, to provide means for the
THE LEVY MUST BE FOR A PUBLIC PURPOSE
rehabilitation and stabilization of the threatened sugar industry. In
other words, the act is primarily an exercise of the police power.
The right of taxation can only be used in aid of a public object. It
The protection and promotion of the sugar industry is a matter of
cannot be exercised in aid of enterprises strictly private and for the
public concern. Sugar production is one of the great industries of the
benefit of individuals, even though in a remote or collateral way, the
Philippines, with sugar occupying a leading position among its export
public may be benefited thereby.
products. It is a great source of the state‘s wealth, hence, its
promotion, protection and advancement redounds greatly to the
TN: Public purpose has now evolved to include social justice. Social
general welfare.
Justice is the broader term.
Thus, the legislature may determine within reasonable bounds what is
Planters Products v. Fertiphil Corp.
necessary for its protection and expedient for its promotion. Here, the
The term "public purpose" is not defined. It is an elastic concept that
legislative discretion must be allowed full play, subject only to the test
can be hammered to fit modern standards. It does not only pertain to
of reasonableness.
those purposes which are traditionally viewed as essentially
government functions, such as building roads and delivery of basic
Q: Why is it that only those people engaged in the sugar industry are
services, but also includes those purposes designed to promote social
the ones burdened to pay the tax?
justice. Thus, public money may now be used for the relocation of
illegal settlers, low-cost housing and urban or agrarian reform.
A: That the tax to be levied should burden the sugar producers
themselves can hardly be a ground of complaint. Indeed, it appears
While the categories of what may constitute a public purpose are
rational that the tax be obtained precisely from those who are to be
continually expanding in light of the expansion of government
benefited from the expenditure of the funds derived from it. At any
functions, the inherent requirement that taxes can only be exacted for
rate, it is inherent in the power to tax that a state be free to select the
a public purpose still stands. Public purpose is the heart of a tax law.
subjects of taxation, and it has been repeatedly held that inequalities
When a tax law is only a mask to exact funds from the public, when its
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 12 | P a g e
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which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation. Matters which cannot be delegated
1. Nature of taxation
Caltex v. COA 2. Object and purpose
Taxation is no longer envisioned as a measure to raise revenue to 3. Subject or coverage
support the existence of the government. Taxes may be levied with a 4. Amount or rate of tax
regulatory purpose to provide means for the rehabilitation and 5. Manner, means and agencies of collection
stabilization of a threatened industry which is affected with public 6. Situs
interest as to be within the police power of the State.
EXCEPTIONS
The oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices Delegation to Local Government Units
could hurt the lives of a majority of the people and cause economic Article 10, Section 5, Constitution
crisis of untold proportions. It would have a chain reaction in terms of
demands for wage increase and upward spiralling of the cost of basic Each LGU shall have the power to create its own sources of revenues
commodities. Hence, the stabilization of oil prices is of prime concern and to levy taxes, fees, charges, subject to such guidelines and
which the state, via its police power, may properly address. limitations as the Congress may provide, consistent with the basis
policy of local autonomy.
CONCEPTS RELATIVE TO PUBLIC PURPOSE
TN: Hence, the Congress passed the Local Government Code of 1991
1. Inequalities resulting from the singling out of one particular which embodies the guidelines on how LGUs can exercise such power.
class for taxation or exemption infringe no constitutional
limitation Q: Can a municipality pass an ordinance imposing a tax on any sale or
2. Individual taxpayers need not derive direct benefits from the tax transfer of real property located within its territory?
3. Public purpose is continually expanding, areas formerly left to
private initiative may not be undertaken by the government if it A: No. The Local Tax Code only allows provinces and cities to impose a
is to meet the increasing social challenges of the time. tax on the transfer of ownership of real property. Municipalities are
4. Public purpose is determined at the time of the enactment of prohibited from imposing said tax that provinces are specifically
the tax law and not at the time of its implementation. authorized to levy. While it is true that the Constitution has given
broad powers of taxation to LGUs, this delegation however is subject
TAXPAYER‟S SUIT to such limitations as may be provided by law.
Where a taxpayer questions the validity of a law appropriating public Basco v. PAGCOR
funds, the case is called a taxpayer‘s suit. It is a question of whether A mere municipal corporation has no inherent right to impose taxes.
the public money is used for public purpose or not. Thus, the Charter must plainly show intent to confer such power.
Otherwise, the municipality cannot assume it. Its power to tax must
The act complained of is directly involved in the illegal disbursement of always yield to a legislative act which is superior, having been passed
public funds. However, the public funds must be derived from taxation. upon by the State itself which has the inherent power to tax.
Taxpayers have sufficient interest in preventing the illegal expenditure B. Flexible tariff clause – the authority given to the President, upon
of moneys raised by taxation and may therefore question the the recommendation of NEDA, to adjust the tariff rates under
constitutionality of statutes requiring expenditure of public money. Sec. 401 of the Code in the interest of national economy, general
welfare and/or national security.
Important concepts to remember:
1. The public funds must be derived from taxation Reason: Impelled by necessity. These matters pertain to
2. Does not apply to donations and contributions made by public international trade. In the enactment of laws, the process
individuals or private entities attendant thereto is very cumbersome. If we let Congress fix
3. Taxpayer is not relieved from the obligation to pay tax just tariff rate, it would take a really long time. But any such
because of his belief that it is being misappropriated delegation to the President must be done by Congress through
4. A taxpayer has no legal standing to question acts which do not the enactment of a law.
involve the use of public funds.
Delegation to administrative bodies
Limited to the administrative implementation that calls for some
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
degree of discretionary powers under sufficient standards expressed
by law or implied from the policy and purposes of the Act.
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX A. Power to value property for purposes of taxation
B. Power to assess and collect taxes
The power of taxation peculiarly and exclusively belongs to the C. Power to perform an innumerable details of computation,
legislative body of the government and therefore may not be appraisal and adjustment
delegated as a rule.
When Congress delegates legislative powers to the various
General rule: The power of taxation is vested in the legislative administrative agencies, i.e. BIR, BOC, what is delegated is the power
branch of the national government and therefore cannot be delegated. of ―subordinate legislation.‖
Exceptions:
1. Delegation to local governments It confers upon the administrative bodies the power and authority to
2. Delegation to the President fill in the details which are lacking in the law and which Congress may
3. Delegation to administrative bodies not have the competence or opportunity to fill in.
provisions of the general law, it cannot be said that the same is the
EXEMPTION FROM TAXATION
intent of the lawmakers as repeal of laws by implication is not favored.
EXEMPTION FROM TAXATION OF GOVERNMENT ENTITIES In this regard, we agree with petitioner that if the lawmakers had
TN: Refers only to real estate tax intended to withdraw petitioner's tax exemption of its gaming income,
then Section 13 of PD 1869 should have been amended expressly in
If the taxing authority is the National Government R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.
GR: Agencies and instrumentalities of the government performing
governmental functions are tax exempt. If performing proprietary 1. Petitioner's tax privilege of paying five percent (5%) franchise tax
function, taxable. in lieu of all other taxes with respect to its income from gaming
operations, pursuant to P .D. 1869, as amended, is not repealed
A. Governmental function – tax exempt 2. Petitioner's income from gaming operations is subject to the five
B. Proprietary function – taxable percent (5%) franchise tax only
3. Petitioner's income from other related services is subject to
EXC: Even if performing proprietary function, if the franchise or law corporate income tax only
creating them exempts them – tax exempt.
Bar Question:
Reason: Otherwise, it would necessitate the imposition of new taxes A tobacco corporation bought a parcel of land and donated the same
in order to pay for the tax imposed on them. There would be a to a municipality for the sole purpose of devoting said land as a
continuing cycle of imposing taxes. relocation site. Through an ordinance, the municipality ordained that
the lots be finally transferred and donated to the beneficiaries.
If the taxing authority is the LGU Determine the tax consequence of the foregoing disposition with
RA 7160 expressly prohibits LGUs from levying tax on the National respect to the municipality.
Government, its agencies and instrumentalities and other LGUs.
The Municipality is not subject to any donor‘s tax on the value of the
NDA v. Cebu City land it subsequently donated, it being exempt from taxes as a political
Re: GOCCs with respect to tax exemption subdivision of the National Government.
TN: What‘s required to originate from HREP is the bill and not the law
TERRITORIAL JURISDICTION
or statute.
TN: Tax amnesties, tax condonations and tax refunds are considered
Direct constitutional limitations
grants in the nature of tax exemptions. Hence, absolute majority is
required.
A. Revenue bill must originate exclusively in the House of
Representatives but the Senate may propose or amendments
B. Concurrence of a majority of all the members of Congress for UNIFORM, EQUITABLE AND PROGRESSIVE SYSTEM
the passage of a law granting tax exemption
C. Rule of uniformity and equity in taxation
Article VI, Section 28 (1) of the 1987 Constitution
D. Progressive system of taxation
The rule of taxation shall be uniform and equitable. The Congress shall
E. Exemption of religious, charitable and educational entities, non-
evolve a progressive system of taxation.
profit cemeteries, and churches from property taxation.
F. Exemption of non-stock, non-profit educational institutions from
taxation A. Uniformity in taxation – alt taxable articles or kinds of
G. Non-imprisonment for non-payment of a poll tax property of the same class shall be taxed at the same rate.
H. Non-impairment of the jurisdiction of the SC in tax cases
I. Prohibition on the use of special fund B. Equity – uniformity in taxation is effected through the
J. Power of the President to veto any particular items in a apportionment of the tax burden among the taxpayers which
revenue or tariff bill must under the Constitution must be equitable – fair, just,
reasonable and proportionate to the taxpayer‘s ability to pay.
REVENUE BILLS MUST ORIGINATE FROM C. Progressive – There shall be more direct taxes than indirect
THE HOUSE OF REPRESENTATIVES taxes, with ability to pay as the principal criterion. Hence, the
tax rate increases as the tax bracket increases.
Article VI, Section 24(4) of the 1987 Constitution
All appropriation, revenue or tariff bills shall originate from the House Q: Is progressive system of taxation directory or mandatory?
of Representatives, but the Senate may propose or concur with
amendments. A: It is merely directory because we even have regressive taxes (VAT),
the lesser money you have, the more you can feel the impact. It is
regressive as to effect. Such a provision is placed in the Constitution as
moral incentives to legislation and not as judicially enforceable rights.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 15 | P a g e
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TN: This does not mean that there should be no indirect taxes. There Example:
can still be indirect taxes as long as it is minimized. In other words, Land owned by Caritas Health Shield/USC
having a progressive system means that the direct taxes are more Rented out to different entities
than the indirect taxes. (Are the lots exempt from Real Property Taxes?)
stated, the use of the school building or lot for commercial purposes is categorized as "commercial" since a tertiary hospital like CHH is
neither contemplated by law, nor by jurisprudence. required by law to have a pool of physicians who comprises the
required medical departments in various medical fields.
Thus, while the use of the second floor of the main building in the case
at bar for residential purposes of the Director and his family, may find The fact that the physicians are holding office in a separate building
justification under the concept of incidental use, which is does not take away the essence and nature of their services vis-à-vis
complimentary to the main or primary purpose— educational, the lease the over-all operation of the hospital and the benefits to the hospital‘s
of the first floor thereof to the Northern Marketing Corporation cannot patients. Their transfer to a more spacious and, perhaps, convenient
by any stretch of the imagination be considered incidental to the place and location for the benefit of the hospital‘s patients does not
purpose of education. remove them from being an integral part of the overall operation of
the hospital.
Hence, the school building as well as the lot where it is built should be
taxed not because the second floor of the same is being used by the Respondent‘s charge of rentals for the offices and clinics its accredited
Director and his family for residential purposes, but because the first physicians occupy cannot be equated to a commercial venture, which
floor thereof is being used for commercial purposes. However, since is mainly for profit.
only a portion is used for purposes of commerce, it is only fair that half
of the assessed tax be returned to the school involved. First, CHHMAC is only for its consultants or accredited doctors and
medical specialists. Second, the charging of rentals is a practical
TN: The property need not be indispensable. It is enough that it is necessity: (1) to recoup the investment cost of the building, (2) to
incidental and reasonably necessary to the purpose. cover the rentals for the lot CHHMAC is built on, and (3) to maintain
the CHHMAC building and its facilities. Third, as correctly pointed out
Phil. Lung Center v. QC by respondent, it pays the proper taxes for its rental income. And,
Philippine Lung Center is not tax exempt. Under the Constitution, in fourth, if there is indeed any net income from the lease income of
order to be entitled to exemption from real property tax, there must be CHHMAC, such does not inure to any private or individual person as it
clear and unequivocal proof that: will be used for respondent‘s other charitable projects.
1. It is a charitable institution and
2. Its real properties are actually, directly and exclusively used for American Bible Society v. City of Manila, 1957
charitable purposes. Facts: American Bible Society is engaged in the distribution and sales
of bibles and religious articles. The City Treasurer of Manila informed
While portions of the hospital are used for treatment of patients and the plaintiff that it was conducting the business of general
the dispensation of medical services to them, whether paying or non- merchandise without providing itself with the necessary Mayor's permit
paying, other portions thereof are being leased to private individuals and municipal license, in violation of Ordinance No. 3000, as amended,
and enterprises. and Ordinance No. 2529, as amended, and required plaintiff to secure
Exclusive is defined as possessed and enjoyed to the exclusion of the corresponding permit and license.
others, debarred from participation or enjoyment. If real property is
used for one or more commercial purposes, it is not exclusively used Held: The constitutional guaranty of the free exercise and enjoyment
for the exempted purposes but is subject to taxation. The words of religious profession and worship carries with it the right to
"dominant use" or "principal use" cannot be substituted for the words disseminate religious information. Any restraint of such right can only
"used exclusively" without doing violence to the Constitution and the be justified like other restraints of freedom of expression on the
law. grounds that there is a clear and present danger of any substantive
evil which the State has the right to prevent.
What is meant by actual, direct and exclusive use of the property is
the direct and immediate and actual application of the property itself It may be true that in the case at bar the price asked for the bibles
to the purposes for which the charitable institution is organized. It is and other religious pamphlets was in some instances a little bit higher
not the use of the income from the real property that is determinative than the actual cost of the same, but this cannot mean that appellant
of whether the property is used for tax-exempt purposes. was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason we believe that the provisions
TN: In the Herrera case, the meaning of ―exclusive use‖ is the of City of Manila Ordinance No. 2529, cannot be applied to appellant,
―principal‖ or ―dominant‖ use. In fact, it likewise considers incidental for in doing so it would impair its free exercise and enjoyment of its
use. Hence, as long as it is related to the principal purpose, then it can religious profession and worship as well as its rights of dissemination
be exempted. However, in the Lung center case, ―exclusively‖ is of religious belief.
synonymous to ―solely‖. Hence, to be exempted from real property
tax, the property should be solely for charitable purpose and not just
EXEMPTION OF NON-STOCK,
mere incidental to the principal purpose. This is the controlling
NON-PROFIT EDUCATIONAL INSTITUTIONS
doctrine.
City Assessor of Cebu v. Ass. of Benevola de Cebu Article XIV, Section 4 (3) of the 1987 Constitution
Facts: Petitioner insists on a 35% assessment rate on the building All revenues and assets of non-stock, non-profit educational
which he considers commercial in nature contrary to respondent's institutions used actually, directly and exclusively for educational
position that it is a special real property entitled to a 10% assessment purposes shall be exempt from taxes and duties.
rate for realty tax.
Proprietary educational institutions, including those cooperatively
Issue: Whether or not a medical arts center built by a hospital to owned, may likewise be entitled to such exemptions, subject to the
house its doctors a separate commercial establishment or an limitations provided by law, including restrictions on dividends and
appurtenant to the hospital. provisions for reinvestment.
Held: The CHH Medical Arts Center (CHHMAC) is an integral part of Subject to conditions prescribed by law, all grants, endowments,
CHH. It is definitely incidental to and reasonably necessary for the donations, or contributions used actually, directly, and exclusively for
operations of Chong Hua Hospital. The doctors and medical specialists educational purposes shall be exempt from tax.
holding clinics in CHHMAC are those duly accredited by CHH. They are
consultants of the hospital and the ones who can treat CHH's patients
Important principles:
confined in it. This fact alone takes away CHHMAC from being
A. The exemption covers income, property, and donor‘s taxes, The 10% preferential tax rate does not apply to the following:
custom duties, and other taxes imposed by either or both the A. The passive income derived by the educational institution,
national government or political subdivisions on all revenues, which is subject to final income tax, i.e. rent income or
assets, property or donations, used actually, directly and interest in income
exclusively for educational purposes. B. Engaged in unrelated trade or business or other activity
where the gross income from such exceeds 50% of the
TN: In case of religious and charitable entities and non-profit total gross income
cemeteries, the exemption is limited only to property tax.
Distinguish Article VI from Article XIV.
B. The exemption does not cover revenues derived from, or assets
used in, unrelated activities or enterprise. Article VI, Section 28 (3) Article XIV, Section 4(3)
Summary of rules: Hence, rental income derived by a tax-exempt organization from the
A. If non-stock, non-profit educational institution – tax lease of its properties, real or personal, is not exempt from income
exempt taxation, even if such income is exclusively used for the
B. Even if for profit – preferential rate at 10% provided its accomplishment of its objectives.
gross income from unrelated trade must not exceed 50%
of its total gross income
Moreover, for the YMCA to be granted income exemption under the Poll tax is a tax of a fixed amount fixed on persons residing within a
Constitution, it must prove with substantial evidence that (1) it falls specified territory, whether resident or not, without regard to their
under the classification non-stock, non-profit educational institution property or the occupation of business which they may be engaged.
and (2) the income it seeks to be exempted from taxation is used It is a tax imposed on persons whether residing or not residing in a
actually, directly, and exclusively for educational purposes. particular place as evidenced by a community tax certificate or cedula.
It is clear that the Constitution does not distinguish with respect to the San Miguel Corp v. Avelino
source or origin of the income. Hence, whether the income was Even the legislative body cannot deprive the SC of its appellate
derived from profit-generating activities or not, it will still be tax jurisdiction over all cases coming from inferior courts where the
exempt. constitutionality or validity of an ordinance or the legality of any tax,
The NIRC, while echoing said exemption, however provided a impost, assessment, or toll is in question.
condition, to wit: ―The income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, Q. What is the scope of judicial review in taxation?
or from any of their activities conducted for profit regardless of the Limited only to the interpretation and application of tax laws. Its power
disposition made of such income, shall be subject to tax imposed does not include inquiry into the policy of legislation. Neither can it
under this Code.‖ legitimately question or refuse to sanction the provisions of any law
consistent with the Constitution.
In other words, the NIRC is trying to say is that income derived by a
non-stock, non-profit educational institutions from profit-generating
activities are now taxable. It in effect made a distinction with respect PROHIBITION ON THE USE OF SPECIAL PURPOSE FUND
to the source or origin of the income, a distinction that the Constitution
itself did not make. This would appear contradictory to the all-
Article VI, Section 29 (3) of the 1987 Constitution
encompassing exemption provided in the Constitution.
All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the
Applying the doctrine of constitutional supremacy, the condition
purpose for which a special fund was created has been fulfilled or
imposed by the Tax Code requiring such institutions to limit the
abandoned, the balance, if any, shall be transferred to the general
sources of their income to educational activities only should be
funds of the Government.
deemed void and of no effect for running contrary to the constitutional
exemption.
POWER OF THE PRESIDENT TO VETO ANY PARTICULAR
However, the Supreme Court has not yet declared this condition as ITEMS IN A REVENUE OR TRARRIFF BILL
―unconstitutional.‖ Consequently, while the fight to render void the last
paragraph of Section 30 of the Tax Code continues, until it is finally
Article VI, Section 27 (2) of the 1987 Constitution
resolved, those advertisements, rental income and other such income
The President shall have the power to veto any particular item or items
derived from profit-generating activities of non -stock non-profit
in an appropriation, revenue, or tariff bill, but the veto shall not affect
educational institutions are all subject to income tax.
the item or items to which he does not object.
Important: On 8 June 2011, the Court of Tax Appeals en banc
promulgated a Decision holding that a non-stock non-profit educational General rule: The President has to approve or disapprove a bill in its
institution is entitled to the constitutional tax exemption, regardless of entirety.
source, as long as the institution is able to prove that these revenues
were actually, directly and exclusively used for educational purposes. Exceptions: (where partial or item veto is allowed)
However, until this is affirmed by the Supreme Court, the BIR will A. Appropriation bill
continue and has continued to tax all income of educational institutions B. Revenue bill
from activities conducted for profit. C. Tariff bill
Article III, Section 20 of the 1987 Constitution CIR v. Manila Golf and Country Club
No person shall be imprisoned for debt or non-payment of a poll tax. Whether the presidential veto referred to the entire section or merely
to the imposition of 20% tax on gross receipts of operators of
restaurants, bars, etc
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 19 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
The CTA opined that the President could not veto words or phrases in
a bill but only an entire item. Obviously, what the CTA meant by "item" Q. Give instances of violations of the due process clause.
was an entire section. 1. If the law violates the inherent limitations on taxation.
2. If the tax amounts to confiscation of property
We do not agree. The presidential veto referred merely to the inclusion 3. If the subject of confiscation is outside the jurisdiction of the
of hotels, motels and rest houses in the 20% caterer's tax bracket but taxing authority
not to the whole section. 4. If the tax is imposed for a purpose other than a public purpose
5. If the law which is applied retroactively imposes just and
An "item" in a revenue bill does not refer to an entire section imposing oppressive taxes
a particular kind of tax, but rather to the subject of the tax and the tax
rate. In the portion of a revenue bill which actually imposes a tax, a IMPORTANT PRINCIPLES
section identifies the tax and enumerates the persons liable therefor
with the corresponding tax rate. To construe the word "item" as A. The validity of a statute must be contested only by one who
referring to the whole section would tie the President's hand in sustained or stands to sustain direct injury in consequence of its
choosing either to approve the whole section at the expense of also performance
approving a provision therein which he deems unacceptable or veto EXC: Transcendental importance, taxpayer‘s suit
the entire section at the expense of foregoing the collection of the kind
of tax altogether. B. There must be proof of arbitrariness, otherwise, the
presumption of constitutionality applies.
INDIRECT CONSTITUTIONAL LIMITATIONS
C. Due process requires hearing before adoption of legislative rules
by administrative bodies of interpretative rulings
INDIRECT CONSTITUTIONAL LIMITATIONS
D. Compliance of strict procedural requirements must be followed
A. Due process of law to avoid a collision course between the state‘s power to tax and
B. Equal protection of the laws the individual‘s recognized rights
C. Non-impairment of the obligations of contracts
D. Non-infringement of religious freedom E. Due process clause may be correctly invoked only when there is
E. No appropriation for religious purposes a clear contravention of inherent or constitutional limitations
F. Non-infringement of the freedom of the press
Sison v. Ancheta
The due process clause may be invoked where a taxing statute is so
DUE PROCESS OF LAW
arbitrary that it finds no support in the Constitution, as where it can be
shown to amount to the confiscation of property. However, where the
Article III, Section 1 of the 1987 Constitution due process clause is invoked, considering that it is not a fixed rule but
No person shall be deprived of life, liberty or property without due rather a broad standard, there is a need for proof of such persuasive
process of law, nor shall any person be denied the equal protection of character as would lead to such a conclusion. Absent such a showing,
the laws. the presumption of validity must prevail.
Example of Non-compliance with Procedural Due Process: MCIT is constitutional because of the following reasons:
Forfeiture of property of the taxpayer for non-payment of
tax without giving notice to the taxpayer or giving a chance 1. There was a legitimate governmental end.
to explain.
2. MCIT is not a tax on the capital but on gross income.
Q. What are the requirements of due process in taxation?
A. It must be for a public purpose TN: Gross income is arrived at by deducting the capital spent by a
B. Imposed within the taxing authority‘s territorial jurisdiction corporation in the sale of its goods, i.e., the cost of goods and
C. Assessment or collection is not arbitrary or oppressive other direct expenses from gross sales
TN: CWT is not a tax but a manner of imposing taxes. A: No. It is well-settled that the equal-protection guarantee does not
require territorial uniformity of laws. As long as there are actual and
material differences between territories, there is no violation of the
Net Income Tax Payable
constitutional clause.
Article III, Section 1 of the 1987 Constitution What distinguishes the real estate business from other manufacturing
No person shall be deprived of life, liberty, or property without due enterprises, for purposes of the imposition of the CWT, is not their
process of law, nor shall any person be denied the equal protection of production processes but the prices of their goods sold and the
the laws. number of transactions involved. The income from the sale of a real
property is bigger and its frequency of transaction limited, making it
Equal protection of the laws less cumbersome for the parties to comply with the withholding tax
scheme.
The equal protection clause means that no person or class of
persons shall be deprived of the same protection of laws which On the other hand, each manufacturing enterprise may have tens of
is enjoyed by other persons or other classes in the same place thousands of transactions with several thousand customers every
and in the like circumstances. month involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the Ormoc. Still, the classification, to be reasonable, should be in terms
taxes on each of their transactions with their tens or hundreds of applicable to future conditions as well.
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax The taxing ordinance should not be singular and exclusive as to
system. exclude any subsequently established sugar central, of the same class
as plaintiff, from the coverage of the tax. As it is now, even if later a
People v. Cayat similar company is set up, it cannot be subject to the tax because the
Facts: Cayat was a native of Baguio, Benguet, Mountain Province. He ordinance expressly points only to Ormoc Sugar Company, Inc. as the
was accused for violating Act No. 1639 which declared unlawful for any entity to be levied upon.
native of the Philippine islands who is a member of a non-Christian
Tribe to have in his possession, drink any beer, wine or intoxicating Tiu v. CA
liquors of any kind, other than the so-called native wines and liquors Petitioners challenged the constitutionality of EO 97-A for allegedly
which the members of the tribes have been accustomed. being violative of their right to equal protection of the laws. Petitioners
contended that the provisions of EO 97 -A confining the application of
It is an established principle of constitutional law that the guaranty of R.A. 7227 which grants tax incentives within the secured area and
the equal protection of the laws is not violated by a legislation based excluding the residents of the zone outside of the secured area is
on reasonable classification. And the classification, to be reasonable, discriminatory.
(1) must rest on substantial distinctions; (2) must be germane to the
purposes of the law; (3) must not be limited to existing conditions Substantial distinctions which make real differences
only; and (4) must apply equally to all members of the same class. There are substantial differences between the big investors who are
being lured to establish and operate their industries in the so-called
Act No. 1639 satisfies these requirements. "secured area" and the present business operators outside the area.
On the one hand, we are talking of billion-peso investments and
A. Classification rests on substantial distinctions which make real thousands of new jobs. On the other hand, definitely none of such
differences magnitude. In the first, the economic impact will be national; in the
second, only local. Even more important, at this time the business
The classification rests on real or substantial, not merely activities outside the "secured area" are not likely to have any impact
imaginary or whimsical, distinctions. It is not based upon in achieving the purpose of the law, which is to turn the former
"accident of birth or parentage," as counsel for the appellant military base to productive use for the benefit of the Philippine
asserts, but upon the degree of civilization and culture. "The economy.
term 'non-Christian tribes' refers, not to religious belief, but, in
a way, to the geographical area, and, more directly, to natives Germane to the purpose of the law
of the Philippine Islands of a low grade of civilization, usually It was reasonable for the President to have delimited the application of
living in tribal relationship apart from settled communities." some incentives to the confines of the former Subic military base. It is
this specific area which the government intends to transform and
B. Classification is germane to achieve the legislative purpose develop from its status quo ante as an abandoned naval facility into a
self-sustaining industrial and commercial zone.
Designed to insure peace and order in and among the non-
Christian tribes. It has been the sad experience of the past, as Why the seeming bias for big investors? Undeniably, they are the ones
the observations of the lower court disclose, that the free use who can pour huge investments to spur economic growth in the
of highly intoxicating liquors by the non-Christian tribes have country and to generate employment opportunities for the Filipinos,
often resulted in lawlessness and crimes, thereby hampering the ultimate goals of the government for such conversion.
the efforts of the government to raise their standard of life and
civilization. The law applies to both present and future conditions
The objective is to establish a "self-sustaining, industrial, commercial,
C. The law applies, all things being equal, to both present and financial and investment center" in the area. There will, therefore, be a
future conditions long-term difference between such investment center and the areas
outside it.
It is intended to apply for all times as long as those conditions
exist. The Act was not predicated, as counsel for appellant Classification applies equally well to all those belonging to the same
asserts, upon the assumption that the non-Christians are class
"impermeable to any civilizing influence." On the contrary, the The classification applies equally to all the resident individuals and
Legislature understood that the civilization of a people is a slow businesses within the "secured area. The residents, being in like
process and that hand in hand with it must go measures of circumstances or contributing directly to the achievement of the end
protection and security. purpose of the law, are not categorized further. Instead, they are all
similarly treated, both in privileges granted and in obligations required.
D. The classification applies equally well to all those belonging to
the same class TN: What is the purpose of the law? To convert former US military
E. bases into an economic or industrial area. So, it must be to entice
The Act applies equally to all members of the class is evident investors into the area. How? By providing economic/fiscal incentives.
from a perusal thereof. That it may be unfair in its operation
against a certain number of non-Christians by reason of their TESTS TO DETERMINE VALID CLASSIFICATION
degree of culture, is not an argument against the equality of its
application. 1. Compelling State Interest Test – State balances the public
interest against religious freedom. The need to advance the
Ormoc Sugar Company v. Conejos constitution and public interest. In case there are less restrictive
A perusal of the requisites instantly shows that the questioned means to advance a right under the constitution.
ordinance does not meet them, for it taxes only centrifugal sugar
produced and exported by the Ormoc Sugar Company, Inc. and none 2. Rational Basis Test – The classification is valid if it is rationally
other. At the time of the taxing ordinance's enactment, Ormoc Sugar related to a constitutionally permissible state interest.
Company, Inc., it is true, was the only sugar central in the city of Ex. Senior Citizens Act
3. Quasi-Suspect Case – Available if needed. Based on The power to tax by local government units emanates from Section 5,
gender/legitimacy. It points out a specific constitutionally granted Article X of the Constitution which empowers them to create their own
state interest such as protection of women where there is a valid sources of revenues and to levy taxes, fees and charges subject to
classification between men and women. such guidelines and limitations as the Congress may provide. The
imposition of local franchise tax is not inconsistent with the advent of
the VAT, which renders functus officio the franchise tax paid to the
NON-IMPAIRMENT OF THE OBLIGATIONS OF CONTRACTS
national government. VAT inures to the benefit of the national
government, while a local franchise tax is a revenue of the local
Article III, Section 10 of the 1987 Constitution government unit.
No law impairing the obligation of contracts shall be passed.
MCIA v. Marcos
General Rule: The power to tax is pursuant to a law and therefore The exempting statutes are both granted unilaterally by Congress in
the obligation to pay taxes is imposed by law. Thus, the non- the exercise of taxing powers. Since taxation is the rule and tax
impairment clause does not apply because it refers to obligations exemption, the exception, any tax exemption unilaterally granted can
brought about by contracts and not law. be withdrawn at the pleasure of the taxing authority without violating
the Constitution.
Exception:
In cases of tax exemptions granted for a valuable consideration Cagayan Electric Power v. Commissioner
because it takes the form and essence of a contract. The Congress could impair petitioner‘s legislative franchise by making
it liable for income tax. The Constitution provides that franchise is
Tolentino v. Secretary of Finance subject to amendment, alteration or repeal by Congress when the
The non-impairment clause has never been thought as a limitation on public interest so requires.
the exercise of the State's power of taxation, except where a tax
exemption has been granted for a valid consideration. Christ Church v. Philadelphia
The exemption granted is in the nature of a unilateral tax exemption.
Rules to remember: Since the exemption given is spontaneous on the part of the
A. If the exemption was granted for a valuable consideration on the legislature and no service or duty or other remunerative conditions
basis of a contract – it cannot be revoked by passing another law. have been imposed on the taxpayer‘s receiving the compensation, it
The non-impairment clause applies. may be revoked at will by the legislature. What constitutes an
B. If the exemption is granted by virtue of a contract between a impairment of the obligation of contract is the revocation of an
private corporation and the government – it cannot be revoked exemption which is founded on a valuable consideration because it
unilaterally by the government. The non-impairment clause takes the form and essence of a contract.
applies.
C. If the basis of the tax exemption is a mere franchise granted by NON-INFRINGEMENT OF RELIGIOUS FREEDOM
Congress – it can be unilaterally revoked by the government
CONGRESS CAN REVOKE FRANCHISE Article III, Section 5 of the 1987 Constitution
No law shall be made respecting an establishment of religion, or
Article XII, Section 11 of the 1987 Constitution prohibiting the free exercise thereof. The free exercise and enjoyment
No franchise, certificate, or any other form of authorization for the of religious profession and worship, without discrimination or
operation of a public utility shall be granted except to citizens of the preference, shall forever be allowed. No religious test shall be required
Philippines or to corporations or associations organized under the laws for the exercise of civil or political rights.
of the Philippines at least sixty per centum of whose capital is owned
by such citizens, nor shall such franchise, certificate, or authorization Non-establishment clause: No law shall be made respecting an
be exclusive in character or for a longer period than fifty years. Neither establishment of religion, or prohibiting the free exercise thereof.
shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the Free exercise clause: The free exercise and enjoyment of religious
Congress when the common good so requires. The State shall profession and worship, without discrimination or preference, shall
encourage equity participation in public utilities by the general public. forever be allowed.
The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in TN: The free exercise clause is the basis of tax exemptions.
its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. American Bible Society v. City of Manila
The imposition of license fees on the distribution and sale of bibles and
Smart Communications v. City of Davao other religious literature by a non-stock, non-profit missionary
Aside from the national franchise tax, the franchisee is still liable to organization not for purposes of profit, amounts to a condition or
pay the local franchise tax, unless it is expressly and unequivocally permit for the exercise of their right, thus violating the constitutional
exempted from the payment thereof under its legislative franchise. The guarantee of the free exercise and enjoyment of religious profession
"in lieu of all taxes" clause in a legislative franchise should categorically and worship which carries with it the right to disseminate religious
state that the exemption applies to both local and national taxes; beliefs and information.
otherwise, the exemption claimed should be strictly construed against TN: It violates the non-establishment of religion clause and
the taxpayer and liberally in favor of the taxing authority. religious freedom.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law", Tolentino v. Secretary of Finance
did not remove or abolish the payment of local franchise tax. It merely The free exercise of religion clause, however, does not prohibit
replaced the national franchise tax that was previously paid by imposing a generally applicable sales tax on the sale of religious
telecommunications franchise holders and in its stead imposed a ten materials by religious organizations. The sale of religious articles can
percent (10%) VAT in accordance with Section 108 of the Tax Code. be subject to VAT, what cannot be taxed is the exercise of religious
VAT replaced the national franchise tax, but it did not prohibit nor worship or activity. The income of the priest from the exercise of a
abolish the imposition of local franchise tax by cities or municipaties. * religious activity cannot also be taxed.
The contention as to restraint "upon the free exercise of religion," with TN: There are multiple situs in the Philippines
respect to the same ordinance, was presented in the case of Coleman
v. City of Griffin, 55 Ga. App. 123, and the appeal was dismissed for Basic rule: The state where the subject to be taxed has a situs may
want of a substantial federal question. rightfully levy and collect the tax, and the situs is necessarily in the
state which has jurisdiction or which exercises dominion over the
subject in question.
NO APPROPRIATION FOR RELIGIOUS PURPOSES
TN: A Filipino citizen earning income abroad can still be a subject of
Article VI, Section 29 (2) of the 1987 Constitution tax in the Philippines not because of geographical location but due to
No money shall be paid out of the Treasury except in pursuance of an the jurial concept or nexus or bond between the taxing authority and
appropriation made by law. the taxpayer.
No public money or property shall be appropriated, applied, paid, or Q. Why is it important to know the situs or place of taxation?
employed, directly or indirectly, for the use, benefit, or support of any 1. To know if the taxing authority really has the authority to tax
sect, church, denomination, sectarian institution, or system of religion, 2. Because there are exceptions or exemptions which only apply to
or of any priest, preacher, minister, other religious teacher, or a specific locality
dignitary as such, except when such priest, preacher, minister, or
dignitary is assigned to the armed forces, or to any penal institution, or Q. What are the factors that determine situs?
government orphanage or leprosarium. 1. Nature of the tax
2. Subject matter of the tax (person, property, act or activity)
General rule: No appropriation is allowed in favor of any sect, 3. Possible protection and benefit that may accrue both to the
church, or any priest, minister, etc. government and the taxpayer
4. Citizenship of the taxpayer
Exception: when such priest is assigned to the armed forces, penal 5. Residence of the taxpayer
institution or government orphanage or leprosarium. 6. Source of income
Q. Is the appropriation or budget given for the visit of the Factors in the Philippines for Purposes of Situs of Income Tax
pope in the Philippines valid or a violation of the separation of
the church and state? 1. Domiciliary Theory – the residence of the taxpayer is the basis
It is valid. The Pope is a head of the State, Vatican, and being one, the of the tax
appropriation made by the government for the visit is justified. Also, 2. Nationality Theory – the citizenship of the taxpayer is the basis
the visit has for itself a secular purpose which is for tourism. The of the tax
benefit to the Catholic Church is merely incidental. The principal 3. Source Theory – the source of the income of the taxpayer is the
primary effect neither advances nor fosters religion. basis of the tax
TN: But it does not mean that the press is exempted from tax. The The faxed documents presented by respondent did not constitute
press is subject to tax but it should be reasonable and not substantial evidence, or that relevant evidence that a reasonable mind
oppressive nor arbitrary. might accept as adequate to support the conclusion that it was in
Germany where she performed the income producing service which
Hence, the sale of magazines or newspapers may be subject to tax. gave rise to the reported monthly sales in the months of March and
What is not allowed is to impose tax on the exercise of an activity such May to September of 1995.
as when license fees are required before one sell magazines or
newspapers. She thus failed to discharge the burden of proving that her income
was from sources outside the Philippines and exempt from the
SITUS OF TAXATION application of our income tax law. Hence, the claim for tax refund
should be denied.
SITUS OF TAXATION KINDS OF TAX AND THEIR SITUS
Persons, properties or activities can only be taxed within the place of 1. Poll or community tax – residence of the taxpayer regardless
the taxing authority or within its territorial jurisdiction. Within the of citizenship.
territorial jurisdiction, the taxing authority may determine the situs. 2. Business tax – place of business
Situs of taxation literally means ―place of taxation‖. 3. Excise tax – where the act is performed or the occupation is
pursued
It is the place and authority that has a right to impose taxes. It usually 4. Income tax – source of income, citizenship, or residence
refers to the place of taxation. It involves the determination of who 5. Transfer tax (donor‟s or estate tax) – residence, citizenship
has jurisdiction of a particular object or subject of taxation. or location of the property
6. Franchise tax – the state which granted the franchise acquired a business situs in
7. Value added tax – where the transaction is made. However, if another jurisdiction
the property is not to be consumed in the Philippines, then it 2. When the law provides
should not be taxed in the Philippines (cross border doctrine or for the situs of the object
destination principle)
8. Sales tax – where the sale is consummated. Presumption: sale Where the act is performed
Excise Tax
of personal property or the occupation is pursued
9. Interest income – residence of the borrower who pays the
interest, irrespective of the place where the obligation was Source of the income,
contracted. Income Tax nationality or residence of
10. Property tax – could either be real or personal property tax. the taxpayer
TN: Double taxation in its strict sense is undoubtedly unconstitutional Q: Tanya owns a beer house. She pays sales/business tax as well as
but that in the broader sense is not necessarily so. Where double the local tax imposed by an ordinance on every bottle of beverage to
taxation (in its strict sense) occurs, the taxpayer may seek relief under be sold. Is there double taxation?
the uniformity rule or the equal protection guarantee.
A: Yes. There is indirect double taxation because it is imposed by
Important principles different taxing authorities and the purpose is different, one is for the
sales and the other is for the fact of selling. Hence, it does not make
A. Only direct double taxation is not allowed because it amounts to the local ordinance invalid.
confiscation of property without due process of law. It violates
the due process clause. Domestic and International double taxation
A. Domestic double taxation – arises when the taxes are imposed
B. You can question the validity of double taxation if there is by the local or the national government.
violation of the equal protection clause, or uniformity of taxation
B. International double taxation – imposition of comparable taxes
C. Doubts as to whether double taxation has been imposed should in two or more states on the same taxpayer with respect to the
be resolved in favor of the taxpayer. same subject matter and for an identical period.
Allowed because they are imposed by different taxing
authorities (domestic and international)
CONSTITUTIONALITY OF DOUBLE TAXATION
Measures allowed by the government are tax refund or
credit but not to declare it invalid.
No Constitutional Prohibition
It is not prohibited by the Constitution. Hence, it may not be invoked Examples
as a defense against the validity of a tax law. a. Income earned by Manny Pacquiao abroad is
subject to income tax both by US and Philippines
Though not prohibited, it is not favored. It should be avoided and b. Income earned by foreign performers in the
prevented whenever possible. Philippines
A. Doubts as to whether double taxation has been imposed should Decided Cases: Only Indirect Double Taxation
be resolved in favor of the taxpayer. A. Taxpayers with warehousing business although carried on in
relation to the operation of its sugar central, is a distinct and
B. Direct duplicate taxation where double taxation in the strict sense separate taxable business – different subject, although the same
occurs, the taxpayer may seek relief under the uniformity rule or owner.
the equal protection guarantee TN: There can be no double taxation where the State merely
imposes a tax on every separate and distinct business in
Q: Is double taxation unconstitutional? which a party is engaged in.
A: No, double taxation cannot be used as a ground to declare the law B. A license tax may be levied upon a business or occupation
unconstitutional. although the land or the property used in connection therewith is
subject to property tax.
However, yes, double taxation is unconstitutional in relation to the TN: License tax applies to the business, property tax is for
equal protection clause. the land – different subject, object or purpose although the
burden is carried by one entity.
Q: Is double taxation constitutionally prohibited?
C. Both a license fee and a tax may be imposed in the same
A: There is no constitutional prohibition against double taxation in the business or occupation for selling the same article.
Philippines. It is something not favored, but is permissible, provided TN: License fee is not a tax.
some other constitutional requirement is not thereby violated.
D. When every bottle or container of intoxicating beverages is
Pepsi Cola v. Mun. of Tanauan subject to local tax and at the same time the business of selling
Double taxation, standing alone and not being forbidden by our such product is also subject to liquor‘s license
fundamental law, is not a valid defense against the legality of a tax TN: Different taxing authority and purpose.
measure. But from it might emanate such defenses against taxation
as oppressiveness and inequality of the tax. E. A tax imposed in both the occupation of fishing and the fish pond.
TN: Different object and subject
F. A local ordinance imposing a tax in the storage of copra where it A method of establishing equality of trading opportunity among states
appears that the finished products manufactured out of the copra by guaranteeing that if one country is given better trade terms by
is also subject to VAT. another, then all other states must get the same terms.
TN: Different subject matter and purpose
This is applied to those doing business in the Philippines who are
G. A lessor pays real estate tax, real estate dealer‘s tax and income parties or signatories to a bilateral treaty.
tax on the rentals.
TN: Different kind and character. Real estate tax is a tax on Purpose of the Most Favored Nation Clause
the property, dealer‘s tax is a tax on the privilege to engage To grant to the contracting party treatment not less favorable than
in business, income tax is a tax on the privilege to earn that which has been or may be granted to the "most favored" among
income. other countries. It is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the
contracting nations may enjoy the privileges accorded by either party
MODES OF ELIMINATING DOUBLE TAXATION
to those of the most favored nation.
o Tax Credit – deduction from taxable income. The amount Held: No. The filing of a tax treaty relief application is not a condition
of taxes paid abroad is used to reduce tax payable in the precedent to the availment of a preferential tax rate.
Philippines. Here, the amount paid abroad is multiplied by
the tax rate in the Philippines. A state that has contracted valid international obligations is bound to
make in its legislations those modifications that may be necessary to
4. Reduction of Philippine tax rate ensure the fulfillment of the obligations undertaken. Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are
Ex. Dividend income of a foreign corporation from dividends accorded to the parties entitled thereto. The BIR must not impose
received from a domestic corporation in the Philippines – the tax additional requirements that would negate the availment of the reliefs
rate is only 15% instead of the usual 30%, subject to the rule on provided for under international agreements. More so, when the RP-
reciprocity. This is under the tax sparing rule. Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
Tax Credit
The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance
Sales P 1,000,000. would impair the value of the tax treaty. At most, the application for a
Less Allowable Deduction (100,000) tax treaty relief from the BIR should merely operate to confirm the
Taxable Income P 900,000. entitlement of the taxpayer to the relief.
Multiplied by the Tax Rate 30%
CIR v. Johnson & Son, Inc.
Tax Due and Payable P 270,000.
Facts: Pursuant to the license agreement entered into by private
Less Tax Credit (100,000) respondent S.C. Johnson and Son, U.S.A., the private respondent was
Tax Payable P 170,000. granted, among others, the right to use the trademark, patents and
technology of SC Johnson and Son, U.S.A. and was obliged to pay to
the latter royalties based on a percentage of net sales. The said
royalties were subjected by the government to a 25% withholding tax.
Tax Deduction
Consequently, from July, 1992 to May, 1993, the private respondent
Sales P 1,000,000. paid a total withholding tax in the amount of P1,603,433.00. However,
Less Allowable Deduction (100,000) on October 29, 1993 the private respondent filed before the
Taxable Income P 900,000. International Tax Affairs Division of the BIR a claim for refund of the
Less Tax Deduction (100,000) overpaid withholding tax on royalties in the amount of P963,266.00.
Tax Due and Payable P 800,000. Issue: Whether or not private respondent is entitled to a tax refund.
Multiplied by the Tax Rate 30%
Tax Payable P 240,000. Held: No. The Court ruled that the RP-US and the RP-West Germany
Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, expressly allows crediting against
Tax credit is preferable since it yields to lesser amount of tax payable. German income and corporation tax of 20% of the gross amount of
royalties paid under the law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the counterpart provision
MOST FAVORED NATION CLAUSE
with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
MOST FAVORED NATION CLAUSE
Since the RP-US Tax Treaty does not give a matching tax credit of THREE KINDS OF SHIFTING
20% for the taxes paid to the Philippines on royalties as allowed under
the RP-West Germany Tax Treaty, private respondent cannot be A. Forward shifting – the transfer of the burden of tax from the
deemed entitled to the 10% rate granted under the latter treaty for units of production to the units of distribution to the consumer.
the reason that there is no payment of taxes on royalties under similar
circumstances. When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles
Tax refunds are in the nature of tax exemptions. As such they are on the ultimate purchaser or consumer.
regarded as in derogation of sovereign authority and to be construed Ex. VAT, percentage tax
strictissimi juris against the person or entry claiming the exemption.
The burden of proof is upon him who claims the exemption in his favor Onward Forward Shift
and he must be able to justify his claim by the clearest grant of Manufacturer/Producer –> Wholesaler –> Retailer –> Consumer
organic or statute law.
B. Backward shifting – The transfer of the burden of tax from the
Private respondent is claiming for a refund of the alleged overpayment consumer back to the units of distribution to the units of
of tax on royalties; however, there is nothing on record to support a production.
claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-West When the burden of the tax is transferred from the consumer or
Germany Tax Treaty. purchaser through the factors of distribution to the factor of
production
TN: This seldom happens. Usually, it can happen when the
FORMS OF ESCAPE FROM TAXATION
buyer haggles for a discount from the retailer.
FORMS OF ESCAPE FROM TAXATION Ex. Consumer/purchaser may shift tax imposed on him to retailer
by purchasing only after the price is reduced, and from the latter
A. Shifting to the wholesaler, and finally to the manufacturer or producer.
B. Capitalization
C. Transformation Onward Backward Shift
D. Tax Evasion Consumer –> Retailer –> Wholesaler–>Manufacturer/Producer
E. Tax Avoidance
F. Tax Exemption C. Onward shifting – When the tax is shifted two or more times
either forward or backward. More than one shift.
SHIFTING
Example: A transfer from producer to wholesaler involves one
shift; from producer to wholesaler then to retailer, two shifts; if
SHIFTING the tax is transferred again to the consumer by the retailer, there
are three shifts in all.
The process where the tax burden is transferred from the statutory
taxpayer to another without violation of law. Statutory taxpayer – the
CAPITALIZATION
original taxpayer required under the law to pay the tax or to remit the
tax to the government.
CAPITALIZATION
TN: Applicable only to indirect taxes like business or percentage taxes.
Direct taxes cannot be shifted, i.e. income tax. The reduction in the price of the taxed object equal to the capitalized
Applicable only when there is an exchange of goods or services. value of future taxes which the purchaser expects to be called upon to
pay. It occurs when the tax falls on an income-producing property, i.e.
Impact of taxation commercial building.
The point on which a tax is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is the person who must The buyer naturally takes into account the taxes that he will be paying
pay the tax to the government. on the property when he becomes the owner thereof in determining
whether the price is reasonable or not. The burden of the tax rests on
This is the point in the taxation process where the tax is imposed. the present owner (seller) if he reduces the price because of the tax.
Ex. Enactment of laws
TN: Applicable only in indirect taxation. Examples:
a. Buying depreciable goods like 1M car, payable every year
Incidence of taxation b. Buying a property with a repurchase agreement after 5
That point on which the tax burden finally rests or settles down. It years on the condition that the seller will pay all real
takes place when shifting has been effected from the statutory property taxes for 5 years.
taxpayer to another.
Value of Property P 1,000,000.
TN: But there may be incidence without shifting, as in transformation. Less RPT for 5 years (20,000x5) (100,000)
In case of business taxes, incidence of taxation falls on the final Amount Payable (Price) P 900,000.
consumer. TN: It is a special kind of backward shift.
Example: Impact in a sales tax is on the seller who shifts the burden to Method of escape in taxation whereby the manufacturer or producer
the customer who finally bears the incidence of the tax. upon whom the tax has been imposed, fearing the loss of his market
should he add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production thereby turning can only present circumstantial evidence or make use of presumptions
out his units of products at a lower cost. under tax laws.
In such a case, the loss occasioned by the tax may be offset by the Ex: Under declaration over 30% - fraud is presumed under the law
gains resulting from the economics of production. The taxpayer
escapes, not by shifting but by transforming the tax into a gain Republic v. Gonzales
through the medium of production. The substantial under declaration of income in the income tax returns
of the taxpayer for four (4) consecutive years coupled with his
Example: Videoke – the greater in number, the lesser the cost. intentional overstatement of deductions justifies the finding of fraud.
TAX EVASION
This is best exemplified through the payment of toll for passing
through a bridge. It is tax evasion if you pass through the railings in
TAX EVASION order not to pay the toll as long as you don‘t get caught. On the other
hand, if there are two bridges where one is imposing a lesser toll fee
The use by the taxpayer of illegal or fraudulent means to defeat or than the other, it is tax avoidance if you choose to pass through the
lessen the payment of a tax. It is also known as ―tax dodging.‖ It is bridge paying a lesser toll.
punishable by law.
EXEMPTION FROM TAXATION
Examples:
Deliberate failure to report a taxable income or property
TAX EXEMPTION
Deliberate reduction of income that has been received
Online sellers who do not declare income, do not pay taxes
and those who do not have business permits (illegal) TAX EXEMPTION
Declare sales less than 30% of the amount
Declare expenses of more than 30% of the sale The grant of immunity to particular persons or corporations or to
Non-issuance of receipts – There is a penalty of P10,000 person or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing district are
Elements of Tax Evasion (How to Establish Tax Evasion) obliged to pay.
A. The end to be achieved is to lessen payment of taxes
Example: the payment of less than that known by the taxpayer to Act of the state of divesting itself of its prerogative to impose taxes.
be legally due, or in paying no tax when such is due.
B. An accompanying state of mind described as being ―evil,‖ ―in bad Broad Sense – Tax not applied on a particular property.
faith,‖ ―willful‖ or ―deliberate and not accidental.‖ Tax on particular property or object within the same
C. A course of action (or failure of action) which is unlawful. jurisdiction but not taxed by the taxing authority.
Ex. Tax on property used by the Government when the
Q: Should fraud be proved by direct evidence? other properties in the same area are subject to tax
(How to Prove Tax Evasion)
Narrow Sense – Exemption of a particular class.
A: No. Since fraud is a state of mind, it need not be proved by direct An entire class of the same conditions are exempted from
evidence but may be inferred from the circumstances of the case. One taxes supposedly imposed on a bigger class.
Important principles from the BIR in an amount corresponding to the tax passed on to it,
A. It is an immunity or privilege since it is tax exempt. Is the claim of ABC Corp meritorious?
B. It is freedom from a financial charge or burden to which others
are subjected No, the claim of ABC Corp is not meritorious. Although the tax was
C. Allowed only when there is a clear provision of the law. shifted to ABC by the seller, what is paid by it is not a tax but a part of
D. Strictly construed against the taxpayer. the cost it has assumed. The taxpayer who can file a claim for refund
E. It is not necessarily discriminatory as long as there is a is the person statutorily liable for the payment of the tax. Since ABC
reasonable foundation or rational basis. Corp is not said taxpayer, it has no capacity to file a claim for refund.
Its avowed purpose is some public benefit or interest which the AS TO SCOPE OR EXTENT
lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption. A. Total exemption – when certain persons, property or
transactions are exempted, expressly or implied, from all taxes
As long as public interest is subserved and the benefit that the entirely.
government acquires outweigh the monetary loses due to the
exemption. B. Partial exemption – when certain persons, property or
TN: These are the non-revenue raising purposes of taxation. transactions are exempted, expressly or implied, from certain
taxes in part.
Ex. Basic personal exemption and additional exemption
GROUNDS FOR TAX EXEMPTION
AS TO OBJECT
GROUNDS FOR TAX EXEMPTION
A. Personal exemption – granted directly in favor of certain
A. It may be based on contract. persons
When the charter provides for such exemption Ex. Basic personal exemption of 50k and additional exemption
TN: In such a case, the public which is represented by the of 25k for each dependent up with a maximum of 4
government is supposed to receive a full equivalent therefor dependents; However, these have been repealed by the TRAIN
Law effective January 1, 2018.
B. It may be based on some ground of public policy.
The exemption is provided in the law itself or the constitution. B. Impersonal exemption – granted directly in favor of a certain
class of property
TN: To encourage new industries or to foster charitable Ex. Property
institutions. Here, the government need not receive any TN: There cannot be simultaneous exemption under two laws
consideration in return for the tax exemption
CONSTRUCTION OF TAX EXEMPTION STATUTES
C. It may be created in a treaty on grounds of reciprocity or to
lessen the rigors of international or multiple taxation.
TN: Recognition of international comity CONSTRUCTION OF TAX EXEMPTION STATUTES
TN: Equity is NOT a ground for tax exemption. Exemption from tax is General rule
allowable only if there is a clear provision. While equity cannot be used Tax exemption statutes are construed strictly against the taxpayer and
as a basis or justification for tax exemption, a law may validly liberally in favor of the government.
authorize the condonation of taxes on equitable considerations.
A. In the construction of tax statutes, in case of doubt, exemptions
are not favored and are construed strictissimi juris against the
KINDS OF TAX EXEMPTION
taxpayer.
B. The fundamental theory is that all taxable property should bear
AS TO MANNER OF CREATION its share in the cost and expenses of the government.
C. Taxation is the rule and exemption the exception, and therefore,
A. Express or affirmative – when certain persons, property or he who claims exemption must be able to justify his claim or
transactions are, by express provision, exempted from all or right thereto, by a grant expressed in terms ―too plain to be
certain taxes. mistaken and too categorical to be misinterpreted.
- When the provision itself provides for exemption D. Claims for an exemption must be able to point out some
TN: May be made by provisions of the Constitution, statutes, provision of law creating the right, and cannot be allowed to
treaties, ordinances, franchises, or contracts. exist upon a mere vague implication or inference.
E. Refunds are in the nature of exemption, and must be construed
B. Implied exemption or exemption by omission – when a strictly against the grantee/taxpayer.
tax is levied on certain classes of persons, properties or
transactions without mentioning the other classes. Every tax Exceptions
statute, in a very real sense, makes exemptions since all those A. When the law itself expressly provides for a liberal construction,
not mentioned are deemed exempted. that is, in case of doubt, it shall be resolved in favor of
- When the law did not include it in the list of those exemption.
exempted. Ex. PAGCOR B. When the exemption is in favor of the government itself or its
agencies, or of religious, charitable, and educational institutions
TN: The omission may be either accidental or intentional. because the general rule is that they are exempt from tax.
Exemptions are not presumed, but when public property is C. When the exemption is granted under special circumstances to
involved, exemption is the rule, and taxation, the exception. special classes of persons.
D. If there is an express mention or if the taxpayer falls within the
C. Contractual – in the real sense of the term and where the non- purview of the exemption by clear legislative intent, the rule on
impairment clause of the Constitution can rightly be invoked, are strict construction does not apply.
those agreed to by the taxing authority in contracts, such as E. If exemption refers to public property (in case of public
those contained in government bonds or debentures, lawfully property, the general rule is exemption and taxation is the
entered into by them under enabling laws in which the exception)
government, acting in its private capacity, sheds its cloak of F. Solutio indebiti
authority and waives its governmental immunity.
Q: When will you apply the strict construction?
TN: These contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises. A A: Only if there is doubt as to the interpretation of the law exempting
franchise partakes of the nature of a grant which is beyond the the person of the property. If there is no doubt, no need to apply the
purview of the non-impairment clause of the Constitution. strict construction.
Strict interpretation does not apply to the government and its TN: There is already a finding that the person has evaded the payment
agencies of tax or violated a tax law. The taxes due are still collected since only
the penalties are forgiven.
Maceda v. Macaraig
Petitioner cannot invoke the rule on strictissimi juris with respect to the Republic v. IAC
interpretation of statutes granting tax exemptions to the NPC. The rule A tax amnesty partakes of an absolute forgiveness or waiver by the
on strict interpretation does not apply in the case of exemptions in Government of its right to collect what otherwise would be due it, and
favor of a political subdivision or instrumentality of the government. in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and become
Davao Gulf v. Commissioner a part of the new society with a clean slate.
A tax cannot be imposed unless it is supported by the clear and
express language of a statute. On the other hand, once the tax is TN: When we say absolute forgiveness, this is retrospective. It looks
unquestionably imposed, a claim for exemption from tax payments back to your previous liabilities and if given a tax amnesty, it is as if
must be clearly shown and based on language in the law too plain to you did not incur those liabilities at all.
be mistaken.
Tax amnesty not favored
Since the partial refund authorized under Section 5, RA 1435 is in the A tax amnesty, much like a tax exemption, is never favored nor
nature of a tax exemption, it must be construed strictissimi juris presumed in law. If granted, the terms of the amnesty, like that of a
against the grantee. Hence, petitioner‘s claim for refund on the basis tax exemption, must be construed strictly against the taxpayer and
of the specific taxes it actually paid must be expressly granted in a liberally in favor of the taxing authority.
statute stated in a language too clear to be mistaken.
CIR v. Marubeni Corp.
TAX EXEMPTIONS ARE GENERALLY REVOCABLE
For the right of taxation is inherent in government. The State cannot
strip itself of the most essential power of taxation by doubtful words.
General rule: He who claims an exemption (or an amnesty) from the common
Tax exemptions are generally revocable by the government. burden must justify his claim by the clearest grant of organic or state
law. It cannot be allowed to exist upon a vague implication. If a doubt
Exception: arises as to the intent of the legislature, that doubt must be resolved
If founded on a contract which is protected from impairment, it cannot in favor of the state.
be revoked unilaterally. But the contract must contain the essential
elements of other contracts. DISTINGUISHED FROM TAX EXEMPTION
C. Tax-exempting grant is in the form of a special law – To desist from exacting, inflicting or enforcing something. The
where the grant is given through a special law and not by a remission of taxes due and payable to the exclusion of taxes already
general law, even if the terms of the general act are broad collected does not constitute unfair discrimination. Such a set of taxes
enough to include the intent to repeal or alter the special law, is a class by itself and the law would be open to attack as class
there would still be no revocation. legislation only if all taxpayers belonging to one class were not treated
alike.
TN: If you want to revoke the tax exemption granted by a special
law, another special law revoking the same must be passed. It Remission or condonation simply means forgiving the taxpayer out of
cannot be done by implied revocation. liberality. However, if the government is to remit or condone a tax, it
must not be applied to a specific person alone but to the entire
persons or property belonging to the same class. Otherwise, it will
TAX AMNESTY amount to class legislation.
TN: The taxes are no longer collected since they are forgiven.
TAX AMNESTY
In the nature of a tax exemption
A tax amnesty is a general pardon or intentional overlooking by the The condonation or remission of a tax liability is equivalent and is in
State of its authority to impose penalties on persons otherwise guilty the nature of a tax exemption. Thus it should be sustained only when
of evasion or violation of a revenue or tax law. expressly provided in the law.
Internal revenue laws are not political in nature. Tax laws are civil and Exception: While it is not favored, a statute may nevertheless
not penal in nature. Even if there is change in government control, it operate retroactively provided it is expressly declared or is clearly the
remains to be implemented. legislative intent.
Not political in nature Exception to the exception: A tax law should not be given
Internal revenue laws are not political in nature. They are deemed to retroactive application when it would be so harsh and oppressive, for
be the laws of the occupied territory and not of the occupying enemy. in such case, the constitutional limitation of due process would be
So even if we are occupied by another State, the taxation laws will violated.
continue. It is as if there is no stoppage of the tax law. Thus, our tax
laws continued in force during the Japanese occupation. Q: BIR issued a ruling that printing companies are not covered by a ew
tax law. Relying on this ruling, DEF Printers did not pay said tax.
Hilado v. Collector Subsequently however the BIR reversed the ruling and issued a new
It is well-known that our internal revenue laws are not political in one stating that the tax covers printing companies. Could the BIR now
nature and as such, continued in force during the period of enemy assess DEF Printers for back taxes corresponding to the years before
occupation and in effect were actually enforced by the occupying the new ruling?
government. Income tax returns that were filed during that period and
income tax payments made were considered valid and legal. Such tax A. No. The reversal of a ruling shall not be given a retroactive
laws are deemed to be the laws of the occupied territory and not of application, if said reversal will be prejudicial to the taxpayer.
the occupying enemy. Therefore, the BIR cannot assess DEF Printers for back taxes because
it would be violative of the principle of non-retroactivity of rulings and
Civil and not penal in nature doing so would result in grave injustice to the taxpayer who relied on
Tax laws are civil and not penal in nature, although there are penalties the first ruling in good faith.
provided for their violation. The purpose of tax laws in imposing
penalties for delinquencies is to compel the timely payment of taxes or
to punish evasion or neglect of duty in respect thereof. MANDATORY AND DIRECTORY PROVISIONS OF TAX LAWS
Republic v. Oasan A. Directory provisions – those designed merely for the information
The war profits tax is not subject to the prohibition on ex post facto or direction of officers or to secure methodical and systematic
laws because such a concept applies only to criminal or penal matters. modes of proceedings.
Tax laws are civil in nature. Ex. Revenue memorandum circulars issued by BIR to guide
personnel on matters of regulation.
CONSTRUCTION & APPLICATION OF TAX LAWS
B. Mandatory provisions – those intended for the security of the
citizens or which are designed to ensure equality of taxation or
CONSTRUCTION OF TAX LAWS certainty as to the nature and amount of each person‘s tax.
Ex. Remedies under the tax code (security); tax rate (equality)
No person or property is subject to taxation unless within the terms or
plain import of a taxing statute. Taxes, being burdens, they are not to LEGISLATIVE APPROVAL BY RE-ENACTMENT
be presumed beyond what the statute expressly and clearly declares.
Where a statute is susceptible of the meaning placed upon it by a
General rule: ruling of the government agency charged with its enforcement and the
In case of doubt, tax laws are to be construed strictly against the legislature thereafter re-enacts the provisions without substantial
government and liberally in favor of the taxpayer. change, such action is to some extent confirmatory that the ruling
carries out the legislative purpose.
Exceptions:
A. Where the language of the statute is plain and there is no doubt TN: The legislature is presumed to have full knowledge of the existing
as to the legislative intent revenue regulations interpreting the provisions of law, and with its
B. Where the taxpayer claims exemption from taxation. subsequent substantial re-enactment, there is a presumption that the
lawmakers have approved and confirmed the rules in question as
TN: In case of tax exemptions, the rule is strictly against the taxpayer carrying out the legislative purpose.
and liberally in favor of the government.
RULES & REGULATIONS
Reason: The taxpayer should not be burdened by unreasonable
interpretations of authorities.
TN: Penal provisions and the statute of limitations are construed in Sec. 244 of the NIRC
favor of the taxpayer. The Secretary of Finance, upon recommendation of the CIR, shall
promulgate all needful rules and regulations for the effective
Important principles: enforcement of the provisions of this Code.
A. Generally prospective in operation
B. When the language is plain, rule on strict construction against
EXCLUSIVE AUTHORITY OF THE SECRETARY OF FINANCE TO
the government does not apply
PROMULGATE RULES AND REGULATIONS
C. Public purpose is always presumed
D. Provisions of the tax act are not to be extended by implication
This is without prejudice to the power of the Commissioner of Internal
E. Tax laws are special laws and therefore prevail over general
Revenue to make rulings or opinions in connection with the
laws.
implementation of the provisions of internal revenue laws, including
rulings on the classification of articles for sales tax and similar Such rules once established and found to be in consonance with the
purposes. general purposes and objects of the law have the force and effect of
law, and so they must be applied and enforced. They are, therefore,
A. Promulgation: Secretary of Finance just as binding as if the regulations had been written in the law itself.
B. Recommendation: Commissioner of Internal Revenue
C. Administrative rulings: Commissioner of Internal Revenue NECESSITY AND FUNCTION OF REGULATIONS
TN: Once implemented, it forms part of the law. It can be questioned. Revenue Memorandum Circular 20-86 was issued to govern the
The CIR has exclusive jurisdiction but it is subject to review by the drafting, issuance and implementation of revenue tax issuances,
Secretary of Finance except for a tax assessment appeal which is including:
cognizable by the CTA and those in relation to a local ordinance which 1. Revenue regulations
is subject to review by the Secretary of Justice. 2. Revenue audit memorandum orders
3. Revenue memorandum circulars and orders
Jurisdiction to Question Revenue Regulations – CIR
Subject to Review by TN: Except when the law otherwise expressly provides, the aforesaid
GR: Sec of Finance revenue tax issuances shall not begin to be operative until after due
EXC: notice thereof may be fairly assumed.
CTA – tax assessment appeal
Sec of Justice – only in relation to a local ordinance Due notice of the said issuances may be fairly presumed only
after the following procedures have been taken:
Tax Rulings 1. Copies of the tax issuance have been sent through registered
Tax rulings are specific positions by the BIR on matters or facts to a mail to the following business and professional organizations:
specific taxpayer. It is applicable only to the particular taxpayer. a. Philippine Institute of Certified Public Accountants
b. Integrated bar of the Philippines
REQUISITES FOR VALIDITY & EFFECTIVITY OF REGULATIONS c. Philippine chamber of commerce and industry
d. American chamber of commerce
A. It must be issued under authority of law e. Federation of Filipino-Chinese chamber of commerce
B. It must be within the scope and purview of the law; not contrary f. Japanese chamber of commerce and industry in the
to law and the Constitution Philippines
C. It must be published in the OG or newspaper of general 2. However, other persons or entities may request a copy of the
circulation said issuances
TN: Interpretative rules or those merely internal in nature 3. The BIR shall issue a press release covering the highlights and
may simply be posted in conspicuous places in the agency features of the new tax issuance in any newspaper of general
itself. circulation
D. Where the regulations impose penal sanctions, the law itself must 4. Effectivity of date of enforcement of the new issuance shall take
declare as punishable the violation of the administrative rule or place 30 days from the date the issuance has been sent to the
regulation and should fix or define the penalty thereof. above-enumerated organizations
Roxas v. Rafferty TN: IRR and administrative regulation are not the same. You have the
The omission to follow mandatory provisions renders invalid the act or law, then you pass the IRR and from the IRR, it now depends on the
proceeding to which it relates while the omission to follow directory Commissioner if he wants to issue a revenue regulation. This revenue
provisions does not involve such consequence. regulation however is not to implement the whole IRR but specific
provisions only.
Two kinds of administrative issuances
1. Legislative rules – rules in the nature of subordinate legislation
BIR RULINGS
designed to implement a primary legislation by providing the
details thereof. Before it is adopted, there must be a hearing
under the AC of 1987. ADMINISTRATIVE RULINGS AND OPINIONS
2. Interpretative rules – are rules and regulations construing or Known as BIR rulings. Less general interpretation of tax laws being
interpreting the provisions of a statute to be enforced and is are used from time to time by the CIR. They are usually rendered on
binding on all concerned until they are changed. Designed to request of taxpayers to clarify certain provisions of a tax law. These
provide guidelines to the law, which the administrative agency is rulings may be revoked by the Secretary of Finance if the latter finds
in charge of enforcing. They have the effect of law and are them not in accordance with law.
entitled to great respect and have in their favor the presumption
of legality. If there is a provision in the tax law which is not clear, you can send a
clarification to the BIR. You just have to lay down all the facts and all
Republic v. Phil Shell Petroleum the details that you have and send it either to the CIR or RD and they
Tax regulations (issued by the CIR/DOF Secretary) whose purpose is will address and clarify your concerns.
to enforce or implement existing law must:
(a) Be published in a newspaper of general circulation, and But when it comes to BIR and administrative rulings, it applies only to
(b) Filed with UP Law Center ONAR (per Chapter 2, Book VII of the the entity asking for it. So even if two companies have the same
Admin Code of 1987 (EO 292) before they can become effective. conditions, as when Company A was declared by the BIR as tax
exempt, Company B with the same economy conditions as Company A
cannot presume that it is also tax exempt. Company B should likewise The same is also true with respect to decisions of the Court of Tax
ask from the BIR a ruling pertaining to its own company. Appeals.. However, by the nature of its jurisdiction, the decisions of
this court are still appealable to the Supreme Court by a petition for
Power to revoke the rulings of his predecessor review on certiorari. Decisions of the CTA have persuasive value
The Commissioner may revoke, repeal or abrogate the acts or previous
rulings of his predecessors in office because the construction of the Important:
statute by those administering it is not binding on their successors if, 1. Follow the hierarchy of the courts
thereafter, such successors are satisfied that a different construction of 2. If it is a question pertaining to the constitutionality of a ruling or
the law should be given. IRR, raise it immediately before the regular courts
3. But if it pertains to questions on the tax payable computations,
Rulings in the form of opinions are also given by the Secretary of question it first with the BIR (Administrative level) then appeal it
Justice who is the chief legal officer of the Government. to the CIR (depends on the amount), then after it can be
appealed later to the Sec of Finance or CTA, and then after, that‘s
Reason: This is possible because the government will not be stopped the time you can go the SC.
by the acts or mistakes of its agents. 4. But in the SC, it should only be purely questions of law
In the strict sense, income refers to the amount of money coming to The definitions laid down in Title II, Chapter 1 are good for title II only
the taxpayer for services performed or an activity which he is engaged and you cannot use it for other titles. However, if there are no other
in or for an investment which he has made including those do not have definitions provided in other titles, definitions in Title II may be used
specific owners but comes in the hands of a finder. as a supplement to understand other terms. These terms are
discussed as they are used in a particular Codal provision.
It refers to all earnings derived from service rendered, capital, or both
including gain derived from sale or exchange of personal or real GENERAL PRINCIPLES OF INCOME TAXATION
property classified as either ordinary or capital asset.
Amounts received as a return of capital are not income. (B) A nonresident citizen is taxable only on income derived from
sources within the Philippines;
Income Capital
Flow Fund (C) An individual citizen of the Philippines who is working and deriving
Service or fruit of wealth Wealth income from abroad as an overseas contract worker is taxable only
Tree fruit on income derived from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall Therefore, it is schedular in the sense that we lump different items of
be treated as an overseas contract worker; income per type or category and it is global in the sense that we
subject all the items in this lump to one tax rate
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the Passive incomes such as royalties, interests and dividends are however
Philippines; subject to different tax rates. This cannot be lumped and so we follow
a schedular tax rate here
(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and Passive income earned by non-stock, non-profit educational institutions
are either subject or not subject to tax. No definite SC decision yet. It
(F) A foreign corporation, whether engaged or not in trade or may be answered either way.
business in the Philippines, is taxable only on income derived from
sources within the Philippines.
KINDS OF INCOME TAX METHODS
This will allow deductions and encourage people to pay taxes. When
Only Resident Citizens and Domestic Corporations are taxed for
you follow gross income taxation, you might be overburdened by the
income earned within and without the Philippines. The rest are taxed
huge taxes you pay and you will feel disheartened. But this type of
for income earned within the Philippines only.
taxation is still followed in the Philippines. MCIT follows gross income
taxation to curtail some evils.
SYSTEMS OF INCOME TAXATION
FEATURES OF OUR PRESENT INCOME TAXATION
SCHEDULAR INCOME TAX SYSTEM
COMPREHENSIVE TAX SITUS
Follows a schedule of tax rates, the tax code treats every category of
income earners individually.
FOLLOWS A COMPREHENSIVE TAX SITUS
The items are classified based on kind or category of income and this
Uses nationality, residence and source rules in determining where or
is subject to different tax rates based on the income classification.
what income are considered taxable or not.
When one files their tax return, there are as many tax returns as there
are tax rates for several income types.
There are a lot of factors to account for prior to determining if the
income is taxable in the Philippines or not.
GLOBAL INCOME TAX SYSTEM
The general principles of income taxation discusses who are the
The taxpayer is required to lump all items of income and a
individuals taxable within and without, including those for the
single/proportional/uniform income tax rate is imposed. Only one
corporation.
return is filed.
Illustration:
SEMI-SCHEDULAR AND SEMI-GLOBAL
For individuals, resident-citizens are taxable within and without;
(Applicable in the Philippines)
Non-resident, taxable sourced within.
There are several items of income which are lumped by kind and
Residency, citizenship, and source of income are factors considered to
subjected to a similar rate.
determine how the person is taxed. The fact that there are several
factors to consider before taxing a person is the reason why the
This is still just similar to following a schedular tax system because we
income taxation system of the Philippines is comprehensive but
still classify them and then subject them to different tax rates and then
corporation have a fixed tax rate.
when all incomes are lumped such as business and compensation
income, we subject this lump to a uniform rate.
Semi-schedular or semi-global but mostly schedular.
INDIVIDUAL INCOME TAXATION In some cases, Withholding System (Pay as you earn)
This is a way of collecting tax and is not another type of tax.
BASIC FEATURES OF INDIVIDUAL INCOME TAXATION Compensation income earners are subjected to withholding tax.
Persons who are leasing out their properties—persons or
Progressive corporations— earn net income. They are subjected to income tax but
Proportional to income earned by individual. The income tax imposed there is withholding tax required by them which is being withheld by
is proportional to the income earned by the individual. Progressive the lessee. Lessees are required to withhold equivalent to 5%.
system is much more clearly illustrated in individual than corporation.
CORPORATE INCOME TAX
Income increases, tax rate increases. In other words, it follows a
scheduler system.
TN: Starting 2018, there is a new income tax schedule. BASIC FEATURES OF CORPORATE INCOME TAX
Modified Gross Income Taxation for Pure Compensation Fixed rate of 30% (Proportional)
Earners The progressive system still exists for Corporate Income taxation even
A modified gross income taxation is used for pure compensation though the rate is fixed because the how much a corporation is taxed
earners because deductions such as return of capital are not allowed. still increases by the income it earns
The computation for gross income only have exclusions.
Net Income for Corporate Income Taxation Can deduct itemized
Normally, return of capital is deducted from gross income. BUT for deductions under Sec 34
pure compensation earners, there is no return of capital since these
individuals do not have any capital to put in (you only use yourself as Pay-as-you file system
your capital). Pay the tax the moment you file the income tax return
The compensation pure compensation earners get are taxable right CRITERIA USED IN IMPOSING INCOME TAX
away but subject to 50,000 pesos exemption as provided by law which
is considered the BASIC personal exemption and 25,000 pesos for
every dependent. COMPREHENSIVE SYSTEM OF IMPOSING INCOME TAX
Follows pay-as-you-file system Source is the property, activity, or service that produces the income.
The moment you file your income tax return, you pay taxes due. Pay A. Capital
and file to the bank. Those who go to BIR are those individuals or B. Labor
entities that either those incurred a loss or do not pay any taxes at all. C. Both labor and capital
They have correctly paid their taxes as they have estimated in their D. Dealings in property
income tax return.
Necessity of determining source of income
If no tax to pay – go to BIR. As defined in general principles of income taxation, there are
If you have tax to pay – go to authorized banks. individuals or entities taxable only for income sourced within the
Philippines while some are within and without the country
Therefore, we need to know where the income is sourced to know Income is not exempted by any treaty or law
where the income can be taxed, here in the Philippines or abroad by Not taxable income
another taxing authority. If services are rendered in the Philippines by NIRC provides for exclusion, and some exceptions.
a non-resident citizen, this is taxed by the Philippines All those income (sec 32B), while they are considered income under
first two criteria, cannot tax them.
Example: OFW is a non-resident under Tax code. If you have a
property leased in the Philippines. It is taxable in the Philippines
KINDS OF TAXABLE INCOME OR GAIN
because property is located here and the source is the property or to
be strict, the activity of leasing out is the source which is conducted
here in the Philippines. So, taxable because being a non-resident, TAXABLE INCOME
taxable within but his compensation while working abroad, not taxable
here. Outside the Philippines, so not taxable here. The pertinent items of gross income specified in the NIRC, less the
deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the NIRC or other special laws.
CRITERIA TO DETERMINE IF INCOME IS TAXABLE
GENERAL CLASSIFICATION OF GAINS
HOW TO TELL IF INCOME IS TAXABLE
1. Capital gains – gain or income from sale or exchange of capital
1. There is gain or profit assets
2. Gain or profit is realized or received (actually or constructively) 2. Ordinary gains – gains or income from sale or exchange of
3. Such gain or profit is not exempted by any treaty or law properties or services which are not considered as capital assets
(categorized as ordinary assets)
TN: These three must be complied with before income can be said to
be taxable.
GROSS INCOME
There is gain or profit
If you are in a better position than where you were originally or net DUMPING GROUND COMPUTATION
worth increases in value than what you used to have.
Gross Income P xxx
Clearly presented if there is investment, Invested 100 then got 400, Less Allowable Deduction (xxx)
there is a 300 gain or profit. But, even if you do not have any Taxable Income P xxx
investment like you found a bar of gold in the street. It increased your Multiplied by the Tax Rate x%
net worth. No investment so the entire value is considered an Tax Due and Payable P xxx.
investment.
TN: For discussion purposes only. Do not write ‗using dumping ground
Gain or profit actually or constructively received computation‘ in the exam as this is only a term coined by Atty. Amago
Actual – there is actual possession of the wealth to facilitate discussion.
Constructive- no actual possession but already in your
control.
Examples: Income deposited in a bank; shares of stock INCLUSIONS
Q: You own shares of stock. Purchased for P100. You look at stock ITEMS OF GROSS INCOME [CGGIRRDAPPP]
exchange, the value is P1,000. Is there gain or profit?
A: Yes, since you are in a better position than before. 1. Compensation for services in whatever form
2. Gross income derived from the conduct of trade or business or
nd
Q. Did it comply with the 2 criteria of actual or constructive receipt? the exercise of a profession
A: No. It is complied only when you sell it. 3. Gains derived from dealings in property
4. Interests
You can only realize the profit in this case is when you separate it from 5. Rents
the capital. You can separate when you sell the shares, you can deduct 6. Royalties
the cost and the remaining is the realized gain. 7. Dividends
8. Annuities
Buying stocks at 100 pesos per share, then when the right time comes 9. Prizes and winnings
and the share increases to 1000 pesos per share, the only way you 10. Pensions
realize profit is when you sell your shares and get the profit out of that 11. Partner‘s distributive share from the net income of the general
sale. In that sense, you get to control both capital and gain by professional partnership
physically segregating them.
TN: Pertinent items of income are not exclusive. It is income when it
You can physically segregate income from capital whereas if not yet increases the wealth or the assets.
sold, it is something inchoate. You do not own the amount (P1,000)
yet but you own the shares which could potentially be an income.
COMPENSATION INCOME
Income is realized:
1. If there is control of income COMPENSATION INCOME
2. It is borne out of a completed transaction
Compensation income refers to all remuneration for services rendered
Other ways to earn income: by an employee for his employer, unless specifically excluded under
Contract of loan – Interest payment is the source of income. The the Tax Code.
moment it is executed, deemed realized. When transaction is
completed, contract perfected, there is already control I the sense that There is compensation income when there is an employer-employee
if due and demandable, can demand payment of interest. relationship. Compensation income can only be earned by an
individual. Only natural persons can become an employee.
1. Selection and engagement of the employee There are certain allowances given by the employer to the employees
2. Payment of wages which benefit the employer. These allowances are not taxable on the
3. Power of dismissal part of the employee but the employer as it is primarily for the
4. Power to control the employee‘s conduct employer‘s benefit.
Two-Tiered Test
BUSINESS INCOME
1. Economic Dependency Test – whether or not the employee
is dependent on the employer for continued employment in TAXABLE INCOME COMPUTATION
the employer‘s line of business For Manufacturing, Merchandising, or Mining Business
COMPENSATION IN KIND
COST OF GOODS SOLD COMPUTATION
1. Stock options – taxed only if there is a benefit to the
employee such as when he can buy the share at a more Cost of Goods Sold
favorable price than the public For Merchandising Concern
2. Promissory note – face value of the promissory note, unless Beginning Inventory P xxx
discounted wherein the cash discounted value will be used Add: Net Purchases xxx
Cost of Goods Sold Available for Sale P xxx
3. Cancellation of debt – value of debt forgiven Less: Ending Inventory (xxx)
Cost of Goods Sold P xxx.
4. Tax liability as compensation – amount of tax shouldered by
employer
Fair Market Value Partnerships follow the constructive receipt doctrine wherein the
It is the value of the property where a seller, who is not compelled to income is deemed automatically distributed to the partners even if
sell, is willing to sell and the buyer, who is not compelled to buy, is there be no actual distribution.
willing to buy.
Tax rate
Example: If there is a property worth 100k and the seller is willing to It is taxed at 0-35%, part of the dumping ground computation.
sell it at 90k and a buyer is also willing to buy it at 90k, that 90k
becomes the fair market value. Situs
Where the profession is undertaken
ORDINARY ASSETS
CONSTRUCTIVE RECEIPT DOCTRINE
The income is deemed received even if there is no actual distribution ORDINARY ASSETS
or receipt of the income.
1) Stock in trade included in the inventory at the end of
For General Professional Partnership, the partnership income is taxable year
deemed distributed to the partners automatically. Even if not declared,
the share of the partner in the partnership income goes to the partner. Ex: Stock of sardines
You originally have 100 cans of sardines. Then you are left with
2 cans of sardines at the end of the year. What do you consider
INCOME FROM DEALINGS IN PROPERTY
as ordinary assets? 2 cans of sardines because they are the only
assets left in your possession.
DEALINGS IN PROPERTY
If sold or eaten, it can no longer be called your asset. Your
Dealings in property refer to the disposal through the sale or exchange assets are those which are included in your inventory at the end
of ordinary assets or capital assets. of a taxable year.
TN: The gains depend on the type of property sold. TN: If land, cannot be stocked and cannot fall under the first
criterion. Instead it falls on the second one.
Goodwill – there may be gain or loss when the business sold
2) Properties primarily held for sale to customers in the
Example ordinary course of his trade or business.
Property which costs 1,000,000 with a life of 10 years is sold for
700,000 at the end of the 6th year. How much is the gain? Ex: Sale of house and lot
You have 10 houses, and you sold the one in Cebu in Cristina
The gain is 300,000. Selling price of 700,000 less the book value of North but you are not engaged in real estate business.
400,000 equals a gain of 300,000.
It will be considered capital because the asset is not primarily
held for sale and it is not in the ordinary course of business
Gain or Loss on Sale
because you are not engaged in real estate business.
Ex: Securities. You may be able to stock the certificates, but not
Straight-Line Method the stock themselves.
**Accumulated Depreciation
3) Property used in trade or business subject to
Cost P 1,000,000 depreciation – that is when there is a decline of value of
Less: Salvage Value - property because of passage of time or because of usage
Depreciable Amount P 1,000,000
Divided by: Useful Life in years 10 Example of property that depreciates: cars, cellphones.
Depreciation Expense (for the year) P 100,000 TN: Land does not depreciate, it ordinarily appreciates rather
Multiplied by: Number of Years used 6 than depreciate. Most personal properties depreciate however
Accumulated Depreciation P 600,000. Rolex watches and other luxury items does not.
If you earn income out of ordinary assets, you have ordinary gains. 4. For the individual, the reportable percentages of capital gain or
But if you earn income with the conduct of business even without loss shall be:
those materials enumerated above, considered ordinary gain. a. 100% if the capital asset is held for 1 year or less
b. 50% if the capital asset is held for more than 1 year
GR: Ordinary if in relation to earning an income not involving capital
asset 5. There is a net capital loss carry-over on the net capital asset‘s
loss in a taxable year; provided that the following conditions
Examples of ordinary income shall be observed:
1) Compensation income a. The taxpayer is other than a corporation
2) Business income b. The amount of loss does not exceed the income before
3) Professional exemptions at the year when the loss was sustained
4) Passive – as a rule are ordinary, unless used as capital c. The holding period should not exceed twelve months
Example:
CAPITAL ASSETS
Holding Cost GSP Gain
Period (Loss)
Sec. 39 A (1) of the NIRC Rolex 10 years P300,000 P450,000 P150,000
The term 'capital assets' means property held by the taxpayer Watch
(whether or not connected with his trade or business), but does not Jewelry 2 years P100,000 P200,000 P100,000
include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand Car 9 months P1,500,000 P900,000 (P600,000)
at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or Net Capital Loss Carry Over (NCLCO)
business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Gain (Loss)
Subsection (F) of Section 34; or real property used in trade or business Rolex Watch (150,000 x 50%)* P 75,000
of the taxpayer. Jewelry (100,000 x 50%)* P 50,000
Car (600,000 x 100%)* (600,000)
Three types of assets subject to capital gains: Net Capital Loss Carry Over P (475,000)
1. Income from dealings in shares of stock of domestic corporation
whether or not through the stock exchange *The holding period is taken into account.
2. Income from dealings in real property located in the Philippines
and
Income
3. Income from dealings in other capital assets other than (a) and
Year 1
(b).
Ordinary Income P 300,000*
TN: This gives a negative definition: ―but does not include…‖ - gives
an enumeration of what are ordinary assets. If does not fall under any,
considered capital assets. For you to answer the exam, memorize the *No NCLCO because there is only ordinary income
ordinary assets.
Year 2
Capital assets are assets which are not used in business but does not
include enumerated ordinary assets. If not one of the ordinary assets, Gain (Loss)
it is capital asset (opposites define each other) Ordinary Income P 300,000
Net Capital Gain P 100,000
NCLCO* (100,000) -
HOLDING PERIOD OF CAPITAL ASSETS Taxable Income P 300,000
For Individual Taxpayer *NCLCO can only be applied to the extent of the capital gain.
Apply the holding period
Held for 12 months or less – report gain or loss at 100%
Held for more than 12 months – report gain or loss at 50% TAX TREATMENT OF ORDINARY AND CAPITAL ASSETS
NET CAPITAL GAIN (LOSS) Gain or Loss From Capital Asset Transactions
Capital gains are to be reduced by capital loss incurred during the
taxable year. Capital loss allowed as deduction from the capital gains
PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN (LOSS)
only.
Rent income refers to the consideration for the use of the property of
another. The rent paid by the lessee is income for the lessor. ROYALTIES
LEASEHOLD IMPROVEMENT Royalty is the compensation for the use of intellectual property.
Situs: Place of use
When the lessee built permanent improvements on the leased property
which will become the property of the lessor upon the expiration of the Kinds of Royalty Income
lease, the value of the improvement should be reported as income of 1. Active Royalty Income – 0-35% for individuals or 30% for
the lessor using either outright method or spread out method. corporations
2. Passive Royalty income – 20% final tax
How to Report Income from Leasehold Improvement Royalties on books as well as other literary works and musical
composition – 10% final tax
The royalty must be earned within the Philippines Important: Share in trade partnership is taxed the same way as
Otherwise, the said passive income will form part of the gross income dividends. This is different from a general professional partnership.
of the taxpayer that will be subject to the dumping ground They are not subject to passive income tax (they follow constructive
computation, provided such taxpayer is a resident citizen or a domestic receipt doctrine: even when you declare or not, you are taxed), and
corporation. they are subject to dumping ground computation of 0-35%.
To individuals from domestic corporations As a result, the stock dividend will be subject to tax based on
Dividends shall be subject to a final withholding tax of applicable final tax rate on dividends for individual taxpayers (10% or
10% - RC, NRC, and RA 20% or 25% FWT as the case may be.
(Resident Citizens, Non-resident citizens and
Resident Aliens) Treasury Shares
20% - NRA – ETB These are shares of corporation being bought back by such
(Non-resident alien engaged in trade or business corporation.
in the Philippines)
25% - NRA –NETB Company X has 100 shares with five stock holders (A, B, C, D, E)
(Non-resident alien not engaged in trade or having 20 shares each. A wants to sell his share and the corporation
business in the Philippines) bought it exercising its right of first refusal as reflected in their by-
laws. As a result, the corporation is now holding its own share which is
To domestic corporation from another domestic corporation commonly called as a Treasury Share.
Dividends are exempt as it will only be taxed when it is distributed to
the stockholders The treasury share is the property of the corporation already. When the
corporation would like to sell its treasury share, it will be treated as a
Rule if dividends are in the form of property property dividend subject to 10% or 20% or 25% as the case may be
They will be subject to a final withholding tax based on the fair market
value of the property.
LIQUIDATING DIVIDENDS
Corporation declaring dividends must be a domestic corp
To be subject to final tax, a domestic corporation must distribute it or LIQUIDATING DIVIDENDS
otherwise, it may be included as gross income and subject to the
dumping ground computation. Return of stockholders investment. It arises from the disruption of
assets by a corporation to its stockholders upon corporate dissolution.
Rule in case of foreign corporation
It gets complicated when it is foreign corporation. You will need to Return of capital if
apply the rule on situs with regard to foreign corporations. Apply the 1. If it is higher than cost
50% and 85% rule. 2. When the corporation is a wasting asset corporation which is
a type of business that will diminish like mining.
Reason: To encourage foreign investors. And to make it equal with the Except: PCSO and lotto winnings
branch profit remittance tax of 15%, otherwise, the foreign 10,000 or less – exempt from tax
corporations will only create branches, not subsidiaries, in the country. In excess of P10,000 – 20% final tax
PENSIONS
ANNUITIES
TN: Need not be yearly as long as it is periodic. Situs: Where the service is rendered
This is given not on account of services rendered under an employer- RETIREMENT BENEFITS
employee relationship. It is subject to tax under the ground
computation. With Reasonable Private Benefit Plan
Retirement benefits may be exempt subject to the following
Tax rate conditions:
A. For individual taxpayer – 0-35% 1. Reasonable private benefit plan
B. Non-resident alien not engaged in trade or business – 25%. 2. Approved by the BIR
Situs: Where the contract is made 3. Employee who received the reasonable private benefit plan
must be at least 50 years old
PRIZES 4. Such employee must have rendered service for at least 10
years, which need not be continuous
5. The benefit can only be availed once in a lifetime
PRIZES
TN: There are not a lot of questions regarding pensions in the bar
Prizes represent remuneration for an effort reflecting one‘s superiority. exam. What usually come out are retirement benefits.
It involves a showcase of skills or talents.
BENEFITS RECEIVED FROM GSIS, SSS The CGT is P9,000. The cost of the shares which is P100,000 is
deducted from the gross selling price of P160,000 which will result to a
Benefits or pensions received from foreign governments by one net gain of P60,000. The 15% rate is multiplied to the net gain of
working abroad or corporations are exempt. P60,000 in order to arrive at the CGT of P9,000.
Separation Pay
Capital Gains Tax
Depends on the reason for termination
Beyond the control of the employee – exempt
Gross Selling Price (P16x10,000) P 160,000
Within the control of the employee – subject to tax
Less: Cost (P10x10,000) (100,000)
Net Gain P 60,000
Those received on account of death, etc. are exempt from tax
Multiplied by 15% tax rate 15%
Capital Gains Tax P 9,000
LONG-TERM DEPOSITS OR INVESTMENTS
The basis for the rate is the holding period of the taxpayer The income should be subjected to the 0-35% tax rate, part of the
If the holding period is at least five years, it is not anymore subject to dumping ground computation. The income is outside the Philippines. It
tax. This is applicable only to Philippine currency deposits or will be difficult to compel anyone. While it is not shares of stock listed
investments. and traded in the local stock exchange (NY stock exchange being
foreign), the same is still not under capital gains tax because it‘s
Q: Feds has a five-year deposit worth one million pesos. He assigned it outside the Philippines.
to Mike after 2 years. How much is Feds subjected to tax?
Stock transaction tax of 60% of 1%
A: 20% tax because the holding period of Mr. X is less than 3 years. If the shares of stocks are listed and traded in the local stock
exchange, it will be subject to a stock transaction tax (OTP) at a rate
Important: The controlling factor in determining the tax rate for each of 60% of 1% of the gross selling price. The two must go together
taxpayer would be their individual holding period. Each person will be for it to be subjected to the stock transaction tax. It has to be listed
taken individually. and at the same time traded.
SALES OF SHARES OF STOCKS Q: If Jollibee shares are listed in the Philippine stock exchange and
sold through a broker in the stock exchange, how much is the tax due?
The shares of stocks must not be listed or traded in the local stock
exchange. Shares of stocks represent equity interest in a corporation. A: 60% of1%.
Note: These are annual rates and the net income is aggregated. Q: But if it is sold directly to a buyer, not through the local stock
exchange, how will it be taxed?
A: 15% because it will fall under not listed or traded in the local stock It is the residential address of a natural person as certified by the
exchange. While listed, it is not traded. Barangay Chairman who has jurisdiction over the place, or the Building
Administrator (in lieu of said Punong Barangay) if the residence is a
Q: If the shares involve a non-domestic corporation, probably a condominium or the individual taxpayer‘s address as indicated in the
corporation abroad, or even if it is a corporation here in the latest income tax return.
Philippines, like PLDT is already listed in the NY stock exchange. How
will it be taxed? Exempt from CGT
If it is the principal residential property of the taxpayer, the transaction
A: 0-35% because again it is abroad. is exempted from CGT. There are certain requirements which must be
complied to prove that it is indeed your residential property:
Summary:
60% of 1% – listed and traded within the Philippines 1. Certification from the barangay that this is your principal
15% CGT – not listed or not traded in the local stock residence.
market
0-35% – if it involves a domestic corporation or a 2. It must be located in the Philippines.
foreign stock exchange
3. The proceeds derived in the sale must be used to acquire a new
Principal residence within 18 months.
SALE OF REAL PROPERTY
4. Historical cost or adjusted basis of the real property sold or
SALE OF REAL PROPERTY disposed shall be carried-over to the new principal residence built
or acquired
If it doesn‘t involve real properties, as in the case of real properties
defined under the local government code like machineries, properties 5. The BIR is notified within 30 days from the date of disposition of
which are reported or declared to the local government and is the taxpayer‘s intention to avail of the tax exemption
represented by a tax declaration which is applicable to both house and
lot. The building, the house is also declared with a separate tax 6. Tax exemption can only be availed of only once every 10 years.
declaration from the lot. It is also possible that machineries are
declared to be considered as real property. 7. Unutilized portion of the proceeds is subject to CGT of 6% based
on the portion of the GSP or ZV, whichever is higher, to be
computed proportionately as expressed in this formula:
Involves only properties which are deemed capital assets
Hence, those not in the ordinary business or trade.
Presumed gain in sale of real property “The historical cost or adjusted basis of the real property sold
This is really unfair because there is no gain but automatically you are or disposed will be carried over to the new principal residence
subjected to tax. It is possible you are earning a loss and yet you are built or acquired”
subjected to tax because the basis is the selling price, not the net
gains unlike that of shares of stock. You don‘t deduct your cost. So if It means that the if the property now that you are selling after
you bought your property for 1 Million and it is sold for 800, 000, depreciation is worth 1 Million pesos and you built a house worth 2
where will you base your tax? It will be based on 1 million pesos even Million, it is as if it is only worth 1M because you are supposed to
if you sold it at a loss because it is always gross selling price, zonal carry-over the historical or adjusted value of your property.
value or assessed value.
The reason for this is that if ever you will sell your new residential
PRINCIPAL RESIDENCE property now, because the basis of the value is less, you will always be
subject to tax since cost is less. Though it does not matter because
This is the family home of the individual taxpayer. It refers to the your sale is based on gross selling price, zonal value or assessed value,
dwelling house, including the land on which it is situated, wherein an whichever is higher supposedly but because you will include it there,
individual including his family permanently resides, or whenever the zonal value is very small.
absent, wherein the said individual intends to return.
Gross selling price now is the highest among them and it will
be subjected to tax in terms of that higher value.
It just includes the value of your old house to your new house. So if
SALE OF OTHER PROPERTIES
you avail of that, your principal house is worth 1 Million and you were
able to sell it for 2 Million pesos (total proceeds). You now want to buy
a house which is worth 1.6 Million, what will happen to the excess SALE OF OTHER PROPERTIES
400,000? It will be taxable because the requirement is that all
proceeds must be fully utilized for purposes of your new principal Those like microphone, laptop, jewelry. If they will be sold, you will be
residence. The excess will be subject to tax. subject to tax if ever there is income. Rate is the dumping ground
computation of 0-35%.
For example, only 1/3 of the entire proceeds is being used. Only 1/3 of
the capital gains tax supposedly will be subject to tax. Your capital loss can only be deducted from capital gains.
Summary:
OG & CL – cannot join
OL & CL – cannot join
The capital gains tax on the excess is P24,000. OG & CG – can join
OL & CG – can join
Another example:
Amount of property is 1M, after 5 years, you want to change principal Example:
residence so you sold it. Because of the land value, it is now worth 5M. Before you compute the taxes, there is a portion for capital gains and
You comply with all the requirements to be able to avail of the capital loss. Example if you receive jewelries (capital asset) for 100k
exemption. In addition to the requirements above, an additional when you were 18 years old and you were able to sell it at 120k after
requirement is that it must be placed in an escrow account which is a 1 year (Note: it matters how long you held on to it). Cost is 100k,
conditional account—you cannot withdraw on that amount until the gross selling price is 120k. Difficulty here is determining whether it is
condition was fulfilled. The supposed capital gains tax in favor of BIR ordinary or capital assets. How much is the tax due?
so that if ever, after 18 months, you are not able to purchase a new
principal residence, the BIR will just withdraw whatever is in that Cost – P100k
escrow account. Gross selling price – P120k
P120k – P100k = P20k
The zonal value of the property is 6M, assessed value is 5.5M. If after
10 months, you decided to purchase a house and lot worth 4M in Ma Net gain is 20k. 20k is added to taxable income, and the sum is called
Luisa. How much is the Capitals Gains Tax due on the transaction net capital gains. Assuming ordinary income is 100k, total taxable
provided? income is 120k, subjected to the rate of 0-35%.
Given: Total tax due and demandable for this type of income is 18.5k. No
Cost of the house = P1M GSP = P5M problem because you only have net capital gains.
Cost of new principal residence = P4M ZV = P6M
AV = P5.5M Q: What if it is more than 1 year? Example you received it when you
Excess (P5M - P4M = P1M) were 18 years and you are now 21. Will you still be able to consider
the entire 20k?
Is there capital gains tax due on the transaction? Yes.
A: No. When it is more than 1 year, you subject it to a holding period
which will necessitate 50% deduction on gains. Better if you hold on
for more than 1 year because only 50% will be considered as the gain
for taxation purposes. It means that only 10k (20k times 50%) will be
Capital Gains Tax is P72,000. added.
2. You can only carry it over to the extent of the net income on the TN: Not taxable because it is an indemnity in lieu of death.
year it was incurred.
Example:
TN: Loss is 30k and ordinary income is 10k. How much can you Kads secured a life insurance for the benefit of Marmie. Marmie was
carry over to the next year? Only 10k because there is a limit that designated as irrevocable beneficiary. If Kads dies, the life insurance
it should not exceed the ordinary income of the year the loss was will pay his beneficiary 10K every month to Marmie. Is it taxable for
incurred. income tax purposes? No.
Q: If on 2016, it is still an ordinary gain with no capital gains, what will Whether or not revocable, it does not matter. Whoever is the
happen to your 10k? beneficiary, it does not matter. Still not subject to income tax.
A: You cannot carry it over again.
TN: Life insurance is tradition it that you must die first before the
Q: If in 2017, you have a capital gain of 10k, can you still carry over insurance is issued. (Unlike in an endowment fund – you pay then you
the 10k from your 2015 loss? can get the investment if you outlive the insurance) Whatever the
A: No, because the limit is only 1 year. proceeds of traditional life insurance – not subject to income tax.
Q: Had it been that there was a capital gain on 2016 for 50k? Company Insuring Employee Example
A: Then 10k will be deducted. There will be a net capital gain of 40k,
added to 200k. You can now deduct—net capital loss carry over—net If the company is the beneficiary = expenses (not taxable)
capital gains of 40k. Total taxable income is 240k. Capital loss can be A company takes a life insurance for one of its employees because the
deducted from capital gains but if there is no capital gain, you cannot latter has been such a great guy that they love him. The company was
deduct capital loss. named as the beneficiary – it will be the only one benefitting from
their beloved employee‘s death.
EXCLUSIONS
The amount paid for the life insurance is now treated as an EXPENSE
and the income that they get after the employee‘s death is not taxable
EXCLUSIONS [LAGCIRM] because these are life insurance proceeds.
Sec 32 (B). Exclusions from Gross Income. — The following items shall The company may deduct it as an expense on their part.
not be included in gross income and shall be exempt from taxation
under this Title: If estate of the employee is the beneficiary = compensation (taxable)
If the company makes the estate of the employee as the beneficiary,
1. Life Insurance the life insurance premium the company pays will now be treated as
2. Amount Received by Insured as Return of Premium COMPENSATION on the part of the employee and will be taxed yearly
3. Gifts, Bequests, and Devises as compensation.
4. Compensation for Injuries or Sickness
5. Income Exempt under Treaty Insurance premium – Taxable
6. Retirement Benefits, Pensions, Gratuities
7. Miscellaneous Items Life insurance proceeds – Still not taxable since the law does not
a. Prizes and awards given in recognition of Religious, distinguish who the beneficiary is.
Charitable, Scientific, Educational, Artistic, Literary or Civic
Achievements TN: Proceeds of life insurance are never taxable, regardless of the
b. Prizes and awards in sports competitions beneficiary.
c. Income derived by Foreign Government or its political
subdivisions from the exercise of any essential governmental When life insurance can be subject to tax
function or from any public utility 1. Insurer and insured agreed that the amount of the proceeds shall
d. Income derived from investments in the Philippines by be withheld by the insurer with the obligation to pay interest in
Foreign Government or Financing institutions the same – the interest is the one subject to tax.
e. Gains derived from redemption of shares of stock issued by
a Mutual Fund Company Example:
f. Contributions to GSIS, SSS, PAG-IBIG, and Union Dues On Jan. 9, 2016, you got life insurance proceeds in the amount of
g. Benefits in the form of 13th month pay and other benefits 1M but the insurance company will only pay you on Jan. 9, 2017.
h. Gains derived from the sale, exchange, retirement bonds, During this supervening period, there is interest of 20% so that
debentures or other certificate of indebtedness with a when the time comes, you will get 1.2M by Jan 9, 2017. Only 1M
maturity of more than 5 years will be excluded. The 200,000 will be subject to tax because this
is the interest will be subject to tax.
Shall not be included in the gross income and shall be exempt from
taxation. (1) There is transfer of the insurance policy.
TN: The exclusions are exclusive because they construed strictly When one sells his insurance to another, the income that the
against the taxpayer while in favor of government. purchaser gains from the insurance is subject to tax. The income
derived from this is now taxable since the insured is now making
a business out of the insurance policy.
PROCEEDS OF LIFE INSURANCE
Illustrative Problem:
PROCEEDS OF LIFE INSURANCE Mr. A is insured for a life insurance policy of 10 Million Pesos
which is due from payment for 10 years. From Year 1 to Year 4,
The proceeds of life insurance policies paid to the heirs or beneficiaries Mr. A paid for the premium for 4 Million pesos. On the 4 th year,
upon the death of the insured, whether in a single sum or otherwise, Mr. A sold the Insurance Policy to Mr. B for 5 Million Pesos. From
but if such amounts are held by the insurer under an agreement to 4th year to 8th Year, Mr. B paid for the Insurance Premium in the
pay interest thereon, the interest payments shall be included in gross amount of 4 million pesos.
income.
On the 8th year, Mr. A dies which means Mr. B is happy since he TN: What is taxable is the excess of the amount received over the
can get the money in the amount of 10 million pesos. (and Mr. B amount paid. The excess forms part of the dumping ground
paid only 9M – 5M for the sale and 4M for the premiums) computation. The interest payment is also taxable.
Mr. B paid 5 million for the transfer from Mr. A to him and he also .
paid 4 Million for the payment of the premium until the 8th year TThere is already direct tax due to it. There is no income to speak of.
when Mr. A died. Therefore, Mr. B paid a total of 9 million pesos The right you are exercising here is not related to your right to earn
which is his capital which will now be subtracted to 10 million income but on some other rights.
pesos which Mr. B earned from the Insurance Policy.
Gifts, etc. is under will if you are granted by some decedent which
Now, Mr. B actually has 1 million pesos as has income and now takes effect only if someone dies. You earned something but not
subject to tax. because of your right to earn income but someone else‘s right to
transfer property. This act is taxable under estate tax, not income tax.
INCOME =
Life Insurance Proceeds – (Purchase Price + Premiums Paid) In the same way, if I am so generous to give you 1M. It increased
your net worth. It is because of my right to be generous not your right
SUMMARY: to earn income. If you are given gifts, it will be subject to donor‘s tax,
GR: Not taxable regardless of the beneficiaries not income tax. The donor, not the donee, is subject to tax.
Conditions:
1. Paid to heirs Gift
2. Paid upon death of the insured Any property legally and validly transferred from one person to
3. Paid in a single sum or in instalment another for free
Reason: It is more of an indemnity or compensation rather than gain
EXC: (When taxable) Bequest
1. Used to secure money obligation Personal property transferred from one person to another by will.
2. Transfer for valuable consideration
Devise
Real property transferred from one person to another by will.
Income from Life Insurance Proceeds
Other damages that you will get, that is a gray area. For example,
compensation for loss profit which forms parts of compensation a. "The provisions of any existing law to the contrary
income but this is a gray area. notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by
Sir thinks that this should not be subject to tax because this was not resident or nonresident citizens of the Philippines or aliens
borne out of your services rendered. It is just compensation because I who come to reside permanently in the Philippines from
was involved in an accident, forms part of physical injuries. foreign government agencies and other institutions, private
or public.
Other damages that you get is still taxable if not related to physical
injury. Example: In labor case, payment of backwages, atty‘s fees, b. Payments of benefits due or to become due to any person
moral damages, nominal damages will still be subject to tax because residing in the Philippines under the laws of the United
not physical injury. States administered by the United States Veterans
Administration.
Exceptions:
1. Actual damages for loss of anticipated profits c. Benefits received from or enjoyed under the Social Security
2. Moral and exemplary damages awarded as a result of breach System in accordance with the provisions of Republic Act No.
of contract 8282.
3. Interest for non-taxable damages above
4. Damages as compensation for unrealized income d. Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by government
officials and employees.
INCOME EXEMPT UNDER TREATY
Retirement plans covered by this provision:
INCOME EXEMPT UNDER TREATY 1. Retirement Pay Law
2. CBA Retirement Plan
Income of any kind, to the extent required by any treaty obligation 3. Reasonable Private Benefit Plan
binding upon the Government of the Philippines
Retirement Pay Law
Most favoured nation clause which is one way of preventing or Under the new retirement law, persons who are 60 years who have
avoiding international double taxation. It is an exclusion because both rendered service of 5 years, extendable until 65 years mandatory
sovereign states, being superior in their own right, entered into an retirement.
agreement.
CBA Retirement Plan
We follow the pacta sunt servanda that we have to be in good faith Retirement Plan entered into by the employer and the labor union. It
whenever we deal with international personalities. So if we agreed that may provide different conditions, provided not more burdensome than
no taxes will be paid so it is appropriate to exclude them from taxes. the Retirement Pay Law.
This also embodies the principle of reciprocity and comity. Reasonable Private Benefit Plan
It is another retirement benefit plan which has more stringent
requirements. This becomes a separate fund of the company. The
RETIREMENT BENEFITS, PENSIONS, GRATUITIES
company cannot make use of it. In fact, there is an entity that may be
set up just for this – usually a bank.
RETIREMENT BENEFITS
Requirements of a reasonable private benefit plan
Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual 1st Must be reasonable private benefit plan
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: 2nd Reasonable private benefit plan is only in the form pension,
gratuity, stock bonus or profit sharing plan
Provided, that the retiring official or employee has been in the service
of the same employer for at least ten (10) years and is not less than A reasonable private benefit plan maintained by an employer for the
fifty (50) years of age at the time of his retirement: benefit of some or all of his officials or employees, wherein
contributions are made by such for the purpose of distributing to such
Provided, further, that the benefits granted under this subparagraph officials or employees, or both, and employees the earnings and
shall be availed of by an official or employee only once. principal of the fund thus accumulated, and wherein it is provided in
said plan that at no time shall any part of the corpus or income of the
For purposes of this Subsection, the term ' reasonable private benefit fund be used for, or be diverted to, any purpose other than for the
plan' means a pension, gratuity, stock bonus or profit-sharing plan exclusive benefit of the said officials and employees.
maintained by an employer for the benefit of some or all of his officials
or employees, wherein contributions are made by such employer for This becomes a separate fund of the company because the company
the officials or employees, or both, for the purpose of distributing to cannot make use of it. In fact, there is an entity that may be set up
such officials and employees the earnings and principal of the fund just for this usually a bank which will manage this
thus accumulated, and wherein it is provided in said plan that at no
time shall any part of the corpus or income of the fund be used for, or 3rd A contributory plan
be diverted to, any purpose other than for the exclusive benefit of the
said officials and employees. There must also be a contribution on the part of the employer, or
employee, or both. No amount shall inure to the benefit of a particular
Any amount received by an official or employee or by his heirs from employee or official and such must be established for the common
the employer as a consequence of separation of such official or benefit of the employees or officials
employee from the service of the employer because of death, sickness
or other physical disability or for any cause beyond the control of the 4th Reasonable private benefit plan must be approved by BIR,
said official or employee.
Otherwise it will fall under the ordinary retirement law or RA 7641. The Pag-ibig, Philihealth, GSIS, SSS are always exempted whenever you
company is not considered to have successfully set up a reasonable get benefits.
private benefit plan.
Illustration:
5th It must also be availed of only once by the employee in his lifetime.
Mr. A
It is contained in the regulations, though not stated in the law. The 30 years ABC Company 5 years Separation Pay of P300K
subsequent retirement benefits received from another private 35 years XYZ Company 10 years Retirement pay of 1M
employer is no longer exempt but subject to tax 45 years ABC Company 5 years Retirement pay of 2M
6th The retiree official or employee must be at least 50 years of age, Will the following be subject to tax?
with at least 10 years of service which is either continuous or not
because the law does not provide.
The separation pay will not be subject to tax as per (b).
No age requirement here. The requirement is only the reason for
Illustration:
separation WON it is for just or lawful causes.
In one company, you can work there for 5 years, leave the company,
go back to the company, and work for another 5 years. You then now
It could fall under retrenchment, redundancy or other labor saving
comply with the requirement of 10 years of service.
devices. Here, the reason for separation is involuntary or beyond the
control of official or employee. It could also be that the reason for
IF Mr A is already 50 when he joined the company and stayed until he termination is death, sickness, physical disability.
was 60 (optional retirement age), his retirement benefit shall be
excluded if the private benefit plan is approved by BIR only if this is
If it falls under any of these two, then your separation will not be
the first time he will receive the benefit , because he complied with the taxable. But if severance is because you tendered your resignation,
age requirement which is 50 years old, he was able to work for 10 clearly it is taxable. That‘s why some companies let you enroll in their
years and it was approved by BIR. redundancy program if they like you, so not taxable.
Effect of previous retirement plan obtained from the
The first retirement plan from XYZ is taxable because Mr. A is not yet
government 50. The last retirement plan is not taxable
10 years of service (5 plus 5 years) in ABC Corp plus 50 years old
If same situation, prior to working in the private company, he already
therefore complied with the requirements.
received retirement benefit from the government which he
previously worked for, will he be exempt if he retires from the private
Let us assume that the retirement plan for XYZ is subject to CBA
company at age 60? Yes, because the first one that was availed of was which provides that you may retire at age 50 or after rendering 10
given by the government and it will not be counted for purposes of the
years of service to the company, approved by BIR, this will not be
exclusion.
taxable. The retirement plan under ABC will now be taxable because
it will now be the second time that he availed of a retirement plan.
These employees are not covered by the labor code but covered by
the Civil Service Law. It is not covered on the law on RA 7641 or new
retirement plan. The reasonable private plan benefit received is MISCELLANEOUS ITEMS
considered as the first time for the application of this law. The
retirement benefit received from the government will not be counted MISCELLANEOUS ITEMS:
for purposes of the exclusion under NIRC, after all it is not private.
A. Income derived by Foreign Government
Separation pay B. Income derived by the Government or its Political Subdivisions
Amount received by an official or an employee or by his heirs from C. Prizes and Awards given in recognition of Religious, Charitable,
the employer due to separation from service because of death, Scientific, Educational, Artistic, Literary, or Civic Achievements
sickness, or other physical disability or for any cause beyond the D. Prizes and awards in Sports Competition
control of the official or employee E. 13th Month Pay and other Benefits
F. GSIS, SSS, Medicare and Other Contributions
Non-taxable benefits G. Gains from the Sale of Bonds, Debentures or other Certificates of
Social Security Benefits, retirement gratuities, pensions, and other Indebtedness
similar benefits received by resident or non-resident citizens or H. Gains from Redemption of Shares in Mutual Fund
resident aliens from foreign institutions, whether public or private,
are not taxable.
SSS benefits under RA 8282 INCOME DERIVED BY FOREIGN GOVERNMENT
GSIS benefits under RA 8291
US Veterans benefit INCOME DERIVED BY FOREIGN GOVERNMENT
Benefit you receive from the United States Veterans Administration Income derived from investments in the Philippines in loans, stocks,
Office, Philippine Veterans benefits are also exempted. bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by:
Q: If you used to work in the US for 20 years and then you retire, Foreign governments,
come back to the Philippines and you receive pension from US social Financing institutions owned, controlled, or enjoying refinancing
security services, will it be excluded? From foreign governments, and
International or regional financial institutions established by
A: Yes, under 32b6c. If you get benefit like pension, social security, foreign governments.
retirement, gratuity and from a foreign government, it is already
excluded. Example:
If South Korea has a deposit here for 2M and it earns 100k interest
General rule in fact is that everything for which you paid a after 10 years, interest will not be subject to tax because it is
contribution, if there are benefits from them, it is always exempted. exempted under 7a. Interest on deposits from foreign governments in
banks in the Philippines is excluded from taxes.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 52 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
If US government invested in the shares of PLDT and PLDT decided to 2. Any political subdivision – cities, provinces, municipalities and
declare dividends, it will not be subject to tax because it is an income barangays. Any income earned by them in the exercise of
from investment in the Philippines of a foreign government of shares governmental function should not be subject to tax.
of stocks of corporation in the Philippines.
GOCCs
Concrete Example Distinguish whether the GOCC is exercising a government or
Atlas Mitsubishi (Non-resident foreign corp. from Japan) proprietary function. It must be engaged in a commercial activity for it
Bank of Japan to be taxable.
Atlas loaned from Mitsubishi 2M (non-resident foreign corporation) for Section 27c of the tax code provides that all corps, agencies, and
equipment to produce the product for Mitsubishi. (IOW, Mitsubishi is GOCCs, except SSS are taxable. As a rule, GOCCs are subject to tax.
client of Atlas). In turn, Mitsubishi loaned that money from Bank of
Japan, owned by government of Japan. Section 27c states that ―upon their taxable income as are imposed by
this Section upon corporations or associations engaged in a similar
Q: Is the interest earned by Mitsubishi taxable? business, industry, or activity.‖ Meaning, it must be a commercial
activity for it to be taxable.
A: Yes, because it is between Atlas and Mistubishi and not between
the Bank of Japan. The situs of interest is the residence of the debtor. Example:
Had it been only Atlas paying directly to the Bank of Japan, then the SSS are not subject to tax but had it not been provided in Section 27c
interest would have been exempt. that they are exempt, they would have been subject tax because they
are doing what other private corporations are doing.
There is interest payment by Atlas equivalent to 10% per year paid to
Mitsubishi, amounting to 200k every year. This interest is TAXABLE The act of loaning will be subject to tax had you been a corporation,
because it is not considered an investment of foreign government in even if a GOCC, is subject to tax. According to BIR, BSP may be
the Philippines. subjected to tax because its charter says that it can be subject to tax
after a certain period which already lapsed.
You need to make a distinction since it is not the bank of Japan but
Mitsubishi which invested in the Philippines. The loan is granted not to For Sir, it should not be the case. The act of loaning of BSP is not
a Philippine company but to Mitsubishi, a company of Japan, and is not commercial but governmental in essence because it needs to maintain
considered an investment of government of Japan. financial stability for the Philippines. Otherwise, all the banks will close.
Unlike for commercial banks which purpose is really for profit.
Interest will go to Mitsubishi, not to bank of Japan. BUT if the bank of
Japan loaned it to Atlas, it is tax exempt. But because in this case it The fact that it is not taxable if it exercises governmental functions will
passed through Mitsubishi before getting to Atlas, the interest earned not fall under 32b7b because sec 32b7b only says of political
by Mitsubishi is taxable. subdivision, so it (GOCC) will not fall under the exclusion.
If Mitsubishi is a domestic corporation or even a resident foreign Sec 32b 7(b) only pertains to GOCCs providing public utilities. But, for
corporation doing business in the Philippines, and it makes payment of GOCCs in general, you refer to Sec. 27c of Tax Code where it
interest to the bank of Japan, then it would not have been taxable. specifically enumerates who are exempted from taxes.
The Philippine has no jurisdiction to tax the bank of Japan. If we will It‘s different for political subdivisions (national government, local
allow this, all companies will deal with foreign corporation so that government units, municipalities, cities, provinces and even
whatever income is not taxable. barangays) – they are exempted from taxes which are connected or
related to governmental taxes. If they will engage in proprietary
TN: It is a landmark case, CIR v. Mitsubishi Corporation. functions, they will be subject to tax. However, seldom does the BIR
GR 54908, Jan. 22, 1990. Read this case. go after them. It may be taken against them as a body after all if the
government produces income, it will still go to the government. It will
Refinancing is when a government renews its loan. just be turnaround of the money.
Example: Bank of Japan loaned 2M to Atlas. Di gihapon kabayad si At best, for the GOCC‘s to be exempted, it should fall under Sec 27c to
Atlas. Nag reloan na sad si Atlas, nisugod ra pud si Bank of Japan. be exempted since it states that GOCC‘s are taxed when performing
International or regional financial institutions established by foreign commercial function.
governments is reciprocal law.
Refer to Section 27 for legal basis for exemption
They are not subject to tax here since the Philippines is not subject to
tax there as well. Income earned by Asian Development Banks are not That is why PAGCOR is not there, it is already subject to tax. We also
subject to tax because they are owned by foreign government. learned that PAGCOR is only subject to tax for activities not related to
gaming operations. Its franchise actually says that it is exempted.
INCOME DERIVED BY THE GOVERNMENT OR
ITS POLITICAL SUBDIVISIONS PRIZES AND AWARDS
V
INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL PRIZES AND AWARDS
SUBDIVISIONS
Prizes and awards made primarily in recognition of religious,
Income derived from any public utility or from the exercise of any charitable, scientific, educational, artistic, literary, or civic achievement
essential governmental function accruing to the Government of the but only if:
Philippines or to any political subdivision thereof.
i. The recipient was selected without any action on his part to enter
There are 2 entities covered: the contest or proceeding; and
1. Government of the Philippines – refers to the National ii. The recipient is not required to render substantial future services
Government as a condition to receiving the prize or award.
13TH MONTH PAY AND OTHER BENEFITS GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
Gross benefits received by officials and employees of public and
private entities: Provided, however, That the total exclusion under this GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
subparagraph shall not exceed Ninety thousand pesos (P90,000)
which shall cover: GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of
individuals
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act When you look at your payroll, there will be deductions which are
No. 6686; done before computing the tax
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; SSS Contributions – 1000 Salary 100k
(iii) Benefits received by officials and employees not Philhealth – 500 Less 1.6k
covered by Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; HDMF – 100 Taxable 98.4k
and
(iv) Other benefits such as productivity incentives and Total: P1,6000 (subjected to tax table)
Christmas bonus.
Debentures are used for bonds, backed by general credit of the No deduction shall be allowed for taxpayers earning compensation
issuer rather than a particular asset. They are unsecured liabilities. income arising from personal services rendered under an employer-
This is like a bank letting someone owe money without any collateral employee relationship.
Q: How can debts be subjected to tax in the first place? Matching principle
Before income can be generated, you have to spend something for it.
A: Debts are not seen as debts but possible investments on the person You need to deduct your expenses from your income to arrive at your
who lends the money. Debts may be securitized which means it can be net taxable income.
covered by a certificate/evidence for which people can invest in.
People are interested in investing in debts because it can be at an
DEDUCTION V. EXCLUSION
amount lower than the face value
There are businesses like PhilAm and most banks engage in Interpretation
management of mutual fund because not everyone has the technical Deductions are strictly construed against the taxpayer.
know-how to trade in the capital market for shares, bonds.
Withholding tax
People trust the professionals and the experts (banks, etc) to manage Withholding tax must be strictly imposed when required under the law.
their funds. Small investments are pooled together and then invested, Otherwise, the salaries cannot be deducted from gross income. Also,
perhaps in the stock market. there is a penalty equivalent to the amount the employer failed to
withhold.
Illustration:
38 people will invest 100,000 each which amounts to 3.8 Million. Related to trade or business
Evidence of ownership of mutual funds is called shares represented by The conditions in the law must be satisfied. The deduction must be
a certificate. At the end of a certain period, you decide to sell it back to used or related to your trade or business.
the fund.
Example: Your business is leasing out real properties. You went to
If you sell your shares to the fund and you gain and earn income, that collect rents from your lessee. When you went out, your child wanted
income is tax exempt. This is done by the government to encourage to buy the very colourful balloons. Can you deduct the cost of
people to invest in mutual funds and save their money. Mutual fund balloons? No, it is not related to conduct of trade or business. There
owners are protected because they are small time investors. could be other conditions.
ALLOWABLE DEDUCTIONS
KINDS OF DEDUCTIONS
Gross Sales P xxx Basis of Individual OSD Physical disability - not something born with – out of accident.
Less: Cost of Sales (xxx) Physical disability is not covered under this law
Gross Profit P xxx. Basis of Corporate OSD
CHANGE OF STATUS
OSD for individuals is higher compared to the corporate OSD since it is
If the taxpayer marries or should have additional dependent(s) during
based on gross sales/receipts wherein no deduction has been made for
the taxable year, the taxpayer may claim the corresponding additional
cost of sales.
exemption, as the case may be, in full for such year.
Individuals
If the taxpayer dies during the taxable year, his estate may still claim
Resident citizens, non-resident citizens and resident aliens except
the personal and additional exemptions for himself and his
purely compensation income earners can claim 40% OSD on gross
dependent(s) as if he died at the close of such year.
sales or receipts. Non-resident aliens cannot claim OSD.
If the spouse or any of the dependents dies or if any of such
If an individual opted to use OSD, he can no longer deduct the cost of
dependents marries, becomes twenty-one (21) years old or becomes
sales or cost of services.
gainfully employed during the taxable year, the taxpayer may still
claim the same exemptions as if the spouse or any of the dependents
If an individual employs the accrual basis of accounting for his income
died, or as if such dependents married, became twenty-one (21) years
and deductions, the OSD shall be based on the gross sales during the
old or became gainfully employed at the close of such year.
taxable year. If he employs cash basis, the OSD shall be based on his
gross receipts during the year.
This is favorable to the taxpayer:
If at end of the year, you gave birth to twins, you can claim
Corporations
50k additional exemption for the whole year even if the twins
Domestic Corporations and resident foreign corporations can claim
were born by 11:59:59 pm on December 31.
40% OSD on their gross income. Non-resident foreign corporations
cannot claim OSD.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 56 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
Even if the status changes at the beginning of the year, such as 3. Any amount expended in restoring property or in making
the dependent becomes 22 by January, the dependent can still good the exhaustion thereof for which an allowance is or has
be included in the deduction. been made
Husband and wife can claim maximum of 4 children for both.
Only one can claim the 4. Husband can claim 2. Wife can claim 4. Premiums paid on any life insurance policy covering the life
the other 2. of any officer or employee, or of any person financially
interested in any trade or business carried on by the
taxpayer, when the taxpayer is directly or indirectly a
NON-DEDUCTIBLE ITEMS
beneficiary under such policy.
(1) Personal, living or family expenses; b. Between a direct stockholder with more than 50%
(2) Any amount paid out for new buildings or for permanent equity interest and his corporation
improvements, or betterments made to increase the EXC: liquidation distributions
value of any property or estate; This Subsection shall not
apply to intangible drilling and development costs c. Between corporations owned by the same
incurred in petroleum operations which are deductible individual, direct or indirect, with more than 50%
under Subsection (G) (1) of Section 34 of this Code. equity interest
(3) Any amount expended in restoring property or in making EXC: liquidation distributions
good the exhaustion thereof for which an allowance is or
has been made; or d. Between grantor and a fiduciary of any trust
(4) Premiums paid on any life insurance policy covering the
life of any officer or employee, or of any person e. Between trusts if the grantor for such trusts are
financially interested in any trade or business carried on the same
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such f. Between the fiduciary of a trust and beneficiary of
policy. such trust
(B) Losses from Sales or Exchanges of Property. - In computing net Personal, living or family expenses
income, no deductions shall in any case be allowed in respect of losses Reason: Not an expense related to your trade, business or exercise of
from sales or exchanges of property directly or indirectly – profession.
(1) Between members of a family. For purposes of this It is also deemed accounted for in the exemption of P250,000 under
paragraph, the family of an individual shall include only his the TRAIN Law.
brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or Amount paid out for new buildings or improvements
(2) Except in the case of distributions in liquidation, between an Exceptions:
individual and corporation more than fifty percent (50%) in 1. Proprietary educational institutions (Sec. 34(A)(2))
value of the outstanding stock of which is owned, directly or 2. Intangible drilling and development costs incurred in
indirectly, by or for such individual; or petroleum operations (Sec. 34 (G)(1), NIRC)
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of The full amount of the capital expenditure for the new asset cannot be
the outstanding stock of which is owned, directly or claimed in the taxable year in which it is paid but will be spread out
indirectly, by or for the same individual if either one of such over the life of the asset.
corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was The depreciation for the current year will be an expense and can be
under the law applicable to such taxable year, a personal claimed as a deduction. So, it is not really correct to say that is not an
holding company or a foreign personal holding company; allowable deduction. Only that the deduction is not outright.
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the Amount expended in restoring property
fiduciary of another trust if the same person is a grantor The capital expenditure for extraordinary restoration cannot be
with respect to each trust; or claimed as a deduction but forms part of the value of the property
(6) Between a fiduciary of a trust and beneficiary of such trust. which will be subject to depreciation. The expense is not deducted
outright but spread over the life of the asset.
Items Not Deductible from Gross Income
As a general rule in computing net income, no deduction shall in any Ex: Mining company digs out an entire mountain and then incurs costs
case be allowed with respect to: to restore the property back to its original form. The costs will form
part of the value of the property which will be subject to depletion.
1. Personal, living or family expenses
Premiums paid on any life insurance policy
2. Any amount paid out for new buildings or for permanent This is not deductible as it is a return of capital where the employer is
improvements, or betterments made to increase the value of the beneficiary of the policy, directly or indirectly.
any property or estate
EXC: Intangible drilling and development costs incurred in Ex. ABC Corporation insured the life of employee X, a key employee.
petroleum operations ABC pays the premium of P100,000 a year. The beneficiary is ABC
Corporation.
2. Can Mr. X consider the life insurance as income? Ex. Shareholder indirectly owns the shares
S1 owns 50% of the shares of X Corporation. S2, S3, S4, S5 and Y
No, there is no gain on the part of Mr. X as he will not be Corporation own 10% each. S1 also owns 75% of Y Corporation.
benefitted by the life insurance. The proceeds will not go to
him or his heirs or his estate but to ABC Corporation. Shareholders of X Corporation
S1 50%
3. If there is another life insurance, are the proceeds taxable? S2 10%
S3 10%
No, life insurance proceeds, regardless of the beneficiaries, S4 10%
are excluded from gross income. Y Corporation 10%
TN: ‗Direct or indirect‘ here refers to the status of ownership. A personal holding company is a corporation in which more than
50% of the value of its shares is owned by 5 or fewer individuals,
Ex. Shareholder directly owns the shares directly or indirectly, and which receives at least 60% of its adjusted
S1 is the controlling shareholder of X Corporation who owns 60% of ordinary income from passive sources.
the shares. S2, S3, S4, and S5 own 10% each.
Ex. S1 owns 80% of X Corp. which is a personal holding company,
Shareholders of X Corporation while S2, S3, S4 and S5 own 5% each.
S1 60%
Moreover, S1 owns 60% of Y Corp. while, S6, S7, S8 and S9 own 10%
S2 10%
each. X Corp. entered into a transaction with Y Corp. which resulted in
S3 10%
a loss of P2M.
S4 10%
S5 10%
Shareholders of X Corporation
RESIDENT CITIZEN
(Personal Holding Company)
S1 80%
S2 5% Article IV, Section 1 of the 1987 Constitution
S3 5% The following are citizens of the Philippines:
S4 5% (1) Those who are citizens of the Philippines at the time of the
S5 5% adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
Shareholders of Y Corporation (3) Those born before January 17, 1973, of Filipino mothers, who
S1 60% elect Philippine citizenship upon reaching the age of majority;
S6 10% and
(4) Those who are naturalized in accordance with law.
S7 10%
S8 10%
S9 10% CITIZEN
Q: Can X Corp. deduct the loss from its dealings with Y Corp.? 1. Resident Citizen (RC)
A: No. The loss cannot be deducted since one of the corporations is a 2. Non-resident Citizen (NRC)
personal holding company and both X and Y Corporations are held by
the same individual, S1, who owns more than 50% interest in each. To be a citizen, whether RC or NRC, the above constitutional
requirements must be complied with.
Between grantor and a fiduciary of any trust
The parties to a trust are: RESIDENT CITIZEN (RC)
1. Grantor/trustor TN: RC is taxable for income within and without.
2. Trustee/fiduciary
3. Grantee/ beneficiary A Resident Citizen is a Filipino citizen who stayed permanently in the
Reason: Trustor may influence the trustee to incur loss. Philippines or stayed outside the Philippines for less than 183 days
during the taxable year.
Between trusts if the grantor for both is the same
No deduction shall be allowed for losses from transactions between the He is one who is physically present in the Philippines and established a
fiduciary of a trust and the fiduciary of another trust if the same domicile in the Philippines.
person is a grantor with respect to each trust
Residence for tax purpose requires physical presence in the
Philippines. One must establish residence here, more or less similar
Trust 1 Trust 2
with domicile. There must be animus revertendi.
A – trustor A – trustor
B – Fiduciary X - Fiduciary
C – Beneficiary Y – Beneficiary NON-RESIDENT CITIZEN
If there is a transaction between B and X (fiduciary), they cannot claim Section 22(E) of the NIRC
a loss because they have the same trustor A. The term ―non-resident citizen‖ means:
Between the fiduciary and beneficiary of a trust (1) A citizen of the Philippines who establishes to the satisfaction of
In the same illustration above, when trust B transacts with C, or X the Commissioner the fact of his physical presence abroad with a
transacts with Y, any of them cannot claim the loss incurred. definite intention to reside therein.
Reason: Control may be exercised by one over the other
(2) A citizen of the Philippines who leaves the Philippines during the
GRANDFATHER RULE taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
GRANDFATHER RULE (3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
The grandfather rule looks at the shareholders (S1) of the corporate physically present abroad most of the time during the taxable
shareholder (Y Corp.) in order to determine the percentage of year.
ownership in a specific corporation (X Corp.).
(4) A citizen who has been previously considered as non-resident
INCOME TAXATION FOR INDIVIDUALS citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall
TAXABLE INDIVIDUALS likewise be treated as a non-resident citizen for the taxable year
in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
TYPES OF TAXABLE INDIVIDUALS Philippines.
1. Resident Citizen (RC) (5) The taxpayer shall submit proof to the Commissioner to show his
2. Non-resident Citizen (NRC) intention of leaving the Philippines to reside permanently abroad
3. Resident Alien (RA) or to return to and reside in the Philippines as the case may be
4. Non-resident Alien (NRA) for purposes of this section.
a. Non-resident Alien Engaged in Trade or Business
(NRA-ETB) Sec. 23 (C) of the NIRC
b. Non-resident Alien Not Engaged in Trade or An individual citizen of the Philippines who is working and deriving
Business (NRA-NETB) income from abroad as an overseas contract worker is taxable only on
5. Special Employees income from sources within the Philippines: Provided, That a seaman
6. Estates and Trusts who is a citizen of the Philippines and who receives compensation for
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 59 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
services rendered abroad as a member of the complement of a vessel 4. Working and deriving income from abroad as an overseas
engaged exclusively in international trade shall be treated as an contract worker.
overseas contract worker. He is taxable only on income from sources within the
Philippines.
NON-RESIDENT CITIZEN (NRC)
TN: NRC is taxable only for income within the Philippines. 5. Receives compensation for services rendered abroad as a
seaman.
A non-resident citizen is one who:
1. Establishes to the satisfaction of the Commissioner the fact of He shall be treated as an overseas contract worker provided
his physical presence abroad with a definite intention to that the following are present:
reside therein. a. He is a member of the complement of a vessel
Write letter to commissioner or photocopy passport and b. The vessel is engaged exclusively in international trade.
show when you leave
If he does not meet these qualifications, then he shall be
2. Leaves the Philippines during the taxable year to reside abroad, treated as a resident citizen.
either as an immigrant or for employment on a permanent
basis. Illustration:
Immigrant – Immigrant visa does not matter when he/she Secondment abroad for 2 years starting on June 26, 2017
leaves, as long as he/she intended to be an immigrant.
Permanent employment – when there is no definite period. 1/1/2017 6/26/2017 12/31/2017 12/31/2018 6/26/2019 12/31/2019
It is not merely contractual.
Ex: Nurses who leave the country in the middle of the year
are deemed non-resident citizen.
NRC NRC NRC RC
3. Works and derives income from abroad and whose employment Stayed for 188 Stayed With respect to For income
requires him to be physically present abroad most of the time days abroad abroad the income abroad from date of
during the taxable year. June – 4 whole year until date of arrival
Most of the time for taxable year = 183 days (365/2) July – 31 arrival Reside
Higher because intention is for wider taxpayers taxable in Aug – 31 Previously NRC permanently
the Philippines Sept – 30 Arrived in in Philippines
183 days doesn‘t need to be continuous as long as it is Oct – 31 Philippines during
Nov – 30 taxable year
within the year Dec – 30
Temporary employment 188 days
Seamen are considered temporary workers and belong
under this category
Jan – 31
Illustration Submit proof to the Commissioner Feb – 28
You are assigned to SG for a period of 2 yrs. You left the country The taxpayer shall submit proof to the Commissioner to show his
Mar – 31
April
intention of leaving the Philippines to reside permanently – 30 or to
abroad
July 2, 2015. Reason is to earn income abroad. Employment
return to and reside in the Philippines. May – 31
requires physical presence. Is it most of the year 2015 to be June – 26
considered a non-resident citizen. 147
Count if reaches 183 days. Philippine Embassy/Consulate days
July 2 to December 31 = 182 days; Resident Citizen for A Filipino employed as Philippine Embassy/Consulate service personnel
2015 of the Philippine Embassy/Consulate is not treated as a non-resident
But if you left on July 1, you will be considered NRC. citizen, hence his income is taxable.
For Jan 1 to Dec 2016, NRC in this case
SUMMARY
3. Has been previously classified as NRC and arrives in the The following are classified as NRC:
Philippines at any time during the taxable year to reside 1. Filipino citizen with physical presence abroad and intention
permanently in the Philippines. to reside therein
He will be treated as NRC for the taxable year in which he 2. Filipino citizen leaves Philippines during taxable year as
arrives in the Philippines with respect to his income immigrant or permanent employee
derived from sources abroad until the date of his arrival in 3. Filipino citizen with temporary employment abroad (most of
the Philippines. the time = at least 183 days)
4. Previous NRC arrives in Philippines to reside permanently
Hybrid or Dual Personality of Taxpayer with respect to income from abroad until date of arrival
Same Illustration as above: Jan 1 to July 7, 2016 (end of the 5. Overseas Contract Worker
assignment to Singapore). 6. Seaman who is a Filipino citizen is considered OCW if
a. He receives compensation for services rendered
In this case, he was previously classified as NRC and will reside abroad as member of complement of vessel
permanently in the Philippines. b. Vessel is engaged exclusively in international trade
A resident alien is one who has a residence in the Philippines although NRA-NETB
he is not a Filipino citizen.
NRA-NETB is a non-resident alien who has stayed within the
He has no definite period of stay in the Philippines. He is not a mere Philippines for only 180 days or less and who has no business
transient or sojourner. His definite purpose for staying requires an income in the Philippines.
extended stay and to that end, he makes his home temporarily in the
Philippines. NRA-NETB is subject to a final tax rate of 25% of gross income within
the Philippines.
You established residence here in Philippines, for as long as you
intended to make Philippines as your residence, or if you established Why distinction is important
presence in Philippines for 1 year. No hard and fast rule for residence They are subject to different tax rates. NRA-ETB is taxed at the regular
requirement. income tax rate of 0%-35% for taxable income within the Philippines
while NRA-NETB is taxed with a final tax rate of 25% of gross income
Test is definite purpose or intention from within the Philippines.
The test is not the length of stay but the definite purpose or intention
to stay in the Philippines. If he has a definite purpose, then he is a SUMMARY
resident alien. An example is the kind of visa applied for. 1. NRA-ETB
a. More than 180 days
b. 0-35% tax on net income
NON-RESIDENT ALIEN
2. NRA-NETB
a. 180 days or less
Sec. 22 (G) of NIRC b. 25% final tax on gross income
The term ―nonresident alien‖ means an individual whose residence is
not within the Philippines and who is not a citizen thereof. SPECIAL EMPLOYEES
SPECIAL EMPLOYEES
TN: NRA, whether or not engaged in trade or business, is taxable only
for income within the Philippines. Special employees are alien individuals or Filipino citizens who are
subject to 15% tax based on their gross compensation income when:
Classification
NRA may be further classified into: 1. They are employed occupying managerial and/or technical
1. Non-resident Alien Engaged in Trade or Business within the positions with regional or area headquarters of multi-
Philippines (NRA-ETB) national corporations, petroleum service contractors and
2. Non-resident Alien Not Engaged in Trade or Business within subcontractors, or offshore banking units.
the Philippines (NRA-NETB)
2. If the special taxpayer is an alien, all of his gross
Test is length of stay compensation income received is subject to 15% final tax.
The test to classify NRA is the length of stay in the Philippines,
whether he stays for more than 180 days or, 180 days or less. 3. If the taxpayer is a Filipino citizen, he has the option to be
taxed at 15% final tax based on his gross compensation
NRA-ETB income received or at a regular income tax rate (0%-35%)
based on the net taxable compensation income if his gross
NRA-ETB is a non-resident alien who is engaged in trade or business annual taxable compensation is at least P975,000 (whether
and has business income in the Philippines. or not actually received).
NRA-ETB is one who has stayed within the Philippines for an aggregate 15% preferential tax rate vetoed
period of more than 180 days (360/2) during the taxable year. Under the TRAIN Law, the preferential tax treatment shall not apply
for employees of ROHQ, RAHQ, OBU and Petroleum service
NRA-ETB is subject to 0-35% tax on net taxable income within the contractors and subcontractors which registered with the SEC
Philippines. beginning January 1, 2018.
Regional or Area Headquarters (RAHQs) If you are employed by an offshore banking unit, Citibank, which paid
Refer to a branch established in the Philippines by multinational you 975k per year and then you sell kutsinta to your co-employees and
companies which you earn 500k per year, how will you be subject to tax? You still
1. Headquarters do not earn income from the Philippines complied with the requirements because you were employed
2. Act as supervisory, communications and coordinating center exclusively by Citibank. Where will you base the 15%? This will only be
for their affiliates, subsidiaries, or branches in the Asia- applied to the compensation income, excluding your sales from the
Pacific Region and other foreign markets. kutsinta.
TN: It is merely a liaison or communication office in the Asia Pacific. Are you allowed to claim deductions for your 15%? No, because it is
It has no business operations in the Philippines. based on gross compensation income.
In short, regional operating headquarters are income-generating while ESTATES AND TRUSTS
regional or area headquarters are non-income generating, but they are
still headquarters for multinational companies. Estates and trusts are taxable as individuals.
Multi-national companies
ESTATES
These are foreign corporations having branches in the Asia Pacific and
other parts of the world. Actually, if a foreign corporation has a branch
in the Philippines, it can be claimed as a multinational company. ESTATE
Foreigners or aliens An estate is composed of all properties, rights and obligations including
Aliens occupying technical or managerial positions can automatically those properties, earnings or obligations that have accrued thereto
claim the 15% rate, provided that you are employed in a regional since the opening of the succession. The estate is to be transferred
operating or regional area headquarters of a multinational company, or from the decedent to his successors.
if you are employed in an offshore banking unit, or a company
engaged in petroleum or geothermal operations (examples: Shell, It is created upon the death of a person who is a resident citizen.
Chevron, Procter and Gamble).
An estate will only be taxable when it is under administration or
Filipinos settlement. Once it has been transferred it will not be taxable as an
TN: These tests are no longer applicable beginning January 1, 2018. estate anymore and will no longer be a separate taxpayer.
D. Exclusivity test – you are only hired by that company, Basic Personal Exemption Repealed
exclusively. It could happen than you have two employers which The exemption of P20,000 allowed from the income of the estate or
are both multinational companies, then you can still qualify to trust has been repealed by the TRAIN Law effective January 1, 2018.
have the 15% rate.
There is not much of a problem when you are talking about estate.
Sec. 60 (A) of the NIRC
The fact that the estate earns income means that it is subject to tax. It
Imposition of Tax. -
is automatic.
(A) Application of Tax. - The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in
Income either to be distributed or accumulated
trust, including:
Take note, in number 2, it is required that it be distributed. Here in,
(1) Income accumulated in trust for the benefit of unborn or
number 4, you will always include the income whether distributed or
unascertained person or persons with contingent interests, and income
not. The good thing is that, if it‘s distributed, it can be claimed as
accumulated or held for future distribution under the terms of the will
deduction.
or trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is TRUST INCOME EXEMPTED FROM INCOME TAX
to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period
of administration or settlement of the estate; and Sec. 60 (B) of the NIRC
(4) Income which, in the discretion of the fiduciary, may be either The tax imposed by this Title shall not apply to employee's trust which
distributed to the beneficiaries or accumulated. forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
Important: The conditions are both to be complied with because it USUAL. This is the income (500k) and part of it is already distributed
mentions AND. There is contribution required and no part of the (100k), meaning 100k is accounted for in the income 500k, so add
principal, the corpus, or income can be distributed for the benefit of both income and deduct distributions from income. What is distributed
anyone other than the employee. It is only for the purpose of pension. is part of the income already. Where will you get distribution, from
If you use the principal or its profit for other purposes than for pension income-the total amount earned by the trust. So there is no need to
or profit sharing plan of employee, it becomes subjected to tax, add distributions in the total income.
whatever income earned. Currently, Employee‘s trusts are managed by
bank. ANOTHER. The 500K income does not account for the 100k
distribution as distributed so add the 100k to 500k.
If there‘s an employee trust and it is actually the one holding your
retirement benefit if it complies with the retirement benefit then there While the usual situation happens take note of how it was written in
is actually no tax to be paid. the problem. If it says the income mentioned already excludes
distribution then add the distribution to total. Law says add the income
But if the retirement plan does not comply with the requirements for distributed as part of the Gross Income of the trust.
exemption (not reasonable private benefit plan duly approved by BIR)
but they set up this trust any income received by the employee from REVOCABLE TRUSTS
trust will be subject to tax.
trustor. It‘s as if he never placed it in a trust and it was as if he the case of income which, in the discretion of the fiduciary, may be
allowed others to manage it but everything is still under the trustor‘s either distributed to the beneficiary or accumulated, there shall be
control. allowed as an additional deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for
Here, it is not considered a separate tax payer. The trust is just an its taxable year, which is properly paid or credited during such year to
extension of his personality as a trustor/grantor. any legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of the
The law deems it that if the trustor is able to control the income or legatee, heir or beneficiary.
corpus of the trust and to the extent of even the beneficiary, then it
cannot be considered as a separate taxpayer. (C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall
This is the reason why only an irrevocable trust may be considered a not be allowed: Provided, That the amount of any income included in
separate taxpayer. This may be subject to abuse because one can set the return of said trust shall not be included in computing the income
up a lot of trusts. of the beneficiaries.
INCOME FOR THE BENEFIT OF GRANTOR DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS
This means that the trust has earned an income but the grantor makes A: No. Since the beneficiary will be the taxed, it is considered an
use of the income for the payment of his life insurance. If you made income on their part. While it is allowed as a deduction to the trust, it
your child a beneficiary when the income is just used for the payment is considered an income of the beneficiary. Taxes are collected not on
of your life insurance, there is no separate entity for the trust. It is an trust but on the beneficiary. The government still finds a way to collect
extension of your personality. The income this property may generate taxes.
is still under your control and it is still for your benefit.
Income either to be distributed or accumulated
For purposes of determining whether it will be treated as a separate If ever there will be distributions to any person other than the
entity or not, it must be that the trustor has no control over the beneficiary, or in the case of estate, it is possible that it is to be
principal and income of the tax payer. distributed other than the heirs, those distributions can be considered
as a deduction. But while there is a deduction, there is tax to be paid
for it but it is on the part of person receiving such property.
DEDUCTIONS ALLOWED TO ESTATES & TRUSTS
It is the recipient that is subject to tax and not the trust itself.
Sec. 61 of the NIRC
Taxable Income. - The taxable income of the estate or trust shall be Q: What is the purpose of creating trust when income is distributed
computed in the same manner and on the same basis as in the case of and the taxable person is the recipient and not the trust?
an individual, except that:
A: It is actually a tax planning tool to minimize the tax.
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate Trust administered in a foreign country
or trust for the taxable year which is to be distributed currently by the Q: Does this mean that the trust is not considered anymore as a tax
fiduciary to the beneficiaries, and the amount of the income collected payer?
by a guardian of an infant which is to be held or distributed as the
court may direct, but the amount so allowed as a deduction shall be A: No. It will be considered as a tax payer but the income that you will
included in computing the taxable income of the beneficiaries, whether claim in the Philippines will be net of the taxes paid abroad.
distributed to them or not. Any amount allowed as a deduction under
this Subsection shall not be allowed as a deduction under Subsection Example:
(B) of this Section in the same or any succeeding taxable year.
Total income abroad 100,000
(B) In the case of income received by estates of deceased persons Taxes paid (abroad) (40,000)
during the period of administration or settlement of the estate, and in Net Income 60,000
EMPHASIZED BY SIR
Tax Due
Using the Graduated Income Tax Rates
Tax Due
Using the 8% Optional Tax Rate
Tax Due on Business Income P 180,000 The two-tiered test pertains to the
Add Tax Due on Compensation Income 190,000 (1) economic dependency test and (2) control test.
Total Tax Due and Payable P 370,000
How compensation is paid
Compensation income can either be paid in cash or in kind.
Since the taxpayer is a mixed income earner whose income does not
exceed the 3M VAT threshold, he can choose to be taxed on his If paid in cash, then the amount of the money received is the
compensation and business income at the graduated income tax rates compensation income.
of 0-35% using the tax table or apply the 8% optional tax rate on his
business income. If paid in kind, then the compensation income is equivalent to the
monetary value of the property under the doctrine of cash equivalent.
Even if he opts for the 8% tax, such is only applied to the business
income. His compensation income will still be subject to the graduated How to tax income if it‟s not in cash
income tax rates. At the rate of its Fair Market Value (FMV)
Here, choosing the 8% tax rate on the business income is more Q: What if instead of money, you received jewelry, car, house and lot,
beneficial since the tax due is only P370,000 which is lesser than the or some other things from your employer, in addition to your
tax due of P670,000 under the graduated income tax rates. compensation, how much is the compensation?
Rev. Reg. 8-2018 A: Compensation is equivalent to the fair market value of the property.
Take note of Rev Reg No. 8-2018. If the taxpayer avails of the 8%
income tax rate, no deduction of 250,000 for the mixed income earner. DOCTRINE OF CASH EQUIVALENT
The option of 8% income tax rate is applicable only to taxpayer‘s All items considered as income which you do not receive as cash has
income from business, and the same is in lieu of the income tax under to be valued in cash for purposes of taxation.
the graduated income tax rates and the percentage tax.
COMPENSATION IN KIND
The amount of P250,000 allowed as deduction under the law for
taxpayers earning solely from self-employment or practice of Stock options
professions, is not applicable for mixed income earner under the 8% Promissory note
income tax rate option. Cancellation of debt
Tax liability as compensation
The P250,000 is already incorporated in the first tier of the graduated
income tax rates applicable to compensation income. STOCK OPTIONS
INCLUSIONS Stock options are taxable as compensation income taxed only if there
is a benefit to the employee such as when he can buy the share at a
more favorable price than the public.
GROSS INCOME FOR INDIVIDUALS [CGGIRRDAPPP]
How computed
1. Compensation for services in whatever form The tax will be on the amount of the difference between the book
2. Gross income derived from the conduct of trade or business or value or the FMV of the stock, whichever is higher, and the exercise
the exercise of a profession price (price which you are allowed to buy the stock). The tax is
3. Gains derived from dealings in property imposed whether or not the stock option is exercised.
4. Interests
5. Rents Example: When the option gives you the right to purchase the stock at
6. Royalties P100 when the price outside is P500. You would not have the option if
7. Dividends you were not an employee of the company.
8. Annuities
9. Prizes and winnings Important: Even if you do not exercise this option, you will still be
10. Pensions subject to tax because the benefit has already been in your control. It
11. Partner‘s distributive share from the net income of the general was only that you chose not to avail of the benefit. At the time it was
professional partnership granted, there was already a benefit to you so you are already taxable.
Withholding tax
PROMISSORY NOTE There is withholding of tax which shall be collected at source the
moment the wages are paid. The taxes are retained by the employer
Compensation is equivalent to the face value of the promissory note, who will remit the taxes withheld to the BIR.
unless it is discounted. For a discounted promissory note, the cash
discounted value will be the amount of compensation. However, there shall be no withholding where the total compensation
income of an individual does not exceed the statutory minimum wage
CANCELLATION OF DEBT or P5,000 per month, whichever is higher.
Cancellation of debt is considered an income when you render services Quarterly remittance
and in exchange, your debt is forgiven. Previously, the remittance of the taxes withheld was done monthly.
However, Sec. 58 of the NIRC has been amended by the TRAIN Law
Example: Supposedly, I have a P10k obligation and I am supposed to such that the remittance shall now be done quarterly.
pay you in cash. Instead, I rendered services and you are now
supposed to pay me. In this case, we might as well cancel the The final and creditable withholding tax returns (except for withholding
obligation instead of receiving the cash and giving it back as payment. tax on compensation and withholding VAT) shall be due quarterly on
I would not have paid the debt had I not rendered the service. This is or before the last day of the month following the close of the calendar
considered as compensation income. quarter. The first quarterly return covering the months of January to
March 2018 should be due on April 30, 2018. These used to be filed
Q: Do we consider employer-employee relationship? monthly.
A: This is purely out of liberality. Thus, it is not taxable under income Although the date mentioned in Sec. 79 of the NIRC which is April 15
tax but subject to donor‘s tax. has not been amended by the TRAIN Law, the date under Sec. 74 has
been amended from April 15 to May 15. For consistency, the relevant
TAX LIABILITY AS COMPENSATION date for the return of the excess of the taxes withheld under Sec. 79
shall also be May 15.
This happens when the employer shoulders your tax on compensation
instead of you getting less than your gross monthly salary. The Q: When is the last payroll period?
employee receives income net of taxes. The amount shouldered by the A: December 31
employer is subject to tax.
Q: When is the last day of refund from the employer to the
Example: If you have a gross monthly salary of 100k, less tax, net employees?
amount is only 65k (assuming it is taxed at 35%). If you will receive A: January 15
the same 100k every month, it means that the employer has
shouldered your 35K tax.
FRINGE BENEFITS
The portion of the tax shouldered by your employer should have been
part of your income. However, there seems to be an issue here if you FRINGE BENEFITS
consider this as income so this should be taxed in the first place.
Any good, service or other benefit furnished or granted in cash or in
To make it simple, it seems that your compensation is grossed up. kind by an employer to an individual employee (except rank and file
Under the employment contract, it should state that the amount you employees) such as, but not limited to, the following:
will receive is already net of tax and your employer will shoulder the [HEVHIMEHEL]
tax instead of them withholding it from you. 1. Housing
2. Expense account
So, the 100K is divided by 65%, the amount of 155K is your actual 3. Vehicle of any kind
salary coming from the employer. This is like a fringe benefit. You are 4. Household personnel, such as maid, driver and others
supposed to pay tax of 54k but instead the employer shoulders this tax 5. Interest on loan at less than market rate to the extent of the
liability. difference between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the
SUMMARY employer for the employee in social and athletic clubs or
Cash – actual value of the cash received other similar organizations
Promissory note – face value of the promissory note 7. Expenses for foreign travel
EXC: Discounted PN – cash discounted value 8. Holiday and vacation expenses
Stock options – taxed only if the employee can buy the share 9. Educational assistance to the employee or his dependents
at a more favorable price than the public 10. Life or health insurance and other non-life insurance
Cancellation of debt – value of debt forgiven premiums or similar amounts in excess of what the law
Tax Liability as compensation – amount of tax shouldered by allows
employer
TN: The list under Sec. 33 (B) of the NIRC is not exclusive.
These items are also found in Revenue Regulation 03-98 which talks
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
about fringe benefits.
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT Important: Fringe benefits refer to benefits given to an employee
other than a rank and file employee.
Managerial employee Another way to determine FBT is to deduct the net monetary value
He is one who is vested with powers and prerogatives to lay down and from the GUMV. The difference will be the FBT.
execute management policies and or fire, transfer, suspend, layoff,
discharge, assign or fire employees. He is the employee vested with Either way, the GUMV is to be computed first.
the power to determine the employer-employee relationship because
of his powers. He has the power to execute management policies
Fringe Benefit Tax
which can include salaries and wages. All aspects of EE relationship
are within his control.
Grossed-up Monetary Value (GUMV) 100%
Less Fringe Benefit Tax (FBT) (35%)
Supervisory employee
Monetary Value (MV) 65%
He recommends managerial action but it should not be considered as
merely routinary or clerical in nature, but which requires use of
independent judgment. FBT is now 35%
Under the TRAIN Law effective January 1, 2018, fringe benefits given
Rank and file employee to non-rank and file employees are subject to 35% final tax rate.
Those who are neither managerial nor supervisory employees Previously, 32% was the and 68% was used for determining GUMV.
In money Since fringe benefit tax can be computed by first determining the
When the fringe benefit is in the form of money, the value is the GUMV, we have to divide the net monetary value of 5,000 by 65%.
amount granted or paid for. This will result to GUMV of P7,692.31.
Ex: If I give you a grocery allowance, the value of the fringe benefit is There are two ways to arrive at the FBT. One way is to deduct the
the amount that I gave. GUMV of P7,692.31 from the net monetary value of 5,000 which will
yield FBT of P2,692.31. Another way is to multiply the GUMV of
If you give a receipt to the employer and he pays for it, the amount P7,692.31 by 35% which will also result to the same FBT of P2,692.31.
paid for is the value of the fringe benefit. But, take note that this is not
the amount subjected to tax. Non-resident Alien Not Engaged in Trade and Business
Other than money with transfer of ownership For non-resident aliens not engaged in trade or business who received
When the benefit granted is property or something other than money fringe benefit tax, they are subject to 25% fringe benefit tax and we
and ownership is transferred to the employee, the value of the fringe use the same computation above. We just have to replace the 65%
benefit is equal to the fair market value of the property which is the with 75% and 35% with 25%.
higher between the assessed value and zonal value.
Ex: Houses and other properties. For instance, a non-resident alien not engaged in trade or business is
given a housing benefit in the form of rent worth P10,000. To get the
Other than money without transfer of ownership net monetary value, we have to multiply it by 50% since ownership is
When the benefit furnished by employer is something other than not transferred to such employee. Hence, the net monetary value of
money where ownership is not transferred to the employee, the value rental allowance is P5,000.
of the fringe benefit is equal to the depreciation of the property.
Since fringe benefit tax can be computed by getting first the GUMV,
If your employer allows you to use a car, you will be benefitted by the we have to divide the net monetary value of P5,000 by 75% because
ease and comfort of using a car. While you use it, the value of the car the fringe benefit tax imposed is 25%. Hence, the GUMV is 6,666.67.
diminishes. The value you receive is equal to the value which the
property diminishes by your use of such property. There are two ways to determine the FBT. One way is to deduct the
GUMV of P6,666.67 from the net monetary value of P5,000 which
will result to FBT of P1,666.67. Another way is to multiply the GUMV of
COMPUTATION OF FRINGE BENEFIT TAX P6,666.67 by 25% which will also result to the same FBT of P1,666.67.
Fringe benefit tax (FBT) is computed by multiplying the grossed-up For special employee who received fringe benefit tax, they are
monetary value (GUMV) by 35%. GUMV is determined by dividing the subject to 15% fringe benefit tax. The same computation will be
monetary value by 65%. used. Only the tax rates will vary. The GUMV will be divided by 85%.
In other words, FBT is computed by first determining the GUMV and FBT CONCEPT SUMMARY
then, multiplying the GUMV by the tax rate.
Taxable amount is the GUMV of the fringe benefit granted/furnished.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 69 | P a g e
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(h) Temporary housing for an employee who stays in a housing If only the right to use is given to you (ownership is still with the
unit for three (3) months or less shall not be considered a company but they allow employees to use it), that is the time that the
taxable fringe benefit. depreciation value is used.
The revenue regulation does not even mention that The general rule on valuation if ownership is transferred is to use FMV,
the employee is travelling but it is interpreted to but if there is no transfer of ownership, use depreciation value.
mean that the employee is travelling because of the
short and temporary time that the employee is
EXPENSE ACCOUNT
assigned. Because this is temporary and this is also
for business considerations, it is deemed for the
convenience of the employer. EXPENSE ACCOUNT
(i) A housing unit which is situated inside or adjacent to the (a) In general, expenses incurred by the employee but which are
premises of a business or factory shall not be considered as a paid by his employer shall be treated as taxable fringe benefits,
taxable fringe benefit. A housing unit is considered adjacent to except when the expenditures are duly receipted for and in the
the premises of the business if it is located within the name of the employer and the expenditures do not partake the
maximum of fifty (50) meters from the perimeter of the nature of a personal expense attributable to the employee.
business premises.
(b) Expenses paid for by the employee but reimbursed by his
A company personnel is still exempt from fringe employer shall be treated as taxable benefits except only when
benefit tax if he is asked to stay in a location more the expenditures are duly receipted for and in the name of the
than 50 meters from the company perimeter due to employer and the expenditures do not partake the nature of a
safety and health hazards. personal expense attributable to the said employee.
If a The BIR took the position that this is considered (c) Personal expenses of the employee (like purchases of groceries
within the exception for the reason that it is for the for the personal consumption of the employee and his family
convenience of the employer. This is set by members) paid for or reimbursed by the employer to the
regulation, not by law. This is deemed for the employee shall be treated as taxable fringe benefits of the
convenience of the employer, the benefit is exempt employee whether or not the same are duly receipted for in the
from fringe benefit tax. Take note, according to sir, name of the employer.
that there is fringe benefit here but it is just that it is
exempt. (d) Representation and transportation allowances which are fixed
in amounts and are regular received by the employees as part
Q: If you are asked by the priest in USC to live in the front of their monthly compensation income shall not be treated as
building, will this privilege be subject to FBT? taxable fringe benefits but the same shall be considered as
taxable compensation income subject to the tax imposed under
A: No, because it is within the premises of the employer‘s Sec. 24 of the Code.
premises. The fifty meter radius rule does not even have to be
considered because this rule applies only when the property is Expense account
adjacent, such as when it is outside the campus. Another fringe benefit is an expense account granted for the usage of
manager of miscellaneous items.
Valuation of housing privilege
It is the amount of rental multiplied by 50%. When you are asked to liquidate your expenses, those cannot be
considered a fringe benefit.
Reason: Whether or not it is for the convenience of the employer, you
will really need to live somewhere else. Note that these expenses must be related to the business of the
employer so that the business can claim these as business expenses.
For all intents and purposes, the benefit is for both you and the An example of this is the transportation allowance given to you and
company. As such, this should be divided. 50% accounts for the you are given a cap of P1,000 per month and you are asked to present
portion that you were really benefitted, and the 50% exemption is for receipts and liquidate. This is fringe benefit but not subject to fringe
the fact that the employer is also deemed benefitted by it. benefit tax because you are asked to liquidate it and this is not a
benefit for you.
If the benefit, whether for personal or business purpose, is not
determined, there is a presumption that both the employer and A fringe benefit only happens when you are given an amount
company are benefitted. without you having to liquidate it.
If you are only asked to present receipts for purposes of knowing the
If a company leases a condo unit and pays for it, the fringe benefit is amount of your expense, then that is different.
the amount of rental that is paid by the company. Because there is no
transfer of ownership, the additional consideration for purposes of When you are given an amount which you are allowed to use and you
valuing is the amount of rental which is considered as the amount of present receipts so you can receive the amount, such is not a fringe
fringe benefit. But for taxation purposes, there is there is a concept of benefit because you are asked to liquidate. These expenses will be
monetary value which is the tax base of the fringe benefit tax. later on considered as expenses of the company.
Rule on housing privilege If your groceries are paid for by the employer and it is for the
Housing privilege is subject to fringe benefit tax, but there are employee‘s personal use, then it is clearly a fringe benefit, subject to
exceptions. When you are computing for the amount, it depends tax. If there are expenses that are personal to the employee but are
whether ownership is transferred or not. Or if in the case that it is just paid for by the employer, or if the employer gives you money so you
leased out, only the rent is deemed as fringe benefit and you multiply can pay for these benefits, then it is a fringe benefit.
it by 50%. If the house and lot is transferred to you, the fringe benefit
is the entire amount of the benefit given. There are certain expenses which are in that form but are not
considered subject to fringe benefit tax. Representation and
transportation allowance (RATA) which are fixed in amount and
are regularly received by an employee are part of monthly the value of the motor vehicle. Otherwise, if
compensation and are subject to income tax. ownership is not transferred, fringe benefit is only
the depreciation value of the car. This is because of
Take note that fringe benefit is given on top of the monthly your use, you are benefitted by the use of the car
compensation tax. and this is shown through the depreciation.
There are also certain instances when you buy groceries and you (d) If the employer shoulders a portion of the amount of the
are to liquidate and present receipt. These are not part of the purchase price of a motor vehicle the ownership of which is
expenses of the company so the company cannot claim them as placed in the name of the employee, the value of the benefit
business expenses. These are fringe benefits subject to tax. shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
MOTOR VEHICLE OF ANY KIND
the employee partly for his personal purpose and partly for the
benefit of his employer.
MOTOR VEHICLE OF ANY KIND
(e) If the employer owns and maintains a fleet of motor vehicles
Guidelines in the Valuation of Motor Vehicles for the use of the business and the employees, the value of the
benefit shall be the acquisition cost of all the motor vehicles
Monetary Value of the notnormally used for sales, freight, delivery service and other
Case non-personal used divided by five (5) years. The monetary
Benefit
value of the fringe benefit shall be fifty per cent (50%) of the
Purchases the motor vehicle in the Acquisition cost
value of the benefit.
name of the employee
Provides the employee with cash for Amount of cash received by The monetary value of the motor vehicle fringe benefit
the purchase of a motor vehicle in the employee is equivalent to the following:
the name of the employee MV = [(A)/5] X 50%
Shoulders a portion of the amount Amount shouldered by the Where:
of the purchase price of a motor employee MV = Monetary value
vehicle in the name of the employee A = acquisition cost
Purchase the car on instalment in Acquisition cost (exclusive of
(f) If the employer leases and maintains a fleet of motor vehicles for
the name of the employee interest) divided by 5 years
the use of the business and the employees, the value of the
Owns and maintains a fleet of motor Acquisition cost of all motor benefit shall be the amount of rental payments for motor vehicles
vehicles for the use of the business vehicles not normally used in not normally used for sales, freight, delivery, service and other
and the employees business divided by 5 years x non-personal use. The monetary value of the fringe benefit shall
50% be fifty per cent (50%) of the value of the benefit.
Leases and maintains a fleet of Amount of rental payment for
motor vehicles for the use of the motor vehicles not normally (g) The use of aircraft (including helicopters) owned and maintained
business and the employees used in business x 50% by the employer shall be treated as business use and not be
subject to the fringe benefits tax.
Use of yacht whether owned and Depreciation of yacht at an
maintained or leased by the estimated useful life of 20
It will never be fringe benefit subject to fringe benefit
employer years
tax because the regulation then looks at the fact that
only few companies use aircrafts. But it seems that
(a) If the employer purchases the motor vehicle in the name of the today, especially in Manila, big companies are using
employee, the value of the benefit is the acquisition cost helicopters because of traffic congestion.
thereof. The monetary value of the fringe benefit shall be the
entire value of the benefit, regardless of whether the motor Airline companies that grant free trips are expense accounts and
vehicle is used by the employee partly for his personal purpose this does not fall under this category of fringe benefit. The
and partly for the benefit of his employer. employees do not use the aircraft exclusively for themselves.
They use their free flights along with other passengers.
(b) If the employer provides the employee with cash for the
purchase of a motor vehicle, the ownership of which is placed (h) The use of yacht whether owned and maintained or leased by the
in the name of the employee, the value of the benefits shall be employer shall be treated as taxable fringe benefit. The value of
the amount of cash received by the employee. The monetary the benefit shall be measured based on the depreciation of a
value of the fringe benefit shall be the entire value of the yacht at an estimated useful life of 20 years.
benefit regardless of whether the motor vehicle is used by the
employee partly for his personal purpose and partly for the It is fringe benefit if you are allowed to use the yacht
benefit of his employer, unless the same was subjected to a for your personal benefit. This presupposes that you
withholding tax as compensation income under Revenue are using the yacht for a month, or for several days.
Regulations No. 2-98. The value of the fringe benefit is equal to the
depreciation value (presupposes that there is no
(c) If the employer purchases the car on installment basis, the transfer of ownership here), with an estimated life of
ownership of which is placed in the name of the employee, the 20 years.
value of the benefit shall be the acquisition cost exclusive of
interest, divided by five (5) years. The monetary value of the Examples:
fringe benefit shall be the entire value of the benefit regardless
of whether the motor vehicle is used by the employee partly If you are given transportation allowance but still required to
for his personal purpose and partly for the benefit of his liquidate, it will not be considered a fringe benefit. If you need to
employer. justify why you have to go to that place, say for example, you need to
specify that you are going to SEC to register your employer‘s business,
It matters also if ownership is transferred or not. If then this is not fringe benefit.
ownership is transferred, fringe benefit is equal to
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 72 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
If a transportation allowance is given and you are not required to 2. The benchmark interest rate of twelve per cent (12%) shall
liquidate, such is in the form of a fringe benefit subject to fringe remain in effect until revised by a subsequent regulation.
benefit tax.
3. This regulation shall apply to installment payments or loans with
If you are allowed to use the company car/ motor vehicle strictly for interest rate lower than twelve per cent (12%) starting January
business purposes, such is not a fringe benefit. There is no 1, 1998.
benefit on your part.
12% interest for fringe benefit
It can be a benefit if you can use it for personal purposes and the The current market rate is 6% but the revenue regulation has not yet
company does not impose restrictions on how you use it. been changed, so we will use 12% for fringe benefits.
If you are free to use the motor vehicle after office hours then
MEMBERSHIP FEES
there is still a fringe benefit here.
In the case of Medical Representatives, the companies keep a pool of MEMBERSHIP FEES
vehicles which the sales persons can make use. This is not a
fringe benefit because the purpose of the car is for sales purposes, Membership fees, dues, and other expenses borne by the employer for
even if the company allows you to bring it home. Usually the company his employee, in social and athletic clubs or other similar
will declare to the BIR that these are company vehicles with organizations.
corresponding company expenses. Another issue here is the fact that
the persons granted these cars are not managers. Even if sales These expenditures shall be treated as taxable fringe benefits of the
managers are granted motor vehicles, such privilege will still not be employee in full.
considered a fringe benefit because this is used for sales and it is
pursuant to the nature and business of the employer and not Membership fee contemplates that you become a member of a sports
for the convenience of the employer. gym for your health. There are some companies that instead of doing
that, they just put up a gym in their own building.
If the employer leases and maintains a fleet of motor vehicles for the
use of the business and the employees, the value of the benefit shall Q: Your employer pays for your membership in Cebu Country Club, so
be the amount of rental payments for motor vehicles not normally you could play golf with the clients of your employer, is this fringe
used for sales, freight, delivery, service and other non-personal use. benefit?
The monetary value of the fringe benefit shall be 50% of the value of
the benefit. This means that sales representatives are not included. A: It depends on the reason of the grant of the membership fee. If the
benefit is pursuant to the nature of the business of the employer, it is
SUMMARY not clearly a benefit to you but to the employer because you are asked
Taxable fringe benefit to play with the clients of the employer. It is not a taxable fringe
1. Can be used for personal purposes benefit. If you are to play anytime you want with anyone, then that
2. No restrictions on its use becomes a taxable fringe benefit.
Instances include:
1. Given transportation allowance but not required to liquidate Necessary for the position not subject to FBT
2. Free to use the motor vehicle after office hours If it is necessary for his/her position, then considered for the benefit of
Not taxable fringe benefit if the employer or pursuant to the nature of the business of the
1. For the convenience of the employer employer, thus, not subject to Fringe Benefit Tax.
2. Used in trade or business of employer
Instances include: It is not intended for social organizations, for fellowship and the like. If
1. Motor vehicle not exclusively used by an employee but used you pay IBP membership fee and your being a lawyer is not pursuant
also by other employees to the nature of the business, it is not considered as fringe benefit and
2. Fleet of vehicle for marketing or sales department subject to ordinary income tax. It is most likely compensation income.
3. Given transportation allowance and required to liquidate If necessary for your position, then not subject to tax since it is now
4. Use company car/vehicle strictly for business purposes considered as expense of the business.
Expenses of the employee which are borne by the employer for (a) Reasonable business expenses which are paid for by the
household personnel, such as salaries of household help, personal employer for the foreign travel of his employee for the purpose
driver of the employee, or other similar personal expenses (like of attending business meetings or conventions shall not be
payment for homeowners association dues, garbage dues, etc.) shall treated as taxable fringe benefits. In this instance, inland travel
be treated as taxable fringe benefits. expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less
INTEREST ON LOAN AT LESS THAN MARKET RATE
per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual
INTEREST ON LOAN AT LESS THAN MARKET RATE occurrences of the meetings or conventions.
1. If the employer lends money to his employee free of interest or (b) The cost of economy and business class airplane ticket shall not
at a rate lower than twelve per cent (12%), such interest be subject to a fringe benefit tax. However, 30 percent of the
foregone by the employer or the difference of the interest cost of first class airplane ticket shall be subject to a fringe
assumed by the employee and the rate of twelve per cent benefit tax.
(12%) shall be treated as a taxable fringe benefit.
In the case of the first class ticket, only 30% of the value of the first Educational assistance to dependents
class ticket will be considered as fringe benefit. Business and economy GR: Cost of Educational assistance extended by an employer to the
class tickets are considered for the benefit of the employer. dependents of an employee is taxable fringe benefit.
Entire cost of family travel is fringe benefit EXC: The assistance was provided through a competitive scheme
If an employee travels with his family, the entire cost of the expenses under the scholarship program of the company.
of the family excluding you the employee will be considered as fringe
benefit if paid for by your employer. Example: Scholarship grants where many will apply or only for those
who pass the exam and where there is a grade requirement.
HOLIDAY & VACATION EXPENSES
Q: If it a benefit provides that all dependents of the employees can be
granted with scholarship, provided that they should to maintain a
HOLIDAY AND VACATION EXPENSES grade of 1.9/subject, is it a fringe Benefit?
Holiday and vacation expenses of the employee borne by his employer A: According to BIR, it is a Fringe benefit but not subject to fringe
shall be treated as taxable fringe benefits. benefit tax because it is still under a competitive scheme since the
students are required to maintain a grade.
TN: Everything is considered as fringe benefit since it is not pursuant
to the purpose of the business of the employer. No required level.
If employee is managerial or supervisory, fringe benefit subject to tax. 3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month.
But if beneficiary is the company, then it is not considered as fringe
benefit since employee does not benefit from it. 4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.
If for group of employees, not a fringe benefit subject to tax because
it is not personal to each of the employees. 5. Uniform and Clothing allowance not exceeding P5,000 per
annum.
SSS contributions not subject to FBT
Not subject to Fringe benefit tax because it is statutorily mandated. 6. Actual medical assistance, e.g. medical allowance to cover
medical and healthcare needs, annual medical/executive check-
up, maternity assistance, and routine consultations, not
EXEMPTION FROM FRINGE BENEFIT TAX
exceeding P10,000.00 per annum.
FRINGE BENEFITS NOT SUBJECT TO TAX When the employer pays for maternity check-up of
the employee, it is considered as de minimis benefits,
(1) Fringe benefits which are authorized and exempted from income provided that there is actual medical assistance.
tax under the code or any special laws.
7. Laundry allowance not exceeding P300 per month.
Retirement benefits granted to managerial employees
are considered fringe benefit, but prior to retirement, 8. Employees achievement awards, e.g., for length of service or
there is still employer-employee relationship. safety achievement, which must be in the form of a tangible
Granting that you are able to comply with all the personal property other than cash or gift certificate, with an
requirements, it is not subject to Fringe benefit tax annual monetary value not exceeding P10,000 received by the
because it is already excluded in income tax law. employee under an established written plan which does not
discriminate in favor of highly paid employees.
(2) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans. Because you are very efficient in your work the
company decided to give you a gift certificate of
This applies to a group of employees. Shangri-la good for 1 day, P10,000, it does not form
part of de minimis since it is provided that it must be a
(3) Benefits given to the rank and file employees, whether granted tangible personal property other than cash or gift
under a collective bargaining agreement or not. certificate.
They are not fringe benefits in the first place as they 9. Gifts given during Christmas and major anniversary celebrations
are given to rank and file employees. not exceeding P5,000 per employee per annum.
Christmas gifts and not Christmas bonus.
(4) Benefits granted to employee as required by the nature of, or
necessary to the trade, business or profession of the employer. 10. Daily meal allowance for overtime work and night/graveyard
shift not exceeding twenty-five percent (25%) of the basic
(5) Benefits granted for the convenience of the employer. minimum wage on a per region basis.
(6) De minimis benefits as defined in the rules and regulations to be 11. Benefits received by an employee by virtue of a collective
promulgated by the Secretary of Finance, upon recommendation bargaining agreement (CBA) and productivity incentive schemes
of the Commissioner. provided that the total monetary value received from both CBA
and productivity incentive schemes combined do not exceed
P10,000.00 per employee per taxable year.
Threshold of P90,000
PASSIVE INCOME
The list of de minimis benefits is exclusive. The threshold now under
the TRAIN Law is P90,000. The amount in excess of P90,000 will be
subject to the normal income tax rate or fringe benefit tax, as the case PASSIVE INCOME
may be.
The types of passive income are:
Example: Determine the tax due given the following: 1. Royalties
Monthly compensation income - P80,000 2. Prizes
Rice subsidy – P2,000/month 3. Winnings
Uniform allowance – P10,000 4. Interest
Medical allowance to employee – P15,000 5. Long-term deposits or investments
Laundry allowance – P800/month 6. Dividends
Productivity incentive – P15,000 7. Capital Gains
Christmas bonus – P10,000
TAX RATES
Tax Due
For RC, NRC & RA
Rank & File Employee
Taxable Income P 987,000 Interest Income from foreign currency deposit 15%
Less Threshold (excess over 2,000,000) (800,000)
Total P 187,000 Cash & Property Dividends
Multiplied by Tax Rate 30% a. To individuals from domestic corporations 10%
b. To domestic corporations from another DC 0%
Total P 56,100
Add Threshold (490,000) 130,000 On capital gains presumed to have been realized from sale,
Total Tax Due and Payable P 186,100 exchange or other disposition of real property (capital asset) 6%
On capital gains for shares of stock not traded in the stock
exchange 15%
De Minimis Benefits
Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
Taxable Non-taxable
substitutes, investment management accounts and other
Rice subsidy (P2,000x12mos) P 6,000 P 18,000
investments evidenced by certificates Exempt
Uniform allowance (P10,000) 5,000 5,000
Medical allowance to employee 5,000 10,000
Upon pre-termination before the 5th year, there should be
(P15,000)
imposed on the entire income from proceeds of the long-
Laundry (P800x12mos) 6,000 3,600
term deposit based on the remaining maturity thereof:
Productivity incentive (P15,000 5,000 10,000
Holding Period
Total P 27,000 P 46,600
a. 4 years to less than 5 years 5%
b. 3 years to less than 4 years 15%
For managerial employees, the excesses will be subject to FBT. The c. Less than 3 years 20%
rate of the excess would depend on the type of individual. This is the
position of the BIR as provided in a revenue regulation. TN: Winnings, other than PCSO and Lotto, are subject to 20% final tax
regardless of the amount.
SUBJECT TO OTHER TAXES (RR 5-98)
For NRA-ETB
The exemption of any fringe benefit from the fringe benefit tax shall
not be interpreted to mean exemption from any other income tax Types of Passive Income Rate
imposed under the Code except if the same is likewise expressly
exempted from any other existing law. Interest from currency deposits, trust funds and deposit 20%
substitutes
Thus, if the fringe benefit is exempted from the fringe benefit tax, the
same may still form part of the employee‘s gross compensation income Interest Income from long-term deposit or investment in the
subject to income tax. Hence, it is likewise subject to withholding tax form of savings, common or individual trust funds, deposit
on compensation income payment. substitutes, investment management accounts and other
investments evidenced by certificates Exempt
Upon pre-termination before the 5th year, there should be TN: Whichever is higher
imposed on the entire income from proceeds of the long-
term deposit based on the remaining maturity thereof: 3. CG from Sale of Other properties
Holding Period a. Rate: 0-35% based on
a. 4 years to less than 5 years 5% b. Things to remember: Ordinary gains and capital gains
b. 3 years to less than 4 years 15% can be added. Ordinary loss and capital gains can be
c. Less than 3 years 20% joined. But capital loss cannot be deducted from
ordinary gains.
On capital gains presumed to have been realized from sale, c. Sec. 39 (B): Percentage taken into account
exchange or other disposition of real property (capital asset) 6% i. Held for not more than 12 months: 100%
ii. Held for more than 12 months: 50%
On capital gains for shares of stock not traded in the stock d. Sec. 39 (D): In case of Capital Loses, the amount of
exchange 15% Net Capital Loss Carry-Over cannot exceed ordinary
gains.
For NRA-NETB i. Can only be carried over for a period of 1 year.
On capital gains presumed to have been realized from sale, 1. Final Withholding Tax
exchange or other disposition of real property (capital asset) 6% 2. Creditable Withholding Tax
On capital gains for shares of stock not traded in the stock a. Withholding Tax On Compensation
exchange 15% b. Expanded Withholding Tax
c. Withholding Tax on Government Money Payments
(GMP) – Percentage Taxes
Q: If you won Bingo in the US while you were on vacation for P10M, d. Withholding tax on GMP – Value Added Tax (GVAT)
how will it be taxed of you are a resident citizen?
KINDS OF WITHHOLDING TAX
A: The 10M will be form part of the income subject to 0-35% tax rates
and will not be considered passive income since it is earned outside of Withholding Tax on Compensation is the tax withheld from
the Philippines. income payments to individuals arising from an employer-employee
relationship.
SUMMARY
Passive income earned outside the Philippines – 0-35% Expanded Withholding Tax is a kind of withholding tax which is
prescribed on certain income payments and is creditable against the
Passive income earned within the Philippines – 20%, except: income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
1. Royalties on books, literary & musical compositions – 10%
2. Prizes & winnings (P10,000 or less) – 0-35% Final Withholding Tax is a kind of withholding tax which is
3. PCSO & lotto winnings (P10,000 or less) – exempt prescribed on certain income payments and is not creditable against
4. Interest income from FCDU – 15% the income tax due of the payee on other income subject to regular
5. Cash & Property dividends rates of tax for the taxable year. Income Tax withheld constitutes the
a. To RC, NRC, RA from DC – 10% full and final payment of the Income Tax due from the payee on the
b. To NRA-ETB from DC – 20% particular income subjected to final withholding tax.
c. To NRA-NETB from DC – 25%
d. To DC from DC – 0% Withholding Tax on Government Money Payments (GMP) -
e. To individuals from RFC – 0-35% Percentage Taxes - is the tax withheld by National Government
- Apply the tax situs rule: Agencies (NGAs) and instrumentalities, including government-owned
i. Income within if ratio is more than 85% and controlled corporations (GOCCs) and local government units
ii. Income without if ratio is less than 50% (LGUs), before making any payments to non-VAT registered
iii. Partly income within & income without if taxpayers/suppliers/payees
ratio is between 50% and 85%
Withholding Tax on GMP - Value Added Taxes (GVAT) - is the
tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before
Capital Gains transactions:
making any payments to VAT registered taxpayers/suppliers/payees on
1. CG from Sales of Shares of Stocks
account of their purchases of goods and services.
a. Must not be listed or traded in the local stock
exchange.
b. Rate: 15% based on Net Gain: GSP – Cost TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
c. If listed and traded in the stock exchange:
i. 60% of 1% based on Gross Selling Price.
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
2. CG from Sale of Real property
1. Income payments to a RC, NRC & RA
a. Rate: 6% based on either:
a. Interest on any peso bank deposit
i. Sec. 24 (D): Gross Selling Price
b. Royalties
ii. Sec. 6 (E)(1): FMV as determined by
c. Prizes (except prizes amounting to P10,000 or less
Commissioner of BIR
which are subject to tax)
iii. Sec. 6 (E)(2): FMV as determined by Prov. or
City Assessors
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 77 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
3. Income derived from all sources within the Philippines by 1. Rent income other than royalties
NRA-NETB 2. Interest income other than interest income on bank deposit
a. On gross amount of income derived from all sources 3. Dividend income
within the Philippines 4. Income from other sources and this include:
b. On capital gains presumed to have been realized from a. Bad debts recovered
the sale, exchange or disposition of real property b. Illegal gains derived from gambling
located in the Philippines c. Tax refunds
d. Compensation for private property expropriated by the
4. Income derived by alien individual employed by special government for public use
corporations e. Damages
f. Cancellation of indebtedness
5. Fringe benefits granted to the employee (except rank & file)
INTEREST INCOME FROM LONG-TERM DEPOSIT
6. Informer‘s reward
- 10% of the revenues, surcharges or fees recovered
and/or fine or penalty imposed and collected or LONG-TERM DEPOSITS OR INVESTMENTS
P1,000,000 per case, whichever is lower
Example
7. Cash or property dividends paid by a Real Estate Investment Mr. X has a 10-year time deposit of P1,000,000 which earns interest at
Trust (REIT) pursuant to Sec. 13 of RR 13-2011 P100,000 per year. Mr. X held it for 3 years before he sold it to Mr. Y.
Mr. Y held it for 5 years before he, in turn, sold it to Mr. Z. Mr. Z held
it for 2 years until the date of maturity. How will income be taxed?
CAPITAL GAINS
The interest income of Mr. X will be taxed at 12% since he held it for 3
Types of Capital Gains Rate Basis years. Mr. Y is exempt since the holding period is 5 years. Mr. Z is
subject to a tax rate of 20% since he held it for 2 years.
Sale of shares of stocks not listed
and traded in the local exchange or 15% Net Capital Gains It does not matter how long the time deposit is. What matters is how
listed but not traded in local stock long you held into it.
exchange
TN: The same goes for deposit substitutes, the tax would also depend
Sale of shares of stocks listed and 60% Gross Selling Price on the holding period
traded in the stock exchange of 1%
Sale of real property located in the 6% GSP or FMV, BAD DEBTS RECOVERED
Philippines whichever is higher
How to compute the benefit on bad debts? Note: Do not show these computations during bar exam or Atty.
TN: This computation applies to tax refund as well. Amago's exam. This is only intended to understand the computation of
tax benefit from bad debts being recovered.
2015 2016 2017 2017
Income 100,000 (100,000) 20,000 20,000 ILLEGAL GAINS FROM GAMBLING
Bad debts (50,000) (50,000) (50,000) (50,000)
Taxable 50,000 (150,000) (30,000) (30,000)
GAMBLING
Income
Amount
Gambling is taxable. The NIRC does not distinguish between legal or
recovered in 30k 30k 30k 40k
illegal gambling. As long as there is income, it is taxable.
2018
For instance in 2016: Compare the income with the tax deduction (the ―actual‖ income) and
1. 'What if' means (100K) minus (20K) = (120K)Loss the income without the tax deduction (the ―would be‖ income. The
N.B. (20K) is derived from (50K) [bad debts in 2016] minus difference, if any is the taxable income.
30K [bad debts recovered in 2018].
2. 'Actual' means (100K) minus (50K) = (150K)Loss Thus, if the ―actual‖ income is more than the ―would be‖ income, the
3. Since both 'what if' and 'actual' are at loss or negative, then it difference is taxable income.
will be treated as zero (0).
4. Therefore, it is not subject to taxable income. Example: In year 1, you had an operating income of P100,000 and tax
deduction of P50,000. This resulted to a taxable income of P50,000. In
For instance in 2017: year 2, you got a tax refund of P10,000. How much is the taxable
B. 'What if' means 20K minus (20K) = 0 income for year 2?
N.B. (20K) is derived from (50K) [bad debts in 2017] minus
30K [bad debts recovered in 2018]. A: The taxable income is P10,000. Since you received a tax refund of
C. 'Actual' means 20K minus (50K) = (30K)Loss P10,000 in year 2, the tax refund will be removed from the deductions
D. Since 'what if' has no income and 'actual' are at loss or in year 1. So only P40,000, which is the tax deduction of P50,000 less
negative, then the 'actual' will be treated as zero (0). As a the tax refund of P10,000, will be deducted from the income of
result, zero income already. P100,000 in year 1.
E. Therefore, it is not subject to taxable income.
As a result, the ―would-be‖ taxable income of year 1 is P60,000.
What if the bad debts collected in 2017 amounted to 40K, would that Comparing the ―would-be‖ taxable income with the ―actual‖ income of
change your answer? Yes. It is because the 'what if' will become 10K P50,000 will yield a difference of P10,000. The difference will form part
while the 'actual' will be the same as zero (0). Then, we have to get of your taxable income.
the difference between the 'what if' and the 'actual' which is 10K.
Clearly, there is already a tax benefit subject to taxable income.
Exception: Damages received from physical injuries are excluded from TAX ON NRA-NETB
tax under the law
TAX ON NRA-NETB
Are the following taxable?
A non-resident alien not engaged in trade or business in the Philippines
1. Moral damages due to sleepless night or exemplary damages – Yes
is taxed at a final tax of 25% based on his gross income within, except
2. Payment of back wages or nominal damages in a labor case –Yes
for alien employed by regional or area headquarters (RAHQs)
3. Moral damages relating to a physical injury case – No
established in the Philippines by multinational company, offshore
Except Lucrum cessans or loss of profits
banking units (OBUs), petroleum service contractor and subcontractor
since they are taxed at 15% of salaries within.
CANCELLATION OF INDEBTEDNESS
SUMMARY
GR: 25% of gross income
CANCELLATION OF INDEBTEDNESS
EXC: 15% of salaries within
1. Alien employed in RAHQ
Rules
2. OBUs
3. Petroleum service contractor and subcontractor
A. If the reason for cancellation is due to the services rendered by
the debtor, it is subject to income tax.
PROCEDURE FOR FILING INCOME TAX RETURN
B. If the reason for cancellation is due to the generosity or liberality
of the creditor, it is not subject to income tax but subject to INDIVIDUALS REQURED TO FILE ITR
donor's tax.
C. When the corporation extended a debt to one of its stock holders Sec. 51 (A) (1) of the NIRC
and eventually condone the debt, it is subject to dividend income Except as provided in paragraph (2) of this Subsection, the following
tax of 10% or 20% or 25% as the case may be. individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
D. When the stock holder extended a debt to its corporation and (b) Every Filipino citizen residing outside the Philippines, on his income
eventually condoned the debt, it is considered as part of from sources within the Philippines;
investment that shall not be subject to tax since it is a capital. (c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
INCOME TAX COMPUTATION exercise of profession in the Philippines.
Who are required to file Tax Returns? Now, it is to ensure that the 250,000 exemption is only claimed once
All individual taxpayers are required to file income tax return, except as it can happen that both employers can separately claim. The BIR
NRA NETB since the final tax is withheld at source. must make sure that he is taxed according to the correct tax bracket.
Subject to FWT
INDIVIDUALS NOT REQUIRED TO FILE ITR
Those earning income solely subject to final withholding tax are not
required to file ITR.
Sec. 51 (A) (2) of the NIRC
The following individuals shall not be required to file an income tax Ex. Housewives receiving remittances from their spouses abroad and
return: placing such in the bank. They are earning interest income but are not
(a) An individual whose taxable income does not exceed P250,000: required to file an ITR because the taxes due are already withheld by
Provided that a citizen of the Philippines and any alien individual the bank. This is only true if all your income are subject to final tax.
engaged in business or practice of profession within the Philippines
shall file an income tax return regardless of the amount of the gross Ex. If you also earn income from a sari-sari store, then you are
income; required to file an ITR regardless of the income earned since it is
(b) An individual with respect to pure compensation income, as considered business income.
defined in Section 32(A)(1), derived from such sources within the
Philippines, the income tax on which has been correctly withheld under Minimum wage earner
the provisions of Section 79 of this Code: Provided, That an individual Minimum wage earners are not required to file an ITR because they
deriving compensation concurrently from two or more employers at are exempt from taxes. However, they are required to file an
any time during the taxable year shall file an income tax return; information return.
(c) An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of this Code; and SUMMARY
(d) A minimum wage earner as defined in Section 22(HH) of this Code A. Individuals not required to file ITR:
or an individual who is exempt from income tax pursuant to the GR: All individuals are required to file an ITR. (RC, NRC, RA,
provisions of this Code and other laws, general or special. NRA-ETB)
EXC: NRA-NETB
Sec. 51 (A) (3) of the NIRC REASON: Income of NRA-NETB is subject to final
The forgoing notwithstanding, any individual not required to file an withholding tax of 25% withheld at source.
income tax return may nevertheless be required to file an information B. Individuals not required to file ITR:
return pursuant to rules and regulations prescribed by the Secretary of Taxable income does not exceed P250,000
Finance, upon recommendation of the Commissioner. o EXC: Business or professional income, regardless
of amount of gross income
INDIVIDUALS NOT REQUIRED TO FILE ITR Pure compensation income earner
o EXC: 2 or more employers any time during the
1. An individual who is a minimum wage earner. taxable year
2. An individual whose taxable income does not exceed Sole income subjected to final withholding tax
P250,000, provided that a citizen of the Philippines and any Minimum wage earner or tax-exempt individual
alien individual engaged in business or practice of profession
within the Philippines shall file an income tax return WHERE TO FILE
regardless of the amount of the gross income
3. An individual whose income has been subjected to final
withholding tax Sec. 51 (B) of the NIRC
4. Those who are qualified under ―substituted filing‖ Except in cases where the Commissioner otherwise permits, the return
shall be filed with an authorized agent bank, Revenue District Officer,
Does not exceed P250,000 Collection Agent or duly authorized Treasurer of the city or
The taxpayer whose income does not exceed P250,000 is not required municipality in which such person has his legal residence or principal
to file since is exempted. place of business in the Philippines, or if there be no legal residence or
place of business in the Philippines, with the Office of the
Professional & Business Income Earner Commissioner.
An individual engaged in business or the practice of profession is
required to file ITR regardless of the amount of gross income so that WHERE TO FILE
the government can verify if they are claiming the proper deductions.
1. Authorized Agent Bank (AAB)
Pure Compensation Income Earner 2. Revenue District Officer (RDO)
General Rule: An individual earning pure compensation income is 3. Treasurer
required to file ITR, regardless of the amount of income, since he is 4. Office of the Commissioner
qualified under substituted filing. It is the employer who files.
Authorized Agent Bank (AAB)
The TRAIN Law added an additional section for substituted filing. It AAB has jurisdiction over the RDO. BIR is prohibited from accepting
wanted to clarify that the certificate of withholding filed by the cash/ check payments in order to prevent or minimize opportunities for
employer duly stamped received by the BIR is tantamount to the filing corruption. At least with AABs, the funds are directly deposited to the
of an ITR by the employee. The taxpayer can therefore present it as government coffers.
proof of payment of tax.
Revenue District Officer (RDO)
Exception: When the employee has two or more employers during the The ITR is filed with the RDO where your principal place of business is
taxable year, he is required to file an ITR. This is because of the located. You can go to the RDO if you don‘t have payment.
possibility that he might be earning total income of more than
P250,000 from his employers. Q: How do you update the RDO now that you are now working in
Cebu with another employer if you were registered by your previous
When BPE existed, the income earned by the taxpayer might be employer in the RDO of Manila where his principal place of business is?
claimed by each employer and such BPE can only be claimed once.
A: You need to write the RDO of your previous employer requesting income of both spouses, but where it is impracticable for the spouses
for the transfer of your registration to the RDO in Cebu. They will then to file one return, each spouse may file a separate return of income
conduct an automatic audit. but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.
Q: What happens if you transfer your business in Cebu to Mandaue?
Sec. 51 (E) of the NIRC
A: The RDO of Cebu will audit your business before transferring you to Return of Parent to Include Income of Children. - The income of
the RDO of Mandaue to ensure that you have cleared your account. unmarried minors derived from property received from a living parent
Once you are transferred, the RDO of Cebu will lose jurisdiction. shall be included in the return of the parent, except (1) when the
donor's tax has been paid on such property, or (2) when the transfer
Treasurer of such property is exempt from donor's tax.
Municipal and city treasurers can be deputized to receive income tax
returns and payments. Sec. 51 (F) of the NIRC
Persons Under Disability. - If the taxpayer is unable to make his own
Office of the Commissioner return, the return may be made by his duly authorized agent or
The ITR can be filed with the Office of the Commissioner in Quezon representative or by the guardian or other person charged with the
City when there is no principal place of business in the Philippines. care of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or fraudulent returns.
WHEN TO FILE
Sec. 51 (G) of the NIRC
Sec. 51 (C) of the NIRC Signature Presumed Correct. - The fact that an individual's name is
(1) The return of any individual specified above shall be filed on or signed to a filed return shall be prima facie evidence for all purposes
before the fifteenth (15th) day of April of each year covering income that the return was actually signed by him.
for the preceding taxable year.
(2) Individuals subject to tax on capital gains; Sec. 56 (A) (2) of the NIRC
(a) From the sale or exchange of shares of stock not traded thru a Installment of Payment. - When a tax due is in excess of Two
local stock exchange as prescribed under Section 24(c) shall file a thousand pesos (P2,000), the taxpayer other than a corporation, may
return within thirty (30) days after each transaction and a final elect to pay the tax in two (2) equal installments, in which case, the
consolidated return on or before April 15 of each year covering all first instalment shall be paid at the time the return is filed and the
stock transactions of the preceding taxable year; and second installment on or before October 15 following the close of the
(b) From the sale or disposition of real property under Section 24(D) calendar year, if any installment is not paid on or before the date fixed
shall file a return within thirty (30) days following each sale or other for its payment, the whole amount of the tax unpaid becomes due and
disposition. payable together with the delinquency penalties.
Joint Account
INCOME TAXATION FOR CORPORATIONS
A joint account is created when two persons form or create a common
fund and such persons engage in a business for profit. This may result
INTRODUCTION & DEFINITION OF TERMS
in a taxable unregistered association or partnership.
Sec. 22 (B) (C) (D) (H) (I) of the NIRC Joint Stock Companies
(B) The term 'corporation' shall include partnerships, no matter how It is the midway between a corporation and a partnership, a ―hybrid
created or organized, joint-stock companies, joint accounts (cuentas personality.‖ It is somewhat a corporation because this is managed by
en participacion), association, or insurance companies, but does not a Board of Directors and such persons may transfer their share/s
include general professional partnerships and a joint venture or without the consent of others, and somewhat a partnership because it
consortium formed for the purpose of undertaking construction is an association, and persons or members of the same contribute
projects or engaging in petroleum, coal, geothermal and other energy fund, money to a common fund.
operations pursuant to an operating consortium agreement under a
service contract with the Government. 'General professional Emergency Operation
partnerships' are partnerships formed by persons for the sole purpose This may be formed by two corporations with separate personalities. If
of exercising their common profession, no part of the income of which they form that emergency operation (it is really a special activity) to
is derived from engaging in any trade or business. engage in joint venture, corporation may be taxed only from the
income derived from such business. The income derived from such
(C) The term 'domestic,' when applied to a corporation, means created emergency operations should also be included in that taxable income
or organized in the Philippines or under its laws. subject to corporate income tax. In the same way that has a separate
and distinct personality; if it‘s a part of that emergency operation, the
(D) The term 'foreign,' when applied to a corporation, means a income derived from such special activity should also be included in
corporation which is not domestic. the income of that corporation, subject to corporate income tax, even
if it is not registered with the SEC.
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines. EXCLUSIONS FROM THE TERM CORPORATION
It is a business activity that is organized or established only for a The share of the joint venture partners will no longer be taxable to
temporary or short period of time. It is dissolved once its business them because they partake of dividends if paid to a domestic or
objective is accomplished. resident corporation.
BIR Revenue regulations require that they be registered or licensed by The following are the ways by which a foreign corporation can legally
the Philippine Contractors Accreditation Board (PCAB) to ensure that do business in the Philippines:
they are engaged in the construction business. 1. Incorporate with a domestic corporation (set up a
subsidiary)
2 – Consortium for the operations engaging in petroleum, 2. Establish a branch in the Philippines
coal, geothermal, and other energy operations pursuant to an 3. Set up a representative office which does not earn income
operating/consortium agreement under the service contract but only exists for communication or as a liaison of the
with the government foreign corporation.
This refers to certain entities providing public utilities like electricity
and its distribution. When the National Power Corporations sub- Resident foreign corporations
transmission assets - the one being used to distribute the line; the Refer to those which are doing business in the Philippines.
asset used to hold the electricity and distribute it, there are certain
entities which on the consortium to buy these sub-transmission assets. It should pass the test of regularity. There should be continuous or
regular operations. A foreign corporation having a branch here is a
If you look at the Tax Code, they will not be treated as forming a means of having regular or continuous operation but it is not
separate entity subject to tax because it is providing public utilities. necessarily a branch because it could be a representative office.
They agreed to service the public when in fact it is the government
who should do that. It will not be treated as a separate entity just like Under Foreign Investment Act, there are 2 ways a foreign corporation
the joint venture. They are joined together in a certain operation, they can do business here. It‘s either by having a branch or a
own sub-transmission assets then they will allow the passage of representative office. If it has either one of these, it is deemed to be a
electricity under their assets. It‘s like contributing asset to a common RFC automatically.
fund.
Q: Does that mean that if you are not registered in the Philippines
Reason: The government wanted support on its energy projects. SEC, you will not be subject to tax?
There must be service contract with the government. Otherwise, such
joint venture or consortium is not exempt from corporate income tax. A: No, because if that‘s the case then all of the foreign corporations
will never register with the Philippine SEC because if they will register
Q: Will they be subject to tax as one entity? then they are subject to tax and if they won‘t register then they won‘t
be subject to tax. Again, the laws on which the corporation is
No, because under the law, when there is a consortium for the registered matters. To be a resident foreign corporation, it must be
purpose of operating petroleum, coal, geothermal and other energy doing business in the Philippines, otherwise, you will only be
operation under service contracts with the government, it is excluded considered NRFC.
from the term corporation.
Non-resident foreign corporation
Q: Are these types of operation really exempted from taxes? Refer to those not engaged in trade or business in the Philippines.
They can be taxed on their isolated transactions in the Philippines.
A: No, because separately, these entities forming the consortium will
still be taxed once the income is distributed - not treated as dividends Example: There is a foreign corporation which happens to have shares
but as ordinary income. of stocks in a domestic corp. It does not necessarily mean that they
are doing business here in the Philippines as their income is dependent
on the operations of the Philippine company.
TAXABLE CORPORATIONS
So there is a domestic corporation set up here and shares of stock
CLASSES OF CORPORATE TAXPAYERS were bought by a foreign corporation (shares of stocks owned by a
foreign corporation but the business is registered here – this is allowed
1. Domestic Corporation – taxed for income within and without the under Foreign Investment Act). If that corporation distributes income
Philippines to its stockholder, is the distribution subject to tax?
2. Resident Foreign Corporation – taxed for income within only
3. Non-resident Foreign Corporation - taxed for income within only Supposedly if NRFC, you are still supposed to subject them to tax
based on their income here in the Philippines. The Corporation will
Reasons for distinction: have to withhold the amount and the rate would be 30% based on its
gross income. It means that in isolated cases, the corporation can still
A. To know when can they be taxed (income within/ within or be subject to tax whether it has actual presence here in the Phil or
without Philippines) not. If there is no actual presence, then it is automatically an NRFC if
they have an isolated transaction.
B. Different tax base and rate will apply
DC is taxed at 30% based on net income for those Howden v. CIR
earned within and without The source of an income is the property, activity or service that
RFC within is taxed based on 30% net income produced the income.
NRFC are taxed at 30% gross income within Philippines
Appellants should not confuse activity that creates income LIABILITY OF PARTNERS
with business in the course of which an income is realized. An activity
may consist of a single act; while business implies continuity of General Professional Partnership
transactions. An income may be earned by a corporation in the Partners in a GPP shall be liable for income tax only in their
Philippines although such corporation conducts all its businesses separate and individual capacities.
abroad. Precisely, Section 24 of the Tax Code does not require a Each partner shall report his distributive share, actually or
foreign corporation to be engaged in business in the Philippines in constructively received in the net income of the partnership
order for its income from sources within the Philippines to be taxable. as gross income.
It subjects foreign corporations not doing business in the Philippines to The share of a partner shall be subject to 8% creditable
tax for income from sources within the Philippines. withholding tax.
The partner is deemed to have elected the itemized
deductions unless he declares his distributive share
PARTNERSHIPS & CO-OWNERSHIPS
undiminished by his share of the itemized deductions.
CO-OWNERSHIP A 40% OSD is deductible from the distributive share of the
gross income if such gross income was not previously
reduced by the partnership‘s itemized deduction.
CO-OWNERSHIP
Trade Partnership
A co-ownership exists when more than one person acquired the right Partners are considered as stockholders.
to own a piece of property or mass of properties. The profits distributed to them by the partnership are
considered dividends subject to final tax of 10%.
General Rule: Co-ownership is tax-exempt
Reason: It is formed an organized not for profit but for common TAXABLE AS CORPORATIONS
enjoyment or preservation of a property.
No specific form required
Any income incident to the co-ownership forms part of the ordinary There is no specific form of partnership required because the tax code
income of the co-owners taxed at 0-35%. provides that partnerships are included in the term corporation ―no
matter how created or organized.‖
Exceptions:
1. When the income of the co-ownership is invested by the co- Tax of partnerships
owners in other income-producing activities; or There is no separate taxation for partnerships as they are taxed like a
2. When there is no attempt to divide the inherited property for corporation. We also need to make a distinction on whether it is
more than 10 years and the said property was not under any domestic, resident foreign or non-resident foreign.
administration proceedings nor held in trust, an unregistered Domestic Partnership – 30% of net income within & without
partnership is deemed to exist Resident Foreign Partnership – 30% of net income within
Non-resident Foreign Partnership – 30% of gross income within
PARTNERSHIP
Constructive Receipt Doctrine
The point of difference between a corporation and a partnership, under
PARTNERSHIP the tax code, lies in the fact that partnerships adhere to the
constructive receipt doctrine. Even if there is no actual declaration of
By the contract of partnership, two or more persons bind themselves dividends or distribution of income by the partnership, such income is
to contribute money, property, or industry into a common fund with deemed to have been automatically received by the partners for
the intention of dividing the profits among themselves. (Art. 1767, CC) purposes of taxation. In corporations, dividends must be declared first.
Tax rate: 30% The tax for a resident foreign corporation is similar to a domestic
Tax base: Net taxable income corporation but only for income earned within the Philippines. The rule
Source: Income within and without for passive income is also similar.
Interest Income All income enumerated in Sec. 32 (A), except compensation and
Interest income from bank deposits is subject to 30% NCIT. pensions, can be earned by a corporation.
Interest income under the expanded foreign currency deposit system Gross income depends on the type of business. This is important since
is tax-exempt. this could be the tax base of the corporation or another entity.
Royalties
Gross Income
Royalties are subject to 30% NCIT.
Merchandising Concern
Capital gains from sale of shares of stock not traded in stock
exchange Gross Sales P xxx
The tax for capital gains derived from the sale of shares of stock not Less Cost of Sales (xxx)
traded in the stock exchange is 15%. Gross Income P xxx.
GROSS INCOME
Gross Income
Sec. 27 (A) of the NIRC Service Entity
xxx
For purposes of this Section, the term 'gross income' derived from Gross Receipts P xxx
business shall be equivalent to gross sales less sales returns, discounts Less Cost of Services (xxx)
and allowances and 'cost of goods sold.' ‗Cost of goods sold' shall Gross Income P xxx.
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
PERTINENT ITEMS OF GROSS INCOME
For a trading or merchandising concern, 'cost of goods sold' shall
include the invoice cost of the goods sold, plus import duties, freight in Not all enumerated items of gross income under Sec. 32 apply to all
transporting the goods to the place where the goods are actually sold, kinds of taxpayers. (Note: dumping ground computation here refers to
including insurance while the goods are in transit. 30% tax rate for corporations and not 0-35%)
(1) Compensation for services in whatever form paid, including, but Interests
not limited to fees, salaries, wages, commissions, and similar items; If the business of the corporation is financing, and they extend loans
(2) Gross income derived from the conduct of trade or business or the to individuals or other entities, they can earn interest income. It will
exercise of a profession; form part of the 30% dumping ground taxation. Deposits in the bank
(3) Gains derived from dealings in property; are passive income subject to a different tax rate.
(4) Interests;
(5) Rents; Rents
(6) Royalties; When a corporation is engaged in the business of leasing out
(7) Dividends; properties then it can earn rent income. This forms part of the 30%
(8) Annuities; dumping ground computation, not passive income.
(9) Prizes and winnings;
(10) Pensions; and Dividends
(11) Partner's distributive share from the net income of the general Corporation can sell their shares to other corporations and if they
professional partnership. declare dividends, these will not form part of the 30%.
---
GROSS INCOME Annuities
When the company‘s investment gets periodic payments of income
Gross income refers to all income derived from whatever source. then it can still earn annuities. Ordinarily, when businesses do
[CGGIRRDAPPP] investments, they can either receive interest income or dividends and
not usually annuities. They are not limited from earning annuities Q: Corp. Y is a stockholder of Corporation X. If Corporation Y has
because there can still be investment opportunities which gives them 2,000 shares with a par value of 1 peso per share, the total value of
periodic payments of income. the shares is P2,000. To earn capital gains, you sell the shares not in a
local stock exchange but in some other market exchange. If you sell it
Prizes and winnings directly to an individual, Mr. A, how will it be taxed?
Corporations may win prizes which require participation on the part of
a corporation. These will be given to the corporation as an entity. A: First, you have to establish that there is net capital gains. The cost
There are winnings when they are earned as a matter of chance - like of the shares is 2,000. We must determine the amount for which the
a raffle ticket bought by a representative. shares were sold. The total cost is P2,000 (2,000xP1) and gross selling
price is P20,000, your Net Capital gains is 18,000. This will be taxed at
Pension 15%. So P18,000 x 5% is P2,700 which is the capital gains tax.
Corporations can‘t earn them.
Q: You have a total of 6,000 shares. The previous transaction
happened on January 1, 2015. If on June, you sold shares in the
PASSIVE INCOME
amount of 2,000 shares but this time, the amount is for 100,000. The
cost would still be 2,000 so your gain is 98,000. How will it be taxed?
PASSIVE INCOME
A: Under the TRAIN Law, it will be taxed at a flat rate of 15%. Before,
Interest Income from Peso Deposits there was a threshold of P100,000 wherein the first P100,000 gain for
Interest income derived from peso currency bank deposit (saving the year was subject to 5% tax and the excess was subject to 10%.
deposits of corporations) is subject to final withholding tax of 20%. YEach of these transactions will have separate income tax returns. A
return will be made within 30 days after the transaction.
The interest income of deposit substitutes is subject to 20% final tax,
unless there are less than 20 lenders wherein it is taxed at 30%. Capital gains realized from sale of real property
The tax depends on the type of real property sold. If it is an ordinary
Interest income from foreign currency deposit is subject to 15% final asset, then it is subject to 30% tax. If it is a capital asset, then it is
withholding tax. This is to encourage foreign reserves. subject to a final tax of 6%. The 6% is based on the highest amount
among the gross selling price, the assessed value given by the local
Income from Expanded Foreign Currency Depositary Unit assessor, and the zonal value determined by the BIR.
This income is derived by a depositary bank. Do not confuse this with
the interest income derived by a domestic corporation from a Even if you sell the property at a loss, you will still be taxed because
depositary bank under a foreign currency deposit subject to a tax of there is a presumed gain when you sell real property. The law for
15%. Under this, it is the bank itself that is earning income. individuals also applies for corporations for treatment of capital gains.
If you are a depository bank and you earn income under EFCD system Q: If there is an improvement on a property of a corporation which is
for foreign currency transactions, your tax will depend on whom you not used in trade or business and such improvement was sold with the
are transacting with. parcel of land, how will it be taxed? Let‘s say the improvement is a
wall or fence.
If you are transacting with non-residents, off -shore banking units in
the Philippines, local commercial banks including branches of foreign A: Improvement is subject to 30% while the parcel of land is subject
banks authorized by BSP, then you will be exempted from all taxes. to 6% based on either GSP, FMV BIR, FMV local assessor whichever is
higher.
If you are transacting with residents, you are subject to the dumping
ground computation of 30%. You will see that under the exemption, if The reason for the distinction is because under Sec 27 D (5), Capital
it relates to a loan transaction, interest income will be subject to final gains realized from the sale exchange or disposition of Lands and/or
tax of 10%. Take note that this 10% rate is applicable only to loan Buildings is subject to 6% capital gains tax unlike in individual
transaction and only for an interest income to residents. taxation, ―Real property‖ is used without distinction which may cover
improvement on the land or building such as machineries, etc. The Tax
Royalties code is specific on the ―LANDS and/or BUILDINGS‖ part, if the property
Royalties sourced within the Philippines are subject to final tax of 20% does not belong to either then it is subject to 30% rate under the
regardless of where that royalty is from, whether or not from books, dumping ground computation.
literary works and musical composition. These are passive royalty
income which is subject to a final tax. There is no distinction of the Q: How about other capital assets that may be sold by a corporation,
royalties in the case of corporations since corporations do not write how are they taxed?
books or create literatures. Only individuals can.
A: Taxed at the rate of 30% under the dumping ground computation.
If a corporation allows the franchise of their name, then they may earn So, the fence in the above example just like any other improvements
royalties. The rate depends on whether it is an active or passive like machineries will be subjected to the tax rate of 30%.
royalty. If it is a passive royalty, then it is subject to 20% final tax. If
it is an active royalty, it forms part of gross income which is subject to TN: Improvements will fall under ―other capital assets‖
30% normal tax.
Q: Do we subject these improvements to the rule on holding period?
Prizes & Winnings
Prizes and winnings form part of the dumping ground computation A: No, because tax code is specific that such will not apply to a
since it is not listed as passive income for purposes of corporations in corporation.
the tax code.
Q: if there is a net capital loss, can it be carried over?
Capital gains from the sale of shares of stock not traded in the
stock exchange A: No, the net capital loss carry-over is only applicable to taxpayers
The tax rate is 15% of the net capital gains. other than a corporation.
B. If income earned is more than 50%, then it is deemed income Q: Compute for the tax due and payable of the corporation.
inside the Philippines
Under the 1997 National Internal Revenue Code, Congress specifically Example: You paid someone to build a cellphone and whatever is the
defined ―public‖ to mean ―twenty (20) or more individual or corporate cost of building that cellphone will be considered part of your research
lenders at any one time.‖ Hence, the number of lenders is & development.
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% FWT. What if part of your operations is into mining? Part of your research is
you have to find a possible mining site. The cost of finding the mining
site will not form part of your research and development but does that
RULE ON SITUS OF DIVIDENDS
mean you cannot deduct it? No, you can deduct it but it will form part
of your expenses, even the cost of the land itself will not form part of
RULE ON SITUS OF DIVIDENDS research and development.
Determine the gross income of the corporation for the last three years Pension trust
and the percentage of income earned within the PH: There is a separate section for pensions granted for employees.
(According to a BIR Revenue Regulation 2-98) Pension can refer to current service cost and past service cost. The
Income within if ratio is more than 85% total cost which you pay in order to set up this pension trust can be
Income without if ratio is less than 50% allowed as a deduction.
Partly income within & income without if ratio is between
50% and 85% Depreciation
Pieces of equipment used are subject to depreciation.
In relation to the earlier example, if you can‘t deduct it under R & D KINDS OF ORDINARY EXPENSES [CARTERS]
then deduct it under depreciation.
A. Compensation for services rendered
Depletion B. Advertising and promotional expenses
In mining sites, equipment used in the mining wasting assets like C. Rent expense
mineral ores may be accounted it under depletion. D. Travelling expense
E. Entertainment, amusement and recreation expense
OPTIONAL STANDARD DEDUCTION F. Repairs and maintenance expense
G. Supplies and materials
The OSD for corporations is 40% based on gross income. Only DC and
RFC can avail of the 40% OSD. NRFC cannot.
COMPENSATION FOR SERVICES RENDERED
Q: How about proprietary educational institutions, OBUs, ROHQs and
PEZA-registered companies? COMPENSATION FOR SERVICES RENDERED
A: It depends on whether the corporation is subject to a preferential Special requisites for deductibility:
tax rate based on gross income. OSD is applicable only when the a. Must be reasonable, meaning, this must not be ostensible
corporation is subject to the normal corporate income tax. The b. It is, in fact, payments for personal services actually
exception is in the case of proprietary educational institutions which rendered.
are taxed at 10% of the net income.
Special requisites for deductibility of bonuses to employees:
a. The bonuses are made in good faith.
EXPENSES
b. They are given for personal services actually rendered.
c. They do not exceed a reasonable compensation for the
EXPENSES services rendered, when added to the stipulated salaries,
measured by the amount and quality of services performed
Business Expense in relation to the taxpayer‘s business.
Refer to all the ordinary and necessary expenses paid for or incurred d. Bonuses must be given in good faith and in determining
during the taxable year in carrying on or which are directly attributable whether the bonuses will form part of the compensation for
to the development, management, operation and/or conduct of the services rendered, you need to consider the (1) nature of
trade, business or the exercise of a profession. the business, (2) financial capacity of the taxpayer, and (3)
extent of the services rendered
Capital Expenses e. General economic condition
These are expenditures for the extraordinary repairs which are
capitalized and subject to depreciation. These tend to increase the Deductible expenses under compensation for personal
value or prolong the life of the taxpayer‘s property. services:
1. Salaries, wages, commissions, professional fees, vacation-
Ordinary Expenses leave pay, retirement pay and other compensation
Refer to the expenses which are normal, usual or common to the 2. Bonuses are deductible expenses if paid-in good faith as
business, trade or profession of the taxpayer. An expense is ordinary additional compensation for services rendered
when it is commonly incurred in the trade or business of the taxpayer 3. Pensions and compensation for injuries, if not compensated
as distinguished from capital expenditures. The payments need not be for by insurance or otherwise
normal or habitual in the sense that the taxpayer will have to make 4. GUMV of fringe benefit provided for, as long as the final tax
them often. The payment may be unique or non-recurring to the imposed has been paid.
particular taxpayer affected.
Ex. Gasoline is an ordinary expense for delivery van of the
ADVERTISING & PROMOTIONAL EXPENSES
manufacturing company but not it sari-sari store.
Operating Lease is a contract that allows for the use of an asset, but Example: X Corp. is engaged in the sale of goods and services with net
does not convey ownership of the asset. The lessee has not taken or is sales of P100,000 and net revenue of P100,000. The actual EAR
not taking title over the property. You pay rent but do not claim expense for the taxable quarter is P10,000. How much will be allowed
ownership over the property no matter how long you have been as a deduction?
paying the rent.
TRAVELLING EXPENSE
A: Only a total of P1,500 will be allowed as deduction. The amount
TRAVELLING EXPENSE cannot exceed the ceiling for the sale of goods of P500 and sale of
services of P1,000.
Requisites:
a. Must be reasonable and necessary REPAIRS & MAINTENANCE EXPENSE
b. Must be incurred or paid ―while away from home‖
Home refers to the station assignment or post/principal
place of business, not your residence. REPAIRS & MAINTENANCE EXPENSES
c. Must be paid or incurred in the conduct of trade or business
Repairs expense is allowed as deductible expense either:
a. In ordinary repairs – the cost of repair increases the life of
ENTERTAINMENT, AMUSEMENT, & RECREATION an asset for a period not more than one year. It will be
treated as period cause subject to deduction within the
ENTERTAINMENT, AMUSEMENT AND RECREATION (EAR) taxable year.
EXPENSES b. In extraordinary repairs – the cost of repair increases the life
of an asset for a period more than one year. It will be
Requisites: treated as part of the cost of the asset and subject to
It must be paid or incurred during the taxable year depreciation.
It must be paid or incurred in carrying on or which are
directly attributable to the development, management, SUPPLIES & MATERIALS
operation and/or conduct of the trade, business or exercise
of profession
It must be supported by adequate invoices or receipts SUPPLIES & MATERIALS
It is not contrary to law, public policy or moral
3. It must not have been paid, directly or indirectly, to an Supplies and material must be actually consumed during the taxable
official or employee of the national government or similar year in order to be deductible.
entity if it constitutes a bribe, kickback or other similar
payment. COHAN RULE
4. The appropriate amount of withholding tax, if applicable,
should have been withheld therefrom and paid to the BIR.
5. Provided that, the deductible expense of sale of goods shall COHAN RULE
not exceed 0.50% of net sales (i.e. Gross sales less sales
returns/allowances and sales discount) while sale of services Some expenses need not be supported by official receipts or sales
shall not exceed 1% of net revenue (i.e. Gross revenue less invoice as long as it can be substantiated with other adequate records
discount). If both sale of goods and sale of services, it is which prove that such were purchased by the company and the goods
proportional based on net sales or net revenue. received were actually converted to the product sold. However, this
does not apply in all instances. It is only to the extent of 50% of the
Q: How about bringing the client to a bikini bar, is that allowed? expenses.
A: Yes, it is allowed because you are trying to establish goodwill with Background
the client in furtherance of your business. The intention is to market George M. Cohan was a very well known Broadway star in the early
your company or product, not necessarily what is being offered in the 1900s. His most famous performance is ―Give My Regards to
bikini bar. It may be considered as EAR expense. Such guests must not Broadway.‖ Interestingly, his legacy is also closely connected to tax
include the employees of the company or family members but there law. Cohan was audited by the IRS and was told that he was not
must be someone from the company accompanying the clients. The allowed to deduct many of his business and entertainment related
benefit of the employee is only incidental and not primary. expenses because he did not keep all of the necessary receipts. Mr.
Cohan appealed this ruling and the courts actually sided with him,
Q: In case such EAR expenses were given to employees, how will it be forcing the IRS has to accept estimates of his expenses.
treated?
A: They are treated as fringe benefits.
The Cohan Rule is now a law that allows taxpayers to deduct some of
TAX ARBITRAGE RULE
their business-related expenses even if the receipts have been lost or
misplaced so long as they are reasonable and credible.
TAX ARBITRAGE RULE
INTEREST EXPENSE
The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 33% of the interest income earned by
INTEREST him which has been subjected to final tax. It means that, instead of
deducting 100% of the interest expense, you can only deduct 100%
Interest must be expressly stipulated in writing. It must be legally due. interest expense less the 33% interest income subjected to final
Interest expense can only be deducted in full if the taxpayer incurs withholding tax.
interest expense but does not earn interest income. Otherwise, the tax
arbitrage rule will apply wherein the allowable deduction will be You are able to get the benefit of 30% because of the deduction but
reduced by 33% of the interest income earned. the interest income is subject only to 20% final tax. There is a
difference of 10%. This is how to get the 33%.
This is to prevent taxpayers from creating a tax shield by loaning
money from a bank and subsequently loaning it back to earn interest
income. The interest expense reduces taxable income while the
interest income is only subject to 20% final tax.
Q: Does Tax Arbitrage Rule apply to all interest expense? Does it mean
Requisites for deductibility: that taxpayer can deduct 100%?
A. It must relate to indebtedness.
B. The indebtedness must be related to the taxpayer's trade or A: No. Tax Arbitrage Rule does not apply when:
business 1. Interest expense is for unpaid taxes
C. The indebtedness must be that of the taxpayer 2. Interest income is not subject to final withholding tax
D. The interest should be legally due on the indebtedness
E. The interest must have been stipulated in writing Actually, if the taxpayer has no interest expense in relation to bank
F. The interest is paid or accrued during the taxable year transaction, the Tax Arbitrage Rule does not apply. The purpose of Tax
G. The indebtedness must not be made under the arrangement with Arbitrage Rule is to avoid circumvention of the law for tax benefit
related taxpayer. between the difference of interest deduction and interest income.
H. The indebtedness must not be incurred to finance petroleum
operation or exploration Requisites for Tax Arbitrage Rule to apply
A. There must be an interest payment to be made to the bank
Non-deductible interest expense B. The interest income must be earned from the bank and
1. Interest expense on preferred stock C. There must be interest income subject to final withholding tax.
2. When there is no agreement in writing to pay interest
3. Interest expense on loan entered into between related taxpayers Arbitrage is an activity or scheme where a certain investor takes
4. Interest paid or calculated for cost-keeping purposes advantage on the difference of the rates and prices from one market
5. Interest paid in advance through discount to another market.
6. Interest on obligation to finance petroleum exploration
7. Interest on unclaimed salaries of employees TAXES
8. 33% of the interest income subject to final tax
Who may claim? Example: A fire occurred in your house. The losses you incurred
1. Citizens cannot be deducted from income of your business because your
2. Domestic Corporations business is separate from your personal properties for purposes of
3. Members of GPPs taxation. But if it is your store which was burned, then you can deduct
4. Beneficiaries of estates and trusts the damage sustained by your store. If there is an insurance, it
5. NRA-ETB and RFC but only for income within the Philippines reduces the amount of losses you can deduct for tax purposes.
You have to compute for the limit for each country. The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
Global Limitation been previously offset as deduction from gross income shall be carried
The total amount of the credit shall not exceed the same proportion of over as a deduction from gross income for the next three (3)
the tax against which such credit is taken, which the taxpayer's taxable consecutive years immediately following the year of such loss.
income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year. Whenever your business incurs operating loss, then that can be
claimed as a deduction for the succeeding year. When expenses is
greater than your revenue, then there is a loss. The government
allows you to spread out this loss for a period of three (3) years by
allowing you to deduct the NOLCO.
Example:
Country Income Tax Paid Tax Credit Any net loss incurred in a taxable year during which the taxpayer was
USA 1,000,000 400,000 150,000 exempt from income tax shall not be allowed as a deduction.
Japan 1,000,000 100,000 100,000
Philippines 2,000,000 600,000 Total: 250,000 Q: Does the three year period need to be continuous?
Per Country Limit: A: Yes, the three year period cannot be extended. It is always the
three years after you incurred the loss.
Period to avail
NOLCO can be claimed for the next 3 consecutive years immediately
following the year of loss.
A. Incurred in trade, profession or business of individual taxpayer. Not less than 75% of the paid up capital of the corporation,
B. Of property connected with the trade, business or profession, if the business is in the name of a corporation, is held by or
if the loss arises from fires, storms, shipwreck or other on behalf of the same persons
casualties or from robbery, theft or embezzlement.
A – The law provides that when the individual is exempted on the year
LOSSES FROM WASH SALES
he incurred the loss, no NOLCO may be allowed as a deduction for the
succeeding year.
A wash sale is the buying or selling of the same type of stock or
security at a loss within 30 days before the date of sale or 30 days
Another illustration:
after date of sale. It cannot be claimed as allowable deduction.
1. If you incurred a loss of 400,000 in Year 1, can you deduct this
loss in Year 2 when you are exempted from taxes? A wash sale is a price manipulation activity prohibited under the
Security Regulation Code (R.A 8799). It is a practice where a
No. The loss cannot be deducted since you are exempted. person or entity who is not a dealer of securities disposes of such
securities. It occurs when the taxpayer disposes shares of stock or
2. How about in Year 3 when you availed of OSD? securities and within 30 days before or after such disposition
acquires substantially identical stocks or securities. That‘s why it is
termed as a 61-day sale.
No. OSD is in lieu of itemized deductions so the losses are
already accounted for. TN: The 30 days before and 30 days after period.
3. If you have a net income of 200,000 in Year 4 and there is still Important: This does not include dealers of securities. Only
no deduction, can NOLCO be applied? spectators who can manipulate sale of shares transactions by means of
washed sales.
Yes, to the extent of 200,000.
Example:
4. Can you still avail of NOLCO during Year 5? 2/20 Bought PLDT Shares 10/Sh x 10,000 100,000
3/20 Sold PLDT Shares 20/Sh x 5,000 100,000
4/19 Sold PLDT Shares 5/Sh x 5,000 25,000
No. NOLCO is allowed as a deduction only for the next 3 5/19 Bought PLDT Shares 10/Sh x 10,000 100,000
consecutive taxable years immediately following the year of such
loss. The remaining amount is forfeited.
You sold the shares on April 19, but you purchased again another set the preceding years shall be included as part of the gross income in
of shares on May 19. The 25,000 loss incurred on April 19 from wash the year of recovery to the extent of the income tax benefit of said
sales cannot be used to reduce your income at the time you sold it on deduction.
March 20. The wash sale would be based on April 19 and May 19 when
you sold the shares and purchased it back thereafter. Tax Benefit Rule
If you were benefited by the deductions made when you claim it as
Considering that the period is covered by the 61-day period, the bad debts, then you will be able to recognize it as income. If there is
25,000 loss cannot be used to reduce the income. As such, you will no benefit as you were already at a loss, you cannot claim recovery of
still be taxed based on the 50,000 income. bad debts later on.
That is wash sale and any loss from any wash sale transaction cannot Requisites for the deductibility of bad debts
be used as a deduction. People do this to make it appear that there is a. Arise from a valid and subsisting obligation
a transaction or activity pertaining to their shares. Actively traded b. Ascertained to be worthless
shares are more attractive to investors but in reality these are just c. Charged off and uncollectible within the taxable year
manipulated. Just take note of that prohibition because first and d. Uncollectible in the near future
foremost, wash sales are illegal. e. Arise from trade or business of profession of taxpayer
Q: You are engaged in the business of financing money for casinos. When the debtor files for the declaration of insolvency in court, and
You give money to whoever may be betting and the guy was able to after the rehabilitation, the liabilities still exceed the assets, then the
incur a loss of 1M. Can he claim the 1M peso loss as a deduction? debtor is considered insolvent and the account will be considered bad
debt.
A: Yes, but only if he has incurred wagering gains. How would this
happen? You must be regularly engaged in gambling. It is a requirement that moment you ascertain the worthlessness of a
debt on the same period you must claim it as bad debts. Otherwise,
you will lose the right to consider it as an allowable deduction. So, in
CASUALTY LOSSES
the year that you ascertained that the debt is uncollectible, make sure
that it is also claimed as bad debts.
CASUALTY LOSSES
Q: You have a bet with your friend on who will win the Binibining
The loss is caused by fortuitous event or force majeure. Pilipinas, and your bet won. Your bet amounted to 100,000, and who
ever loses would pay such amount. Now, you are demanding payment
Requisites for deductibility but X cannot pay you anymore. Can you claim that as bad debts?
a. Report to taxing authorities within 45 days from occurrence
of the loss A: No, because such debt is not born out of a valid and subsisting
b. Related to trade and business obligation and because such debt is not connected with my trade,
c. Evidenced by a closed and completed transaction (perfected business, or exercise of profession.
sale)
d. Actually sustained during the taxable year Q: What if your debtor dies, does that make your debt worthless?
e. Must not be compensated by insurance or other forms of
indemnity A: No, because you can charge the debt against the estate of the
deceased.
ABANDONMENT LOSSES
Near future
There is no hard and fast rule as long as it cannot be collected by next
ABANDONMENT LOSSES year, then it can be considered bad debts.
BAD DEBTS Depreciation is the gradual diminution of the useful value of the
property used in trade, business or profession of the taxpayer, arising
from wear and tear or natural obsolescence. The term is also applied
BAD DEBTS to amortization of the value of intangible assets, the use of which in
Bad debts actually ascertained to be worthless and charged off within trade or business is definitely limited in duration.
the taxable year except those not connected with profession, trade or
business and those sustained in a transaction entered into between There is a depreciation deduction a reasonable allowance for the
parties. The recovery of bad debts previously allowed as deduction in exhaustion, wear and tear of property used in the trade or business.
When you buy a property, that‘s really a cost in the first place, Cost – P1,000,000
however, the law cannot allow you to deduct it outright. That‘s why Useful Life – 10 years
you have to account for how long that property will be considered Salvage Value – P100,000
useful, because you will spread that cost during the period that it is
useful. After all, you will be able to use it during the time it is
considered useful, so here when you actually account for depreciation
you are just spreading the cost. It is a cost-spreading mechanism. It is
just apportioning the cost of your property throughout its life. TN: No Computation for Depreciation in the exams. This is just for you
to imagine the method or how it is done.
For example: If you bought machinery that is good for 10 years for
1,000,000 pesos, you won‘t be able to deduct that on the year you
DECLINING BALANCE METHOD
purchased it, after all that machinery can be used for the next 10
years. What we‘re doing here is to account for depreciation and try to
spread-out the cost throughout the useful life of the property. DECLINING BALANCE METHOD
Requisites for deductibility Under the declining balance method, a fixed or uniform rate is
a. Property must be used in trade, business or profession of the multiplied by the declining carrying amount of the asset in order to
taxpayer arrive at the annual depreciation.
b. There must be depreciable properties
c. Allowance for depreciation must be reasonable Formula:
d. Depreciation must be charged off during the taxable year
e. Statement of the allowance must be attached to the return
f. Method for computing the allowance for depreciation must
be in accordance with the method prescribed by the
Secretary of Finance upon the recommendation of the BIR
Commissioner
TN: It is actually the taxpayer who recommends to the CIR.
Example:
FACTORS OF DEPRECIATION Cost – P1,000,000
Useful Life – 10 years
Depreciable amount
Depreciable amount or cost is the cost of an asset or other amount
substituted for cost, less its residual value. Year 1:
STRAIGHT LINE
Year 3:
Year 4:
Example: A parcel of land has a total mineral ore deposit of
10,000,000. The asset used to extract the mineral ore deposit is
valued at 10,000,000. A total mineral ore of 789,000 was extracted
Year 5: during the year.
You begin with the highest until to the lowest until you reached the 5 th
year or the ratio of 1/15.
CHARITABLE & OTHER CONTRIBUTIONS
UNITS OF PRODUCTION METHOD
CHARITABLE AND OTHER CONTRIBUTIONS
UNITS OF PRODUCTION METHOD
This is the only deduction that does not have to be related to the tax
Under this method, depreciation per unit is computed by dividing the payer‘s trade, business, or exercise of profession. In the first place,
depreciable amount by the estimated useful life in terms of units of when you donate to charity it makes no qualification on what sort of
output. The depreciation rate per unit is then multiplied by the yearly trade, business, or exercise of profession the donor has. If it did, it
output to get the annual depreciation. The output or production would be difficult to donate to charitable institutions. However, the
method results in a charge based on the expected use or output. type of organization you are giving your donation and the purpose of
such donation would matter since it will affect the amount to be
Formula: recognized as a deduction.
Example: In a soft drinks company, after producing 10 Million Bottles, Requisites for Deductibility
the machine used will already be deemed fully depreciated. The value a. Contribution or gift must actually be paid
of machine is 10 Million Pesos. 2M bottles were produced. b. Must be given to organizations specified in the tax code
c. Net income of the institution must not inure to the benefit of
any private stockholder or individual
d. Must be made within the taxable year
e. Must be evidenced by adequate records or receipts
f. Must not exceed 10% in the case of individuals and 5% in
the case of a corporation, of the taxpayer‘s taxable income
(except where the donation is deductible in full) to be
DEPLETION determined without the benefit of the contribution.
Depletion is the exhaustion of natural resources like mines and oil and
gas as well as result of production or severance from such mines or DEDUCTIBLE IN FULL
wells. These are non-replaceable assets. This is applicable to wasting
asset entities 1. Recipient is:
Government of the Philippines or to any of its agencies or political D. Character building/youth and sports development
subdivisions, including fully-owned government corporations, E. Charitable
exclusively to finance, to provide for, or to be used in undertaking F. Social welfare
priority activities G. Religious
H. Rehabilitation of Veterans
For priority activities in: I. Social welfare institution
A. Science
B. Education If the conditions under those deductible in full is not complied with
C. Culture Subject to limitation:
D. Health a. Individual – 10% of taxable income from trade,
E. Economic Development business or profession before contribution or before the
F. Human Settlement deduction of the charitable contribution
G. Youth and Sports Development b. Corporation – 5% of taxable income from trade
business or profession before contribution or before the
2. Recipient is: deduction of the charitable contribution
An accredited non-government organization, organized/operated for
(purposes) How it is done?
A. Scientific In arriving with the taxable income, all deductions (EX-IN-TA-LO-BA-
B. Education RE-PEN-DEP-DEP) are allowed except the Charitable Contributions.
C. Cultural From the taxable income, you make the deductions multiplied
D. Character building/youth and sports development by10% or 5%. Choose whichever is lower between the computation
E. Charitable or the contribution.
F. Social welfare
G. Health
RESEARCH AND DEVELOPMENT
H. Research
The PSC must be spread out over a period of 10 years. Using the
PENSION TRUSTS
Corregidor method, divide the PSC by 10 years. From the year 2015
down to the year 2025, the deduction you can claim additional
PENSION TRUSTS deduction of 100,000 (1M/10years).
A pension trust is a trust fund established by the employer for the The amortization of the PSC will be added to the CSC. Hence, you can
retirement of the employees. claim a total deduction of 300,000 per year from 2015-2025.
This would refer to any reasonable amount transferred or paid in to In 2026, the amount that can be claimed as deduction will now only
such trust during the taxable year in excess of such contributions, but be P200,000 because the PSC has already been fully amortized.
only if such amount
PREMIUMS ON HEALTH & HOSPITALIZATION
1. Has not theretofore been allowed as a deduction, and
2. Is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment is PREMIUMS ON HEALTH AND HOSPITALIZATION
made.
The amount of premiums not to exceed P2, 400 per family or P200 a
Company usually sets up pension trust for their employees and it month paid during the taxable year.
usually accounts for the current services or particular years of service
that the employee has rendered. But then it is also possible that the Conditions:
employer has set up the pension trust years after the years you have A. That said nuclear family has a gross income of not more than
started the company or past services were already rendered. P250,000 for the taxable year
B. The taxpayer must be the person who availed of health or
Current Service Cost is the cost of the services rendered from the hospitalization benefit
time the pension trust is set up until its retirement.
Repealed
Past Service Cost is the cost of the services relating to those prior to This has already been repealed under the TRAIN Law. No one avails of
the setting up of the pension trust. it anyway since the requirements are too stringent for such a small
amount of benefit.
It would seem that it violates the matching principle if I‘m allowed to
deduct it this year when I set-up the trust, because after all the
CORPORATE INCOME TAX RATES
service were done prior to the setting up of the trust, but then again if
we look at the taxpayer, he actually incurs it and previously, he wasn‘t
allowed to deduct it as well. CORPORATE INCOME TAX RATES
Example: The tax base for domestic corporations is net income within and
Current Service Cost (CSC) – 200,000/year without. For resident foreign corporations, it is based on net income
Past Service Cost (PSC) – 1,000,000 within. For non-resident foreign corporations, it is based on gross
income within.
Pension Trust
OPTIONAL CORPORATE INCOME TAX
2015-2025 2026
Past Service Cost P 100,000 P - OPTIONAL CORPORATE INCOME TAX
(1M/10years)
Current Service Cost 200,000 200,000 Domestic corporations and resident foreign corporations have the
Total P 300,000 P 200,000 option to be taxed at 15% of gross income, provided certain
conditions are satisfied.
Conditions to be satisfied If MCIT is higher than the NCIT for the year, then the excess MCIT
1. Tax effort ratio of 20% of GNP cannot be credited but will continue to be carried over until the 3-year
2. Ratio of 40% of income tax collection to total tax revenues period expires.
3. VAT tax effort ratio of 4% of GNP
4. 0.9% ratio of the Consolidated Public Sector Financial Position The credit of the excess MCIT is based on the First-In First-Out
to GNP method such that the excess MCIT incurred first will also be the first to
be credited against the NCIT for the taxable year.
Not available to NRFC
This option is not available to Non-Resident Foreign Corporations EXCEPTIONS TO MCIT
because they are already subject to 30% tax based on Gross Income.
1. Proprietary Educational Institutions
The government will definitely not allow NRFC from availing of this a. 10% of net income – exempt from MCIT
option because all NRFC will just avail of this smaller rate instead of b. 30% of net income – not exempt from MCIT
the 30% Income Tax on their Gross Income.
2. Non-profit hospitals
Cost ratio does not exceed 55% a. 10% of net income – exempt from MCIT
The ratio of the firm‘s cost of sales to gross sales or receipts from all b. 30% of net income – not exempt from MCIT
sources must not exceed 55% in order to be taxed at 15%.
3. PEZA-registered entities
Irrevocable for 3 years a. 5% income from registered activities – exempt from MCIT
If the corporation incurs very high expenses on the succeeding years, b. 30% income from unregistered activities – not exempt
it may end up at a disadvantage for choosing this option because the from MCIT
expenses are not accounted for when it is taxed based on gross
income. 4. OBUs – exempt from MCIT whether taxed at 10% or tax
exempt
MINIMUM CORPORATE INCOME TAX
5. International Carriers – exempt from MCIT since it is taxed
at 2.5% of Gross Philippine Billings
MINIMUM CORPORATE INCOME TAX (MCIT)
TN: Corporations subject to special tax rates are exempt from MCIT.
A minimum corporate income tax rate of 2% of the gross income at
the end of the taxable year is imposed on a corporation beginning the Proprietary educational institutions & non-profit hospitals
4th taxable year immediately following the year in which such For domestic corporations, these include proprietary educational
corporation commenced its business operations. institutions and non-profit hospitals subject to the tax rate of 10% on
their net taxable income when the income derived from unrelated
The MCIT is paid when the minimum income tax is greater than the trade, business, or activity does not exceed 50% of the gross income.
NCIT of 30% of the net taxable income.
This is because MCIT can only be imposed if the corporation is subject
Purpose to the NCIT of 30% of net taxable income.
The purpose of the MCIT is to curtail the fraudulent mechanisms of
corporations done in order to avoid paying the right amount of taxes However, if the income of proprietary educational institutions and non-
due to the government. This is to discourage corporations from profit hospitals from unrelated trade, business, or activity exceeds
overstating their expenses since the MCIT is imposed on the gross 50% of the gross income, MCIT can now be applied since they will be
income where the expenses have not yet been deducted. subject to 30% tax on their net taxable income.
PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
Proprietary educational institutions and non-profit hospitals are subject
to a tax rate of 10% based on taxable income. CIR v. St. Luke‟s Medical Center
St. Luke‘s fails to meet the requirements under Section 30(E) and (G)
The general rule is that it is subject to a 10% tax if it complies with of the NIRC to be completely tax exempt from all its income. It is a
the predominance test with the unrelated activities as basis. corporation that is not ―operated exclusively‖ for charitable or social
Otherwise, it is subject to 30% tax. welfare purposes insofar as its revenues from paying patients are
concerned. However, an institution under Section 30(E) or (G) does
Predominance test not lose its tax exemption if it earns income from its for-profit
If the gross income from unrelated trade, business, or other activities activities. It remains a proprietary non-profit hospital as long as it does
exceeds 50% of the total gross income from all sources, then it is not distribute any of its profits to its members and such profits are
subject to the 30% of net income. reinvested pursuant to its corporate purposes. St. Luke‘s, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of
Otherwise, if the gross income from unrelated trade, business, or other 10% on its net income from its for-profit activities.
activities does not exceed 50%, then it is taxable at 10% of net
income. CIR v. De La Salle University
The tax exemption granted by the Constitution to non-stock, non-profit
Q: The University of Cebu earns rent income from unrelated activities educational institutions is conditioned only on the actual, direct and
at the amount of 1,000,000. Aside from that, it earns educational exclusive use of their assets, revenues and income for educational
income from tuition fees, sales of books and library fees amounting to purposes. Unlike the exemption that may be availed of by proprietary
1,000,000. How will this be subject to tax? educational institutions, it is not subject to limitations imposed by law.
Hence, the income and revenues of DLSU proven to have been used
Formula: actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
A: The tax rate will be 10% of the net taxable income. Since the Sec. 27 (C) of the NIRC
income from unrelated trade activities did not exceed 50% of the Government-owned or -Controlled Corporations, Agencies or
gross income, it passed the predominance test. Instrumentalities. — The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies, or
Q: If the income from unrelated activities is 2,000,000, how will it be instrumentalities owned or controlled by the Government, except the
taxed? Government Service Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (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
A: The tax will be at 30% of the net taxable income. It did not pass associations engaged in a similar business, industry, or activity.
the predominance test since the income from unrelated activities of
66.67% more than 50%.
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS,
AGENCIES OR INSTRUMENTALITIES
Important: Take note that this rule not only applies to proprietary
educational institutions but also to hospitals which are also non-profit.
General Rule:
Chong Hua, according to sir, is a non-profit hospital.
GOCCs, agencies or instrumentalities are taxed at 30% like any other
corporation.
Unrelated Trade, Business or other Activity
Conduct of trade, business or other activity is not substantially related
Exceptions:
to the exercise or performance of the primary purpose or function.
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
Lung Center v. Quezon City
3. Philippine Health Insurance Corporation (PHIC)
As a general principle, a charitable institution does not lose its
4. National Power Corporation (NAPOCOR)
character as such and its exemption from taxes simply because it
5. Local Water Districts (RMC 28-2010, RA 10026)
derives income from paying patients, so long as the money received is
6. Cooperatives (RA 6938) with conditions
devoted to charitable objects and no money inures to the private
7. Foundations created for scientific advancement (RA 2067)
benefit of the persons managing or operating the institution. As well as
the reason of donation in the form of subsidies granted by the
PAGCOR
government.
Philippine Amusement and Gaming Corporation (PAGCOR) is exempt
from taxes for income related to gaming operations as provided for in
The petitioner failed to prove that the entirety of its real property is
its charter. If it earns income from other sources then such would be
actually, directly and exclusively used for charitable purposes. While
subject to 30% tax because this is the tax for other gaming
portions of the hospital are used for the treatment of patients and the
corporations. PAGCOR was previously part of the exemptions provided
dispensation of medical services to them, whether paying or non-
in the tax code but it was recently changed by an act of congress and
paying, other portions thereof are being leased to private individuals
the extent of their exemption was clarified by the SC in a recent case.
for their clinics and a canteen.
PCSO
Hence, the portions of the land leased to private entities as well as
Philippine Charity Sweepstakes Office (PCSO) was removed from the
those parts of the hospital leased to private individuals are not exempt
exemptions under the tax code. It is no longer exempt from corporate
from such taxes. On the other hand, the portions of the land occupied
income tax under the TRAIN law.
Subsidiary
SPECIAL NONRESIDENT FOREIGN CORPORATIONS
A subsidiary is a corporation set-up here in the Philippines. It is a
domestic corporation where the shares are owned by a foreign
NONRESIDENT CINEMATOGRAPHIC FILM OWNERS, ETC.
corporation and it is a separate entity. A branch is an extension of the
home office abroad and it is not a separate entity.
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR
When a corporation is a stockholder of a corporation, the subsidiary DISTRIBUTOR
will distribute income to its principal through dividends and not
remittance. It is taxed at 30% or at 15% depending on the A cinematographic film owner, lessor, or distributor shall pay a tax of
applicability of the tax sparing rule. It is as if it is a domestic 25% of its gross income from all sources within the Philippines.
corporation distributes income through dividends to a non-resident
foreign corporation. Example: You want to watch Batman vs Superman. The owner of the
film will have to lease it to someone here in the Philippines, but they
Tax sparing rule need not be considered as resident foreign corporations. DC is the
The domestic corporation giving out dividends to the NRFC, the latter owner of that film and it is shown in the Philippines, so they allowed
may be subject to tax because it is the one earning income. It is taxed cinemas in the Philippines to show it. They can be considered as non-
either at 15% or 30%. A rate of 15% will be applied if there is resident cinematographic film owner, lessor or distributor and so they
reciprocity in the sense that the foreign country where the NRFC is can subject to the 25% tax based on their gross income.
domiciled allowed the same credit or more favorable to Filipino
corporations. This concept is similar to personal exemptions granted to TN: The income is not the sale of the tickets, because the ticket sales
NRA NETB under the reciprocity rule for individuals. belong to the cinemas. The film owner will only get a portion of the
income earned by the cinemas.
If the country of NRFC allows credit to Filipino corporations, then 15%
rate is allowed. This is computed by deducting the amount spared of NONRESIDENT OWNER OR LESSOR OF VESSELS
15% from the regular tax rate of 30% which will result to 15%.
If you have a subsidiary distributing income to principal, the rate is NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED
15% or 30%. When would you advice your client that it is better set- BY PHILIPPINE NATIONALS OR CORPORATIONS
up a branch here in the Philippines rather than a subsidiary?
A non-resident owner or lessor of vessels shall be subject to a tax of
First, ask about the country of the NRFC and check if there is 4 1/2% of gross rentals, lease or charter fees from leases or charters
reciprocity. If it is the US and there is reciprocity, then you can advise to Filipino citizens or corporations, as approved by the Maritime
that they can set-up either a subsidiary or a branch. In actual practice, Industry Authority.
you will realize that it is better to set-up a subsidiary than a branch
because the requirements for the latter are difficult to comply with. However, Maritime Industry Authority does not allow non-resident
foreign corporations to own vessels in the Philippines.
Otherwise, if there is no reciprocity, then it would be better to set-up a
branch where the tax is at 15%. NONRESIDENT OWNER OR LESSOR OF AIRCRAFTS, ETC
IMPROPERLY ACCUMULATED EARNINGS TAX The balance sheet, located in the financial statement, tells us the
financial position of the company, indicating its assets, liabilities and
Improperly accumulated earnings tax (IAET) is a penalty tax imposed the capital contributed by the owners.
on corporations for permitting its earnings to accumulate instead of
being distributed for the purpose of avoiding income tax on its In the portion for stockholders‘ equity, you will see paid-up capital and
shareholders or members. It is a penalty imposed to discourage retained earnings. To be technical about it, your paid-up capital will
accumulation of income beyond the reasonable needs of the business. have several components: common shares, preference shares
depending on the type of shares issued by the corporation.
This is a penalty to corporation if it fails to declare dividends to
shareholders. It is not automatic for a corporation to be subject to The retained earnings accounts for the total income that the company
IAET if it doesn‘t declare dividends. had for the past years of operation. All incomes from past to present
will be accumulated, that is why it is termed retained earnings,
We use the immediacy test and look at the purpose for the non- meaning it is held by the company and not distributed.
declaration.
In applying IAET, earnings found in the Retained Earnings account will
Standard for knowing whether it is beyond reasonable means be compared with the paid-up capital. Ordinarily, it is equivalent to the
There will be no IAET imposed if the company is holding earnings par values of the shares of stock. A par value is an assigned value of
within reasonable means of business. Compare the par-value (the paid the shares which are determined by the incorporators, as stated in the
up capital of the company) with the earnings also known as retained articles of incorporation of the corporation. These articles are like the
earnings. birth certificate of the corporation.
In sum, when RE is in excess of paid-up capital, this is only prima facie 5. Resident foreign corporation registered as branches because
evidence for application of IAET. Corporations may not be subject to it has no capital of its own in the Philippines.
this tax if they can prove the three conditions previously mentioned.
6. Publicly held corporations
TRUST FUND DOCTRINE
7. International Carriers because they are taxed at 2.5% based
on Gross Philippine Billings
TRUST FUND DOCTRINE
8. Non-stock non-profit educational institutions if income from
Corporate assets are held as a trust fund for the benefit of unrelated activities is 50% or less of the total gross income
shareholders and creditors and the corporate officers have a fiduciary using the predominance test
duty to deal with them properly. The subscribed capital stock of the
corporation is a trust fund for the payment of debts of the corporation Tax on partnership
which the creditors have the right to look up to satisfy their credits. A and B trading partnership has the following income:
The creditors can use it to reduce the debts, unless it has passed into
the hands of a bona fide purchaser without notice. Gross Sales 1,000,000
Cost of Sales 500,000
This is the reason for the comparison of the paid-up and retained Gross Income 500,000
earnings. Creditors can go up to the paid-up capital. The corporations Expenses 200,000
are only required to maintain the paid up capital for the protection of Taxable Income 300,000
the creditors and capital/ investment cannot be withdrawn. This is the Tax rate 30%
trust fund doctrine which provides that you cannot diminish your paid- Taxable Due and Payable 90,000
up capital. Net Income after tax 210,000
This is because of the constructive Receipt Doctrine where A general professional is not subject to tax so there is no tax due and
partners received income constructively. There is no retained
payable for this type of partnership. When it is distributed to partners
earnings and paid up capital in a partnership, there is only
A and B, it will still follow constructive receipt doctrine. It will be
partners interest hence this cannot be compared to RE. distributed by dividing 300,000 equally. Each partner receives 150,000
and this amount will be treated as an ordinary income of an individual
2. Bank and non-bank financial institutions – this is the partner‘s distributive share in a general professional
partnership. This will then be subject to the dumping ground
3. Insurance companies computation of 0-35%.
4. PEZA registered companies because they are subject to 5% Take note of the difference between the two types of partnerships and
tax on gross income
how they are taxed.
Provided, however, that for corporations using the calendar year basis, Gross Sales P8,000,000
the accumulated earnings tax shall not apply on improperly Sales Returns and Allowances 200,000
accumulated income as of December 31, 1997. In the case of Sales Discounts 300,000
corporations adopting the fiscal year accounting period, the improperly Cost of Goods Sold 2,500,000
accumulated income not subject to this tax, shall be reckoned, as of Business Expenses 500,000
the end of the month comprising the twelve (12)-month period of Dividends from Domestic Corp 35,000
fiscal year 1997-1998 Interest Income:
Interest Income from Long-term Investments
Rate: IAET is 10% of improperly accumulated earnings. (More than 5 years) 10,000
Philippine Currency Deposit 15,000
This is a penalty tax so the government wants to tax you for all of your Capital Gains on Sale of Land held for 12 years
income. You add back NOLCO because it is supposed to be only a (Selling price is P6,000,000) 200,000
reprieve given by the government before because you incurred losses. Capital Gains on Sale of Shares directly to buyer 200,000
However, this NOLCO was actually deducted when you computed for Dividends paid and constructively paid 300,000
your taxable income.
The equity section of Very Easy Inc.‘s current statement of financial
Taxable income: Items of Gross income less allowable deductions position reflects the following:
Income tax actually paid: Tax imposed for taxable and passive First, we will compute the taxable income.
income; if you paid MCIT, you will use this in the computation
Taxable Income
Important: This is sir‘s favorite tax because it will show sir if we
understand corporate taxation because a lot of things must be Gross Sales P 8,000,000
considered. It is, according to sir, a very comprehensive tax. Less: Sales Returns and Allowances (200,000)
Sales Discounts (300,000)
IAET Net Sales P 7,500,000
Less: Cost of Goods Sold (2,500,000)
Taxable income P xxx Gross Income P 5,000,000
Add: Less: Business Expenses (500,000)
Income exempt from tax xxx Net Income 4,500,000
Income excluded from gross income xxx Add: Capital Gain on Sale of Land 200,000
Income subject to final tax xxx Less: NOLCO (100,000*40%) (40,000)
NOLCO xxx Taxable Income P 4,660,000
Less:
Dividends actually or constructively paid (xxx) MCIT
Income tax actually paid (xxx) Take note that Very Easy Inc. has been operating for a decade, so it
can already avail of NOLCO. Moreover, 60% had already been applied,
Improperly accumulated taxable income P xxx
so Gross
for theIncome
current year, only the remaining 40% will beP deducted.
5,000,000
Multiplied by the tax rate 10%
Multiplied by the Tax Rate 2%
Improperly accumulated earnings tax P xxx
Tax Due
Second, we and Payable the tax due and payable. ItPis based
will compute 100,000
on the
NCIT of 30% since Very Easy, Inc. is a resident foreign corporation.
Paid-up capital IAET
This is the par value of the share stated in the articles of incorporation. NCIT
For IAET, you only account for the par value. The excess of the paid Taxable income P 4,660,000
up capital is called the share premium which are all found in the Add:
Taxable Income P 4,660,000
financial statement. In the exam, sir will tell us the amount of paid-up Income exempt
Multiplied by thefrom tax:
Tax Rate 30%
capital and there is no need for us to compute. Dividend Income 35,000
Tax Due and Payable P 1,398,000
Interest income on long-term investment 10,000
Income excluded from gross income -
Income subject to final
UNIVERSITY OF SANtax:CARLOS COLLEGE OF LAW 108 | P a g e
Interest Income from Phil. Currency deposit 15,000
Capital Gains on sale of shares 200,000
NOLCO 40,000
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
MCIT
Sec. 30 of the NIRC
Exemptions from Tax on Corporations. — The following organizations
Gross Income P 5,000,000 shall not be taxed under this Title in respect to income received by
Multiplied by the Tax Rate 2% them as such:
Tax Due and Payable P 100,000
(A) Labor, agricultural or horticultural organization not organized
Since MCIT of P100,000 is lower than the NCIT of P1,398,000, the tax principally for profit;
due will be based on the NCIT.
(B) Mutual savings bank not having a capital stock represented by
Third, we will look for indications of improperly accumulated earnings. shares, and cooperative bank without capital stock organized
At this point, we will compare the retained earnings not appropriated and operated for mutual purposes and without profit;
for reasonable needs of the business with the paid-up capital.
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
Compare RE with Paid-up Capital organization operating under the lodge system, or a mutual aid
association or a nonstock corporation organized by employees
RE – unappropriated P 1,600,000 providing for the payment of life, sickness, accident, or other
Paid-up capital 1,000,000 benefits exclusively to the members of such society, order, or
Difference P 600,000 association, or nonstock corporation or their dependents
Therefore, Very Easy, Inc. will pay IAET of P322,900 on its improperly Generally, corporations under this title shall not be taxed because they
accumulated earnings. are not intended for profit. If ever they earn income it is simply used
to realize their purpose or perpetrate whatever is their occupation.
In addition, Very Easy, Inc. will pay NCIT of P1,398,000 on its net
income for the year, as well as final taxes of P3,000 for the interest Even if the Tax Code provides that these are exempted from taxes,
income on its Philippine Currency deposit and P30,000 for the capital there are instances when these corporations can be subjected to tax:
gains on the sale of shares directly to the buyer.
1. Earned income of whatever kind and character by using their ACCOUNTING PERIOD
property, real or personal.
Ex. use cemetery as a venue for a concert General taxable period of taxpayers is 12 months (year) that is why it
is called a taxable year.
2. Income from activities conducted for profit.
Calendar Year
Example: Fraternal Organizations registered under the BIR for A calendar year is an accounting period of 12 months ending on the
them to be subject to tax, they should be earning income. They last day of December.
sell reviewer, the proceeds for that will be taxed.
It is from January 1 to December 31.
Common denominator among all of them is that they‘re not intended
for profit, usually for the benefit of their members only or to help Fiscal Year
government extend services to the people as in the case of educational A fiscal year is an accounting period of 12 months ending on the last
institutions. day of any month other than December.
Even if non-stock, non-profit educational institutions are not included For example, the period is from May 1 to April 30 of the following year.
or expressly mentioned in the tax code, they are still exempt because
they are exempt under the 1987 Constitution. Accounting period
Individuals can only choose calendar year and there are no exceptions
Moreover, Article XIV, Section 4 of the Constitution provides that: ―All here. Corporations can choose either fiscal or calendar year.
revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational We use calendar or fiscal year because income tax is based on your
purposes shall be exempt from taxes and duties. Upon the yearly profits. You need to know your 12-month period to know if it
dissolution or cessation of the corporate existence of such institutions, falls in the yearly profit of the taxpayer.
their assets shall be disposed of in the manner provided by law.‖
Deductions
Non-stock, non-profit educational institutions are not subject to tax or Deductions incurred during the taxable year or the 12-month period
costumes duties for all revenues including real property tax for as long may be deducted for the income during the year. If it is an individual
as the income are actually, directly or exclusively used for educational taxpayer, it must be from those made during the January 1 to
purposes. So, even if they are not listed in the tax code, they will still December 31. Corporations may choose any 12-month period.
be exempted because of the provision in the constitution.
CHANGE OF ACCOUNTING PERIOD
Q: There is a cemetery corporation and a concert organizer asks that
the cemetery be the venue for a concert, paying 1M for the use of the
property. The cemetery will use the proceeds for maintenance. Will Sec. 47 of the NIRC
this be taxable as income of the cemetery corporation? Final or Adjustment Returns for a Period of Less than Twelve (12)
Months. —
A: Yes, as provided in the last paragraph of Sec 30 of the Tax Code
that income of whatever kind and character of the foregoing (1) Returns for Short Period Resulting from Change of
organizations from any of their properties, real or personal, even if not Accounting Period. — If a taxpayer, other than an
for profit, may still be subject to tax. individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to
This is income from the use of property, regardless of disposition of calendar year, a separate final or adjustment return shall be
income, is subject to tax. made for the period between the close of the last fiscal year
for which return was made and the following December 31.
If the cemetery corporation itself is organizing the concert and then it If the change is from calendar year to fiscal year, a separate
sells tickets for the concert, this will be subject to tax even if it will be final or adjustment return shall be made for the period
for the building of the chapel in the cemetery. Regardless of the between the close of the last calendar year for which return
disposition of the income, it is still subject to tax. was made and the date designated as the close of the fiscal
year. If the change is from one fiscal year to another fiscal
While they are exempted from taxes, if they earn income from use of year, a separate final or adjustment return shall be made for
property or from any activity for profit, regardless of the disposition of the period between the close of the former fiscal year and
the income, it will be subject to tax. the date designated as the close of the new fiscal year.
If you want to change your accounting period from one fiscal year, for You account for income the moment there is a right to earn that
example, ending on May 31 to another fiscal year ending on November income and you claim deductions when there is an obligation to pay,
31, then the short period return will cover the period from May 31 to regardless of whether there is cash received or dispensed. This follows
November 31. the rule on constructive receipt.
Mixed/Hybrid
CORPORATE INCOME TAX RETURNS
Combination of the cash and accrual method
every year that will be evidenced by the certificates of engineers or Percentage of Completion: (as provided)
architects. The reportable income is calculated by deducting from the 1st year: 30%
contract price the actual cost of construction. 2nd year: 30%
3rd year: 20%
For taxation purposes, the Percentage of Completion Method is used. 4th year: 20%
Duration of Contract: 4 Years
PERCENTAGE OF COMPLETION METHOD
3rd Step: Determine Income per year
The gross income is reported gradually based on the accomplished We already determined the total income. That is 20 for the whole
percentage of construction. The burden of paying tax is spread over contract. Lastly, we need to know what is the income received by the
the term of the contract. Contractor per year. In most cases, the income would just be
proportional to the work done per year. That means, for example,
Illustration: 30% of work done in the 1st year, means 30% of the total income is
given or earned by the contractor for that year. In other words, for the
Percentage of Completion Method
1st year, 30% of 20M is 6M. The contractor earned 6M income for that
Long-term Construction Contract year. If you add everything diba? This is still 20M? This is just broken
down according to work done per year.
2017 2018
Contract Price P 50,00,000 P 50,00,000 Income per year = Percentage of work Done for that particular year x
Cost of Construction (30,000,000) (30,000,000) Income
Gross Income P 20,000,000 P 20,000,000
Multiply by Payment Received by Contractor:
Percentage of Completion 30% 30% 1st year: 30%work done so income earned is 30% of 20M = 6M
Gross Income to Date P 6,000,000 P 6,000,000 2nd year: 30% work done so income earned is 30% of 20M = 6M
Multiply by Tax Rate 30% 30% 3RD year: 20% work done so income earned is 20% of 20M = 4M
Tax Due P 1,800,000 P 1,800,000 4th year: 20% work done so income is earned 20% of 20M = 4M
2019
2019 2020
2020 4th Step: Determine Tax on Income per Year
Contract
Contract Price
Price P
P 50,00,000
50,00,000 P
P 50,00,000
50,00,000 What‘s left to do is to tax the income per year. Multiply the income per
Cost of
Cost of Construction
Construction (30,000,000)
(30,000,000) (30,000,000)
(30,000,000) year by 30% (Corporate Income Tax Rate). For example the income of
Gross Profit P 20,000,000 P 20,000,000 1st year is 6M, 30% of 6M is 1.8M. This is the tax per year. Assuming
Multiply by
Multiply by there are no other expenses to be deducted from taxable income. The
Percentage
Percentage ofof Completion
Completion 20%
20% 20%
20% income tax per year will total 6M, which is actually 30% of your total
Gross Income
Gross Income toto date
date P
P 4,000,000
4,000,000 P
P 4,000,000
4,000,000 income of 20M. We just broke it down according to percentage of
Multiply by Tax Rate 30% 30% work, so that the tax can be paid by installments using Percentage of
Tax Due
Due P 1,200,000 P 1,200,000 Completion Method
Tax P 1,200,000 P 1,200,000
st
1 step: Determine Income Tax for year = Corporate income tax rate X income per year
First we must determine the Contract Price and the cost of
construction to determine the income. These are stated in the long 1st Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 1 st year)
term contract, and these figures represent the whole contract price 2nd Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 2 nd year)
and the whole cost of construction, not just per year. Then let‘s 3rd Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 3 rd year)
subtract Total Contract Price and Cost of Construction, to get the 4th Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 4 th year)
income. Then let‘s assume that this is the only income that the
contractor gets. The income is 20 Million for the whole undertaking. Understand this principle, because basically, you are just paying the
tax in proportion to the income that you have received for that year.
Total Contract Price (TCP) – Cost of Construction (CoC) = Income There is no difference in the total tax that you actually have to pay for
the whole transaction. You just broke it down. You did not yet receive
Total Contract Price: 50 Million the full payment for the year so why pay tax for the whole thing in
Cost of Construction: 30 Million that same year? The provision gives you this option. If you understand
TCP – CoC = Income = 20 Million this, that it can be applicable to Transactions on Installment basis of
sales of Dealers and even to casual sales of real and personal property
2nd Step: Determine Percentage of Completion with just some minor differences and qualifications peculiar to each
The next step would be to determine the percentage of completion. provision. Just change the income per year to installments paid.
(Sir did not mention this directly, but he also deemed the duration of
the contract as one of the important factors to note). (Retention amount in contracts of construction discussion omitted
since deemed not relevant)
What we need to determine is the percent of completion for that year
only. In other words, how much work was done for that year. So, for Anyway as lawyers, you will only be asked what to use on long term
the first year how much work was done? Let‘s just say 30 percent. Contracts. And your answer should be Percentage of Completion Basis.
How about the second year? What was the work done? Let‘s just say
another 30 %. The Percentages of completion are given in this To get the tax due per year, multiply the percentage of completion per
problem. year to the total contract price then multiply it by the gross profit rate
and finally multiply it by the tax rate.
This is the percent of work done per year in relation to the building
(100%). This data means that for example, in the 1 st year, 30% of the In short: Tax Due = Percentage of Completion x Total Contract Price x
building was constructed. Subsequently, another 30% of the building Gross Profit Rate x Tax Rate
was done on the 2nd year. Hence by the 2 nd year, a total of 60% of
the building has already been constructed. Apply by analogy to the Contract Price P 50,000,000 100%
rest of the years in the example. Therefore, after four years, the total Less: Costs (30,000,000) (60%)
would then be 100% percentage of work, meaning, the building would Gross Profit P 20,000,000 40% Gross Profit Rate
be done in 4 years.
Cumulative Current Gross GP Current Tax Tax SALES OF REALTY & CASUAL SALES OF PERSONAL PROPERTY
POC POC Profit Rate GP Rate Due
2017 30% - 15M 40% 6M 30% 1.8M This provision covers:
2018 60% 30% 15M 40% 6M 30% 1.8M 1. A casual sale (meaning you don‘t regularly sell real property)
2019 80% 20% 10M 40% 4M 30% 1.2M or other casual disposition of personal property (not included
2020 100% 20% 10M 40% 4M 30% 1.2M in the inventory) for a price exceeding P1,000 or
20M 6M 2. A sale or other disposition of real property
Provided that the initial payments of either case do not exceed 25%
SALES OF DEALERS IN PERSONAL PROPERTY of the selling price
Selling Price = 1M
Sec. 49 (B) of the NIRC
Down Payment = 10% of selling Price = 100k
In the case (1) of a casual sale or other casual disposition of personal
Installments = 10% of selling Price = 100k
property (other than property of a kind which would properly be Cost = 500K
included in the inventory of the taxpayer if on hand at the close of the
taxable year), for a price exceeding One thousand pesos (PhP1,000),
Selling Price – Cost = Total Income
or (2) of a sale or other disposition of real property, if in either case
1M – 500k = 500K
the initial payments do not exceed twenty-five percent (25%) of the
selling price, the income may, under the rules and regulations
2nd step: Determine Percentage of Installments Paid per year
prescribed by the Secretary of Finance, upon recommendation of the
This is similar to percentage of work done in long term contracts.
Commissioner, be returned on the basis and in the manner above
prescribed in this Section. As used in this Section, the term 'initial
Now we determine the percentage of installments paid within each
payments' means the payments received in cash or property other
year. Why do we do this? Because again, we only pay tax in proportion
than evidences of indebtedness of the purchaser during the taxable
to the income that we receive for that year. The amount in peso of the
period in which the sale or other disposition is made.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 113 | P a g e
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
installment received does not really matter in this problem since the SALES OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET
percentages are already given in the contract.
Illustration: Real Property is sold for 1Million as Selling Price. There is a
However, if the percentages of Down Payments and Installments are stipulation that it shall be paid in 20% installment per year, for 5
not given in the problem and what instead is given is the amount of years.
payment in peso (highly unlikely), just convert that to percentage. Cost = 500k
Amount of payments in the year in peso received divided by Total Zonal Value = 500k
Selling price. That‘s the percentage. Assessed Value = 700k
For the first year, we already know that we take into account the Steps:
Down payment and the 1st installment. So that means we actually We determine if the provisions are applicable. 20% is the initial
received 20% of the total selling price for that year. For the rest of the payment. Which means that installment basis for paying tax is
years, there is payment of 10%. So basically, we receive 100k for the applicable because it less than or equal to 25%. If the given in
succeeding years after the year of sale. This is the case since there is the problem is amount in Peso of the initial payment, compute for
nothing in the problem that states that there are other payments made the percentage by following the prior example in sale of personal
within the 2nd year, 3rd year, etc. property.
1st year: 10% +10% = 20% Most importantly in this case, we do not anymore subtract the
2nd year: 10% Cost from the Selling Price because Taxable Income in this case is
3rd year: 10% not based on Income/Gross Profit. What is applicable here is
4th year: 10% Capital Gains Tax, which is 6% of the Zonal Value, Assessed
And so on and so forth until the 9th year Value, or Gross Selling Price, whichever is higher.
3rd Step: Determine Taxable Income per year We determine the total CG tax to be paid which is 6% of Gross
So now, we determine the income you have received each year, in selling price, because in this case, it is the highest.
relation to the total income. For example, if we get 10% of the total 6% of 1M = 60k
selling price through installment, it also follows that we earn 10% of
the income. Because for 1M income, we get 500k profit. In other Multiply the installment paid in percentage to the Total CGT. The
words, we ask the question again, how much of the total income have result would be the CGT payable for the year. In this case, All
you received in that particular year? We multiply the percentage of the installments are 20%, so you just multiply 20% to Total CGT, in
installment we received by the total income, which is 500k in this case. this case 60,000, and you will arrive at the CGT payable for the
This is like multiplying the percentage of the amount of work done, to year. It‘s just like dividing the Total CGT by 5 equal installments.
the total income in long term contracts. In this case, 12k is the tax payable for each year since all are
equal 20% installments.
Hence, for the 1st year, we received 100k as income from the 200k 20% (60k) = 12k Tax payable for each of the 5 years
initial payments paid. On the 2nd year, we have 50k income, for the
100k installment. If you add all these, this is still 500k total income. What if the installments are not uniform or equal per year? First
get the percentage of the payments in relation to the Gross
1st year: 20% of 500k = 100k selling Price, then multiply it to the Total CGT. You will then arrive
2nd year: 10% of 500k = 50k at the CGT payable for that year. For example, given these
3rd year: 10% of 500k = 50k additional stipulations in the contract, solve for the CGT per year.
4th year: 10% of 500k = 50k
5th year: 10% of 500k = 50k 1st installment: 100k
6th year: 10% of 500k = 50k 2nd installment: 200k
7th year: 10% of 500k = 50k 3rd installment: 250k
8th year: 10% of 500k = 50k 4th installment: 250k
9th year: 10% of 500k = 50k 5th installment: 200k
Tax on income per year = Taxable Income Per Year x Tax Rate
1st year: 100k (30%) = 30k tax due on the first year
2nd – 9th year: 50k (30%) = 15k tax due on the 2nd year
As a general rule Capital Gains are taxable and Losses are allowed as
deductions. But there are losses not allowed as deductions and there
are gains not subject to tax.
Take note that in a merger or consolidation there is always a Merger The total is 51 shares which is 51% of 100 total shares of
or Consolidation Plan. Corporation X. If just one person accounts for 51%, then it is
tax exempt.
Illustration:
X and Y merged and Y is the surviving Corporation. X happens to own 2. If we need to account for more than five people in order to
a parcel of land worth 1M pesos which it will transfer to Y because of reach 51% shares. Then the transfers are still subject to
the merger. Y owns shares of stock which are not newly issued, which capital gains tax.
it will give to the shareholders of X.
Example:
Normally, the transfer of real property is subject to 6% Capital gains a. A1 has 5 shares
tax and the transfer of shares would be subject to 15% capital gains b. A6 has 5 shares
tax but these transactions are not subject to capital gains tax under c. A3 has 10 shares
these situations. d. A7 has 5 shares
e. A5 has 5 shares