Tax Quizzler

COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
TAX QUIZZLER
INCOME TAXATION
INSTRUCTIONS
This Tax Quizzler covers the study of the law on Income Taxation which
includes:
1. Title II of the National Internal Revenue Code (NIRC)
2. Statutes related or amending the NIRC
3. Related Revenue Regulations, BIR Rulings and other
administrative issuances
4. Cases decided by the Supreme Court
Study the Quizzler alongside the Tax Digests for Income Taxation. As a
complement to this reviewer, use any book containing the complete
codal provisions of the NIRC (either the green codal from Rex Bookstore
or the NIRC annotated codal by Casasola and Bernaldo. As for reference
books, use Income Taxation by Mamalateo or Tax Law and Jurisprudence
by Vitug and Acosta.
INCOME TAX
Q: What is an Income Tax?
A: Income Tax has been defined as a tax on all yearly profits arising from
property, professions, trades or offices, or as a tax on a persons income,
emoluments, profits and the like.
fund or property existing at one distinct point in time while income

denotes a flow of wealth during a definite period of time. Income is gain
derived and severed from capital. (see CHAMBER OF REAL ESTATE AND
BUILDERS ASSOCIATION, INC. V. ROMULO)
Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is
called capital. A flow of services rendered by that capital by the payment
of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an income.
Capital is wealth, while income is the service of wealth. A tax on income
is not a tax on property. "Income," as here used, can be defined as
"profits or gains." (see MADRIGAL VS. RAFFERTY)
Illustration
Q: Are stock dividends income or capital?
A: Stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. Mere issuance thereof is not yet
subject to income tax as they are nothing but an enrichment through
increase in value of capital investment. Such are considered unrealized
gain and cannot be subjected to income tax until that gain has been
realized
As held in REPUBLIC OF THE PHILIPPINES VS. MANILA ELECTRIC COMPANY, Income

tax is imposed on an individual or entity as a form of excise tax or a tax
on the privilege of earning income. In exchange for the protection
extended by the State to the taxpayer, the government collects taxes as
a source of revenue to finance its activities. Hence, income should not be
included in the computation of operating expenses of a public utility as
they are not reasonably incurred in connection with business operations
to yield revenue or income.
Q: When can stock dividends be considered income?
An income tax is a national tax imposed on the net or the gross income
realized in a taxable year. It is subject to withholding. A percentage tax is
a national tax measured by a certain percentage of the gross selling price
or gross value in money of goods sold, bartered or imported or of the
gross receipts or earnings derived by any person engaged in the sale of
services. Unlike income tax, it is not subject to withholding. (see CIR VS.
SOLIDBANK CORPORATION)
The redemption converts into money the stock dividends which become
a realized profit or gain and consequently, the stockholder's separate
property. Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence
of any business purpose for the redemption. (see CIR VS. CA)
Q: When is income taxable?

A: Income, gain or profit is subject to income tax when the following
conditions are present:
1. There is income, gain or profit
2. The income, gain or profit is received or realized during the
taxable year; and
3. The income, gain or profit is not exempt from income tax.
(see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO
and COMMISSIONER OF INTERNAL REVENUE VS. COURT OF APPEALS)
Q: What is the difference between income and capital?

A: Income is distinct from capital. Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a
1 | P I E R R E M A R T I N D L R E Y E S 2C
A: Stock dividends which represent transfer of surplus to capital account

is not subject to income tax as a general rule. But if a corporation
redeems stock issued so as to make a distribution, this is essentially
equivalent to the distribution of a taxable dividend the amount so
distributed in the redemption considered as taxable income. (see
COMMISSIONER VS. MANNING)
KINDS OF INCOME TAX SYSTEMS

Q: What are the different income tax systems adopted by the
Philippines?
A: The types of income tax systems adopted are as follows:
1. Global Tax System where the taxpayer is required to lump
up all items of income earned during a taxable period and pay
under a single set of income tax rates on these different items
of income.
2. Schedular Tax System where there are different tax
treatments of different types of income so that a separate tax
return is required to be filed for each type of income and the
tax is computed on a per return or per schedule basis.
3. Semi-Schedular or Semi-Global Tax System where the tax
system is either (a) global (e.g. taxpayer with compensation
income not subject to final withholding tax or business or
COURSE: TAXATION I
PROFESSOR: GRUBA
professional income or mixed income compensation and

business or professional income) or (b) schedular (e.g.
taxpayer with compensation, capital gains, passive income, or
other income subject to final withholding tax) or (c) both
global and schedular may be applied depending on the
nature of the income realized by the taxpayer during the year.
Q: How do you distinguish schedular treatment from global

treatment as used in income taxation?
A: Under the schedular tax system, the various types of income (i.e.
compensation; business/professional income) are classified accordingly
and are accorded different tax treatments, in accordance with
schedules characterized by graduated tax rates. Since these types of
income are treated separately, the allowable deductions shall likewise
vary for each type of income.
On the other hand, under the global tax system, all income received by
the taxpayer are grouped together, without any distinction as to type or
nature of the income, and after deducting therefrom expenses and
other allowable deductions, are subjected to tax at a graduated or fixed
rate (see TAN VS. DEL ROSARIO)
Q: To which system does the method of taxation under the

NIRC belong?
A: The current method of taxation under the NIRC belongs to semischedular and semi-global tax system.
PHILIPPINE INCOME TAX LAW

Q: Where is the Philippine Income Tax Law embodied?
A: It is embodied in Title II (Tax on Income) of the National Internal
Revenue Code (NIRC) as well as in numerous (a) revenue regulations
and (b) BIR rulings and other administrative issuances (e.g. Revenue
Memorandum Circulars or RMCs).
3.
tax only from his income from Philippine sources but is taxexempt from foreign-source income
Source of income principle An alien is subject to Philippine
income tax because he derives income from sources within
the Philippines. Thus, a non-resident alien or non-resident
foreign corporation is liable to pay Philippine income tax on
income from sources within the Philippines.
Q: What are the types of Philippine Income Tax?

A: The types of Income tax under Title II of the NIRC are:
1. Graduated income tax on individuals
2. Normal corporate income tax on corporations
3. Minimum corporate income tax on corporations
4. Special income tax on certain corporations (e.g. private
educational institutions, FCDUs, and international carriers)
5. Capital gains tax on sale or exchange of unlisted shares of
stock of a domestic corporation classified as a capital asset
6. Capital gains tax on sale or exchange of real property located
in the Philippines and classified as a capital asset
7. Final withholding tax on certain passive investment incomes
8. Fringe benefit tax
9. Branch profit remittance tax; and
10. Tax on improperly accumulated earnings.
DEFINITION OF TERMS (SECTION 22, NIRC)

NOTE: It is advisable that you memorize or at the very least familiarize
yourself with the following terms as you will encounter these terms in
the succeeding provisions. Understanding tax requires knowing the
definitions of the technical terms.
Person
Corporation
Q: What are the features of the Philippine Income Tax Law?

A: The features are as follows:
1. Income tax is a direct tax because the tax burden is borne by
the income recipient upon whom the tax is imposed.
2. Income tax is a progressive tax since the tax base increases as
the tax rate increases.
3. The Philippines has adopted the most comprehensive system
of imposing income tax by adopting the citizenship principle,
resident principle and the source principle.
4. The Philippines follows the semi-schedular or semi-global
system of income taxation.
Q: What are the criteria in imposing Income Tax in the

Philippines?
A: The criteria are:
1. Citizenship or nationality principle A citizen of the
Philippines is subject to Philippine income tax (a) on his
worldwide income, if he resides in the Philippines (b) only on
his Philippine source income, if he qualifies as a non-resident
citizen where his foreign-source income shall be tax-exempt.
2. Residence or domicile principle An alien is subject to
Philippine income tax because of his residence in the
Philippines. A resident alien is liable to pay Philippine income
General Professional
Partnerships
Domestic
Foreign
Nonresident citizen
An individual, a trust, estate or corporation

Includes partnerships, no matter how created
or organized, joint-stock companies, joint
accounts, associations, or insurance companies
but does not include general professional
partnerships and a joint venture or consortium
formed for the purpose of undertaking
construction projects or engaging in petroleum
and other energy operations pursuant to an
operating agreement under a service contract
with the Government
Partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business
When applied to a corporation, means created
or organized in the Philippines or under its laws
When applied to a corporation, means a
corporation which is not domestic
The term means a citizen of the Philippines:
1. who establishes to the satisfaction
of the Commissioner the fact of his
physical presence abroad with
intention to reside therein
2. who leaves the Philippines during
the taxable year to reside abroad
either as an immigrant or for
employment on a permanent basis
3. who works and derives income from
abroad and whose employment
thereat requires him to be
physically present abroad most of
COURSE: TAXATION I
PROFESSOR: GRUBA
the time during the taxable year.

who has been previously considered
a non-resident citizen and who
arrives in the Philippines at any time
during the taxable year to reside
permanently in the Philippines with
respect to his income derived from
sources abroad until date of his
arrival in the Philippines
An individual whose residence is within the
Philippines and who is not a citizen thereof
An individual whose residence is not within the
Philippines and who is not a citizen thereof
A foreign corporation engaged in trade or
business within the Philippines
A foreign corporation not engaged in trade or
business within the Philippines
A guardian, trustee, executor, administrator,
receiver, conservator or any person acting in
any fiduciary capacity for any person
Any person required to deduct and withhold tax
under the provisions of Section 57 (Withholding
of Tax at source)
Includes shares of stock of a corporation,
warrants and/or options to purchase shares of
stocks as well as units of participation in a
partnership (except general professional
partnerships), joint stock companies, joint
accounts,
joint
ventures
taxable
as
corporations, associations and recreation or
amusement clubs and mutual fund certificates
Includes any holder of shares of stock and
others which are considered shares of stock
under this code (refer to definition of Shares of
Stock)
Any person subject to tax
When used in a definition, it shall not be
deemed to exclude other things otherwise
within the meaning of the term
Means the calendar year or the fiscal year
ending during such calendar year, upon the
basis of which the net income is computed
Means an accounting period of 12 months
ending on the last day of any month other than
December
Shall be construed according to the method of
accounting upon the basis of which net income
is computed
Includes the performance of the functions of a
public office
Means share of stock n a corporation and rights
to subscribe for or to receive such shares
A merchant of stocks or securities, whether an
individual, partnership or corporation, with an
established place of business, regularly engaged
in the purchase of securities and the resale
thereof to customers
Every banking institution as defined in RA 337
as amended by RA 8791 (General Banking Act of
2000)
A financial intermediary as defined in RA 337 as
amended by RA 8791 (General Banking Act of
2000) authorized by the BSP to perform quasibanking activities
4.
Resident alien
Nonresident alien
Resident
foreign
corporation
Nonresident foreign
corporation
Fiduciary
Withholding agent
Shares of stock
Shareholder
Taxpayer
Including
includes
and
Taxable year
Fiscal year
Paid or incurred
and
paid
or
accrued
Trade or business
Securities
Dealer in securities
Bank
Non-bank
institution
financial
Quasi-banking
activities
Deposit substitutes
Ordinary Income
Ordinary loss
Rank
and
employees
file
Mutual
fund
company
Trade, business or
profession
Regional or area
headquarters
Long-term deposit or
investment
certificate
Statutory Minimum
Wage
Minimum
earner
Wage
Means borrowing funds from 20 or more

personal or corporate lenders at any one time,
through the issuance, endorsement, or
acceptance of debt instruments of any kind
other than deposits for the borrowers own
account or through the issuance of certificates
of assignments or similar instruments, with
recourse, or of purchase agreements for
purposes of re-lending or purchasing
receivables and other similar obligations
An alternative form of obtaining funds from the
public (the term public means borrowing from
20 or more individual or corporate lenders at
any one time), other than deposits, through the
issuance, endorsement, or acceptance of debt
instruments for the borrowers own account for
purposes of re-lending or purchasing
receivables and other similar obligations, or
financing their own needs or the needs of their
agent or dealer
Any gain from the sale or exchange of property
which is not a capital asset or property
described in Section 39(A)(1) (which defines
what capital assets are and those which are
not)
Includes any loss from the sale or exchange of
property which is not a capital asset
Mean all employees who are holding neither
managerial nor supervisory position as defined
under existing provisions of the Labor Code
An open-end and close-end investment
company as defined under the Investment Code
Include performance of services by the taxpayer
as an employee
A branch established in the Philippines by
multinational companies
Certificate of time deposit or investment in the
form of savings, common or individual trust
funds,
deposit
substitutes,
investment
management accounts and other investments
with maturity period of not less than 5 years,
the form of which shall be prescribed by the
BSP and issued by Banks only to individuals in
denominations of P10,000 and other
denominations as may be prescribed by the BSP
Refers to the rate fixed by the Regional
Tripartite Wage and Productivity Boar, as
defined by the Bureau of Labor and
Employment Statistics (BLES) of DOLE
A worker in the private sector paid the
statutory minimum wage or to an employee in
the public sector with compensation income of
not more than the statutory minimum wage in
the non-agricultural sector where he/she is
assigned
COURSE: TAXATION I
PROFESSOR: GRUBA
GENERAL PRINCIPLES OF INCOME TAXATION

(SECTION 23, NIRC)
Q: What are the general principles of income taxation in the
Philippines?
A: Except as otherwise provided in this Code, the general principles are:
1. A citizen of the Philippines residing therein is taxable on all
income derived from sources within and outside the
Philippines (Citizenship principle)
2. A non-resident citizen (of the Philippines) is taxable only on
income derived from sources within the Philippines
(Citizenship principle)
3. An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker
is taxable only on income from sources within the Philippines
(Citizenship principle)
4. An alien individual whether a resident or not of the
Philippines is taxable only on income derived from sources
within the Philippines (Residence and source of income
principle)
5. A domestic corporation is taxable on all income derived from
sources within and outside the Philippines (Citizenship
principle)
6. A foreign corporation, whether engaged or not in trade or
business in the Philippines is taxable only on income derived
from sources within the Philippines (source of income
principle).
In other words, under Title II, only resident citizens and domestic
corporations are taxable on their worldwide income while the other
types of individual and corporate taxpayers are taxable only on income
derived from sources within the Philippines. (Remember this!)
KINDS OF INCOME TAXPAYERS

NOTE: Before we proceed to income taxation proper, it is important to
know the different kinds of taxpayers first. This is because in analyzing
any problem involving income taxation, the first thing to do is to
determine who the taxpayer is.
The only two exceptions where knowing the taxpayer is immaterial are
where the transaction involves sales of shares of stock of a domestic
corporation because it is subject to 1% of stock transaction tax or
5%/10% capital gains tax on net capital gain whether the seller is an
individual, citizen or alien or a corporation, domestic or foreign and (2)
where the real property sold is a capital asset located in the Philippines
which is subject to 6% capital gains tax.
Q: What are the kinds of income taxpayers?

A: The kinds of income taxpayers under Title II of the NIRC are:
A. Individuals
1. Citizens (Section 24, NIRC)
a.
Resident Citizens
b. Nonresident Citizens
2. Aliens
a.
Resident Aliens (Section 24, NIRC)
b. Nonresident Aliens (Section 25, NIRC)
i.
Engaged in trade or business in the
Philippines
ii.
Not engaged in trade or business in the
Philippines
3. Estates and Trusts (Section 60, NIRC)
B.
a.
Revocable trust
b. Irrevocable trust
Corporations
1. Domestic Corporations (Section 27, NIRC)
2. Foreign Corporations (Section 28, NIRC)
a.
Resident foreign corporations
b. Nonresident foreign corporations
3. Partnerships
a.
Taxable partnership (Section 73(D), NIRC)
b. Exempt partnership
i.
General Professional Partnership (Section 26,
NIRC)
ii.
Joint venture or consortium undertaking
construction activity or engaged in
petroleum operations with operating
contract with the government
(Note that the definitions of all the kinds of taxpayers mentioned above
can be found in Section 22, NIRC. This is why it is important to memorize
them!)
INDIVIDUAL TAXPAYERS
Q: Who are the individual taxpayers?
A: They are:
1. Citizens
a.
Resident Citizens
b. Nonresident Citizens
2. Aliens
a.
Resident Aliens
b. Nonresident Aliens
i.
Engaged in trade or business in the Philippines
ii.
Not engaged in trade or business in the Philippines
RESIDENT CITIZENS
Q: Who are citizens of the Philippines?
A: The following are considered Citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the
adoption of the Constitution
2. Those whose fathers or mothers are citizens of the Philippines
3. Those born before January 17, 1973 of Filipino mothers, who
elect Philippine Citizenship upon reaching the age of majority;
and
4. Those who are naturalized in accordance with law
Q: What is meant by residence?

A: Residence refers to an individuals habitual place of abode to which
whenever absent, he has the intention of returning.
Q: Why is it important to determine whether a citizen is a

resident or non-resident?
A: It is important because a person will be taxable on his worldwide
income if he is a resident citizen and he shall also be taxable on his
income from sources within the Philippines. If he is a non-resident, he
shall be exempted on his income from sources outside the Philippines.
Q: Why is there a distinction?
COURSE: TAXATION I
PROFESSOR: GRUBA
A: A resident citizen is taxed on his worldwide income because he

receives protection from the Philippine government even outside the
country. As to a non-resident, the Philippines retains personal
jurisdiction over the person of the citizen no matter how long he lives in
a foreign country for as long as he remains a citizen.
NON-RESIDENT CITIZENS
Q: Who is a non-resident citizen?
A: The term means a citizen of the Philippines:
1. who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with intention to reside
therein
2. who leaves the Philippines during the taxable year to reside
abroad either as an immigrant or for employment on a
permanent basis
3. who works and derives income from abroad and whose
employment thereat requires him to be physically present
abroad most of the time during the taxable year.
4. who has been previously considered a non-resident citizen
and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines with
respect to his income derived from sources abroad until date
of his arrival in the Philippines
Illustration
Q: A and B are Filipino citizens and employees of P&G
Philippines, a subsidiary of Procter & Gamble, a foreign
corporation based in the US. They were assigned for certain
periods to other subsidiaries of P&G outside the Philippines,
during which they were paid US Dollars as compensation. Is the
income taxable?
A: YES. They are not exempted from this. Petitioners forget that they are
citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. Note that
although they worked abroad. It was for a certain period which did not
qualify them to be a non-resident as provided in the definition of a nonresident citizen.
Q: Are non-resident citizens required to file income tax returns

on their foreign income with the BIR?
A: NO. This is because their income without the Philippines is not
taxable. However, by virtue of RR 9-99, non-resident citizens, overseas
contract workers and seamen must file information returns. Said form,
together with other relevant supporting papers, shall be filed to the
Foreign Post or the Revenue District Office which has jurisdiction over
the place of residence of the taxpayer
RESIDENT ALIENS
Q: Who is a resident alien?
A: A Resident alien is an individual whose residence is within the
Philippines and who is not a citizen thereof. He is taxed in the same
manner as a resident citizen, except that only his income from Philippine
sources is taxable. His income from foreign sources is not liable to
Philippine income tax.
Non-resident Aliens Engaged and Not engaged in Trade or

Business
Q: Who is a non-resident alien?
A: A non-resident alien is an individual whose residence is not within the
Philippines and who is not a citizen thereof. A non-resident alien is
further classified into (a) engaged in trade or business in the Philippines
or (b) not engaged in trade or business in the Philippines. As provided in
Section 25(A)(1), if the aggregate period of his stay is 180 days during
any calendar year, he shall be deemed a non-resident alien doing
business in the Philippines (180-day Rule).
Illustration
Q: A, a non-resident citizen, was engaged by a domestic
corporation as a commission agent. It was agreed that A will
receive 10% sales commission on all sales actually concluded
and collected through As efforts. A argues that the income is
not taxable as A does not reside in the Philippines and that the
place of payment of the income is outside the Philippines. Is As
contention correct?
A: NO. Pursuant to Section 25(A) (Nonresident Alien Engaged in Trade or
Business Within the Philippines) and Section 25(B) (Nonresident Alien
Individual Not Engaged in Trade or Business Within the Philippines), nonresident aliens, whether or not engaged in trade or business, are subject
to Philippine income taxation on their income received from all sources
within the Philippines. Thus, the keyword in determining the taxability of
non-resident aliens is the incomes "source." In construing the meaning
of "source" in Section 25 of the NIRC, resort must be had on the origin of
the provision.
The source of an income is the property, activity or service that
produced the income. With respect of rendition of labor or personal
service, as in the instant case, it is the place where the labor or service
is performed that determines the source of income. There is therefore
no merit in petitioners interpretation which equates source of income in
labor or personal service with the residence of the payor or the place of
payment of the income (see CIR VS. BAIER-NICKEL).
Q: Is an heir of a deceased individual taxpayer liable for taxes?

A: YES. As an heir he is individually answerable for the part of the tax
proportionate to the share he received from the inheritance. His liability,
however, cannot exceed the amount of his share. As a holder of property
belonging to the estate, Pineda is liable for he tax up to the amount of
the property in his possession. The reason is that the Government has a
lien on the amount received by him from the estate as his share in the
inheritance, for unpaid income taxes for which said estate is liable. (see
CIR VS. PINEDA).
CORPORATIONS
Q: What is a corporation under the NIRC?
A: A corporation includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or
insurance companies but does not include:
a.
b.
general professional partnerships

joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum
COURSE: TAXATION I
PROFESSOR: GRUBA
and other energy operations pursuant to an operating

agreement under a service contract with the Government.
OVERVIEW OF CORPORATIONS AS TAXPAYERS

Q: What are the kinds of corporate taxpayers?
A: They are:
1. Domestic Corporations (Section 27, NIRC)
2. Foreign Corporations (Section 28, NIRC)
a.
Resident foreign corporations
b. Nonresident foreign corporations
Q: Differentiate the kinds of corporate taxpayers.

A: A corporation is itself a taxpaying entity and speaking generally, for
purposes of income tax, corporations are classified into (a) domestic
corporations and (b) foreign corporations. Foreign corporations are
further classified into (1) resident foreign corporations and (2) nonresident foreign corporations. A resident foreign corporation is a foreign
corporation engaged in trade or business within the Philippines or having
an office or place of business therein while a non- resident foreign
corporation is a foreign corporation not engaged in trade or business
within the Philippines and not having any office or place of business
therein.
A domestic corporation is taxed on its income from sources within and
without the Philippines, but a foreign corporation is taxed only on its
income from sources within the Philippines. However, while a foreign
corporation doing business in the Philippines is taxable on income solely
from sources within the Philippines, it is permitted to deductions from
gross income but only to the extent connected with income earned in
the Philippines. On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within
the Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities Compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income
and capital gains. (see N.V. REEDERIJ AMSTERDAM VS. CIR)
RESIDENT FOREIGN CORPORATIONS

Q: Are foreign banks licensed to do business in the Philippines
considered residents of the Philippines?
A: YES. YES. Courts have held that "a domestic corporation is regarded as
having a residence within the state at any place where it is engaged in
the particulars of the corporate enterprise, and not only at its chief place
or home office;" that "a corporation may be domiciled in one state and
resident in another; its legal domicile in the state of its creation presents
no impediment to its residence in a real and practical sense in the state
of its business activities." The foregoing propositions are in accord with
the dictionary concept of residence as applied to juridical persons, a
term which appears to comprehend permanent as well as temporary
residence (see STATE INVESTMENT HOUSE, INC. VS. CITIBANK, N.A.)
Q: ABC Airways is a foreign airline. ABC maintains a general sales agent
of its tickets in the Philippines. Is ABC a resident foreign corporation? Is
the sale of tickets taxable as income from sources within the
Philippines?
A: In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment
of a local agent, and not one of a temporary character. ABC maintained
a general sales agent and it was engaged in selling or issuing tickets,

which is considered the main lifeblood of an airline.
For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity
within the Philippines. In ABCs case, the sale of tickets in the Philippines
is the activity that produces the income. The tickets exchanged hands
here in the country and the payments for fares were also made with
Philippine currency. The site of the source of payments is the Philippines.
The absence of flight operations to and from the Philippines is not
determinative of the source of income/site of income taxation for the
test of taxability is the source. (see COMMISSIONER OF INTERNAL REVENUE
VS. JAPAN AIRLINES and COMMISSIONER VS. OVERSEAS AIRWAYS)
NON-RESIDENT FOREIGN CORPORATIONS

Q: XYZ is a foreign shipping company. It does not have a branch
office in the Philippines and it made only two calls in Philippine
ports. What kind of foreign corporation is XYZ?
A: XYZ is a foreign corporation not authorized or licensed to do business
in the Philippines. In order that a foreign corporation may be
considered engaged in trade or business, its business transactions must
be continuous. A casual business activity in the Philippines by a foreign
corporation does not amount to engaging in trade or business in the
Philippines for income tax purposes. Accordingly, its taxable income for
purposes of our income tax law consists of its gross income from all
sources within the Philippines. (see N.V. REEDERIJ AMSTERDAM VS. CIR)
Q: Company A, a domestic corporation, entered into contracts

in Tokyo. Company A made initial payments to the Japanese
companies for the construction of vessels. CIR held Company A
liable for withholding tax. Company A argues that the Japanese
companies were not liable on the tax because all the related
activities from the signing of the contract, payment to delivery
of the vessels were done in Tokyo. Is Company A correct?
A: YES. Company A should have withheld the tax because the tax on
interest received by foreign corporations not engaged in trade or
business within the Philippines is not conditioned on the fact that the
sale or activity from which the interest income came from took place in
the Philippines. The residence of the debtor who pays the interest is the
determining factor of the source of interest income. (see NATIONAL
DEVELOPMENT CO. VS. COMMISSIONER).
FOREIGN CORPORATION VIS--VIS BRANCH OFFICE IN THE

PHILIPPINES
Q: ABC Corporation, a foreign corporation in Japan and licensed
to do engage in business in the Philippines (hence, a resident
foreign corporation) has equity investments in XYZ Company, a
domestic corporation. XYZ declared and paid cash dividends to
ABC. XYZ directly remitted the cash dividends to ABCs head
office in Japan net not only of the 10% final dividend tax but
also of the withheld 15% profit remittance tax based on the
remittable amount after deducting the final withholding tax of
10%. ABC argues that following the principal-agent relationship
theory, ABC is a resident foreign corporation subject only to the
10 % intercorporate final tax on dividends received from a
domestic corporation. Is ABC correct?
A: NO. The general rule that a foreign corporation is the same juridical
entity as its branch office in the Philippines cannot apply here. This rule is
COURSE: TAXATION I
PROFESSOR: GRUBA
based on the premise that the business of the foreign corporation is

conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its agent
here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship
is set aside. The transaction becomes one of the foreign corporation, not
of the branch. Consequently, the taxpayer is the foreign corporation, not
the branch or the resident foreign corporation. Corollarily, if the business
transaction is conducted through the branch office, the latter becomes
the taxpayer, and not the foreign corporation. (see MARUBENI
CORPORATION VS. CIR).
NON-RESIDENT FOREIGN CORPORATIONS

CONSORTIUM IN THE PHILIPPINES
FORMING
Over P500,000
Note the following:

1.
A
2.
Q: The tax code provides that the recipient (doing business

outside the Philippines) of services other than processing,
manufacturing, or repacking of goods performed for persons
doing business outside the Philippines is subject to VAT at zero
percent. X, Y, and Z non-resident foreign corporation formed
ABC consortium to do business in the Philippines. ABC claims
that its transactions are subject to VAT at zero percent. Is ABC
consortium correct?
A: NO. The legislative intent is that the recipient of services is doing
business outside the Philippines. The payer-recipient of services is the
Consortium which is a joint-venture doing business in the Philippines.
While the Consortiums principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines.
Hence, the transactions of ABC are not subject to VAT at zero percent.
(see CIR VS. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO)
TAX ON INDIVIDUALS (SECTIONS 24-26, NIRC)

Q: What are the graduated income tax rates on taxable income
of individuals?
A: In relation to Section 23 of the NIRC, the taxable income (i.e. the
pertinent items of gross income less deductions and/or personal and
additional exemptions authorized for such types of income by the Tax
Code or other special laws) derived for each taxable year:
1.
2.
3.
From all sources within and without the Philippines by

resident citizens;
From all sources within the Philippines only by a non-resident
citizen including overseas contract workers;
From all sources within the Philippines only, by a resident
alien or a non-resident alien engaged in trade or business in
the Philippines
Shall be subject to the graduated income tax in accordance with the

following schedule provided under Section 24:
Not over P10,000
Over 10,000 but not over P30,000
Over P30,000 but not over P70,000
5%
P500 + 10% of excess over
P10,000
P2,500 + 15% of the excess
over P30,000
over P70,000
over P140,000
over P250,000
P125,000 + 32% of the
excess over P500,000
3.
The taxable income here does not include

a.
Tax on certain passive income under Section 24(B)
b. Capital gains from sale of shares of stock not traded in
the Stock exchange under Section 24(C)
c.
Capital gains from sale of real property under Section
24(D)
(These are subject to preferential tax rates. See next
question)
For married individuals, the husband and wife shall compute
separately their individual income tax based on their
respective total taxable income provided that if any income
cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the
same shall be divided equally between the spouses for the
purpose of determining their respective taxable income
Under RA 9504, minimum wage earners shall be exempt from
the payment of income tax on their taxable income. Holiday
pay, overtime pay, night shift differential pay and hazard pay
shall likewise be exempt from tax.
Q: What are the incomes subject to final tax rates and what are
the tax rates applicable to each?
A: As a general rule, income, gain or profit derived by an individual
during the taxable year shall be subject to the graduated income tax
rates. As exceptions, certain income subject to tax are not subject to the
graduated tax rates stated previously and are subject to final tax rates.
They are:
1.
2.
3.
4.
Tax on certain passive income under Section 24(B)

a.
Interests, royalties, prizes and other winnings under
Section 24(B)(1)
b. Cash and/or property dividends under Section 24(B)(2)
Capital gains from sale of shares of stock not traded in the
Stock exchange under Section 24(C)
Capital gains from sale of real property under Section 24(D)
Compensation income of alien and Filipino employees of
a.
Regional or area headquarters and regional operating
headquarters of MNCs under Section 25(C)
b. Offshore Banking Units under Section 25(D)
c.
Foreign petroleum service contractors and subcontractors under Section 25(E)
NOTE: See Income Tax Table for the final tax rates.
PASSIVE INCOME IN GENERAL

Q: What is passive income?
A: The BIR defines passive income by stating what it is not. If the income
is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income. Generally, it is income
generated by the taxpayers assets. These assets can be in the form of
real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings
(see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO)
Q: Are passive incomes included in the computation of gross

income which determines taxable income?
COURSE: TAXATION I
PROFESSOR: GRUBA
A: NO. Since these passive incomes are already subject to different rates
and taxed finally at source, they are no longer included in the
computation of gross income, which determines taxable income (see
Commissioner vs. PAL)
CAPITAL GAINS TAX IN GENERAL

CAPITAL GAINS WRT REAL PROPERTY
Q: Who files the capital gains tax return?
A: as provided in RR No. 8-98, the Capital Gains Tax (CGT) Return will be
filed by the seller within 30 days following each sale or disposition of real
property. Specifically, Payment of the CGT will be made to an Authorized
Agent Bank (AAB) located within the Revenue District Office (RDO)
having jurisdiction over the place where the property being transferred is
located. Creditable withholding taxes, on the other hand, deducted and
withheld by the withholding agent/buyer on the sale, transfer or
exchange or real property classified as ordinary asset will be paid by the
withholding agent/buyer upon filing of the return with the AAB located
within the RDO having jurisdiction over the place where the property
being transferred is located.
Q: Seller (S) and Buyer (B) entered into a sale. B gave S a check
so that S could pay the CGT. The TCT was still registered in the
name of S. B demanded that it be registered in his name before
B pays the balance of the purchase price. S tore up the Deed of
Sale. B stopped payment of the check for the CGT. B filed a
complaint for specific performance against S. Whether the
withholding of the payment of the balance on the part of B was
justified by the circumstances?
A: NO. Customarily, in the absence of a contrary agreement, the
submission by an individual seller to the buyer of the following papers
would complete a sale of real estate:
(1) owner's duplicate copy of the Torrens title;
(2) signed deed of absolute sale;
(3) tax declaration; and
(4) latest realty tax receipt.
The buyer can retain the amount for the capital gains tax and pay it upon
authority of the seller, or the seller can pay the tax, depending on the
agreement of the parties.
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new Torrens
title in his name. Nevertheless, as far as the government is concerned,
the capital gains tax remains a liability of the seller since it is a tax on the
seller's gain from the sale of the real estate. Payment of the capital gains
tax, however, is not a pre-requisite to the transfer of ownership to the
buyer. The transfer of ownership takes effect upon the signing and
notarization of the deed of absolute sale. The recording of the sale with
the proper Registry of Deeds and the transfer of the certificate of title in
the name of the buyer are necessary only to bind third parties to the
transfer of ownership. As between the seller and the buyer, the transfer
of ownership takes effect upon the execution of a public instrument
conveying the real estate. Registration of the sale with the Registry of
Deeds, or the issuance of a new certificate of title, does not confer
ownership on the buyer. Such registration or issuance of a new
certificate of title is not one of the modes of acquiring ownership.
In this case, S was ready, able and willing to submit to B all the papers
that customarily would complete the sale, and to pay as well the capital
gains tax. On the other hand, Bs condition that a new TCT be first issued
in his name before he pays the balance is not customary in a sale of real
estate. (see Chua vs. Court of Appeals)
Q: A bought a land from ABC corporation with the condition that no lot
may be resold by the buyer unless a residential house has been
constructed thereon and upon full payment. A entered into a contract to
sell with B but B did not construct a house thereon. B decided to sell it to
C but was confronted with the conditions imposed by ABC. Hence, B
made it appear that the property was sold directly by A to C. Did this
agreement violate the law as it deprived the government of capital gains
tax?
A: NO. The issue is wholly irrelevant. Capital gains taxes, after all, are
only imposed on gains presumed to have been realized from sales,
exchanges or dispositions of property. Having declared that the contract
to sell in this case was aborted by petitioners failure to comply with the
twin suspensive conditions of full payment and construction of a
residence, the obligation to pay taxes never arose (see TORCUATOR VS.
BERNABE)
CAPITAL GAINS WRT SHARES OF STOCK

Q: Is an assignment of deposits on stock subscriptions subject
to capital gains tax?
A: YES. The assignment of the deposits on stock subscriptions results in a
net gain. A tax on the profit of sale on net capital gain is the very essence
of the net capital gains tax law. To hold otherwise will ineluctably deprive
the government of its due and unduly set free from tax liability persons
who profited from said transactions (see COMPAGNIE FINANCIERE SUCRES ET
DENREES VS. CIR)
INTEREST DERIVED FROM FOREIGN CURRENCY DEPOSIT AND

OFFSHORE BANKING SYSTEMS
Q: Is interest from a depository bank under the expanded
foreign currency deposit system and offshore banking system
subject to final tax?
A: YES. Moreover, as provided in RR No. 10-98, interest income which is
actually or constructively received by a resident citizen of the Philippines
or by a resident alien individual from a foreign currency bank deposit will
be subject to a final withholding tax of 7.5%. The depository bank will
withhold and remit the tax. If a bank account is jointly in the name of a
non-resident citizen, 50% of the interest income from such bank deposit
will be treated as exempt while the other 50% will be subject to a final
withholding tax of 7.5%.
GENERAL PROFESSIONAL PARTNERSHIPS (GPPs)

Q: What is a general professional partnership?
A General professional partnership (GPP) are partnerships formed by
persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business.
Q: Is a GPP liable for income tax?

A: No. A GPP is not considered a taxable entity for income tax purposes.
Section 26 of the NIRC provides that persons engaging in business as
partners in a GPP shall be liable for income tax only in their separate and
individual capacities computed on their respective distributive shares of
the partnership profit.
COURSE: TAXATION I
PROFESSOR: GRUBA
Q: Distinguish between a GPP and an ordinary business

partnership?
A: A general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes
and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership profits (see
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES VS. DEL ROSARIO,
COMMISSIONER V. SUTER and TAN GUAN V. CTA)
1.
2.
35% effective November 1, 2005

30% effective January 1, 2009.
In case of corporations adopting the fiscal year accounting period, the

taxable income shall be computed without regard to the specific date
when specific sales, purchases, and other transactions occur. Their
income and expenses for the fiscal year shall be deemed earned and
spent equally for each month of the period. The reduced corporate
income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the
fiscal year by the taxable income of the corporation for the period
divided by twelve.
Q: A and B, co-owners, bought 3 parcels of land in one

transaction and bought 2 more parcels of land in another. They
decided to sell the 3 parcels to C and the 2 parcels to D. They
realized a net profit gain and paid CGT. CIR assessed them for
deficiency corporate income tax. Is the co-ownership taxable as
a corporation?
On the other hand, as provided in Section 28(B)(1), the rate of RCIT on

the gross income from all sources within the Philippines for a nonresidence foreign corporation during the taxable year are as follows:
1. 35% effective November 1, 2005
2. 30% effective January 1, 2009.
A: NO. A Co-Ownership who own properties which produce income

should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax
law. The essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. Here,
there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they
intended to divide the profits among themselves. The sharing of returns
does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property. (see
OBILLOS VS. COMMISSIONER and PASCUAL VS. COMMISSIONER).
A: As defined in Section 31, taxable income means the pertinent items

of gross income specified in the Code, less the deductions and/or
personal and additional exemptions, if any authorized for such types of
income by the Code or other special laws. For corporations, taxable
income would mean net income. Net income and taxable income is used
interchangeably when it comes to corporations.
Q: A group of insurance companies in the Philippines decided

to form a pool and entered into a reinsurance treaty with a
non-resident reinsurance company. Is such a pool subject to
corporate taxes and withholding taxes on dividends paid to the
non-resident reinsurance company?
A: YES. Where several local insurance ceding companies enter into a Pool
Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with a non-resident foreign reinsurance
company, the resulting pool having a common fund, and functions
through an executive board and its work is indispensable, beneficial and
economically useful to the business of the ceding companies and the
foreign firm, such circumstances indicate a partnership or an association
taxable as a corporation (see AFISCO INSURANCE CORPORATION VS. CIR)
TAX ON CORPORATIONS (SECTIONS 27-30, NIRC)

RCIT
Q: What is the regular corporate income tax (RCIT)?
A: Section 27(A)(1) and Section 28(A)(1) of the NIRC provide that, except
as otherwise provided for in the Code, the rates of RCIT on taxable
income from worldwide sources of a domestic corporation or from
sources within the Philippines of a foreign corporation during the
taxable year are as follows:
Q: What is meant by taxable income which is subject to RCIT?
Q: May the President allow domestic and resident foreign

corporations the option to be taxed on their gross income?
A: Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the
President upon recommendation of the Secretary of Finance may allow
domestic and resident foreign corporations the option to be taxed at
15% of gross income after the following conditions have been satisfied:
1.
2.
3.
4.
a tax effort ratio of 20% of the GNP

a ratio of 40% of income tax collection to total tax revenues
a VAT tax effort of 4% of GNP
a 0.9% ratio of Consolidated Public Sector Financial Position
(CPSFP) to GNP
This option is available to firms whose ratio of cost of sales to gross sales
or receipts from all sources does not exceed 55%. Upon election of the
gross income tax option, it shall be irrevocable for 3 consecutive taxable
years during which the corporation is qualified.
MCIT
Q: What is the minimum corporate income tax?
A: As provided in Section 27(E) and Section 28(A)(2), a minimum
corporate income tax of 2% of gross income shall be imposed on a
domestic corporation and resident foreign corporation beginning on the
fourth taxable year immediately following the year in which such
corporation commenced its business operations when the MCIT is
greater than the RCIT for the taxable year.
Q: What is gross income for purposes of applying the MCIT?

A: Gross income shall mean gross sales less sales returns, discounts,
allowances and cost of goods sold.
Q: When is MCIT imposed?
COURSE: TAXATION I
PROFESSOR: GRUBA
7.
A: As provided in RR No. 9-98, the MCIT will be imposed whenever (1)
such operation has zero or negative taxable income or (2) whenever the
amount of MCIT is greater than the normal income tax due from such
operation.
8.
9.
Branch of foreign corporation with respect to profit

remittances to head office.
Branch of foreign corporations registered with PEZA, SBMA,
CDA, CDJHA.
Qualified service contractor or subcontractor engaged in
petroleum operations in the Philippines
Q: What is the purpose of MCIT?

A: The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
Q: What income of a domestic corporation or resident foreign

corporation is subject to preferential tax rates?
A: As a general rule, all taxable income of a domestic corporation or
resident foreign corporation is subject to the flat rate tax of 30%. As
exceptions, the following are subject to final tax rates:
1.
Certain passive incomes such as interests from deposits and

yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements and royalties
Capital gains from the Sale of Shares of Stock not traded in
the Stock Exchange
Intercorporate dividends (dividends actually or constructively
received by a domestic corporation or resident foreign
corporation from another domestic corporation)
Capital gains realized from the sale, exchange or disposition
of lands and/or buildings.
Q: What is the difference between RCIT and MCIT?
2.
A: There is a distinction between taxable income, which is the basis for

basic corporate income tax); and gross income, which is the basis for the
MCIT under Section 27(E). The two terms have their respective technical
meanings, and cannot be used interchangeably. Hence, the basic
corporate income tax cannot cover MCIT since the basis for the first is
the annual net taxable income, while the basis for the second is gross
(see COMMISSIONER VS. PAL)
3.
Q: What domestic corporations are subject to preferential tax

rates and what are the tax rates applicable to each?
Q: What income of a non-resident foreign corporation is

subject to preferential tax rates?
A: As a general rule, all domestic corporations are subject to the RCIT or

MCIT. As exceptions, certain domestic corporations are subject to final
tax rates. They are:
A: As a general rule, the gross income of a non-resident foreign

corporation is subject to the flat rate tax of 30%. As exceptions, the
following are subject to final tax rates and final withholding taxes:
1.
2.
3.
4.
5.
Proprietary education institutions and hospitals

Foreign currency deposit unit of a local universal or
commercial bank
Firms that are taxed under a special income tax regime
Private educational institutions
Hospitals
4.
1.
2.
3.
4.
5.
Q: What resident foreign corporations are subject to

preferential tax rates and what are the tax rates applicable to
each?
A: As a general rule, all resident foreign corporations are subject to the
RCIT or MCIT. As exceptions, certain resident foreign corporations are
subject to final rates. They are:
1.
2.
3.
4.
5.
6.
Regional or area headquarters (RHQ) (a branch established in

the Philippines by MNCs and which does not earn or derive
income from the Philippines and whose role is supervisory)
Representative office (a branch in the Philippines of a MNC
whose activities are limited to information dissemination,
product promotion)
International carriers by air or water
Offshore Banking Units
Foreign Currency deposit Unit in the Philippines of a foreing
bank
Regional Operating Headquarters (ROHQ)
6.
Income of a non-resident cinematographic film owner, lessor

or distributor
Income of a non-resident owner or lessor of vessels chartered
by Philippine nationals
Income of a non-resident owner of aircraft, machineries and
other equipment
Interest income on foreign loans contract on or after August
1, 1986.
Intercorporate dividends received from a domestic
corporation
Capital gains from sale of shares of stock in a domestic
corporation not traded in the Stock exchange
CAPITAL GAINS TAX IN GENERAL

CAPITAL GAINS WRT REAL PROPERTY
Q: What was the previous treatment on corporations on the
payment of CGT for any sale, exchange or disposition of real
property?
A: Under the 1977 Tax Code, corporations wre exempt from payment of
capital gains tax for any slae, exchange or disposition of property.
However, the 1997 Tax Code changed the rule. As it stands now, the
1997 Tax Code requires corporations to pay capital gains tax at rates
provided for (see VIVA EAGLE LAND, INC. VS. CA).
COURSE: TAXATION I
PROFESSOR: GRUBA
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
divided into shares. MIAA has no stockholders or voting shares. Second,

MIAA is also not a non-stock corporation because it has no members.
Third, the Corporation Code provides that non-stock corporations are
"organized for charitable, religious, educational,..." MIAA is not
organized for any of these purposes. MIAA, a public utility, is organized
to operate an international and domestic airport for public use. Since
MIAA is not a GOCC but a government instrumentality, its tax exemption
stands (see MIAA VS. CITY OF PASAY)
Q: Are GOCCs subject to corporate income tax?
GROSS PHILIPPINE BILLINGS
A: As a general rule, YES. As provided under Section 27(C), the provisions

of special or general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned or controlled by the
Government, except the GSIS, SSS, Philhealth, and the PCSO, shall pay
such rate of tax upon their taxable income as imposed by this section
upon corporations or associations engaged in a similar business, industry
or activity.
Q: What is Gross Philippine billings?
NOTE: Other Q&As, same as above under Individual Taxpayers
CAPITAL GAINS WRT SHARES OF STOCK

NOTE: Same Q&As as above under Individual Taxpayers
Q: Philippine Airlines, under PD 1590 (its franchise), is liable

only for basic corporate income tax or franchise tax, whichever
is lower and all other taxes, duties, royalties and other fees and
charges, except real property tax. Hence, it is not subject to
MCIT. CIR contends that the NIRC of 1997 repealed or amended
said PD 1590 and thus, PAL may be subjected to MCIT. Is the
CIR correct?
A: NO. It is true that when Presidential Decree No. 1590 was issued on 11
June 1978, PAL was then a government-owned and controlled
corporation; but when Republic Act No. 8424, amending the NIRC, took
effect on 1 January 1998, PAL was already a private corporation for six
years. The repealing clause under Section 7(B) of Republic Act No. 8424
simply refers to charters of government-owned and controlled
corporations, which would simply and plainly mean corporations under
the ownership and control of the government at the time of effectivity of
said statute. It is already a stretch for the Court to read into said
provision charters, issued to what were then government-owned and
controlled corporations that are now private, but still operating under
the same charters (see COMMISSIONER VS. PAL)
Q: MIAA, which operates the NAIA complex, was assessed by

the City of Pasay for realty tax. The City contends that the
Local Government Code withdrew the exemption from
payment of real property taxes granted to natural or juridical
persons, including GOCCs and since MIAA is a GOCC, it follows
that its tax exemption has been withdrawn upon the effectivity
of the Local Government Code. Is the City correct?
A: NO. The term government "instrumentality" is broader than the term
"government-owned or controlled corporation." Instrumentality refers
to any agency of the national Government, not integrated within the
department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a
charter. This term includes regulatory agencies, chartered institutions
and government-owned or controlled corporations. GOCC refers to any
agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least 51% of its capital stock. MIAA
is a government "instrumentality" that does not qualify as a "GOCC."
First, MIAA is not a stock corporation because it has no capital stock
A: The 2.5% tax on gross Philippine billings is an income tax levied on the
presumed gain of the airline and shipping companies. It ensures that
they are taxed on the income they derive from Philippine sources. For an
international air carrier, Gross Philippine Billings refers to the amount
of gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document. For International
Shipping, Gross Philippine Billings means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or
freight documents.
Q: ABC Shipping is a foreign corporation. XYZ chartered one of

ABCs ships to load raw sugar in the Philippines. Upon arriving
at the port, the vessel found no sugar for loading. The ship
sailed back without carrying any sugar. Is ABC Shipping liable
for gross Philippine billings tax?
A: NO. A resident foreign corporation engaged in the transport of cargo
is liable for taxes depending on the amount of income it derives from
sources within the Philippines. ABC derived no receipt from its charter
agreement with XYZ. The vessel arrived in the port on but found no raw
sugar to load and returned without any cargo laden on board (see CIR vs.
Tokyo Shipping)
BRANCH PROFITS REMITTANCES

Q: Whether the 15% branch profit remittance tax should be
assessed on the amount actually remitted and not on the
amount before profit remittance tax?
A: The tax base upon which the 15% which the 15% branch profits
remittance tax shall be imposed is the profit actually remitted abroad
and not the total branch profits out of which the remittance is to be
made.
Q: What is the purpose of the branch profit remittance tax?

A: The purpose of a branch profit remittance tax is to equalize the tax
burden on foreign corporations maintaining on one hand, local branch
offices, and organizing, on the other hand, a subsidiary domestic
corporation where at least majority of all the latters stocks are owned
by such foreign corporation
IMPROPERLY ACCUMULATED EARNINGS TAX
COURSE: TAXATION I
PROFESSOR: GRUBA
Q: What is the income tax imposed on a corporation if its

earnings and profits are accumulated (undistributed) instead of
being divided and distributed to its stockholders?
EXEMPT CORPORATIONS
A: Section 29(A) provides that, in addition to other taxes imposed under

Title II, an improperly accumulated earnings tax (IAET) equal to 10% is
imposed for each taxable year on the improperly accumulated taxable
income of each corporation.
A: Section 30 of the NIRC provides that the following organizations shall

be exempt from tax:
1. Labor, agricultural or horticultural organization not
organized principally for profit
2. Mutual savings bank not having a capital stock represented
by shares and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit
3. A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or a mutual
aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or
their dependents
4. Cemetery company owned and operated exclusively for the
benefit of its members
5. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any
specific person
6. Business league, chamber of commerce, or board of trade,
not organized for profit and no part of the net income of
which inures to the benefit of any private stockholder or
individual
7. Civil league or organization not organized for profit but
operated exclusively for the promotion of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution
10. Farmers or mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company or like organizstion of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose
of meeting its expenses; and
11. Farmers, fruit growers, or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them.
Q: What is the purpose of IAET?

A: The imposition of IAET discouraged tax avoidance through corporate
surplus accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially
a penalty tax designed to compel corporations to distribute earnings so
that the said earnings by shareholders could, in turn, be taxed (see
CYNAMID PHILIPPINES INC VS. CA)
Q: What corporations are subject to IAET?

A: As a general rule, the IAET shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting
earnings and profits accumulate instead of being divided or distributed.
As exceptions, the IAET shall not apply to:
1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
Q: How do you determine if a corporation is formed or availed

for the purpose of avoiding the income tax with respect to
shareholders?
A: Section 29(C)(1) provides that the fact that any corporation is a mere
holding company or investment company shall be prima facie evidence
of a purpose to avoid the tax upon its shareholders or members.
Moreover, Section 29(C)(2) provides that the fact that the earnings or
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose
to avoid the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence shall prove the
contrary.
Note that under Section 29(E), the term reasonable needs of the
business includes the reasonably anticipated needs of the business.
Q: What is meant by improperly accumulated taxable income

in connection with the imposition of IAET?
A: Section 29(D) provides that the term improperly accumulated taxable
income means taxable income adjusted by:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax; and
4. The amount of net operating loss carry-over deducted;
And reduced by the sum of:
1. Dividends actually or constructively paid; and
2. Income tax paid for the taxable year
Q: What are the corporations exempt from tax?
Note: Notwithstanding that they are exempt corporations, the income of

whatever kind and character of the organizations mentioned above from
any of their properties, real or personal, or form any of their activities
conducted for profit regardless of the disposition made of such income
shall be subject to tax imposed under this Code. (Remember this!)
Q: How are tax exemptions on corporations construed?

A: Tax exemptions are construed strictly against the taxpayer (see PASEO
REALTY VS. CA)
NON-STOCK NON-PROFIT EDUCATIONAL INSTITUTION

Laws allowing tax exemption are construed strictissimi juris. Hence, for
the YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1) it falls under
the classification non-stock, non-profit educational institution; and (2)
COURSE: TAXATION I
PROFESSOR: GRUBA
the income it seeks to be exempted from taxation is used actually,

directly, and exclusively for educational purposes. However, the Court
notes that not a scintilla of evidence was submitted by private
respondent to prove that it met the said requisites. (see CIR vs. CA).
TAXABLE INCOME DEFINED (SECTION 31, NIRC)
amended.
FWT vs. GRT

Q: Should the 20% FWT on banks interest income for part of
the taxable gross receipts for the purpose of computing the
GRT?
Q: What is taxable income?

A: As defined in Section 31, the term taxable income means the
pertinent items of gross income specified in this Code, less the
deductions and/or personal and additional exemptions, if any,
authorized for such types of income by this Code or other special laws.
EO 37 changed all net income phrases appearing in Title II of the Tax
Code of 1997 to taxable income. Taxable income is the income subject
to tax less deductions, if any, authorized by such type of income. In
short, the term refers to the tax base. For individuals engaged in trade
or business or in the practice of their profession, it is the income after
deducting exemptions and certain allowable deductions. For
corporations and other juridical entities, taxable income would mean
net income.
(see PIROVANO VS. COMMISSIONER and COLLECTOR VS. HENDERSON)
A: YES. The 20% FWT on a bank's interest income forms part of the
taxable gross receipts for the purpose of computing the 5% GRT. As
commonly understood, the term gross receipts means the entire
receipts without any deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates
a tax on gross receipts, unless the law itself makes an exception. (see
CIR VS. CITYTRUST INVESTMENT PHILS, INC, COMMISSIONER VS. SOLIDBANK CORP
and CHINA BANKING CORP. VS. COURT OF APPEALS )
Q: Compare and contrast final withholding tax (FWT) from

Gross receipts tax (GRT)?
A: The similarities and distinctions between FWT and GRT are:
FWT vs. CWT

Q: What is the withholding tax system?
Subject matter
A: The withholding tax system is a procedure through which taxes

(including income taxes) are collected. Under Section 57 of RA 8424, the
types of income subject to withholding tax are divided into three
categories:
(a) withholding of final tax on certain incomes;
(b) withholding of creditable tax at source and
(c) tax-free covenant bonds.
Scope
Taxing Authority
Taxing period
Q: What is the difference between final withholding tax (FWT)

and creditable withholding tax (CWT)?
Kind/Character
FWT
passive
income
generated in the form
of interest on deposits
and yield on deposit
substitutes
national
National government
deducted
and
withheld as soon as
the income is earned,
and is paid after
every calendar quarter
in which it is earned
The FWT is an income
tax
subject
to
withholding
GRT
the privilege of engaging
in the business of banking
national
National government
GRT is neither deducted
nor withheld, but is paid
only
after
every taxable quarter in
which it is earned
The GRT is a percentage
tax not subject to
withholding.
A: The differences are as follows:

(see COMMISSIONER VS. SOLIDBANK CORP)
FWT
a) The amount of income tax
withheld by the withholding
agent is constituted as a full and
final payment of the income tax
due from the payee on the said
income.
b)The liability for payment of the
tax rests primarily on the payor
as a withholding agent.
c) The payee is not required to

file an income tax return for the
particular income.
CWT
a) Taxes withheld on certain
income payments are intended
to equal or at least approximate
the tax due of the payee on said
income.
b) Payee of income is required to
report the income and/or pay
the difference between the tax
withheld and the tax due on the
income. The payee also has the
right to ask for a refund if the tax
withheld is more than the tax
due.
c) The income recipient is still
required to file an income tax
return, as prescribed in Sec. 51
and Sec. 52 of the NIRC, as
GROSS INCOME DEFINED (SECTION 32, NIRC)

Q: What is gross income?
A: As provided in Section 32(A), gross income means all income derived
from whatever source, including, but not limited to, the following items:
1. Compensation for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions and
similar items;
2. Gross income derived from the conduct of trade or business
or the exercise of a profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
COURSE: TAXATION I
PROFESSOR: GRUBA
10. Pensions; and

11. Partners distributive share from the net income of the GPP
Q: How does gross income differ from net income?

A: Simply put, Gross income means income, gain or profit subject to
income tax while Net income is gross income less the statutory
deductions and exemptions.
Q: What items are excluded from gross income?

A: As provided in Section 32(B), the following items shall not be included
in gross income and shall be exempt from taxation under Title II:
1. Proceeds of life insurance, payable upon the death of the
insured to the heirs or beneficiaries, but mot the interest
payments thereon if such amounts are held by the insurer
under an agreement to pay interest (Note: It is considered as
indemnity rather than income)
2. Amounts received by the insured as return of premiums paid
under life insurance, endowment or annuity contracts, either
during the term or at the maturity of the contract or upon the
surrender thereof.
3. Gifts, bequests, and devises but not the income from such
property; if the amount received is on account of services
rendered whether constituting a demandable debt or not
such as remuneratory donations or the use or opportunity or
use of capital, the receipt is income. (Note: They are instead
subject to estate or gift taxes; See PIROVANO VS.
COMMISSIONER above.)
4. Compensation for injuries or sickness whether by suit or
agreement including amounts received through accident or
health insurance or under the Workmens compensation Act,
but not damages or compensation recovered for loss of profit
in loss or damage to property which would be taxable
5. Income exempt under treaty binding upon the Government
of the Philippines.
6. Certain retirement benefits, pensions, gratuities, more
particularly:
a.
Retirement benefits received under RA 7641 and those
received by officials and employees of private firms,
whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the
employer provided:
i.
provided that the retiring official or employee has
been in the service of the same employer for at
least ten (10) years and is not less than fifty (50)
years of age at the time of his retirement
ii.
That the benefits granted shall be availed of by an
official or employee only once.
(Note: Reasonable private benefit plan means a
pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all
of his officials or employees, wherein contributions are
made by such employer for the officials or employees,
or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund
thus accumulated, and wherein its is provided in said
plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said
officials and employees.)
b. Any amount received by an official or employee or by
his heirs from the employer as a consequence of
separation of such official or employee from the service
of the employer because of death sickness or other
7.
physical disability or for any cause beyond the control of

the said official or employee.
c.
The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the
Philippines from foreign government agencies and other
institutions, private or public.
d. Payments of benefits due or to become due to any
person (residing in the Philippines) under the laws of
the United States administered by the United States
Veterans Administration.
e. Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
f.
Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by
government officials and employees.
Miscellaneous items, likewise exempt, including:
a.
Income of foreign governments or financing institutions
owned, controlled or enjoying refinancing from such
foreign governments and of international or regional
financial institutions established by foreign governments
from their passive investments in the Philippines
b. Income of the Philippine government and its political
subdivisions derived from public utilities or in the
exercise of essential governmental functions
c.
Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic,
literary or civic achievement but only if:
i.
The recipient was selected without any action on
his part to enter the contest or proceedings; and
ii.
The recipient is not required to render substantial
future services as a condition to receiving the prize
or award
d. All prizes and wards granted to athletes in local and
international sports competitions whether held in the
Philippines or abroad.
e. Gross benefits received by officials and employees of
public and private entities provided, however, that the
total exclusion shall not exceed P30,000 which shall
cover:
i.
Benefits received by officials and employees of the
national and local government pursuant to RA
6686
ii.
Benefits received by employees pursuant to PD
851
iii. Benefits received by officials and employees not
covered by PD 851
iv. Other benefits such as productivity incentives and
Christmas bonus provided that the ceiling of
P30,000 may be increased through the rules and
regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after
considering, among others, the effect on the same
of the inflation rate at the end of the taxable year.
f.
GSIS, SSS, Medicare and Pag-ibig contributions and
union dues of individuals
g.
Gains from the sale of bonds, debentures or other
certificate of indebtedness with a maturity of more
than 5 years
h. Gains from the redemption of shares of stock in a
mutual fund company
COURSE: TAXATION I
PROFESSOR: GRUBA
Illustrations
Q: A, government employee, retired from service. Upon
retirement, he received, among other benefits, terminal leave
pay which the CIR withheld a portion allegedly representing
income tax thereon. Is terminal leave pay considered part of
gross income of the recipient?
A: NO. Terminal leave pay received by a government official or employee
is not subject to withholding (income) tax. The rationale behind the
employees entitlement to an exemption from withholding tax on his
terminal leave is that commutation of leave credits, more commonly
known as terminal leave, is applied for by an officer or employee who
retires, resigns or is separated from the service through no fault of his
own. In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement pay is always less
than generous if not meager and scrimpy. Terminal leave payments are
given not only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not being part of
the gross salary or income of a government official or employee but a
retirement benefit, terminal leave pay is not subject to income tax (see
COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA)
Q: A, a US Citizen, was a civilian employee working in Clark Air

Base. He sold a car to a member of the US Marine Corp, the
transaction having taken place at Clark Air Base. As a result of
said sale, the CIR rendered A liable for CGT. A argues that the
sale was made outside the Philippine territory and hence he is
not liable for CGT. Is As contention correct?
A: NO. The Philippines is is not precluded from allowing another power
to participate in the exercise of jurisdictional right over certain portions
of its territory. If it does so, it by no means follows that such areas
become impressed with an alien character. They retain their status as
native soil. They are still subject to its authority. Its jurisdiction may be
diminished, but it does not disappear. So it is with the bases under lease
to the American armed forces by virtue of the military bases agreement
of 1947. They are not and cannot be foreign territory. Having held that
Clark Air Base has not become foreign soil or territory, the country's
jurisdictional rights therein, certainly not excluding the power to tax,
have been preserved. A is liable for the income tax arising from a sale of
his automobile in the Clark Field Air Base, which clearly is and cannot
otherwise be other than, within our territorial jurisdiction to tax (see
REAGAN VS. COMMISSIONER)
Q: The national government expropriated the property of A.

For just compensation, the government paid A a sum of which a
portion was in tax-exempt government Bonds. A did not
include the sum received by him from the government in the
form of bonds in payment of the expropriated properties, in
the belief that the said amount was free or exempt from
taxation. Is A correct?
A: NO. There can be no question that Rodriguez is taxable on its income
derived from the sale of its property to the Government. The fact that a
portion of the purchase price of the property was paid by the
Government in the form of tax exempt bonds does not operate to
exempt said income from income tax. The income from the sale of the
land in question and the bond are two different and distinct taxable
items so that the exemption of one does not operate to exempt the
other, unless the law expressly so provides. What the law exempts is
documentary stamp tax and the interest derived from such bonds. (see
E. RODRIGUEZ INC. VS. COLLECTOR)
FRINGE BENEFITS TAX (SECTION 33, NIRC)

Q: What is a fringe benefit?
A: As defined by Section 33(B), the term fringe benefit means any
good, service or other benefit furnished or granted in cash or in kind by
an employer to an individual employee (except rank and file employees
as defined herein) such as, but not limited to, the following:
1.
2.
3.
4.
5.
Housing;
Expense account;
Vehicle of any kind;
Household personnel, such as maid, driver and others;
Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents;
and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
Q: What is the Fringe Benefit Tax?

A: The State imposes a final tax of 32% effective January 1, 2000 on the
grossed-up monetary value of fringe benefit furnished or granted to the
employee except rank and file employees by the employer, whether an
individual or a corporation unless the fringe benefit is required by the
nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage
of the employer.
Q: What is the rationale behind the Fringe Benefits Tax?

A: As a general rule, the income recipient is the person liable to pay the
income tax. In order to improve collection of income on the
compensation income of employees, the State requires the employer to
withhold the tax upon payment of the compensation income. However,
it has been observed that many of the fringe benefits paid by the
employer to his employees are not subjected to income tax and
withholding tax on compensation. To plug this loophole, RA 8424 was
passed. It imposed a fringe benefits tax on the fringe benefits received by
supervisory and managerial employees. The law mandates that the
employer shall assume the fringe benefits tax imposed on the taxable
fringe benefits of the managerial or supervisory employees, but allows
the employer to deduct such fringe benefit tax as a business expense
from its gross income. However, the fringe benefits of rank-and-file
employees are treated as part of his compensation income, which must
be withheld and deducted by his employer from the compensation
income of the employee.
Note: Clearly, there is a difference in tax treatment between supervisory
and managerial employees on one hand and rank-and-file employees on
the other. It can be argued that such contravenes the fundamental
principle that the income tax shall be imposed based on the taxpayers
ability to pay.
COURSE: TAXATION I
PROFESSOR: GRUBA
Q: How do you define a (1) managerial employee; (2)

supervisory employee and (3) rank-and-file employee?
A: RR 3-98 provides the following definitions:
a.
A managerial employee refers to one who is vested with
powers or prerogatives to lay down and execute management
policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees
b. A supervisory employee is one who, in the interest of the
employer, effectively recommends such managerial actions if
the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent
judgment.
c.
A rank-and-file employee means all employees who are
holding neither managerial or supervisory position
Q: What is meant by grossed-up monetary value of the fringe

benefit?
A: As defined in RR 3-98, the grossed-up monetary value of the fringe
benefit represents the whole amount of income received by the
employee which includes the net amount of money or net monetary
value of property which has been received plus the amount of the fringe
benefit tax thereon otherwise due from the employee, but paid by the
employer for and in behalf of his employee.
Q: How is the grossed-up monetary value of the fringe benefit

determined?
A: It is determined by dividing the the actual monetary value of the
fringe benefit by 68% effective January 1, 2000 provided that:
1.
Fringe benefit furnished to employees and taxable under

Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at
the applicable rates imposed thereat.
(Note: To review, Section 25(B) refers to non-resident aliens
not engaged in trade or business in the Philippines whose
income are taxed at 25% and Sections 25(C-E) refers to alien
individuals and Filipinos employed in RHQs, ROHQs of MNCs,
OBUs and petroleum subcontractors.)
2.
The grossed-up value of the fringe benefit shall be

determined by dividing the actual monetary value of the
fringe benefit by the difference between one hundred
percent (100%) and the applicable rates of income tax under
Subsections (B), (C), (D), and (E) of Section 25.
Q: Are all fringe benefits taxable?

A: No. As provided in Section 33(C), the following fringe benefits are not
taxable:
1. fringe benefits which are authorized and exempted from tax
under special laws;
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit
plans;
3. Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not; and
4. De minimis benefits as defined in the rules and regulations to
be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Q: What are de minimis benefits?

A: As defined by RR 3-98, de minimis benefits are benefits of relatively
small value offered or furnished by the employer to his/her employees
as a means of promoting the health, goodwill, contentment, efficiency of
his/her employees. These benefits are exempt from the withholding tax
on compensation income, and consequently from income tax, regardless
of whether or not the recipients of the benefits are managerial or rankand-file employees.
Q: What are examples of de minimis benefits?

A: The following are examples of de minimis benefits:
a.
rice subsidy of P1,500 or one sack of 50kg rice per month
amounting to not more than P1,500.
b. Uniforms and clothing allowance not exceeding P4,000 per
annum
c.
Actual yearly medical benefits not exceeding P4,000 per
annum
d. Daily meal allowance for overtime work not exceeding 25% of
the basic minimum wage
e. Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year and the
monetized value of leave credits paid to government officials
and employees.

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COURSE: TAXATION I

fund or property existing at one distinct point in time while income

As held in REPUBLIC OF THE PHILIPPINES VS. MANILA ELECTRIC COMPANY, Income

Q: When can stock dividends be considered income?

Q: When is income taxable?

Q: What is the difference between income and capital?

A: Stock dividends which represent transfer of surplus to capital account

KINDS OF INCOME TAX SYSTEMS

professional income or mixed income compensation and

Q: How do you distinguish schedular treatment from global

Q: To which system does the method of taxation under the

PHILIPPINE INCOME TAX LAW

Q: What are the types of Philippine Income Tax?

DEFINITION OF TERMS (SECTION 22, NIRC)

Q: What are the features of the Philippine Income Tax Law?

Q: What are the criteria in imposing Income Tax in the

An individual, a trust, estate or corporation

the time during the taxable year.

Means borrowing funds from 20 or more

GENERAL PRINCIPLES OF INCOME TAXATION

KINDS OF INCOME TAXPAYERS

Q: What are the kinds of income taxpayers?

Q: What is meant by residence?

Q: Why is it important to determine whether a citizen is a

Q: Why is there a distinction?

A: A resident citizen is taxed on his worldwide income because he

Q: Are non-resident citizens required to file income tax returns

Non-resident Aliens Engaged and Not engaged in Trade or

Q: Is an heir of a deceased individual taxpayer liable for taxes?

general professional partnerships

and other energy operations pursuant to an operating

OVERVIEW OF CORPORATIONS AS TAXPAYERS

Q: Differentiate the kinds of corporate taxpayers.

RESIDENT FOREIGN CORPORATIONS

a general sales agent and it was engaged in selling or issuing tickets,

NON-RESIDENT FOREIGN CORPORATIONS

Q: Company A, a domestic corporation, entered into contracts

FOREIGN CORPORATION VIS--VIS BRANCH OFFICE IN THE

based on the premise that the business of the foreign corporation is

NON-RESIDENT FOREIGN CORPORATIONS

Note the following:

Q: The tax code provides that the recipient (doing business

TAX ON INDIVIDUALS (SECTIONS 24-26, NIRC)

From all sources within and without the Philippines by

Shall be subject to the graduated income tax in accordance with the

The taxable income here does not include

Tax on certain passive income under Section 24(B)

PASSIVE INCOME IN GENERAL

Q: Are passive incomes included in the computation of gross

CAPITAL GAINS TAX IN GENERAL

CAPITAL GAINS WRT SHARES OF STOCK

INTEREST DERIVED FROM FOREIGN CURRENCY DEPOSIT AND

GENERAL PROFESSIONAL PARTNERSHIPS (GPPs)

Q: Is a GPP liable for income tax?

Q: Distinguish between a GPP and an ordinary business

35% effective November 1, 2005

In case of corporations adopting the fiscal year accounting period, the

Q: A and B, co-owners, bought 3 parcels of land in one

On the other hand, as provided in Section 28(B)(1), the rate of RCIT on

A: NO. A Co-Ownership who own properties which produce income

A: As defined in Section 31, taxable income means the pertinent items

Q: A group of insurance companies in the Philippines decided

TAX ON CORPORATIONS (SECTIONS 27-30, NIRC)

Q: What is meant by taxable income which is subject to RCIT?