TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
August 2, 2016
By Isay Abad
Title 1 Organization and Function of the Bureau of
Internal Revenue
We will take up tonight Title 1 of the National Internal Revenue
Code (NIRC), in so far as the Organization and Function of the
Bureau of Internal Revenue (BIR).
_History_
1904 - Our Internal Revenue (IR) tax laws dates back
as early as 1904. It was patterned after the IR laws of
the United States, being then a colony of the US. From
1904 it went to series of amendments in 1913, 1916
and 1970.
1939 - The NIRC from then up to now began only in
1939. Prior to 1939, it was just called an Internal
Revenue Law. And in 1939, the NIRC was enacted.
This was under CA 466 (?).
1972 - From 1939 it went to series of amendments until
on 1972, the declaration of Martial Law, where Marcos
re-enacted the NIRC and called it the NIRC of 1977. Of
course, it went through series of amendments. Marcos
that time had both legislative and executive powers.
1986 - Then came EDSA in 1986. An Executive Order
was enacted re-enacting the same and called it the
NIRC of 1986. Cory at that time also had Legislative
and Executive powers under a Revolutionary
Government.
1997 - The current NIRC is now the NIRC of 1997 RA
8424. This was promulgated through the persuasions
of the World Bank to reform our IR laws. So you notice
in your Section 1:
Section 1. Title of the Code. This Code shall be known as
the National Internal Revenue Code of 1997.
Now, this law took effect on January 1, 1998. This has been the
law until now which was also subjected to amendments. What
we are using now is the NIRC of 1997 as amended. That is the
brief background of our Section 1 on how these all came about.
You have Section 2, the Powers and Duties of the BIR, in so far
as the BIR set-up.
Section 2. Powers and Duties of the Bureau of Internal
Revenue The Bureau of Internal Revenue shall be under
the supervision and control of the Department of Finance and
its powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect
to and administer the supervisory and police powers
conferred to it by this Code or other laws.
In the exercise of the power of taxation which was brought up
under our discussion in the Principles, the power of Taxation is
inherent in the State. It is exercised by the Legislative body, in
our case, the Congress. Specifically, the tax measures should
emanate and originate in the House. So Congress will determine
what we call as the Tax Policy, thus the NIRC was enacted. (Of
course, the legislation is brought to the President for signing, or
the President will not act on it and after 30 days it will lapse into
a law.)
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So the NIRC, in so far as the Executive Department,
the implementation and enforcement of the law is in the
Department of Finance (DOF).
- It is brought to the BIR, the agency in charge in so
far as our internal revenue laws.
- The other agency, in charge also of revenue
collection is the Bureau of Customs (BOC). But
here, what is legislated involves the Tariff and
Customs Code. Currently you have the Customs
Modernizations Act of 2016. It lapsed into law
sometime in June for Pnoy did not sign.
Nevertheless, in so far as taxation of imported articles, it will be
governed by the Tariff and Customs Code (TACC) and likewise,
it will still be the DOF that is in charge.
The Tax Policy on the levy is on Congress, the Tax
administration aspect is done by the Executive through the DOF.
But for specific purposes, as in the enforcement of the TACC, it
is the BOC.
In the case of BOC, you have there the Commissioner, wherein
below him are the District collectors. The Philippines is divided
into several districts where there are district collectors assigned.
In the case of the BIR( in so far as internal revenue laws in
connection with the NIRC and other special laws), it is headed
by the Commissioner, and below him are the Revenue
Regional Directors. Like the BOC, the revenue collection
offices are also brought down to the regional levels, not
necessarily following the regional political set-up. Then below
the Regional Directors is the Revenue District Officers (RDO) in
the cities.
The you have Section 3. The Officials of the BIR is headed by
the Commissioner with 4 deputy commissioners.
Section 3. Chief Officials of the Bureau of Internal
Revenue - The Bureau of Internal Revenue shall have a chief
to be known as Commissioner of Internal Revenue,
hereinafter referred to as the Commissioner and four (4)
assistant chiefs to be known as Deputy Commissioners.
Now the BIR has 2 essential functions:
1. Quasi-legislative power to make rules and
regulations in the enforcement of the NIRC or the tax
law, for purposes of assessment and collection under
Section 2.
2. Quasi-judicial the power under Section 4, the power
to interpret. Interpretation is usually judicial in character
such as in deciding cases.
The Commissioner both has this legislative and powers.
SEC. 4. - Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.
The power to interpret the provisions of this Code and other
tax laws shall be under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of
Finance.
Xxx
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
So take note of the scope of authority. It is exclusive and
original. No other office in the government has the power to
interpret, except the Commissioner, subject to review by the
Secretary of Finance.
SEC. 4. - Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.
Xxxx
The power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals.
So, second paragraph of Section 4. All matters involving
assessments.
How come they are to decide disputed assessments?
- Because the taxes in the NIRC are what we call
Self-assessing taxes.
- They are called self-assessing because the tax
payer himself determines the tax liability.
How?
- He files the tax return and pays the tax.
Is there any intervention outside of the tax payer?
- None. The tax payer is the one who files the return,
makes the declaration of the return, on the basis
of such, computes the tax and pays the amount he
computed.
Unlike real property tax, there is an intervention, this is what we
call as the Non- self-assessing.
- Example of a non- self-assessing is the Customs
Duties. The importer is unable to determine the
dutiable value. The imported article upon arrival,
will pass through the Customs Examiner and
Customs Appraiser and will go to the Customs
Collector.
In the NIRC, there is no such process. Just like in your income,
the determination of your income is not dictated by the
government, ikaw mismo as a tax payer would know the income
or wages that you will be earning. On the basis of that, ikaw ang
magfifile ng iyong returns kasi ikaw yung nakakaalam. Whether
dayaan mo iyan o hindi, that is up to you. On the basis of that
return, you will be paying the tax. This is a general feature ha,
this is not the nitty-gritty yet because the statute will provide the
peculiarities.
After that is done, does that mean na tapos na iyon? Natanggap
nan g BIR yung return and bayad mo, hanggang doon na lang
ba? The answer is No. After filing the return and paying, tska
palang papasok iyong tax assessment process.
You will now be subject to tax examination, merong taga BIR na
pupunta sa tindahan mo dala ang letter of authority that you are
under investigation. You are under investigation not for the
reason na nandaya ka, but for purposes that they want to
examine on whether you declared the correct income and filed
the correct tax. Malalaman lang na nandaya ka after the result
of the examination, meanwhile, wala pa iyon. There is no
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suspicion. That is a routinary process done kasi nga self-
assessing. How will the BIR know na tama iyong dineclare at
binayaran mo. So, since hindi alam ng gobyerno na tama iyon,
it goes to that assessment process. The government is given 3
years after the filing of the return, from the deadline, the
government is given 3 years to determine kung tama ba iyong
dineclare mo at tama ba iyong tax.
However, not all dadaan sa assessment, may mga suki lang jan.
Of course, if you are a wage earner you will not be subject to
that. The government will be spending so much for the
examination and then 1thousand lang pala ang babayaran mo
na tax. In other words, there is bench marking and selection
process, titingnan nila sino itong big tax payers. If you are a big
business or a large tax payer then they will have a basis for the
examination.
Your returns now will be investigated kung tama ba iyon. After
that they will send you now a notice of assessment, on the basis
na meron silang nakita na deficiency, pag-recompute may
kulang, a notice will now be sent. So kung gusto mong
ichallenge yung assessment deficiency, then the remedy of the
tax payer is to protest. The protest is lodged to the CIR (BIR) on
the basis of its Quasi-judicial powers. It will either be granted or
denied.
Also, under section 4 the tax payer may file for a tax refund. If
the tax payer discovers that he has overpaid or erroneously paid
the tax then magfifile siya ng claim for refund. The BIR will either
grant or deny, if denied, it will go to the CTA.
Now Section 5, the power of the Commissioner to Obtain
information, and to Summon/Examine, and to take Testimony.
Section 5. Power of the Commissioner to Obtain
information, and to Summon/Examine, and Take
Testimony of Persons. - In ascertaining the correctness of
any return, or in making a return when none has been made,
or in determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in evaluating
tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which
may be relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than
the person whose internal revenue tax liability is subject to
audit or investigation, or from any office or officer of the
national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas
and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of
production, receipts or sales and gross incomes of taxpayers,
and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies,
regional operating headquarters of multinational companies,
joint accounts, associations, joint ventures of consortia and
registered partnerships, and their members;
(C) To summon the person liable for tax or required to file a
return, or any officer or employee of such person, or any
person having possession, custody, or care of the books of
accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any
other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or
other data, and to give testimony;
(D) To take such testimony of the person concerned, under
oath, as may be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a
canvass from time to time of any revenue district or region
and inquire after and concerning all persons therein who may
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
be liable to pay any internal revenue tax, and all persons
owning or having the care, management or possession of any
object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding,
nothing in this Section shall be construed as granting the
Commissioner the authority to inquire into bank deposits
other than as provided for in Section 6(F) of this Code
Ito yung mangyayari during the 3year period. The BIR will ask
you to submit your receipts, books and records. They will obtain
3rd party information, your suppliers and customers. Baka meron
palang undeclared income.
Then on the last paragraph, on the authority to inquire on your
bank accounts. In spite of all these vast powers and authority of
the Commissioner, hindi nito saklaw ang paginquire sa iyong
bank deposits. There is actually a proposal in Congress to relax
the Bank Secrecy Law because its provisions are very strict.
There are only 2 grounds within which the BIR can inquire into
your bank accounts:
1. For Estate Tax purposes
2. When the tax payer files for compromise on tax
deficiency based on financial incapacity
- After a finding of a deficiency, the tax payer would
now ask for a compromise. May finding na 10M
ang deficiency and the tax payer will say na I am
willing to pay pero wala akong pera, may pera ako
sa bangko pero 500T nalang. So totoo ba yan,
papirmahin ka ng waiver to inquire now into your
bank accounts.
Outside of the 2 grounds, there is no way.
Then Section 6. Another Power of the Commissioner to Make
assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. That is really a power in so far
as the tax administration aspect.
Under section 6(a). Examination of Returns and Determination
of Tax Due. After the return has been filed, che-check apin kung
tama ba yun by the Commissioner through the district revenue
officers.
Section 6. Power of the Commissioner to Make
assessments and Prescribe additional Requirements for
Tax Administration and Enforcement
(A)Examination of Returns and Determination of Tax
Due.
- After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of
any taxpayer and the assessment of the correct amount of
tax: Provided, however; That failure to file a return shall not
prevent the Commissioner from authorizing the examination
of any taxpayer.
The tax or any deficiency so assessed shall be paid upon
notice and demand from the Commissioner of from his duly
authorized representative.
Any return, statement of declaration filed in any office
authorized to receive the same shall not be withdrawn:
Provided, That within three (3) years from the date of such
filing, the same may be modified, changed, or amended:
Provided, further, That no notice for audit or investigation of
such return, statement or declaration has in the meantime
been actually served upon the taxpayer.
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Section 6(b). For failure to submit required returns, statements,
reports and other documents, then the Commissioner will make
the assessments on the basis of the best evidence obtainable.
Like you did not file a return, what is the basis now for the BIR if
wala kang record sa kanila, they will now investigate you and
ask for your records. On the basis of the best evidence
obtainable, they will now make an assessment na ito ang hindi
mo binayaran, they will make an assessment of your tax
deficiency.
(B) Failure to Submit Required Returns, Statements,
Reports and other Documents. When a report required by
law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is reason to
believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best
evidence obtainable.
In case a person fails to file a required return or other
document at the time prescribed by law, or willfully or
otherwise files a false or fraudulent return or other document,
the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain
through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.
Then Section 6(c), for the authority to conduct inventory-taking,
surveillance and to prescribe Presumptive Gross Sales and
Receipts. They would go to your bodega and conduct
inventories. Or do surveillance like na tip-off yung BIR na heavy
yung business but noticed that the volume of the business that
come and go does not match to the returns of the tax that you
are paying. Magoobserve ngayon sila sa business mo, across
the street, magcocoffeeshop, titingnan tingnan ang labas pasok
ng business mo. On that day alone, they will be able to record
of the volume. If it will not match their surveillance, they will now
make a presumptive gross sales and receipts, kasi you
underdeclared your gross rates.
(C) Authority to Conduct Inventory-taking, surveillance
and to Prescribe Presumptive Gross Sales and Receipts.
- The Commissioner may, at any time during the taxable year,
order inventory-taking of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities, or may place
the business operations of any person, natural or juridical,
under observation or surveillance if there is reason to believe
that such person is not declaring his correct income, sales or
receipts for internal revenue tax purposes. The findings may
be used as the basis for assessing the taxes for the other
months or quarters of the same or different taxable years and
such assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and
invoices in violation of the requirements of Sections 113 and
237 of this Code, or when there is reason to believe that the
books of accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be
filed under the provisions of this Code, the Commissioner,
after taking into account the sales, receipts, income or other
taxable base of other persons engaged in similar businesses
under similar situations or circumstances or after considering
other relevant information may prescribe a minimum amount
of such gross receipts, sales and taxable base, and such
amount so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax liabilities of
such person.
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
Section 6(d), is the authority to terminate taxable period which
will take place when the tax payer will retire. Hindi ibig sabihin
na wala ka ng obligasyon when you retire. Babalikan ka pa rin
ng BIR, paano iyong transactions before that. When you retire,
the BIR will make an assessment, a tax period otherwise
babalikan ka. They will investigate you again to determine you
still have to pay deficiency tax. We also have those intending to
leave the country or removing property or hide or concealing
property tending to obstruct the collection of the tax.
We will just finish this part. When the assessment has already
become final, the next thing that will happen is collection. Paano
ba nila kokolektahin ang deficiency tax. They would run after you
real and personal properties, garnish your properties to collect
the deficiency. The assessment is 3 years, the BIR is given 5
years to complete the collection.
(D) Authority to Terminate Taxable Period. - When it shall
come to the knowledge of the Commissioner that a taxpayer
is retiring from business subject to tax, or is intending to leave
the Philippines or to remove his property therefrom or to hide
or conceal his property, or is performing any act tending to
obstruct the proceedings for the collection of the tax for the
past or current quarter or year or to render the same totally or
partly ineffective unless such proceedings are begun
immediately, the Commissioner shall declare the tax period
of such taxpayer terminated at any time and shall send the
taxpayer a notice of such decision, together with a request for
the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, or
such portion thereof as may be unpaid, and said taxes shall
be due and payable immediately and shall be subject to all
the penalties hereafter prescribed, unless paid within the time
fixed in the demand made by the Commissioner.
Section 6(e). The authority to prescribe real property values. For
purposes of real property tax, it is your local assessor (city or
provincial) which determines the fair market value in a particular
territory or locality. The BIR also makes its own valuation which
we call as the zonal value. Usually the zonal value of the BIR is
higher than the fair market value of the assessor. They are not
necessarily bound to follow the valuation of the assessor. So, in
determining fair market value therefore, there are 2 valuations.
For purposes of the tax base, the rule is whichever is higher
between the BIR and the assessor.
(E) Authority of the Commissioner to Prescribe Real
Property Values. - The Commissioner is hereby authorized
to divide the Philippines into different zones or areas and
shall, upon consultation with competent appraisers both from
the private and public sectors, determine the fair market value
of real properties located in each zone or area. For purposes
of computing any internal revenue tax, the value of the
property shall be, whichever is the higher of:
(1) the fair market value as determined by the Commissioner,
or
(2) the fair market value as shown in the schedule of values
of the Provincial and City Assessors.
Section 6(f). This is the authority to inquire into the bank
accounts, whether you have the peso or foreign currency.
Looking into the 2 instances, for the estate and on the basis to
compromise the tax liability based on financial capacity.
Now there is a third one which is introduced under RA 10021,
this is an inquiry by a foreign tax authority. A foreign tax authority
may inquire on the BIR for a tax information, and that is allowed
under this section 6f number 3. Ang haba2x ng provision.
(Please refer to your codal for the provision.)
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Section 6(g). Authority to accredit and register tax agents. Hindi
ito mga fixers. They used to be fixers. Ngayon, kasi di mapigilan
ang mga taong nagfofollow-up, they are now able to regulate the
fixers by accrediting them. They are accredited based on their
professional competence, integrity and moral fitness. This is
required if you are not a lawyer. If you are a lawyer, you can go
to all offices without need of any accreditation. But for purposes
of the BIR, kailangan accredited ka. If you are a lawyer, there is
no need for such accreditation.
(G) Authority to Accredit and Register Tax Agents. - The
Commissioner shall accredit and register, based on their
professional competence, integrity and moral fitness,
individuals and general professional partnerships and their
representatives who prepare and file tax returns, statements,
reports, protests, and other papers with or who appear
before, the Bureau for taxpayers. Within one hundred twenty
(120) days from January 1, 1998, the Commissioner shall
create national and regional accreditation boards, the
members of which shall serve for three (3) years, and shall
designate from among the senior officials of the Bureau, one
(1) chairman and two (2) members for each board, subject to
such rules and regulations as the Secretary of Finance shall
promulgate upon the recommendation of the Commissioner.
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Section 6(h). This is for purposes of compliance. If they see
some loopholes in your requirements then they will require some
more documents.
(H) Authority of the Commissioner to Prescribe
Additional Procedural or Documentary Requirements. -
The Commissioner may prescribe the manner of compliance
with any documentary or procedural requirement in
connection with the submission or preparation of financial
statements accompanying the tax returns.
Now, Section 7. Authority of the Commissioner to delegate
power. The powers of the commissioner will be delegated down
to the regional directors down to the revenue offices. However,
there are powers that cannot be delegated.
SEC. 7. Authority of the Commissioner to Delegate
Power. - The Commissioner may delegate the powers vested
in him under the pertinent provisions of this Code to any or
such subordinate officials with the rank equivalent to a
division chief or higher, subject to such limitations and
restrictions as may be imposed under rules and regulations
to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner: Provided, however,
That the following powers of the Commissioner shall not be
delegated:
(a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate, xxx
(d) The power to assign or reassign internal revenue officers
to establishments where articles subject to excise tax are
produced or kept.
SEC. 8. Duty of the Commissioner to Ensure the Provision
and Distribution of forms, Receipts, Certificates, and
Appliances, and the Acknowledgment of Payment of Taxes.
SEC. 9. Internal Revenue Districts.
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
SEC. 10. Revenue Regional Director.
SEC. 11. Duties of Revenue District Officers and Other
Internal Revenue Officers.
SEC. 12. Agents and Deputies for Collection of National
Internal Revenue Taxes. - The following are hereby
constituted agents of the Commissioner:
(a) The Commissioner of Customs and his subordinates with
respect to the collection of national internal revenue taxes on
imported goods;
(b) The head of the appropriate government office and his
subordinates with respect to the collection of energy tax; and
(c) Banks duly accredited by the Commissioner with respect
to receipt of payments internal revenue taxes authorized to
be made thru bank.
Any officer or employee of an authorized agent bank
assigned to receive internal revenue tax payments and
transmit tax returns or documents to the Bureau of Internal
Revenue shall be subject to the same sanctions and
penalties prescribed in Sections 269 and 270 of this Code.
For Section 12(a) We have here the BOC, in connection with
importation. When you import you dont only pay the duties, you
also pay an internal revenue tax (like VAT) on account of
importation on excise tax. Since the excise tax is due to the BIR,
it is the BOC who is in charge of collecting kasi doon dadaan sa
kanila. We dont place BIR personnel there but under the law
they are now deputized.
For Section 6(c). Payment of taxes may now be made online to
duly accredited banks.
SEC. 13. Authority of a Revenue Offices. - subject to the
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a
Revenue Officer assigned to perform assessment functions
in any district may, pursuant to a Letter of Authority issued by
the Revenue Regional Director, examine taxpayers within the
jurisdiction of the district in order to collect the correct amount
of tax, or to recommend the assessment of any deficiency tax
due in the same manner that the said acts could have been
performed by the Revenue Regional Director himself.
Section 13. The Revenue officer could not make his
assessment functions without that Letter of Authority (LOA). No
revenue officer can go to the tax payer and say iimbestigahan
ka na namin that we are asking for your books of account etc.,
that could not be done if he is not armed with the letter of
authority. That LOA should also define kung anong year ka
iimbestigahan, kasi paano kung nagprescribe na pala.
SEC. 15. Authority of Internal Revenue Officers to Make
Arrests and Seizures. - The Commissioner, the Deputy
Commissioners, the Revenue Regional Directors, the
Revenue District Officers and other internal revenue officers
shall have authority to make arrests and seizures for the
violation of any penal law, rule or regulation administered by
the Bureau of Internal Revenue. Any person so arrested shall
be forthwith brought before a court, there to be dealt with
according to law.
SEC. 16. Assignment of Internal Revenue Officers
Involved in Excise Tax Functions to Establishments
Where Articles subject to Excise Tax are Produced or
Kept. - The Commissioner shall employ, assign, or reassign
internal revenue officers involved in excise tax functions, as
often as the exigencies of the revenue service may require,
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to establishments or places where articles subject to excise
tax are produced or kept: Provided, That an internal revenue
officer assigned to any such establishment shall in no case
stay in his assignment for more than two (2) years, subject to
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
Section 16. Here, revenue officers may be assigned to certain
establishments for 2 years lang. After that pwede ng palitan
because familiarity brings ------. Kung magtagal yan, di na yan
magbantay, magbeso2x na yan and magchikachika.
SEC. 17. Assignment of Internal Revenue Officers and
Other Employees to Other Duties. - The Commissioner
may, subject to the provisions of Section 16 and the laws on
civil service, as well as the rules and regulations to be
prescribed by the Secretary of Finance upon the
recommendation of the Commissioner, assign or reassign
internal revenue officers and employees of the Bureau of
Internal Revenue, without change in their official rank and
salary, to other or special duties connected with the
enforcement or administration of the revenue laws as the
exigencies of the service may require: Provided, That internal
revenue officers assigned to perform assessment or
collection function shall not remain in the same assignment
for more than three (3) years; Provided, further, That
assignment of internal revenue officers and employees of the
Bureau to special duties shall not exceed one (1) year.
Section 17. Assignment of Internal Revenue Officers and Other
Employees to Other Duties. They could be assigned to other
duties but it shall not be more than 3 years. This became a law
because prior to this law during the time of Commissioner
Liwayway Santiago, she made reassignments. Of course, yung
mga racket nila matatamaan, so they complained. Kung mag-
assign ka 3 years lang.
SEC. 19. Contents of Commissioner's Annual Report. -
The Annual Report of the Commissioner shall contain
detailed statements of the collections of the Bureau with
specifications of the sources of revenue by type of tax, by
manner of payment, by revenue region and by industry group
and its disbursements by classes of expenditures.
In case the actual collection exceeds or falls short of target
as set in the annual national budget by fifteen percent (15%)
or more, the Commissioner shall explain the reason for such
excess or shortfall.
SEC. 20. Submission of Report and Pertinent Information
by the Commissioner
(A) Submission of Pertinent Information to Congress. - The
provision of Section 270 of this Code to the contrary
notwithstanding, the Commissioner shall, upon request of
Congress and in aid of legislation, furnish its appropriate
Committee pertinent information including but not limited to:
industry audits, collection performance data, status reports in
criminal actions initiated against persons and taxpayer's
returns: Provided, however, That any return or return
information which can be associated with, or otherwise
identify, directly or indirectly, a particular taxpayer shall be
furnished the appropriate Committee of Congress only when
sitting in Executive Session Unless such taxpayer otherwise
consents in writing to such disclosure.
(B) Report to Oversight Committee. - The Commissioner
shall, with reference to Section 204 of this Code, submit to
the Oversight Committee referred to in Section 290 hereof,
5
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
through the Chairmen of the Committee on Ways and Means
of the Senate and House of Representatives, a report on the
exercise of his powers pursuant to the said section, every six
(6) months of each calendar year.
Section 19. and Section 20. These reports are submitted to
Congress by the commissioner, specially if the statutes have
loopholes on the basis of her reports. Any tax leakages or
loopholes will be brought to the oversight committee for its
corresponding legislation.
Section 21. Sources of Revenue. These taxes are self-
assessing.
SEC. 21. Sources of Revenue. - The following taxes, fees
and charges are deemed to be national internal revenue
taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue.
Next meeting we will go now to Income Tax.
August 9, 2016
By Yasmine Ibay
INTRODUCTION TO INCOME TAXATION
What is Income?
Income is the amount of money or property received by a
taxpayer (person or corporation) within a specified time whether
as payment for services, interest, or profits from investments.
Supreme Courts Definition of Income - Income is the flow of
wealth into the hands of the taxpayer other than return of capital.
*Note: This is a broader concept of income.
CONCEPT OF INCOME
Capital is the fund whereas, income is the wealth. However, not
all wealth which goes into the hands of the taxpayer will become
income. Part of that will be considered as capital.
As an illustration, we look into a borrower-lending relationship.
The lender lends money to the borrower for P10,000 with 12%
interest.
Principal: 10,000
Interest: (10,000 *12%) 1,200
Total Payment due: 11,200 (10,000 is a return
of capital and 1,200 is the income)
Take note that a part of the 11,200 is capital and capital is not
considered as income. So 10,000 is the capital and the 1,200 is
the income.
3 Manresa 2016-2017
Wealth which goes into the hands of the taxpayer will be income
provided that it does not pertain to capital. If the wealth that goes
into the hands of the taxpayer includes income, then you have
to remove capital portion in order to determine the income.
INCOME DERIVED FROM LABOR, EXERCISE OF BUSINESS
OR PROFESSION
From services rendered. Income is also pertains to earnings
derived from services rendered. Wages are paid services for
rendered. Likewise, salaries are paid for the labor rendered,
there is income.
Who earned the income? The laborer or the worker.
From the exercise of business or profession. It is through the
use of capital as a form of business or investment. Income is
derived from profit in the exercise of a business. Also, income is
derived when investments are made. When a gain or profit is
made through those investments then you will have also income.
So income may be derived from labor, exercise of business or
investment, or both.
GAINS IN DEALINGS OF PROPERTY
Income is also derived from the gains or profits in dealings in
property whether real or personal. The gain or profit in excess of
capital as a result of the exchange of transactions will be called
as income. However, we are not only interested in the income.
What we are interested of is the taxability of the income. For
purposes of taxability, there are 3 essential requisites for the
taxability of the income.
ESSENTIAL REQUISITES FOR THE TAXABILITY OF
INCOME
1. There must be a gain or profit.
Mere expectation for profit is not income. An increase
or appreciation in the value of the property does
not give rise to income.
For instance, you are a holder of shares of stocks
which you acquired 5 years ago and it was just selling
at P1.00. So you acquired 1,000 shares at P1.00 at a
total of P1,000. 5 years after, the value of the shares
ballooned to P1,000.00/share. So from P1.00, the
value of the share increased to P1,000.
Is there income?
No. There is merely an appreciation or increase in the
value of the property. There is no income.
For purposes that there will be an income, there
must be a transaction that will give rise to the
income. Hence, a transaction where no exchange of
value is given or received does not give rise to an
income. For income to be recognized, there must be a
transaction where there is a change of value. How will
that be? There must be a sale, conveyance or transfer
6
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
of the property. If there is no change or transaction,
there will just be an appreciation. What you are looking
at is just a capital which just appreciated in value. But
in the event that you are going to sell that property and
you are going to derive a gain upon that sale, then there
will be an income. So a transaction where there is no
exchange of values, it does not give rise to an income.
2. The gain or profit must be realized or received.
Basis on recognizing income:
a. Actual receipt (Cash Basis)
b. Constructive Receipt (Accrual Basis)
In the context of realization of income, income is
recognized on the basis of actual receipt or
constructive receipt. Under the Tax Code in relation
for accounting purposes, the taxpayer is given an
option at what point in time income is to be
recognized. It may be recognized on the basis of
actual receipt or constructive receipt. In other words,
income will be recognized upon the actual receipt of the
money. Or income is recognized when it was realized
even though actual receipt is only later.
In accounting, the actual receipt is called the CASH
BASIS. On the other hand, constructive receipt refers
to the ACCRUAL BASIS. Here, income is already
recognized although actual receipt is later.
Example:
Declaration of Dividends by X Corporation
November 15, 2015 declaration of dividends
January 15, 2016 distribution of dividends
You are a stockholder of the corporation and you
received dividends. Lets say, on the basis of your
shareholdings, there is a dividend of P1,000 and you
received the dividends on January 15, 2016. If you are
a stockholder, when did you realize/recognize the
income? The taxpayer under the NIRC is given 2
options at what point in time he is going to recognize
the income. If a stockholder uses the actual receipt for
recognizing the income, income is recognized only on
January 15, 2016 (taxable in the year 2016). This is the
time he realized the income on the basis of actual
receipt.
But if the stockholder is a constructive receipt taxpayer,
that he recognized the income at the time it was earned
even though receipt will take place later, then income
is recognized as early as 2015 (November 15, 2015)
when the dividends were declared. So at the point
where dividends were declared, income was already
there even though he is going to receive that later on.
The income was constructively received as early as
November 15, 2015.
So that is the option given to the taxpayer. He may use
constructive or actual receipt in recognizing the
income.
*Note: The law and for accounting purposes
requires consistency in recognizing/ realizing the
amount of income that you are going to earn during
3 Manresa 2016-2017
the tax year. Hence, if the taxpayer uses the actual
receipt, then all income that he is going to receive
during the tax year shall be based on the actual receipt.
The same is true if he opts to use the constructive
receipt.
3. The gain or profit must not be excluded by law or
treaty from taxation. (It is not tax-exempt.)
TWO APPROCHES IN TAXATION
In taxation of income, there are 2 role approaches.
1. Global Approach
2. Schedular Approach
Brief History of our Tax System. The Philippine Income Tax
System evolved from global to schedular. Before the late 80s,
we have the global system of taxation. The global system follows
the principle that all income are one and the same. Under this
income recognition, the law did not recognize the different kinds
and classes of income. In other words, since all income is
treated as one and the same, all types of income that you will
receive during the tax year (whether compensation, business,
profits, gains, and from other transactions) will be all treated as
one and the same. They are declared one time, claim the
deductions, and the taxable income will remain subject to the
income tax rates. So there was no differentiation of the different
types of income because all income are one and the same.
Case Ruling
Tan vs. Del Rosario (237 SCRA 324)
Global Approach refers ta a system where the tax
treatment views indifferently the tax base and generally
treats in common all categories of taxable income of
the taxpayer.
On the other hand, Schedular Approach refers to a
system employed where the income tax treatment
varies and made to depend on the kind or category of
taxable income of the taxpayer.
Take note that the tax treatment view indifferently the tax base.
There is no distinction. It generally treats in common the
categories of taxable income. All income are mingled, we allow
deductions if applicable, then you have your taxable income
times the income tax rate.
The opposite is what we call as the Schedular. There is a
distinction or differentiation of the different classes/items of
income. Under the Schedular, there is a separate treatment for
compensation, separate treatment for professional/business
income, passive income, and capital gains. There is now a
distinction of the different types of income which the taxpayer
may earn.
Our current income tax system follows the schedular. We
categorize our income into 4 classes.
Four classes of categories of income:
1. Compensation income
2. Business income / professional income
7
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
3. Passive income
4. Capital gains
In your readings you may encounter semi-schedular, semi-
global etc. but predominantly it is schedular. You would go over
the tax treatment over the different classes of taxpayers from
individuals to corporations. Youll notice the differentiation in the
manner of the treatment of these income. But they would say
that it is semi-global because there would be a common
treatment to all other income which are not subject to
special/preferential rates.
WITHHOLDING TAXES
When we shifted from the global to schedular, when there was
a distinction and differentiation of income, we introduced a tax
reform. We introduced the withholding of taxes.
Under the global approach, since it follows the principle that all
income are one and the same, a lot of income items have
escaped taxation. If you are a taxpayer who is purely
compensation income earner, normally the income that will be
taxed are those income arising from your labor. Now, if you have
a bank deposit having an amount of P10,000 and at the end of
the year it earned an interest of P100, normally you will not
anymore declare an interest income of P100 since it is merely of
minimal value. However, what if there are 100 million people
doing the same thing? Then that would be a big chunk of
revenue that would escape taxation. Nakaligtaan itax because
of the global approach of taxing income. There will be a lot of
income items which will not be reported. So we addressed that
by shifting to schedular approach. Then we introduced the
withholding of taxes.
The withholding of taxes follows the principle of pay-as-
you-go. Under the principle of pay-as-you-go, a tax is already
collected at the source of the income. In the case of wages, upon
the receipt from the employer, the taxes due are already
deducted and withheld by the employer. The employer then
remits the same to the BIR.
Yung interest income niyo sa deposit, masking P100 lang yan,
kinaltasan na yan ng bangko for the withholding tax on interest
income which we also call as passive income.
Withholding Agents. Under this principle, the tax was already
charged against the taxpayer at the very source of the income.
So you have withholding agents. The employer, banks,
whoever has custody of the income before its remittance to the
recipient. That custodian or withholding agent is the one, under
the law, with the obligation to make the withholding. Upon
receipt of income by the recipient, the tax had already been
deducted.
Who are the withholding agents?
Compensation income: employer
If you are engaged in the business or practice of profession,
when you bill your clients for services rendered, upon receipt of
the check, the withholding tax had already been removed.
Illustration:
3 Manresa 2016-2017
A fee has been charged at P100,00 for the services rendered
to a client. Normally, the withholding tax is at 10%. Hence, only
the P90,00 will be actually received. The P10,000 has been
withheld as income tax.
PASSIVE INCOME
An example would be interest income on bank deposits.
CAPITAL GAINS
Capital gains are when you have properties which are not used
in business. For instance, you sell a house and lot. There is
capital gains tax on the sale of the real property. A tax is already
collected unlike before. Before, the gains are declared on an
annual basis. Under the global, there is only one return to be
filed. You consolidate the income you have already earned
during the year, claim the deductions, then determine your
taxable income. From the taxable income you apply it to the
rates. Then thats the income tax you are going to pay. We
shifted from that and introduced the schedular.
Case Digest by Dean
Sison vs. Ancheta
When the simplified net income tax scheme or gross modified
income taxation was introduced, we recognized as early as that,
the 4 categories of income. Under that system, there were
separate traits for compensation income. To the individuals
engaged in business or practice of their profession were also
subject to different set of rates. A group of professionals
challenged the validity of that law. They questioned as to why
the rates for the compensation income earners are lower
than those earning business income.
Ruling: Apparently, what misled petitioner is his failure to take
into consideration the distinction between a tax rate and a tax
base Taxpayers may be classified into different categories. To
repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences Taxpayers
who are recipients of compensation income are set apart as
a class. As there is practically no overhead expense, these
taxpayers are not entitled to make deductions for income tax
purposes because they are in the same situation more or less.
On the other hand, in the case of professionals in the practice
of their calling and businessmen, there is no uniformity in the
costs or expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving all of them
zero deduction and indiscriminately impose on all alike the same
tax rates on the basis of gross income. There is ample
justification then for the Batasang Pambansa to adopt the gross
system of income taxation to compensation income, while
continuing the system of net income taxation as regards
professional and business income.
*Note: Later on, after EDSA Revolution, Cory Aquino revised
the tax rates complained of by the people. From that time until
now, youll notice that the rates of the individuals who are
compensation income earners or engaged in business or
practice of profession have the same rates. From 5%-32%. We
8
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

have the commonality insofar as the rates of their taxable Rental income location of the property
income.
*If the property is found abroad,
it is a foreign sourced income. If
FORMS OF INCOME in the Philippines, the rental
income is deemed earned in the
Philippines.
Money
Property Royalties or Gains derived place of use of the
Service from the use of intellectual intangibles
property
In receiving income, it is not always necessary that the income Gains on sale of real property location of the property
that you are going to receive will be in the form of cash. Income
is also recognized even if you will receive property. Likewise,
Gain on sale of real property place of sale
income is deemed recognized even if you receive a rendition of
service.
*Even if the product is found in
the Philippines but the
For instance, you are a lawyer and you are able to help consummation was in Hongkong
someone. Then the client has no money, in turn, hell render then it is an income without.
services to you as payment. He subsequently becomes your
driver. Hence, rendering such service(driving) is considered as Sale of merchandise place of sale
payment to the lawyer. Interest income residence of the debtor

A combination of cash, property or service is also allowed. *Contract of loan having a

lender-borrower relationship, the
source of income is the
SITUS OF TAXATION residence of the debtor. Lender
is in the Philippines, borrower is
Situs is the place of taxation. The place where the income is from Hongkong. Interest income
is earned in Hongkong.
due. For purposes of income tax, the situs is determined based
on the following:
Dividend Income residence/office of the
1. citizenship of the taxpayer corporation
2. residence of taxpayer Dividends are profits earned
3. source of income by a corporation distributed * If prinicipal office is in the US
to its stockholders. and you are a Filipino
stockholder residing in the
If you are a citizen of the state, the income you earned is subject Philippines, the income is
to income tax by reason of your citizenship. If you are an alien earned in the US. It is not the
residing in that state, the state taxes your income by reason of place of payment that
your residence. If you are an alien not residing in that country determines the source of the
but you are deriving income from that country, you are still taxed income but the office of the
based on the source of the income. corporation. Hence, it is an
income earned outside of the
Philippines.
Likewise, in our jurisdiction, we follow that rule on situs. We tax
income on the basis of citizenship, residence or source.
Mining place where the mine is
located
DETERMINATION OF SOURCE Farming place where the farm is
located
As a rule, it is not the place of payment which determines where
the income was earned.

Income Source August 11, 2016

Compensation for services place of performance of
rendered service (not the place of
payment)
*Note: A talent receiving
compensation in this country but
the performance was made
abroad, the income shall be
considered as an income earned
outside the Philippines (income
without). Because that is the
place of performance of the
service.
By Shahata Tagtagan
(NOTE: Sorry guys hindi ko narecord ang 1st 3 minutes (approx)
na discussion ni Dean. Pero sure ako na Section 31 lang ang
diniscuss nya na namiss ko. Let me cite the provision here and
put some discussion based on the Casasola book. )
SECTION 31 TAXABLE INCOME DEFINED 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.

3 Manresa 2016-2017
9
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
Taxable income refers to the gross income subject to tax, less
the deductions, whether itemized or optional standard
deductions, and/or personal and additional exemptions, if any,
authorized for such type of income. This term refers to the tax
base.
For individuals who are employed, it is the income after
deducting the exclusions and the exemptions.
For individuals engaged in trade or business or in the practice of
their profession, it is the income after deducting exemptions.
For corporations and other juridical entities, taxable income
would mean the net income, also after deducting the itemized
deductions or the optimal standard deductions of 40%, at the
option of the taxpayer.
Computation of taxable income must be computed with
respect to a fixed period. That period is twelve months ending
December 31st of every year, except in the case of a corporation
filing returns on a fiscal year basis, in which case taxable income
will be computed on the basis of such fiscal year.
DEANS DISCUSSION PROPER
Principle involving taxation: Income pertains to the flow of
wealth which goes into the hands of the taxpayer other than
return of capital. This gross income makes all income derived
from whatever source including but not limited to the following
items:
SECTION 32. GROSS INCOME
(A) General Definition Except when otherwise
provided in this Title, gross income means all
income derived from whatever source, including, but
not limited to the following items:
(1) Compensation;
(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) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partners distributive share from the net income
of the general professional partnership.
The gross income is defined under Section 32 by providing a list
of what would be considered as income, but the list is not limited
only to the items enumerated. From this list of 1 11, these are
not only the sources of your gross income. For purposes of
income taxation, or even for purposes of taxation, whether
the source is lawful or unlawful, it will still be taxable, unlike
in imposition of license fee which is normally imposed on
legitimate activities. But for purposes of tax, in particular income,
whether you derive income from, say, drag race, prostitution,
gambling, other vices, all these income are still taxable. If you
want to, you may be made to declare these sources of income,
whether legitimate or illegitimate sources.
1) Compensation. It pertain to compensation for services
in whatever form paid, including but not limited to fees,
salaries, wages, commissions, and similar others. For
purposes of compensation income, regardless of
whatever form the services were paid, it could still be
3 Manresa 2016-2017
taxable compensation income and they form part of
your taxable income.
There are employers who will provide mere allowance,
board and lodging, or representation. All these will form
part of the compensation income of the employee.
There is the rule we call for the convenience of the
employer rule the board and lodging and meal
allowance are provided by the employer, because
the employer has to have that person (e.g driver).
He has to have the person available 24 hours because
of the nature of the profession. The employer will
provide housing and meals.
In that occasion, will these board and lodging and the
meals and other facilities be included as part of this
compensation income?
NO MORE, because these facilities are extended to the
employee which are for the convenience of the
employer.
(To reiterate: If facilities are provided for the
convenience of the employer, these allowances will no
longer form part of the taxable compensation income
of the employee, in accordance with the for the
convenience of the employer rule. They are expenses
on the part of the employer; it will not be an additional
taxable compensation income on the part of the
employee. What will be taxable perhaps are the wages
and salaries).
There are also employers, especially those engaged in
business, where representation is provided. Gas
allowance, or even service vehicle, or vehicle
allowance is provided by the employer, which are in
pursuit of his trade or business.
If these allowances will require the employee:
a) to account how they were spent;
b) provide receipts; and
c) return any excess,
then these allowances will not form part of the
compensation income in the hands of the
employee. Meron kang mga salesman, sales
representative. They go around promoting the
business, to get customers. The employer will provide
them for this __. May sasakyan sila, gasoline,
representation etc. However, if these allowances will
require them to liquidate or account or provide receipts
on how they were spent, then return any excess, then
these allowances will not form part of the compensation
income. While there may be expenses on the part of
the employer, it is not income on the hands of the
employee.
On the other hand, if the allowances will NOT
require the employee to provide receipts, like add
on na lang yun sa sweldo nya, no requirement to
liquidate and account for them, then that
allowances will form part of his taxable
compensation income. Those allowances will be
subject to tax, including his salaries and wages.
2) Gross income derived from the conduct of trade or
business or the exercise of a profession When in
10
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
the course of the conduct of the business, income was
derived, then that income is also taxable. Or in the
exercise of a profession, there is professional income
in the performance of profession, then a professional
income is recognized, and therefore also taxable.
3) Gains derived from dealings in property - This
pertains to transactions where gain is derived when
properties are sold, exchanged or conveyed, whether
real or personal properties. For as long as there will be
a gain or profit in those dealings, the gain or profit will
also be a taxable income.
4) Interest - It pertains to the use or forbearance of
money. In a contract of loan, the lender will impose an
interest on the money borrowed by the borrower. An
interest income is earned in the loan, then that interest
income is also a taxable income.
5) Rents - Rental income for the use, or as a
consideration for the use of the property. The lessee
pays rentals to the lessor, then in the hands of the
lessor, that is a rental income, and therefore taxable.
6) Royalties This pertains to the consideration for the
use of intangibles/intellectual properties or the use of
the trade name or trademark, where the owner is
entitled to the payment of royalties. In the hands of the
owner of the trade name or trademark, that is a taxable
income.
7) Dividends These are distribution of profits, as
earned by the corporation, to the stockholders or
business partner in a partnership. That is considered
as taxable dividends.
8) Annuities - Like interest income, this pertains to
periodic payment. There is a fund set up, and that fund
earns or generates income in the form of annuities.
This is taxable income in the hands of the beneficiary.
9) Prizes and winnings - There are conditions and
requirements for their exclusion. However as a rule,
these are taxable.
10) Pension - In the event you retire, you receive
pensions. These pensions include retirement pay and
separation pay. They are taxable, as a rule, because
they are payment for services rendered. They will be
excluded only when they comply with the requirements
for purposes of exclusion.
3 Manresa 2016-2017
11) Partners distributive share from the net income of
the general professional partnership - In the case of
the professional partnership, this pertains to the
exercise of a common profession. The partnership
earns income from the exercise of a common
profession. However, when we go to Section 26, the
partnership is not a taxable person (the professional
partnership). The taxable persons are the professional
individuals in that partnership. The individual
partners distributive share is a taxable income.
The income of the professional partnership per se
is not a taxable entity.
Again, these items from 1-11 are just some of the sources of
taxable income, but not limited only to them. There are other
sources. The rule is: as long as they would pertain to the
flow of wealth, which goes to the hands of the taxpayer
other than return of capital, then that will be income.
SECTION 32 (B) EXCLUSIONS FROM GROSS INCOME -
The following items shall not be included in gross income and
shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or
otherwise, but if such amounts are held by the
insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross
income.
(2) Amount Received by Insured as Return of
Premium. - The amount received by the insured, as
a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term
mentioned in the contract or upon surrender of the
contract.
(3) Gifts, Bequests, and Devises. The value of
property acquired by gift, bequest, devise, or
descent: Provided, however, that income from such
property, as well as gift, bequest, devise or descent
of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts
received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus
the amounts of any damages received, whether by
suit or agreement, on account of such injuries or
sickness.
(5) Income Exempt under Treaty. - Income of any kind,
to the extent required by any treaty obligation
binding upon the Government of the Philippines.
1) Life Insurance - How is this excluded? It is excluded
when the insured dies, and the insurance company
faces the heirs/beneficiaries. On the death of the
insured, the proceeds of the life insurance policy are
the receipt (?) of the proceeds income. Under 32 b (1),
life insurance proceeds are not income, because what
the heirs/beneficiaries receive pertains to return of
capital, because that is an indemnity for the loss of life.
11
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
Ano na ang kapalit ng life? Pera na. Namonetize ang
life by reason of the death of the insured. What you
receive actually is the return of capital, being contracts
of indemnity.
(NOTE: Dean started saying #2 Amount received
pero hindi nya tinuloy. So Im guessing part pa rin ito
ng #1) Another feature (?) of insurance is when they
are paid in installments. Say coverage is for P500k,
then you are paid in installments. When you add up all
the installment payment, naging P560k, then there is
income. The income is P60k, the difference of the
principal coverage/principal amount of the policy. The
interest feature of the installment payment is
recognized as a taxable income.
2) Amount received by insured as return of premium
- There are insurance policies that, during their life,
there are amounts received by the insured. Say, on the
5thyr, the insured will receive this much, then on the
10thyr, and towards the life of the policy. Amounts are
received at certain point during the life of the policy.
Are these amounts that you received, are they income?
Under b2, these amounts represent return of your
premiums. The premium payments are the capital or
the consideration that you paid (?) for that contract of
insurance. The payments you received by reason of
that feature in the policy are not actually income, but
they represent return of capital, or return of the
premium. Your premium is your capital. There is no
income.
3) Gifts, bequest, and devices
When an heir/beneficiary receives a gift, bequest or
device, is the receipt of this property as a gift, bequest
or device, income?
No. What you have received is a receipt of capital.
When this capital will earn income or will have fruits,
then that is the time you recognize an income.
Example: few of the properties you received from the
estate are apartment dwellings. There are renters.
When you received the apartment, even when there
are existing renters, that is still not income, but receipt
of capital. However, when you are the one starting to
collect the rent from the renters, then this time it
becomes your income.
4) Compensation for injuries or sickness
(a) The amounts received for accidents, or
(b) health insurance, or
(c) under Workmans Compensation Act, or
(d) as compensation for personal injury or sickness
PLUS the amount of any damages received
whether by suit or agreement on account of such
injuries/sickness
-> ARE EXCLUDED. Again, they are forms of
indemnity. The amounts you received are receipt
of capital; you are being indemnified for the
loss/accident. In the context of the damages, the
damages wherein an income is recognized,
pertains only to loss of income or loss of
earning capacity, or loss of profits. By reason
3 Manresa 2016-2017
of the accident, you will be hospitalized; you
incurred expenses in your confinement. You are
further indemnified for the loss of your income, you
were unable to work for 1month, and you were
indemnified for the loss of that income.
Are the amounts you received income?
(i) Insofar as to the other damages and
indemnity (the expenses incurred for the
confinement, for medicine etc, medical bills)
they are excluded as they represent return of
capital. They are forms of indemnity.
(ii) But the indemnity insofar as the loss of
income, loss of earning capacity or loss of
profit, they will now be considered as
taxable income.
Even if these were derived as a judgment in your favor,
being the injured party, where the offender was
adjudged to be liable and was ordered to pay, still it will
not change whether the amount you received is income
or not. There will be income only when the damages
referred to would involve loss of earning cap, loss of
income or loss of profit.
In terms of moral, exemplary, actual etc damages,
they will be excluded. In the course of the litigation,
you entered into amicable settlement/compromise
agreement. You agreed to the following indemnities -
that the offender will have to pay for your
hospitalization, damages, loss of income, then you
have now to determine what items are to be excluded
and the items to be considered as income.
(To reiterate: Insofar as loss of income or loss of
earnings, those are the damages which will be
considered as taxable income.)
5) Income exempt under treaty - The income of any kind
to the extent required under a treaty obligation is
binding upon the Government of the Philippines. Here,
the Philippine Government enters into a treaty with
another country to exempt, for income tax purposes,
several items of income. Usually this is done on the
basis of reciprocity. Tax agreements/treaties which
would extend exemptions on the basis of reciprocity
are executive agreements which DO NOT operate
similar to an international treaty, where the latter will
need senate ratification. Being an executive
agreement, there is no need for this to be approved by
the senate. Reciprocity means we will exempt that
income from this foreigner in the Philippines provided
the Filipinos in that country will also be given similar
exemption.
6) Retirement benefits, pensions, gratuities, etc.
SECTION 32 (B)
6.) Retirement benefits received under Republic Act No. 7641
and those received by officials and employees of private
firms, whether individual or corporate, in accordance with a
12
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
reasonable private benefit plan maintained by the employer:
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: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the
term '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.
RECIT!!
How are these retirement benefits become excluded?
What is R.A. 7641?
How many retirement benefits are contemplated in that
provision?
There are two.
(1) Under R.A. 7641 (amending Art. 287 of the Labor Code);
(2) Those received by officials and employees of private
firms whether individual or corporate in accordance with a
REASONABLE PRIVATE BENEFIT PLAN maintained by the
employer.
The provision contemplates two types of retirements wherein the
law excludes from tax.
(1) When you retire under the Labor Code, the retirement
benefits have their own requirements. Hindi na inulit
dito as it made reference to R.A. 7641. Your retirement
pay will be excluded.
(2) When your employer sets up reasonable private benefit
plan. It pertains to pension, gratuity, stock bonus, or
profit-sharing plan etc. The employer sets up its own,
whether individual or corporate, reasonable private
benefit plan. Ibig sabihin, nagset-up sya ng sarili nyang
retirement fund, pension fund, etc. For purposes of the
exclusion, these are the requirements, so that those
retiring under the employers own benefit plan will be
excluded.
REQUIREMENTS:
(a) It must be in accordance with a reasonable
private benefit plan. This reasonable private
benefit plan should be one approved and
accredited by the BIR. It could not just set up
private benefit plan without having this approved
by the BIR.
(b) Length of service minimum length of service
requirement is at least 10 years.
(c) Age requirement not less than 50 years of age.
(d) It must be availed of the employee only once.
3 Manresa 2016-2017
For purposes of exclusion, if you are retiring and the
employer has its own retirement policy, the private
benefit plan should comply with these requirements.
When the employee retires under the reasonable private benefit
plan at 49 years of age, would his retirement excluded or
taxable?
TAXABLE, because the requirement is that the employee must
be at least 50 years old.
If he retired at 50, but his length of service is only 8 years, will
the retirement benefit be excluded or taxable?
TAXABLE, because minimum length of service requirement is
at least 10 years. All the requirements must be complied with.
For purposes of exclusion, and for purposes of being taxed,
what is the essential requirement?
All the four requirements must be complied with.
Absent one requirement, what will happen?
The retirement shall be TAXABLE.
(To reiterate: All those requisites must be there for purposes of
the exclusion. Otherwise, requirement benefits shall be taxable.)
Supposed the employer sets up a retirement plan as approved
by the BIR, then his retirement policy is that kelangan ng 20
years of service, then the age now is 65yo. Then the employee
retires at the age of 60 and rendered 20 years of service.
Employer told him that is taxable! Employee insisted that is not
taxable because I complied with the requiremens under the
NIRC! Decide. If the employer sets up a higher standards for
purposes of retirement (length of service/retirement age is
higher than that set by law), that has to be followed. That will
now be the basis for the retirement. The employee could not
retire under the requirements of NIRC. If employer sets up
higher requirements than NIRC, then the employee retires
lower than that set up by the employer, the retirement now
becomes taxable. The requirements of the retirement policy of
the employer have to be followed, because these policy
requirements, including the reasonable private benefit plan,
were already made known to the BIR for purposes of the
exemption.
SECTION 32 (B)
6) (b) Any amount received by an official or employee or by
his heirs from the employer as a consequence of separation
of such official or employee from the service of the employer
because of death sickness or other physical disability or for
any cause beyond the control of the said official or employee.
Section 32 B, #6 (b) pertains to treatment of separation pay.
Payment on account of death, sickness or other physical
disability or for any cause beyond the control of the official or
employee, then the separation pay is excluded. For purposes
of the exclusion, it does not only cover the death sickness or
other physical disability of the employee but for any cause. All
other causes, for as long as they are involuntary or beyond
the control of said employee, the separation pay shall be
excluded. However, if the cause of the separation is one
within the control of the employee (voluntary), separation
pay is taxable. Example is resignation. In labor law, when you
resign, you are not entitled to separation pay. But despite that,
13
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
the employer extended separation pay. That separation pay
becomes taxable.
SCENARIO: If you resigned because you applied for job abroad.
The employer abroad told you to get the next flight, so you
resigned. Your employer in the Philippines learned about it and
gave you separation pay. What is the treatment of that
separation pay? It will now be taxable because it was voluntary.
There are instances when despite resignation, the resignation
is not voluntary. Example: Business acquisition or business
combination (merger, consolidation). The new owners will bring
the new managers. Previous managers will tender their
resignation, allowing the new management to have free hands
to run the business. The old managers will be given separation
pay. What is the treatment? The resignation is INVOLUNTARY
because they extended that courtesy for purposes of allowing
the employer to have a free hand. Being involuntary in nature, it
is beyond the control of said employees, therefore the
separation pay is excluded.
August 16, 2016
By April Liz Pareo
*Continuation of Sec. 32B, Par. 6 (Exclusion from Gross income
of Retirement benefits, etc.)
(b) Any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of
such official or employee from the service of the employer
because of death sickness or other physical disability or for
any cause beyond the control of the said official or employee.
Separation pay, as a rule, are to be taxable because they are
given also for services rendered. They will be excluded when the
ground for the separation is one which is involuntary or one
beyond the control of separated employee.
c), treatment of social security benefits from abroad,
retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the Philippines
from foreign government agencies and other institutions,
private or public.
Take note that the source of these benefits are from foreign
government agencies or from foreign institutions whether private
or public. The law based the exclusion of this retirement from tax
because it is foreign source.
(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.
This is in connection with benefits received by our immigrants
from the World War II who are still around and still continue to
receive benefits from the US. We grant the exclusion.
(e) Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
3 Manresa 2016-2017
(f) Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by government
officials and employees.
The retirement gratuity received by the retiring officials and
employees would cover the terminal leave pay as well as
unused leave credits which are not convertible to cash. The law
excludes them from the tax.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income
derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by (i) foreign
governments, (ii) financing institutions owned, controlled, or
enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by
foreign governments.
We exclude that because the rule on international comity. We
do not tax another sovereign. Income derived from investments
in the Philippines by foreign governments, financial institutions
who are in control or enjoying the financing from foreign
governments. Then you have the national/regional financial
institutions established by foreign governments
(b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing
to the Government of the Philippines or to any political
subdivision thereof.
This is the rule on immunity of government from tax. The
government does not tax itself and it excludes taxing itself when
it performs governmental function.
c) Prizes and Awards. - Prizes and awards made primarily
in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part
to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
As a prior rule, under 32(a), prizes and winnings are taxable. For
the purposes of their exclusion you have prizes and awards
under Section C.
Under (i), when he join the contest and sent his application to
join and he won. Despite that it was a recognition of religious,
charitable, scientific, etc., prizes and awards are now taxable
because the recipient took action to enter the contest. But when
he was nominated without him knowing about such fact, for that
recognition or for that prize and award, you were selected, then
comes the exclusion.
14
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

Under (ii), while in some competitions where prizes and awards
are given, the recipient is made to render future services but still
theres an exclusion because it was not substantial. When you
say substantial, it means he has to promote this contest, he
becomes an ambassador for that certain competition wherein he
was given a prize and award and where it will take his time and
devote his time for that recognition, prize and award. The
services now being substantial, will now require taxability of that
prizes.
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of Thirty
thousand pesos (P30,000) may be increased through rules
and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at
the end of the taxable year.

If the services rendered is not substantial, he is made to

promote but only for some conditions. For example, he is made
to promote on certain dates like for 1 year, tatlong araw then in
selected dates(???). Its not really substantial that will take up
his time, then exclusion will be invoked and the prizes and
awards will no longer be taxable.
(d) Prizes and Awards in sports Competition. - All prizes and
awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines
or abroad and sanctioned by their national sports
associations.
The one who won in the Olympics, so the prizes and awards
granted in local as well as international sports competition,
whether in the Philippines or abroad. One important requirement
is that the participation must be recognized and approved and
allowed by the respective sports association.
13th month pay is taxable since it forms part of your services
rendered. For purposes of exclusion, the law sets a limit. You
have RA 10653 where the exclusion is up to P 82, 000.00 That
is the maximum amount.
Eg: You receive a13th month pay of 100k, the 82k is exempted,
the excess is taxable. The 13th month pay whether received from
public or private will take into different forms. Merong iba
nagbibigay ng 14th month pay or 6th month bonus, etc.
Still, it will be consolidated for as long as it will not exceed 82k.
Since this will be annualized, pag nag-exceed, the excess will
be subject to tax. The 82k is the one that is excluded.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS,
SSS, Medicare and Pag-ibig contributions, and union dues of
individuals.

Eg: A participated in the sports competition, while his sport is
weight lifting, but he participated abroad as player in chess, then
the prizes and awards will be subject to tax.
In one case, the chess players of the Philippines have been
divide because of Politics. Some went to abroad, participated in
intl sports competition without the sanction from their respective
sport association. They won, received cash prizes which were
subjected to tax.
For purposes of the exclusion when there are competitions here
or abroad, local or intl, should be one allowed by your national
sports association.
They are excluded because in the determination of your tax in
your salary, it is based on the gross amount without the benefit
of the deduction. Like yung mga cash advances mo, utang, will
be subject to salary deduction. The withholding tax, the income
tax of your wages is not based on the net pay but on the gross
amount that you are going to receive without the benefit
deduction. If these contributions are tax free, the tax base of the
withholding tax against your salaries will be adjusted.
What will happen here, is yung salaries less contributions.
Whether SSS in private, GSIS in in government, PhilHealth,
PAG_IBIG or union dues if its an organized standard. Ibawas
yan to arrive at your net salary. The net now is now the tax based
for purposes of the income tax.

(e) 13th Month Pay and Other Benefits. - Gross benefits

received by officials and employees of public and private
entities: Provided, however, That the total exclusion under
this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:
(g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the same
or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five
(5) years.

(i) Benefits received by officials and employees of the

These are excluded because of the maturity of this
national and local government pursuant to Republic Act No.
indebtedness, what we call long term investments.
6686;

(h) Gains from Redemption of Shares in Mutual Fund. -

(ii) Benefits received by employees pursuant to Presidential
Gains realized by the investor upon redemption of shares of
Decree No. 851, as amended by Memorandum Order No. 28,
stock in a mutual fund company as defined in Section 22 (BB)
dated August 13, 1986;
of this Code.

(iii) Benefits received by officials and employees not covered

by Presidential decree No. 851, as amended by They are exempted for purposes of giving incentive in these
Memorandum Order No. 28, dated August 13 1986; and forms of investments and these redemption also of shares in
Mutual fund operates as a redemption of Capital.

3 Manresa 2016-2017
15
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
We go back to Section 22. Definitions - When used in this Title:
(B) The term 'corporation' shall include partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), association, or
insurance companies, but does not include general
professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement
under a service contract with the Government. 'General
professional partnerships' are partnerships formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the
date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
(K) The term 'withholding agent' means any person
required to deduct and withhold any tax under the provisions
of Section 57.
Our Income Tax System has a withholding of taxes feature
under the principle of pay as you go. Our passive income and
capital gains are already subject to tax at the time or source of
the income. Even the income has not yet received by the tax
payer, the tax has already been collected and claimed through
the withholding agent. What is received by the income recipient
of the beneficiary *** is already net of tax.
3 Manresa 2016-2017
(P) The term 'taxable year' means the calendar year, or the
fiscal year ending during such calendar year, upon the basis
of which the net income is computed under this Title. 'Taxable
year' includes, in the case of a return made for a fractional
part of a year under the provisions of this Title or under rules
and regulations prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for which
such return is made.
Individuals are required to follow the calendar year as the tax
year, regardless of citizenship. In case of corporations, the
taxable year may be the calendar year or the fiscal year.
For tax purposes, you will see that the terms are defined in the
negative. Like for example, a fiscal year, a period of 12 months
that does not begin in December and does not end in January.
Section 39 on how capital assets are assigned, they are also
defined in the negative.
(Z) The term 'ordinary income' includes any gain from the
sale or exchange of property which is not a capital asset or
property described in Section 39(A)(1). Any gain from the sale
or exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary income' shall be
treated as gain from the sale or exchange of property which
is not a capital asset as defined in Section 39(A)(1). The term
'ordinary loss' includes any loss from the sale or exchange of
property which is not a capital asset. Any loss from the sale
or exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall be treated
as loss from the sale or exchange of property which is not a
capital asset.
Capital gain gain on a capital asset.
When there is sale or disposition of ordinary assets, we call it
ordinary income. When there is loss, we call it ordinary loss.
FF) The term 'long-term deposit or investment
certificates' shall refer to certificate of time deposit or
investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
and other investments with a maturity period of not less than
five (5) years, the form of which shall be prescribed by the
Bangko Sentral ng Pilipinas (BSP) and issued by banks only
(not by nonbank financial intermediaries and finance
companies) to individuals in denominations of Ten thousand
pesos (P10,000) and other denominations as may be
prescribed by the BSP.
More than 5 years, long term investment. Less than 5 years,
short term.
Section 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
16
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for
services rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker;
(D) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only
on income derived from sources within the
Philippines.
The rules are simple.
So far as Individuals, resident citizens lang ang taxable for all
sources. The rest of them, Philippine source income lang.
I. Individuals
A. Citizens
Resident citizens : taxable for all sources within and
without ( Philippine or Foreign Source)
Non-resident citizens : taxable only on sources within
B. Aliens : Regardless of their status, taxable only on sources
within
Resident alien
Non-resident alien :
a) Engaged in trade or business
b) Not engaged in trade or business
II. CORPORATIONS
A. Domestic corporation: is one which is organized and
created under Philippine laws. Taxable on all sources
within and without. All income in the Philippines are
taxable as well as the foreign sourcre income.
B. Foreign Corporation: one organized outside the
Philippines
Resident Foreign Corporation : one with license
or authority to engage in business
3 Manresa 2016-2017
Non-resident foreign Corporation: no authority
to do business yet it earns income. We tax that
because the source is in the Philippines.
The rule on situs will take place on the basis of citizenship,
residency and the source. In the case of citizens, we tax them
because of their citizenship. We tax the aliens because they
reside here. We tax the resident alien because the source of the
income is in the Philippines. That holds true, likewise, in the
case of corporations.
In these categories, there are only two taxpayers that are
taxable on all sources: the Resident Citizens and the Domestic
Corporations. The rest of the entities, individuals are taxable
only within.
The third category is the partnership. As we have mentioned,
the term, corporation involves partnership. If you organize
among yourselves and you make a group, even if you are not
registered with the SEC, even if you do not have a business and
you engage in a regular business, your income will be taxable.
You will be tax of your business partnership or professional
partnership.
C. Partnerships:
Business Partnership: one who is not in the exercise
of a professional partnership (in the negative). They will
be taxed like the corporations.
Professional partnership: one exercising a common
profession. Under Section 26, they are not taxable.
Taxable are the individual professional partnership.
If you set up a professional partnership to engage in the practice
of law, so you registered, agreed to such partnership, that is not
taxable. It will be the individual partners who will bring along the
respective share on the income of that partnership, they will be
individually and separately taxed like individuals. It will be the
individual professional partners who are taxable not the
professional partnership.
III. ESTATES : pertains to the taxpayer represented by the
executor or administrator or one of the surviving
spouse or the children of the decedent, wherein the
decedent left behind income-generating properties
prior to his death. The estate, while earning income
may still be taxable as an estate. Tax will still be
collected against estate, it will be treated as a separate
taxable person from the personality of the administrator
or executor.
Trust created by the grantor or for the benefit of the beneficiary.
The trust is treated as a separate taxable person form the person
of the grantor. So when the trust earns income because property
or money is in the trust, then it is invested, income is earned then
it is treated as a separate taxable person from the grantor.
In the case of estates, the property is in abroad the decedent is
earning income from that property. If the decedent is a citizen,
that would be taxable. Being a citizen, the foreign source income
of the estate will be subject to income tax.
17
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

In determining the taxability of the income:
1) Know where is the income (Phil or outside)
2) Know the earner (Filipino, Phil corp or alien, or foreign
corp)
3) Determine the rate
Section 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.
Individual citizens do not speak whether resident or non-resident
but speaks of a citizen in general. The aliens that are covered
here are only the resident aliens. The rates for this are 5-32%
imposed on these citizens and individual resident aliens.
The rates applicable are 5-32% are the income mentioned in
Section 24 A. all other income within or without which are not 24
B, C, D. you have to determine by exclusion. Those which are
passive income which are not B, capital gains which are not C
will be taxed.

An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within and without
the Philippines be every individual citizen of the
Philippines residing therein;
(b) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines
by an individual citizen of the Philippines who is residing
outside of the Philippines including overseas contract
workers referred to in Subsection(C) of Section 23
hereof; and
(c) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (b), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines
by an individual alien who is a resident of the
Philippines.
The tax shall be computed in accordance with and at the rates
established in the following schedule:
The rates here is 5-32%, the application is cumulative. If the
taxable income is 100, 000.00. you compute it bracket to
bracket. It belongs to the bracket more than 70,000 but less than
140, 000. So the tax is 8, 500 plus 20% of the excess.
Eg: Tax due = 100, 000
=8,500 + 205 (100k -70k)
=8,500 + 20% (30,000)
8,500 + 6,000
=14, 500
If your income is 1million, you get the maximum bracket. You will
be taxed 125,000 + 32% of the excess of 500,000. Do the math.
These rates were to apply on the individual citizen who is
residing outside the Philippines including OFW if they earn
income in the Philippines
The non-resident citizens, the one referred to Section 24 A (i), in
letter B, the non-resident with income therein. On a resident
alien, for the income within which are not B, C, D.
Then you have the minimum wage earners, whether public or
private, are exempted from income tax. The wages include your
overtime, night shift, hazard pay, they will be exempted from tax.
If you are husband and wife who are both income tax earners,
they are treated as separate taxable income persons. They file
their own separate income tax returns.
(B) Rate of Tax on Certain Passive Income.

Not over 5%
(1) Interests, Royalties, Prizes, and Other Winnings. - A final
P10,000
tax at the rate of twenty percent (20%) is hereby imposed
Over P10,000 but not over P500+10% of the upon the amount of interest from any currency bank deposit
P30,000 excess over and yield or any other monetary benefit from deposit
P10,000 substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and
Over P30,000 but not over P2,500+15% of the
musical compositions, which shall be imposed a final tax of
P70,000 excess over
ten percent (10%); prizes (except prizes amounting to Ten
P30,000
thousand pesos (P10,000) or less which shall be subject to
Over P70,000 but not over P8,500+20% of the tax under Subsection (A) of Section 24; and other winnings
P140,000 excess over (except Philippine Charity Sweepstakes and Lotto winnings),
P70,000 derived from sources within the Philippines: Provided,
however, That interest income received by an individual
Over P140,000 but not over P22,500+25% of
taxpayer (except a nonresident individual) from a depository
P250,000 the excess over
bank under the expanded foreign currency deposit system
P140,000
shall be subject to a final income tax at the rate of seven and
Over P250,000 but not over P50,000+30% of one-half percent (7 1/2%) of such interest income: Provided,
P500,000 the excess over further, That interest income from long-term deposit or
P250,000 investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
Over P500,000 P125,000+34% of
and other investments evidenced by certificates in such form
the excess over
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
P500,000 in 1998.
exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate pre-
Section 24. Income Tax Rates. terminate the deposit or investment before the fifth (5th) year,

3 Manresa 2016-2017
18
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years -
5%;
Three (3) years to less than (4) years -
12%; and
Less than three (3) years - 20%
2) Cash and/or Property Dividends - A final tax at the
following rates shall be imposed upon the cash and/or
property dividends actually or constructively received by an
individual from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional
operating headquarters of multinational companies, or on the
share of an individual in the distributable net income after tax
of a partnership (except a general professional partnership)
of which he is a partner, or on the share of an individual in the
net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which
he is a member or co-venturer:
Six percent (6%) beginning January 1,
1998;
Eight percent (8%) beginning January 1,
1999;
Ten percent (10% beginning January 1,
2000.
Provided, however, That the tax on
dividends shall apply only on income
earned on or after January 1, 1998.
Income forming part of retained earnings
as of December 31, 1997 shall not, even if
declared or distributed on or after January
1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded
in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock
exchange.
Not over 5%
P100,000 (1) An income tax is hereby imposed:
On any amount in excess of 10%
P100,000
D) Capital Gains from Sale of Real Property. -
3 Manresa 2016-2017
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined
in accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other
disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales and
other forms of conditional sales, by individuals, including
estates and trusts: Provided, That the tax liability, if any, on
gains from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or
to government-owned or controlled corporations shall be
determined either under Section 24 (A) or under this
Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition
of their principal residence by natural persons, the proceeds
of which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months
from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real property
sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer
within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the
said tax exemption can only be availed of once every ten (10)
years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or disposition
shall be subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the
unutilized amount bears to the gross selling price in order to
determine the taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed thereon.
August 18,2016
Jennifer Lim
GOING BACK TO SECTION 24.
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.-
(a) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all sources
19
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
within and without the Philippines be every individual citizen of
the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual citizen of the Philippines
who is residing outside of the Philippines including overseas
contract workers referred to in Subsection(C) of Section 23
hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of
the Philippines.
Section 24(A), we have the rates of 5-32 %. These rates will b
e used for the compensation or income of citizens and resident
aliens as well as all other types of income not subject to the pre
ferential tax rates.
So if you are a citizen and resident alien and your income is not
under paragraphs b, c and d then the rates applicable to you wi
ll be 5- 32%. Because b, c and d are preferential tax rates for s
pecific types of income.
LETS MOVE ON TO SECTION 24 (B), (C) AND (D).
Note: Dean said he will leave us responsible to read the codal p
rovisions.
(B) Rate of Tax on Certain Passive Income: -
(1) Interests, Royalties, Prizes, and Other Winnings. -
A final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements; royalties, except on
books, as well as other literary works and musical compositions,
which shall be imposed a final tax of ten percent (10%); prizes
(except prizes amounting to Ten thousand pesos (P10,000) or
less which shall be subject to tax under Subsection (A) of
Section 24; and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings), derived from sources within
the Philippines: Provided, however, That interest income
received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such interest
income: Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the
3 Manresa 2016-2017
certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire income
and shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends. - A final tax at the following
rates shall be imposed upon the cash and/or property dividends
actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance
or mutual fund companies and regional operating headquarters
of multinational companies, or on the share of an individual in
the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or on
the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium
taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on
income earned on or after January 1, 1998. Income forming part
of retained earnings as of December 31, 1997 shall not, even if
declared or distributed on or after January 1, 1998, be subject to
this tax.
In Section 24 (B):
(1)The passive income on interests, royalties, prizes and other
winnings. There will be a tax or lien.
(2)Cash and/or property dividends
(C) Capital Gains from Sale of Shares of Stock not Traded
in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange.
Not over P 100,000 5%
On any amount in excess of P 100,000 10%
In Section 24 (C) , the capital gains from the sale of shares of s
tock and not traded in stock exchange.
So what about shares of stocks traded in stock exchange?
In so far as shares of stocks which are traded it is no longer an
income tax, but the applicable rates will be section 127 under th
e percentage tax.
20
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
In your NIRC, Section 127 is the tax on sale, barter, or exchng
e of shares of stock listed and traded through the local stock ex
change or through initial public offering. Now, this item used to
be in income taxation, nilipat nila and transferred it here to the p
ercentage tax. So insofar as shares of stocks traded in stock ex
change, it is no longer an income tax but a percentage tax; ano
ng naiwan are the shares of stocks not traded in stock exchang
e.
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
controlled corporations shall be determined either under Section
24 (A) or under this Subsection, at the option of the taxpayer;
In Section 24 (D), it talks about capital gains from the sale of re
al property.
When we say capital gains it refers to capital assets. Meanin
g properties of the tax payers which are not used in the busines
s. So the real property contemplated--- the sale of real property
, are subject to the 6% capital gains tax or what we call the capi
tal assets. Ex: the house and lot of the payer which are not use
d in business. The applicable rate will be under section 24 (D).
Now the application of the 6% will not only apply to the sale but
also on the rules on exchange. So let's say 2 tax payers woul
d like to exchange their properties ( lot 1 and lot 2), the excha
nge is subject to the capital gains tax. The owner of lot 1 will pa
y for the capital gains tax and the owner of lot 2 will also pay th
e capital gains tax. So sila dalawa mag bayad with respect to th
eir real properties in case of exchange of real properties. Becau
se here, unless you are granted an exemption then can the exe
mption apply; otherwise, the exchange will be taxable.
ON OTHER DISPOSITION OF REAL PROPERTY
So what about donation?
Donation will be not be covered by this because there is a sepa
rate treatment for donations
What about succession?
There is also a separate tax treatement for succession
3 Manresa 2016-2017
Other dispositions such as foreclosure of mortgage. If there is a
foreclosure of a real estate mortage then that portion, the highe
st bidder will be the one subject to the capital gains tax. Whethe
r you auction it under Article 3135 or under other current mortg
age statutory provisions.
Now take note also that for purposes of the 6% the property
must be found in the Philippines.
What if you have a real property or condo abroad tapos binenta
mo, kumita ka, is the property taxable in the Philippines? And y
ou are a resident citizen wherein you are taxed on all sources. i
s the 6% capital gains tax applicable?
No more. because the criteria is a property located in the Philip
pines. So ano ngayon gagamitin mo? Then you will use the 5-3
2%.
As we mentioned, the 5-32% is the applicable tax rates if they a
re foreign sourced income of a resident citizen or the income of
a citizen which are not subject to preferential tax rates or in
come which are not b c or d of this section. In other words, t
he rates 5-32% will be the catch-all of other income not subject
to the mentioned. It does not follow na hindi magiging taxable (
yung condo), magiging taxable and the rate will be 5-32%.
(2) Exception. - The provisions of paragraph (1) of this Subsec
tion to the contrary notwithstanding, capital gains presumed to h
ave been realized from the sale or disposition of their principal r
esidence by natural persons, the proceeds of which is fully utiliz
ed in acquiring or constructing a new principal residence within
eighteen (18) calendar months from the date of sale or dispositi
on, shall be exempt from the capital gains tax imposed under th
is Subsection: Provided, That the historical cost or adjusted bas
is of the real property sold or disposed shall be carried over to t
he new principal residence built or acquired: Provided, further, T
hat the Commissioner shall have been duly notified by the taxp
ayer within thirty (30) days from the date of sale or disposition t
hrough a prescribed return of his intention to avail of the tax ex
emption herein mentioned: Provided, still further, That the said t
ax exemption can only be availed of once every ten (10) years:
Provided, finally, That if there is no full utilization of the proceed
s of sale or disposition, the portion of the gain presumed to hav
e been realized from the sale or disposition shall be subject to c
apital gains tax. For this purpose, the gross selling price or fair
market value at the time of sale, whichever is higher, shall be m
ultiplied by a fraction which the unutilized amount bears to the g
ross selling price in order to determine the taxable portion and t
he tax prescribed under paragraph (1) of this Subsection shall b
e imposed thereon.
Take note also under Section 24 (D), the application of the exe
mption. Take note of the requisites for the purposes of the tax e
xemption from the real property tax. When you would dispose o
f your house to construct a new business and what are the requ
irements for purposes of the exemption.
Taken from previous TSN
The acquisition or construction of the new principal residence,
you are required within 18 months from the date of sale or
disposition shall be exempt from the capital gains tax. Within the
period, for purposes of the exemption you have the following
requirements:
1. You avail of the exemption once
21
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
2. The historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired.
3. 3. That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption
4. 4. The said tax exemption can only be availed of
only once every ten (10) years
So to avail of the exemption, the proceeds shall be used to
acquire or construct. Remember the period within which you can
avail of the exemption, you are only allowed to avail this once
every 10 years when you would sell your principal or acquire or
construct a new residence.
NOW LET'S GO TO TAX ON TREATMENT ON NON-RESIDE
NT ALIENS UNDER SECTION 25
Now remember a nonresident alien could be:
1. Non resident alien engaged in business and trade.
2. Nonresident alien not engaged in business and trade
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within
the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade
or business in the Philippines shall be subject to an income tax
in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within
the Philippines. A nonresident alien individual who shall come to
the Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year
shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
In Section 25A(1), it talks about the length of stay or the 180 d
ay period. For the purposes of the classification of the non-resid
ent alien doing business or not doing business
Less than 180 days = non-resident alien not engaged
More than 180 days but less than a year = a non-
resident alien engaged
A year or more = He will be now considered a resident
alien.
For the non-resident alien not engaged in paragraph A(1) wher
e the applicable rate would still be the 5-32%. Section 25A (2)
3 Manresa 2016-2017
on the applicable rates for all other income like cash or improve
ments and other specific treatment.
As per Dean: Just dissect that long provision. himay himayin ni
yo. I dont know why it had to be worded this way.
Taken from previous TSN:
Yung royalties dito in any form, take note of the distinction in
Section 24 of the royalties. Royalties on books, musical
composition and literary works, iba yong rate. Royalties to other
forms which are not musical composition, or other literary works
you have a different rate.
Pero pagdating sa non-resident alien engaged in trade, the
royalties and any form, regardless of the form or kind of royalties
and as well as prizes except prizes amounting to 10k or less
shall be subject to tax under Subsection (B)(1) of Section 24
which is 20% in tax rate. Which includes other winnings.
Depending on the length of time you pre-terminated, you have
the rates 5, 12, and 20.
For the clarification, you have still the rates of 20% or cash or
property dividends 20% or interest, royalties and other forms,
winning and prizes, except prizes 10k below except also for
PCSO and Lotto the rate is 20%.
Royalties on books, literary works, musical compositions the
rate is still the same 10%. Royalties on books, literary works,
and musical compositions for the non-resident alien engaged in
trade or business, final withholding tax of 10%.
As for the capital gains, the same treatment with Section 25 (C
& D)
Now Section 25(B) is the non-resident alien individual not enga
ged in trade or business. Yun pinaka simple because you have
uniform tax rate of 25% on all types of income without ded
uction. But if they have other income or property in the Philippi
nes, the applicable rates are provided by Section25 (C&D).
So the Section 24 C&D and Section 25 wherein it involves tax
payers with shares of stocks not traded and real properties as w
ell as assets then we have the same tax treatments. 5 &10% fo
r the shares of stock; 6% for the capital gains tax of the rea
l property.
Now, Section 25 C D &E are tax treatments for expats. Now w
hat is new here is that before Filipinos are given different tax rat
es whereas these expats are given lesser rates. Now it is the s
ame, the Filipino counterpart receives the same tax treatment w
ith their foreign counterpart. kasi sa mga corporation may mga
expats who have preferential tax treatments whether financial c
ompensation package and etc, the rates applied to these will be
similar to their Filipino counterpart. I hold you responsible to rea
d the other details
Taken from previous TSN:
These are the aliens employed by regional area headquarters,
22
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
regional operational headquarters of multinationals(C). Aliens
employed by offshore banking units(D), and aliens employed by
petroleum service contractor (E).
So you have here a rate of 15%. Now the rate of 15% given to
the expats will be the same rate to the Filipino counterpart. So
Filipinos employed and occupied the same positions as those of
the aliens/expats will also be given a similar rate of 15%.
Otherwise this would be a deprivation; yong alien expats will
have a lesser rate than the Filipino counterpart.
The Filipino counterpart, having the same position as the expats
5to 32%. So kung he is earning 5 million annually he will be
given the maximum rate of 32%. Yong expat 15% lang. The
Filipino counterpart will be given a similar rate, 15%.
LETS PROCEED TO SECTION 26 ON TREATMENT FOR GE
NERAL PROFESSIONAL PARTNERSHIPS.
SEC. 26. Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as such
shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in
their separate and individual capacities.
For purposes of computing the distributive share of the partners,
the net income of the partnership shall be computed in the same
manner as a corporation.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
The general professional partnership is not subject to inco
me tax. Persons engaging in business aspartners in a general
professional partnership shall be liable for income tax only in th
eir separate and individual capacities. In other words, the profe
ssional partners are the ones separately and individually liable
not the partnership itself.
In the case of a business partneship, it will not be taxed under s
ection 26. It will be taxed as corporations under Sections 27 an
d 28. Why is that so? You have the definition of a taxable corp
oration in Section 22(b). This includes partnerships no matter h
ow created or organized; joint stock companies, joint accounts
etc.
3 Manresa 2016-2017
(B) The term 'corporation' shall include partnerships, no matte
r how created or organized, joint-stock companies, joint accoun
ts (cuentas en participacion), association, or insurance compan
ies, but does not include general professional partnerships and
a joint venture or consortium formed for the purpose of underta
king construction projects or engaging in petroleum, coal, geoth
ermal and other energy operations pursuant to an operating co
nsortium agreement under a service contract with the Governm
ent. 'General professional partnerships' are partnerships for
med by persons for the sole purpose of exercising their commo
n profession, no part of the income of which is derived from eng
aging in any trade or business.
What is the operative factor there? Exercising their common
profession.
So if you have a professional partnership of a certain corporatio
n, may doctor, lawyer architect, accountant. It renders multi-dis
ciplinary services and operates as a partnership. How do you ta
x such when it does not suit the definition of a general professio
nal corporation? This time now it will be taxed as a business
partnership because the criteria under section 26 is an exe
rcise of a common profession. Kung lawyer lahat, lawyer. en
gineer lahat, engineer. cpa lahat, cpa. If you have an assortme
nt of professionals, while professional partnership siya but for ta
x purposes it will not be treated as such.
So when you went to that office, biglang may nag lagay ng stet
hoscope pero attorney hinahanap ko. The need of the client wa
s not met. so it will be taxed like a business partnership.
Now in the case of DOMESTIC COPORATIONS IN SECTION
27. Like the resident citizen who is taxed on all sources; domes
tic corporations are also taxed on all sources. The current rate t
hat we have now is 30%. This is 30% under taxable income an
d the giving the benefit of deductions.
Now there is an optional tax treatment in the case of corporatio
ns. Domestic corporations 15% of the gross income. We have t
he law, but it is not in place or operationalized. What is being d
one is the regular corporate income tax rate.
Then SECTION 27(B), the proprietary educational institutions a
nd hospitals. So educational institutions and hospitals which ar
e for profit shall pay a tax of 10% of their taxable income excep
t those covered under Section B meaning their passive income.
In other words, the educational income or hospital income will b
e subject to this preferential tax rate of 10% the taxable income
provided that it will be subject to the predominance test.
What is this predominance test?
The predominance of income test means that the proprietary ed
ucational insittutions and hospitals will have the so called tuition
and non-tuition income & hospital and non-hospital income. Th
at will now be the basis of the tax. In the case of educational ins
titutions, tuition and non-tuition. The rule here is that the 10% a
pplicable tax rate is to be applied when the predominant incom
e is tuition. But if the predominant income is non-tuition, then th
23
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
e regular corporate income tax is applicable so it will now the th
e total income.
If more than 50% of the taxable income constitutes tuition, then
you apply the 10% rate. If the predominant income meaning mo
re than 50% of the total income is non-tuition, like rentals and y
ung ibang kinikita, whatever income derived to will be subject to
the 30% income tax rate. So if the predominant tuition 10%; i
f non-tuition 30%.
The same rule applies to hospitals, if the predominant income i
s hospital income then the 10% tax rate will apply. if it otherwis
e (non-hospital income), then apply the regular corporate incom
e tax of 30%.
Who are covered by these proprietary educational institutions?
(taken from previous tsn/codal provision) A Proprietary
educational institution' is any private school maintained and
administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
NOW SECTION 27 ON THE GOVERNMENT-OWNED AND
CONTROLLED CORPORATIONS, AGENCIES OR INSTRUM
ENTALITIES.
Now, as a rule GOCCs are taxable persons subject to the inco
me tax rate of 30% on the regular income tax.
How are they exempted?
Unless the law of the charter grants so. Who are exempted fr
om here? GSIS, SSS, PhilHealth, Local Water Districts, and th
e PCSO. Dati andyan yung PAGCOR but it has been removed
under RA 9337. Now PAGCOR is a taxable person subject to in
come tax.
Now in Section 27(D), the passive income, capital gains from t
he sale of shares of stocks not traded as the same rate as indiv
iduals, tax income derived under the expanded foreign currency
deposit system, intercorporate dividends (intercorporate dividen
ds received by domestic corporation from another corporation s
hall not be subject to tax), and capital gains realized from the s
ale, exchange, or disposition of lands and/ or buildings not actu
ally used in business meaning capital assets. Subject to the 6%
similar to the capital gains tax of individuals.
Then Section 27(E), the application of the MCIT or the minimu
m corporate income tax. (we will discuss this next time)
Now in the case of corporations, they are subject to two tax trea
tments.
1. Normal corporate income tax/ regular corporate incom
e tax or 30% of the taxable income.
2. MCIT equivalent to 2 % of the gross income.
So if you are a corporate entity, you will be subject to these tax
treatement. But you will pay only one kind of tax even though y
ou are subject to different tax treatments. In other words, for pu
3 Manresa 2016-2017
rposes of the MCIT of paragraph (E), if at the end of the year (b
ut now it is done quarterly) , there will be two computations. I-co
compute annually or quarterly the income actualized to comput
e it at 30% of the taxable income compared with 2% of the gros
s income whichever is higher. If the MCIT is higher, you will pay
such. if the 30% is higher, then you will pay the tax of 30%.
The determination of what tax treatment wil apply to the corpor
ation is kung saan yung malaking income tax. Depende sa com
putation, if the MCIT is higher, it will have higher income tax du
e, then you pay the MCIT. If the corporate income tax due is hig
her than the mcit, then it will be subject to the regular corporate
income tax rate.
NOW LETS GO TO SECTION 28,
SEC. 28. Rates of Income Tax on Foreign Corporations. - [21]
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%). [22]
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month
of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve. [23]
Provided, however, That a resident foreign corporation shall be
granted the option to be taxed at fifteen percent (15%) on gross
income under the same conditions, as provided in Section 27
(A).
Tax treatment Resident Foreign Coporations. These are corpo
rations organized abroad authorized to do business in the Philip
pines also taxed at 30%. The non-resident foreign corporation w
ill also be subject to these tax treatments 30%. The treatment f
or computing the corporate income tax due either for 30% or 2
%.
Now there are Resident Foreign Corporations who are engaged
in a particular type of business. like number 3 international carri
ers doing business in the Philippines. (Singapore Air, etc.).
(3) International Carrier. - An international carrier doing
business in the Philippines shall pay a tax of two and one-half
percent (2 1/2 %) on its 'Gross Philippine Billings' as defined
hereunder:
24
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
(a) International Air Carrier. - 'Gross Philippine Billings'
refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That
for a flight which originates from the Philippines, but
transshipment of passenger takes place at any part outside the
Philippines on another airline, only the aliquot portion of the cost
of the ticket corresponding to the leg flown from the Philippines
to the point of transshipment shall form part of Gross Philippine
Billings.
(b) International 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.
Provided, That international carriers doing business in the
Philippines may avail of a preferential rate or exemption from the
tax herein imposed on their gross revenue derived from the
carriage of persons and their excess baggage on the basis of an
applicable tax treaty or international agreement to which the
Philippines is a signatory or on the basis of reciprocity such that
an international carrier, whose home country grants income tax
exemption to Philippine carriers, shall likewise be exempt from
the tax imposed under this provision.
As international carriers by air or by sea, they have a preferenti
al tax treatment. We do not tax them at 30%. They are taxed at
2.5 % on their gross billings without the benefit of deduction. Ku
ng ano yung gross income nila from tickets of passengers. The
y will be subject to on their gross billing and this holds true for i
nternational shipping.
From previous TSN: gross billings refer to the amount of gross
revenue derived from carriage of persons, excess baggage
But what if it is an international carrier but it has no landing right
s in the Philippines? Because in order to avail the 2.5% tax on g
ross billings, it must be a resident foreign corporation authorize
d to do business in the Philippines and may landing rights sila.
What if they derive income from the Philippines but wala silang
landing rights?
They will not be taxed under this as international carrier becaus
e they pertain to revenues from passengers originating in the P
hilippines but again they do not have landing right kumikita sila
dito but ang boarding, doon sa Thailand. From the Philippines t
o Bangkok na aircraft, applicable pa. but then again when you b
oard that aircraft from Bangkok it will be something else.
How will you tax it then?
It will be taxed at 30% which will operate as the tax rate use
d for those income outisde the preferential tax rates. 30% w
ill the applicable to all other income not subject to these prefere
ntial tax rates.
3 Manresa 2016-2017
Going back to the domestic corporation, if the domestic corpora
tion has foreign sourced income, then the applicable rate will al
so be 30%.
What if the corporation which is domestic has real properties ab
road which are capital assests?
Then we apply the 6% subject to the regular rate.
Now other income such as the OBUs or the offshore banking
units Number 4, as a rule they are exempted.
(4) Offshore Banking Units. - The provisions of any law to the
contrary notwithstanding, income derived by offshore banking
units authorized by the Bangko Sentral ng Pilipinas (BSP), from
foreign currency transactions with nonresidents, other offshore
banking units, local commercial banks, including branches of
foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with offshore banking units
shall be exempt from all taxes except net income from such
transactions as may be specified by the Secretary of Finance,
upon recommendation of the Monetary Board which shall be
subject to the regular income tax payable by banks: Provided,
however, That any interest income derived from foreign currency
loans granted to residents other than offshore banking units or
local commercial banks, including local, branches of foreign
banks that may be authorized by the BSP to transact business
with offshore banking units, shall be subject only to a final tax at
the rate of ten percent (10%). [24]Any income of nonresidents,
whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted
by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered
with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections
57 and 58 of this Code: Provided, that interests, dividends, rents,
royalties, including remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income
and capital gains received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively
25
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

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

connected with the conduct of its trade or business in the
dividends kasi mahaba ang provision. It will be easier if may
Philippines. matrix.

Then you have Branch Profits Remittances Tax under Num Taken from previous TSN:
ber 5. These are the tax rates imposed when the branch office
would remit profits to the head office. It will be coursed through
the Central Bank. The tax rate there is 15%. Take note of the
base which is 15% of the total profits applied or earmarked for r
emmittance without any deductions for the tax component there
of.

So kung mag remit ang branch office ng $100, ang mag dating
doon, $85 na lang because 15% has been deducted. The branc
h profit will be taxed. But the 15% is based on the total profits a
pplied, not the net profits.

That used to be an issue before, kasi pag remit nila at pag dating
doon sa HongKong or abroad, it was then less 15% pa. But that
has been clarified by the Supreme Court. It should be based on
the profits applied or earmarked for remittance. As clarified by
the Supreme Court, it is the total profits which will be applied
without deduction for the tax component thereof. In other words,
pag dating doon automatically set na, wala nang further
deductions.
Then we have Number 6, the Regional Area Or Head
Quarters And Regional Operating Head Quarters Of Multi
National Companies.
The Regional Head Quarter area is not taxable but the Regional
Operating Headquarters is taxable at 10% of their taxable
income.
Then you have tax on certain incomes received by a resident
foreign corporation:
7a on the interest from deposits and royalties
7b on the income derived from foreign currency
deposits
7c on the capital gains from the sale of shares of stock
not traded in the stock exchange.
7d on intercorporate dividends. in the case of a resident
feoreign coporaytion, the dividends receivfed from the
domestic is not taxable, excluded or exempted from
tax.
THEN SECTION 28 B THE NON-RESIDENT FOREIGN
CORPORATION
1. The non-resident foreign corporation is taxed on gross
( meaning without deductions, similar to the non-
resident alien taxed at 15% tax on gross). Itong non-
resident foreign corporation taxed at 30% on gross.
2. Nonresident cinematographic film owner, lessor, or
distributor shall be subject to the 25% gross.
3. The resident owner or lessor of vessels chartered by
Philippine Nationals . A non-resident owner or lessor of
vessels shall be subject to tax of 4.5% of gross rentals
4. Non-resident owner or lessor of aircraft, machineries,
and other equipment shall be subject to tax of 7.5% of
the gross rental and fees.
Take note also that these rates, these are dividends from a
domestic source of these corporations. The stockholders are
citizen, resident aliens, non-resident aliens or a non-resident
alien in business and trade or a non-resident alien not engaged
in business and trade, or a domestic corporation. They are the
owners or stock holders who are the recipients of dividends
coming from the domestic sources.
If the dividends came from a domestic foreign corporation, take
note that the taxability of all sources will be applicable only to
resident citizens and domestic corporation. Kasi taxable sila
within and without the Philippines. So the dividends from a
foreign corporation received by a citizen are not taxable.
The non-resident alien or the non-resident citizen. In so far as
the resident alien, not taxable. Because they are only taxable
within. Likewise all the aliens for that matter taxable na siya. The
rate then is 30%, the regular tax rate. Pag foreign hindi taxable
kasi foreign source man yan. Foreign corporations are also
sourced from income within and not outside the country. Take
note of how the tax dividends move correspondingly to the
individual recipients.
Then you have this IMPROPERLY ACCUMULATED
EARNINGS TAX UNDER SECTION 29.
The improperly accumulated earnings tax is a form of penalty
tax or a surtax. These are imposed on corporations who would
accumulate earnings beyond the reasonable tax rates and the
penalty is 10% of the improperly accumulated income. Kasi if
you are a corporation, you will be piling up and accumulating
earnings, kung mag pile up yan bigyan mo ng dividends yung
stockholders. Do not pile it up. Matatakot naman sila na i-
distribute kasi baka nga ma charge ng 10% penalty tax in the
case of dividends. If such happens, we will just postpone. But
when they will distribute it later on, ganun pa naman din,
matatamaan pa din sila ng 10%. So if they continue
accumulating earnings, then babalik sila ng surtax or 10% tax
on their improperly accumulated earnings. So that is precisely
why you should divide or give rewards for profits to the stock
holders of corporations.
Now in accumulating also earnings, the corporations do not
uphold the accumulated earnings. The burden that on these
accumulated earnings are on the tax payer now. He has to prove
to the BIR that there is a need or a reasonable business and on
why they need to accumulate the earnings of the declaration of

3 Manresa 2016-2017
26
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
dividends as when they would contemplate expansion- they
want to buy new equipment and machineries. Instead of
borrowing money, they resort to capital sourcing as funds or
capital to expand. Therefore, the accumulation is justified.
Once justified, the BIR will withdraw from assessing you the 10%
tax. Again, the burden of proving otherwise is with the tax payer.
The term reasonable means of business depends upon the tax
payer to justify the reasonably anticipated needs of the
business.
SECTION 30 YOU HAVE THE EXEMPTIONS FROM TAX ON
CORPORATIONS
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock organized
and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade,
not organized for profit and no part of the net income of which
inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;
3 Manresa 2016-2017
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
These are the corporations exempted from the earnings tax.
What is important here is the last paragraph.
In other words, the corporations will be exempted when what
has been earned was in pursuance of the objective and purpose
of the exempt corporation. But if these exempt corporation has
other income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, then
that is taxable.
If it has activities conducted for profit, regardless of the
disposition means that even if the income are flowed back to the
exempted corporation, it will still be taxable.
Case Discussion by Dean
YMCA vs. CIR
FACTS: In 1980, YMCA earned an income of 676,829.80 from
leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators and 44,259 from parking fees
collected from non-members. On July 2, 1984, the CIR issued
an assessment to YMCA for deficiency taxes which included the
income from lease of YMCAs real property. YMCA formally
protested the assessment but the CIR denied the claims of
YMCA. On appeal, the CTA ruled in favor of YMCA and
excluded income from lease to small shop owners and parking
fees. However, the CA reversed the CTA but affirmed the CTA
upon motion for reconsideration.
ISSUE: Whether the rental income of YMCA is taxable
RULING: Yes. The exemption claimed by YMCA is expressly
disallowed by the very wording of then Section 27 of the NIRC
which mandates that the income of exempt organizations (such
as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. While the income
received by the organizations enumerated in Section 26 of the
NIRC is, as a rule, exempted from the payment of tax in respect
to income received by them as such, the exemption does not
apply to income derived from any of their properties, real or
personal or from any of their activities conducted for profit,
regardless of the disposition made of such income.
In YMCA, it was argued that it was a charitable educational
institution. But in this case, Supreme Court said that while it is
an exempted institution for tax purposes it rented some of its
spaces for lessees. It had a parking lot for its members but it
allowed non-members to park provided that they pay parking
fees. So income was earned from the parking fees collected
from non-members and rents from the rents of its spaces in the
building.
All these income were used for the objective of YMCA. Now they
claim exemption. SC ruled that they cannot claim exemption
even if the income was flowed back to its purpose or used for
their non-profit objective because of the last paragraph of
27
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
Section 30. Income of whatever kind. Kahit ano pang income
yan whatever kind or character from any of the properties.
For example: a building doon nila nilagay ang office and other
tax exempt activities and ngayon binenta nila yung kainilang
building or lot, and construct a new one.
Is the sale of the building and the lot exempted?
Probably not . Precisely based on the provision of the last
paragraph on income of whatever kind and character of the
foregoing organizations from any of their properties. Even if the
proceeds of that sale will be used to buy another property which
will be used for the objective of the institution, it will still be not
granted with exemption. The sale will be subject to income tax.
Likewise, if they engage in activities which they would profit even
if the proceeds thereof are used back to their tax exempt
purpose, it will still be subject to tax.
So you have a list here of the exempted institutions from A-K.
The tax treatment of these institutions should be harmonized
with the provisions of the Constitution on the non-stock non-
profit organizations. (Article XVI, Section 4(3))
Supposedly, that should not be there (referring to the NIRC
provision) because for as long as non-stock nonprofit income is
used for its purposes, it yields to exemption. To tax that income
of the non-stock non-profit educational institution or non-tuition
income used for it tuition purposes, will defeat the Constitutional
provision. You would not encroach on what has been
established by the Constitution by virtue of the legislative
enactment. You can not reduce the extent of the tax exemption.
August 25,2016
Weng Resurreccion
Those workers which are covered under the minimum wage law
or what we call minimum wage earners, their compensation
income are not taxable.They cover both the government and
private and it includes the ovetime pay, night shift differential,
hazard pay received by these minimum wage earners. If the
compensation income received is over and above the minimum
wage, it is no longer covered by the exemption. The tax
treatment is not the difference, i.e, the minimum wage is 300 and
he is given 350, ang itax nyo lang is the 50 differential. No. He
would be taxed entirely. So,lets say the monthly min wage is is
8k, but you are receiving 10k, then the entire 10k is taxable.
In the case of the husband and the wife, teh spouses
are given a separate income tax rate while on the case of
par. B in case of interest, royalties, prizes and other
winnings, they have tax rate of 20% excpt on rayalties on
books, musical and other literary compositions which is
taxed at 10%.
Prizes are taxed at 20% those 10k or below which is taxed
based on the schedular rate under 24A. So, the prizes under 10k
should be added to the regular income. Winnings, it shall also
3 Manresa 2016-2017
be subject to 20% final withholding tax except those PCSO and
lotto winnings which are tax exempt.
We also have ecpanded foreign currency deposit(EFCD)
which is subject to 7 1/2 tax rate but what is taxed is the interest
income. While long term deposits are tax free which has a
maturity of 5 years or more. If during the lifetime of the deposit,
the tax payer decided to pre-terminate, it becomes taxable. The
rate will depend on the date of the pre termination.
In the case of cash or property dividends, take note
of the various types of dividends. What is taxable here
pertains to cash and property dividends. Dividends are
distribution of profits of corporations to theri stock holders.
Now, the scope of the taxation of dividends is 10%? In the
case of citizens and resident alien. This 2 will cover also
distribution of profits of partnerships except when it is
engaged in a professional partnership engaged in the
practice of a profession; When you are given a share of
income in latter, then that income is taxed as part of the
individual partner income.
As to business partnership, being taxable enities are
taxed like corporations.
As to capital gains for the sale of shares of stocks that
are no traded are 5 or 10%. The tax treatment here is that
the first 100k is taxed at 5% while the excess thereof is
taxed at 10%. While capital gains on sale of real property,
it pertains to property considered as capital asset. These
are real properties of an individual citizen etc that are not
used for business. These includes exchange or other
dispositions, such as foreclosure of mortgage. After the
expiration of the redemption period, the highest bidder
thereof shall pay a capital gains tax.
If a GOCC or any of its political subdivision would
purchase a property, then the option would belong to the
seller whether the tax rate would be the schedular tax rate
or the 6%. If it is in 6% capital gains tax, you have there a
tax base which is the gross selling price or the fair market
value as determined by the Commissioner or the Provincial
or City Assessor whichever is higher. But if the seller
choose the schedular rate then the tax base therein is the
gain from the sale. Take note also the requirement for the
applicatio of the exemption if you would sell a house and
lot and you decide to rebuild another using the proceeds,
then you can apply for he exemption.
In case of corporations, we have the NCIT which
applies to domestic as well as resident foreign corporations
including all other corporation subject to regular based tax.
So hhere in Section 27(E) and the applicable concession
under 28(A)(2), is the treatment of the NCIT. So, the
minmum corporate income tax of 2% of the gross income
is also imposed on corporations taxable under NCIT.
In other words, if you are a corporation taxed a 30%,
then you will also be assessed the 2% MCIT, and you will
pay whichever is higher. And if you are taxed at a special
rate, then the MCIT does not apply such as international
carriers which is a resident foreign corporation. Ordinarily,
resident foreign corporations are taxed at 30% but if it is an
international carrier, then it is taxed at 2 1/2% of their Gross
Philippine Billing. The computation now is quarterly but let
as assume it is still in the yearly scheme. Lets say you have
a corporation:
28
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

construction of coal and geothermal facilities and energy

NCIT of MCIT of 2% Excess constructions.
30%
2010 100,000 150,000 50, 000 We also have a special treatment of fringe benefits
2011 130,000 190,000 60,000 tax.
2012 200,000 180,000
Total 110,000 The fringe benefits are received by employees (EEs) to
Excess be considered as rank and file EEs. It forms part of the
Tax Due 200,000-110,0000=90,000 compensation of the EE. If you are a rank and file EE
and you receive a fringe benefit, it comes in a different
forms.
In 2010, pay the 150k but MCIT is only applicable if
the corporation is already more than 3 years in operation Section 33 (b)Fringe Benefit defined. - For purposes of this
and then the MCIT be imposable beginning the 4 th taxable Section, the term 'fringe benefit' means any good, service or
year. The law also recognizes that you are only to pay the other benefit furnished or granted in cash or in kind by an
regular rate hence the excess which is the difference of the employer to an individual employee (except rank and file
MCIT and NCIT. Its purpose is the carry forward of the employees as defined herein) such as, but not limited to, the
excess minmum tax which shall be carried forward and following:
credited against the normal income tax in the 3 succeeding
taxable year. The credit is applicable when the NCIT rate
(1) Housing;
is higher than the MCIT. In the effect, lets say if the MCIT
is still higher then, it is not creditable.
*Revenue Regulation 12-2007(?) (2) Expense account;

Can the taxpayer ask for the suspenson of the effects (3) Vehicle of any kind;
of the MCIT?
(4) Household personnel, such as maid, driver and others;
Yes.
We have No. 3. The Sec. Of Finance may to suspend
its imposition when the corp. Suffers losses on account of (5) Interest on loan at less than market rate to the extent of
prolonged labor dispute or on account of force majeure or the difference between the market rate and actual rate
caused by legitimate business reverses. Hence, you are granted;
still taxable under the NCIT. This treatment also applies to
resident foreign corporations. (6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other
For corporations, the inter corporate dividends are not similar organizations;
taxable both from the domestic and resident foreign corp.
But not in the case of non resident foreign corp. which
receives dividends from other corps., has a specified tax (7) Expenses for foreign travel;
rate. The rate depends on whether or not the corporation
is entitled to a tax sparring Credit. The rate is either 15 or (8) Holiday and vacation expenses;
30% which shall be collected under the tax withholding
system.. (9) Educational assistance to the employee or his
dependents; and
It is subject to the conditon that the country in which
the non-resident foreign corporation is domiciled shall
allow a credit against the tax due to a non resident foreign (10) Life or health insurance and other non-life insurance
corporation, taxes deemed to have been granted to them premiums or similar amounts in excess of what the law allows.
by the Philippines equivalent to 20%.
(C) Fringe Benefits Not Taxable. - The following fringe
The Improperly Accumulaed Earnings Tax is a benefits are not taxable under this Section:
penalty tax or a surtax. This is imposed oly to corporations
which accumulated earnings beyond the reasonable need (1) fringe benefits which are authorized and exempted from
of the business or industry. WHile corps. Are allowed to tax under special laws;
accumulate profits they are however prohibted to
accumulate it beyond reasonable needs of business. It is
determined by BIR when the corps. File their tax return, (2) Contributions of the employer for the benefit of the
they are required to attach their financial statements. It is employee to retirement, insurance and hospitalization benefit
taxed at 10% of the improperly accumulated earnings. plans;
There are however corps. Which are exempted under Sec.
29, the law mentions publicly held corporations meaning (3) Benefits given to the rank and file employees, whether
those traded in the stock exchange, there are banks, granted under a collective bargaining agreement or not; and
financial corps, financial intermediaries and insurance
companies. You also have business partnerships,
professional partnerships, non-taxable joint ventures for

3 Manresa 2016-2017
29
 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
(4) De minimis benefits as defined in the rules and regulations
to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession
of the employer.
Except when they are for the convenience of the
employer or they are in pursuit of the business of the
employer.
Those not excluded will be added to their
compensation.
The other group of EEs who receive fringe benefits
are what we call supervisory and managerial EEs. While these
fringe benefits form part of their compensation as a general, this
not however form part of their taxable compensation. These
benefits will then be taxed to the employer. The employers will
pay the tax for those benefits.
What is the scope of this fringe benefit?
Please be guided of Revenue Regulation 3-98
Revenue Regulations No. 3-98 - Fringe Benefit Tax
May 21, 1998 January 1, 1998
REVENUE REGULATIONS NO. 03-98
SUBJECT : Implementing Section 33 of the National
Internal Revenue Code, as Amended by Republic Act No. 8424
Relative to the Special Treatment of Fringe Benefits
TO : All Internal Revenue Officers and Others
Concerned
Pursuant to Section 244, in relation to Section 33 of
the National Internal Revenue Code of 1997, these Regulations
are hereby promulgated to govern the collection at source of the
tax on fringe benefits which have been furnished, granted or
paid by the employer beginning January 1, 1998.
SEC. 2.33. SPECIAL TREATMENT OF FRINGE
BENEFITS
(A) Imposition of Fringe Benefits Tax A final
withholding tax is hereby imposed on the grossed-up monetary
value of fringe benefit furnished, granted or paid by the employer
to the employee, except rank and file employees as defined in
these Regulations, whether such employer is an individual,
professional partnership or a corporation, regardless of whether
the corporation is taxable or not, or the government and its
instrumentalities except when: (1) the fringe benefit is required
by the nature of or necessary to the trade, business or
profession of the employer; or (2) when the fringe benefit is for
the convenience or advantage of the employer. The fringe
benefit tax shall be imposed at the following rates:
Effective January 1, 1998 - 34%
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Effective January 1, 1999 - 33%
Effective January 1, 2000 - 32%
The tax imposed under Sec. 33 of the Code shall be
treated as a final income tax on the employee which shall be
withheld and paid by the employer on a calendar quarterly basis
as provided under Sec. 57 (A) (Withholding of Final Tax on
certain Incomes) and Sec. 58 A (Quarterly Returns and
Payments of Taxes Withheld) of the Code.
The grossed-up monetary value of the fringe benefit
shall be determined by dividing the monetary value of the fringe
benefit by the following percentages and in accordance with the
following schedule:
Effective January 1, 1998 - 66%
Effective January 1, 1999 - 67%
Effective January 1, 2000 - 68%
The grossed-up monetary value of the fringe benefit
represents the whole amount of income realized by the
employee which includes the net amount of money or net
monetary value of property which has been received plus the
amount of fringe benefit tax thereon otherwise due from the
employee but paid by the employer for and in behalf of his
employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only
those fringe benefits given or furnished to managerial or
supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means
all employees who are holding neither managerial nor
supervisory position. The Labor Code of the Philippines, as
amended, defines "managerial employee" as one who is vested
with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off,
recall, discharge, assign or discipline employees. "Supervisory
employees" are those who, in the interest of the employer,
effectively recommend such managerial actions if the exercise
of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment.
Moreover, these regulations do not cover those
benefits properly forming part of compensation income subject
to withholding tax on compensation in accordance with Revenue
Regulations No. 2-98.
Fringe benefits which have been paid prior to January
1, 1998 shall not be covered by these Regulations.
Determination of the Amount Subject to the
Fringe Benefit Tax In general, the computation of the fringe
benefits tax would entail (a) valuation of the benefit granted and
(b) determination of the proportion or percentage of the benefit
which is subject to the fringe benefit tax. That the Tax Code
allows for the cases where only a portion (i.e. less than 100 per
cent) of the fringe benefit is subject to the fringe benefit tax is
clearly stated in Section 33 (a) of R.A. 8424 which stipulates that
fringe benefits which are "required by the nature of, or necessary
to the trade, business or profession of the employer, or when the
fringe benefit is for the convenience or advantage of the
employer" are not subject to the fringe benefit tax. Thus, in cases
where the fringe benefits entail joint benefits to the employer and
employee, the portion which shall be subject to the fringe
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
benefits tax and the guidelines for the valuation of fringe benefits
are defined under these rules and regulations.
Unless otherwise provided in these regulations, the
valuation of fringe benefits shall be as follows:
(1) If the fringe benefit is granted in money, or is
directly paid for by the employer, then the value is the amount
granted or paid for.
(2) If the fringe benefit is granted or furnished by
the employer in property other than money and ownership is
transferred to the employee, then the value of the fringe benefit
shall be equal to the fair market value of the property as
determined in accordance with Sec. 6 (E) of the Code (Authority
of the Commissioner to Prescribe Real Property Values).
(3) If the fringe benefit is granted or furnished by
the employer in property other than money but ownership is not
transferred to the employee, the value of the fringe benefit is
equal to the depreciation value of the property.
Taxation of fringe benefit received by a non-
resident alien individual who is not engaged in trade or
business in the Philippines A fringe benefit tax of twenty-
five percent (25%) shall be imposed on the grossed-up
monetary value of the fringe benefit. The said tax base shall be
computed by dividing the monetary value of the fringe benefit by
seventy-five per cent (75%).
Taxation of fringe benefit received by
(1) an alien individual employed by regional or area
headquarters of a multinational company or by regional
operating headquarters of a multinational company;
(2) an alien individual employed by an offshore
banking unit of a foreign bank established in the Philippines;
(3) an alien individual employed by a foreign service
contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines; and
(4) any of their Filipino individual employees who are
employed and occupying the same position as those occupied
or held by the alien employees. A fringe benefit tax of fifteen
per cent (15%) shall be imposed on the grossed-up monetary
value of the fringe benefit. The said tax base shall be computed
by dividing the monetary value of the fringe benefit by eighty-five
per cent (85%).
Taxation of fringe benefit received by employees
in special economic zones Fringe benefits received by
employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade
Zone, are also covered by these regulations and subject to the
normal rate of fringe benefit tax or the special rates of 25% or
15% as provided above.
(B) Definition of Fringe Benefit In general,
except as otherwise provided under these regulations, for
purposes of this Section, the term "FRINGE BENEFIT" means
any good, service, or other benefit furnished or granted by an
employer in cash or in kind, in addition to basic salaries, to an
individual employee (except rank and file employee as defined
in these regulations) such as, but not limited to the following:
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(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver
and others;
(5) Interest on loan at less than market rate to the
extent of the difference between the market rate and actual rate
granted;
(6) Membership fees, dues and other expenses
borne by the employer for the employee in social and athletic
clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his
dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of what the
law allows.
For this purpose, the guidelines for valuation of
specific types of fringe benefits and the determination of the
monetary value of the fringe benefits are give below. The taxable
value shall be the grossed-up monetary value of the fringe
benefit.
(1) Housing privilege
(a) If the employer leases a residential property
for the use of his employee and the said property is the usual
place of residence of the employee, the value of the benefit shall
be the amount of rental paid thereon by the employer, as
evidenced by the lease contract. The monetary value of the
fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
(b) If the employer owns a residential property
and the same is assigned for the use of his employee as his
usual place of residence, the annual value of the benefit shall be
five per cent (5%) of the market value of the land and
improvement, as declared in the Real Property Tax Declaration
Form, or zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is
higher. The monetary value of the fringe benefit shall be fifty per
cent (50%) of the value of the benefit. cda
The monetary value of the housing fringe benefit is
equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c) If the employer purchases a residential
property on installment basis and allows his employee to use the
same as his usual place of residence, the annual value of the
benefit shall be five per cent (5%) of the acquisition cost,
exclusive of interest. The monetary value of fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
(d) If the employer purchases a residential
property and transfers ownership thereof in the name of the
employee, the value of the benefit shall be the employer's
acquisition cost or zonal value as determined by the
Commissioner pursuant to Section 6(E) of the Code (Authority
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
of the Commissioner to Prescribe Real Property Values),
whichever is higher. The monetary value of the fringe benefit
shall be the entire value of the benefit.
(e) If the employer purchases a residential
property and transfers ownership thereof to his employee for the
latter's residential use, at a price less than the employer's
acquisition cost, the value of the benefit shall be the difference
between the fair market value, as declared in the Real Property
Tax Declaration Form, or zonal value as determined by the
Commissioner pursuant to Sec. 6(E) of the Code (Authority of
the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The monetary
value of the fringe benefit shall be the entire value of the benefit.
(f) Housing privilege of military officials of the
Armed Forces of the Philippines (AFP) consisting of officials of
the Philippine Army, Philippine Navy and Philippine Air Force
shall not be treated as taxable fringe benefit in accordance with
the existing doctrine that the State shall provide its soldiers with
necessary quarters which are within or accessible from the
military camp so that they can be readily on call to meet the
exigencies of their military service.
(g) A housing unit which is situated inside or
adjacent to the premises of a business or factory shall not be
considered as a taxable fringe benefit. A housing unit is
considered adjacent to the premises of the business if it is
located within the maximum of fifty (50) meters from the
perimeter of the business premises.
(h) Temporary housing for an employee who
stays in a housing unit for three (3) months or less shall not be
considered a taxable fringe benefit.
(2) Expense account
(a) In general, expenses incurred by the
employee but which are paid by his employer shall be treated as
taxable fringe benefits, except when the expenditures are duly
receipted for and in the name of the employer and the
expenditures do not partake the nature of a personal expense
attributable to the employee.
(b) Expenses paid for by the employee but
reimbursed by his employer shall be treated as taxable benefits
except only when the expenditures are duly receipted for and in
the name of the employer and the expenditures do not partake
the nature of a personal expense attributable to the said
employee.
(c) Personal expenses of the employee (like
purchases of groceries for the personal consumption of the
employee and his family members) paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe
benefits of the employee whether or not the same are duly
receipted for in the name of the employer.
(d) Representation and transportation allowances
which are fixed in amounts and are regular received by the
employees as part of their monthly compensation income shall
not be treated as taxable fringe benefits but the same shall be
considered as taxable compensation income subject to the tax
imposed under Sec. 24 of the Code.
(3) Motor vehicle of any kind
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(a) If the employer purchases the motor vehicle
in the name of the employee, the value of the benefit is the
acquisition cost thereof. The monetary value of the fringe benefit
shall be the entire value of the benefit, regardless of whether the
motor vehicle is used by the employee partly for his personal
purpose and partly for the benefit of his employer.
(b) If the employer provides the employee with
cash for the purchase of a motor vehicle, the ownership of which
is placed in the name of the employee, the value of the benefits
shall be the amount of cash received by the employee. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
the employee partly for his personal purpose and partly for the
benefit of his employer, unless the same was subjected to a
withholding tax as compensation income under Revenue
Regulations No. 2-98.
(c) If the employer purchases the car on
installment basis, the ownership of which is placed in the name
of the employee, the value of the benefit shall be the acquisition
cost exclusive of interest, divided by five (5) years. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
the employee partly for his personal purpose and partly for the
benefit of his employer.
(d) If the employer shoulders a portion of the
amount of the purchase price of a motor vehicle the ownership
of which is placed in the name of the employee, the value of the
benefit shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
the employee partly for his personal purpose and partly for the
benefit of his employer.
(e) If the employer owns and maintains a fleet of
motor vehicles for the use of the business and the employees,
the value of the benefit shall be the acquisition cost of all the
motor vehicles not normally used for sales, freight, delivery
service and other non-personal used divided by five (5) years.
The monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
The monetary value of the motor vehicle fringe benefit
is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f) If the employer leases and maintains a fleet of
motor vehicles for the use of the business and the employees,
the value of the benefit shall be the amount of rental payments
for motor vehicles not normally used for sales, freight, delivery,
service and other non-personal use. The monetary value of the
fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
(g) The use of aircraft (including helicopters)
owned and maintained by the employer shall be treated as
business use and not be subject to the fringe benefits tax.
(h) The use of yacht whether owned and
maintained or leased by the employer shall be treated as taxable
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
fringe benefit. The value of the benefit shall be measured based
on the depreciation of a yacht at an estimated useful life of 20
years.
(4) Household expenses Expenses of the
employee which are borne by the employer for household
personnel, such as salaries of household help, personal driver
of the employee, or other similar personal expenses (like
payment for homeowners association dues, garbage dues, etc.)
shall be treated as taxable fringe benefits.
(5) Interest on loan at less than market rate
(a) If the employer lends money to his employee
free of interest or at a rate lower than twelve per cent (12%),
such interest foregone by the employer or the difference of the
interest assumed by the employee and the rate of twelve per
cent (12%) shall be treated as a taxable fringe benefit.
(b) The benchmark interest rate of twelve per cent
(12%) shall remain in effect until revised by a subsequent
regulation.
(c) This regulation shall apply to installment
payments or loans with interest rate lower than twelve per cent
(12%) starting January 1, 1998.
(6) Membership fees, dues, and other
expenses borne by the employer for his employee, in social
and athletic clubs or other similar organizations. These
expenditures shall be treated as taxable fringe benefits of the
employee in full.
(7) Expenses for foreign travel
(a) Reasonable business expenses which are
paid for by the employer for the foreign travel of his employee
for the purpose of attending business meetings or conventions
shall not be treated as taxable fringe benefits. In this instance,
inland travel expenses (such as expenses for food, beverages
and local transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less
per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual
occurrences of the meetings or conventions.
The cost of economy and business class airplane
ticket shall not be subject to a fringe benefit tax. However, 30
percent of the cost of first class airplane ticket shall be subject
to a fringe benefit tax.
(b) In the absence of documentary evidence
showing that the employee's travel abroad was in connection
with business meetings or conventions, the entire cost of the
ticket, including cost of hotel accommodations and other
expenses incident thereto shouldered by the employer, shall be
treated as taxable fringe benefits. The business meetings shall
be evidenced by official communications from business
associates abroad indicating the purpose of the meetings.
Business conventions shall be evidenced by official
invitations/communications from the host organization or entity
abroad. Otherwise, the entire cost thereof shouldered by the
employer shall be treated as taxable fringe benefits of the
employee.
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(c) Travelling expenses which are paid by the
employer for the travel of the family members of the employee
shall be treated as taxable fringe benefits of the employee.
(8) Holiday and vacation expenses Holiday
and vacation expenses of the employee borne by his employer
shall be treated as taxable fringe benefits.
(9) Educational assistance to the employee or
his dependents
(a) The cost of the educational assistance to the
employee which are borne by the employer shall, in general, be
treated as taxable fringe benefit. However, a scholarship grant
to the employee by the employer shall not be treated as taxable
fringe benefit if the education or study involved is directly
connected with the employer's trade, business or profession,
and there is a written contract between them that the employee
is under obligation to remain in the employ of the employer for
period of time that they have mutually agreed upon. In this case,
the expenditure shall be treated as incurred for the convenience
and furtherance of the employer's trade or business.
(b) The cost of educational assistance extended
by an employer to the dependents of an employee shall be
treated as taxable fringe benefits of the employee unless the
assistance was provided through a competitive scheme under
the scholarship program of the company.
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of what
the law allows The cost of life or health insurance and other
non-life insurance premiums borne by the employer for his
employee shall be treated as taxable fringe benefit, except the
following: (a) contributions of the employer for the benefit of the
employee, pursuant to the provisions of existing law, such as
under the Social Security System (SSS), (R.A. No. 8282, as
amended) or under the Government Service Insurance System
(GSIS) (R.A. No. 8291), or similar contributions arising from the
provisions of any other existing law; and (b) the cost of premiums
borne by the employer for the group insurance of his employees.
(C) Fringe Benefits Not Subject to Fringe
Benefits Tax In general, the fringe benefits tax shall not be
imposed on the following fringe benefits:
(1) Fringe benefits which are authorized and
exempted from income tax under the Code or under any special
law;
(2) Contributions of the employer for the benefit
of the employee to retirement, insurance and hospitalization
benefit plans;
(3) Benefits given to the rank and file, whether
granted under a collective bargaining agreement or not;
(4) De minimis benefits as defined in these
Regulations;
(5) If the grant of fringe benefits to the employee
is required by the nature of, or necessary to the trade, business
or profession of the employer; or
(6) If the grant of the fringe benefit is for the
convenience of the employer.
The exemption of any fringe benefit from the fringe
benefit tax imposed under this Section shall not be interpreted
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod
to mean exemption from any other income tax imposed under
the Code except if the same is likewise expressly exempt from
any other income tax imposed under the Code or under any
other existing law. Thus, if the fringe benefit is exempted from
the fringe benefits tax, the same may, however, still form part of
the employee's gross compensation income which is subject to
income tax, hence, likewise subject to a withholding tax on
compensation income payment.
The term "DE MINIMIS" benefits which are exempt
from the fringe benefit tax shall, in general, be limited to facilities
or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees
such as the following:
(1) Monetized unused vacation leave credits of
employees not exceeding ten (10) days during the year;
(2) Medical cash allowance to dependents of
employees not exceeding P750 per semester or P125 per
month;
(3) Rice subsidy of P350 per month granted by
an employer to his employees;
(4) Uniforms given to employees by the
employer;
(5) Medical benefits given to the employees by
the employer;
(6) Laundry allowance of P150 per month;
(7) Employee achievement awards, e.g. for
length of service or safety achievement, which must be in the
form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding one-
half () month of the basic salary of the employee receiving the
award under an established written plan which does not
discriminate in favor of highly paid employees;
(8) Christmas and major anniversary
celebrations for employees and their guests;
(9) Company picnics and sports tournaments in
the Philippines and are participated exclusively by employees;
and
(10) Flowers, fruits, books or similar items given to
employees under special circumstances, e.g. on account of
illness, marriage, birth of a baby, etc
(D) Tax Accounting for the Fringe Benefit
Furnished to the Employee and the Fringe Benefit Tax Due
Thereon. As a general rule, the amount of taxable fringe
benefit and the fringe benefits tax shall constitute allowable
deductions from gross income of the employer. However, if the
basis for computation of the fringe benefits tax is the
depreciation value, the zonal value as determined by the
Commissioner pursuant to Section 6(E) of the Code or the fair
market value as determined in the current real property tax
declaration of a certain property, only the actual fringe benefits
tax paid shall constitute a deductible expense for the employer.
The value of the fringe benefit shall not be deductible and shall
be presumed to have been tacked on or actually claimed as
depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value
or fair market value of the said property is greater than its cost
subject to depreciation, the excess amount shall be allowed as
a deduction from the employer's gross income as fringe benefit
expense.
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Illustrations on fringe benefit furnished or granted by
the employer to an employee (other than a rank-and-file
employee)
(1) During the year 1998, ABC Corporation paid
for the monthly rental of a residential house of its branch
manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up
monetary value of the said fringe benefit furnished or granted to
its branch manager (Mr. Dela Cruz) shall be P50,000.00,
computed as follows:
Monthly rental for the residential house P66,000.00
Grossed-up monetary benefit granted
(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable
portion) P50,000.00
Fringe benefit tax due thereon
(34%) P17,000.00
=========
ABC Corporation shall take up in its books of
accounts the P66,000.00 fringe benefit furnished to Mr. Dela
Cruz, under account title "Fringe Benefit Expense" and the
amount of 17,000.00 under the account title "Fringe Benefit Tax
Expense". The aforesaid amounts shall be fully allowed as
deductions from the gross income of ABC Corporation and shall
be taken up in the said employer's books of accounts as follows:
Debit: Fringe Benefit Expense P66,000
Debit: Fringe Benefit Tax Expense P17,000
Credit: Cash P83,000
To record fringe benefit expense and fringe benefit
tax paid on rental of the residential property furnished to Mr. Dela
Cruz for his residential use. (Note: If the fringe benefit expense
of P66,000.00 has already accrued but not yet paid, use the
account title "fringe benefit payable". If the fringe benefit tax has
already accrued but not yet paid, use the account title "fringe
benefit tax payable").
(2) XYZ Corporation owns a condominium unit.
During the year 1998, the said corporation furnished and
granted the said property for the residential use of its Assistant
Vice-President. The fair market value of the said property as
determined by the Commissioner pursuant to Section 6(E) of the
Code amounts P10,000,000.00 while its fair market value as
shown in its current Real Property Tax Declaration amounts to
P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be
used in computing the monetary of the fringe benefit so
furnished or granted to said employee and the fringe benefit tax
due thereon shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months) P20,833.33
Grossed-up monetary value thereof as fringe
benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66
Fringe Benefit tax due thereon
(34%) P10,732.32
=========
In general, under this illustration, the XYZ Corporation
shall not further claim deduction for allowing its Assistant Vice-
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 TAXATION 1
Second Exam Transcription
Based on the Lectures of Dean Quibod

President the use of its residential property since the cost for the EXAMPLE:
use thereof has already been recovered as deduction from its
gross income under "Depreciation Expense". However, since Actual Value = 10,000,000 vehicle
the fringe benefit tax in the amount of P10,732.32, assumed and
paid by XYZ corporation has not as yet been recovered by way
of deduction from gross income, the same shall be allowed as a Gross-up monetary value = 10,000,000
deduction from its gross income. XYZ Corporation shall take up
the foregoing in its books of accounts, as follows: 68%
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax = 147058.82
Payable P10,732.32
To record fringe benefit tax expense for the
residential property furnished to employees. Fringe Benefit= 147058.82 x 32%

However, if the cost of the aforesaid condominium = 4595.59(?)

unit subject to depreciation allowance (example: its acquisition
cost is only P7,000,000.00) is lesser that its fair market value as
Those fringe benefits for the convenience of the
determined by the Commissioner (i.e. P10,000,000.00), the
employer which are excluded from tax ad those
excess amount (i.e. P3,000,000.00) shall be amortized
benefits which are necessary for the business of the
throughout the remaining estimated useful life of the residential
employer.
property used in computing the said employer's depreciation
expense and allowed as a deduction from the said employer's
gross income as fringe benefit expense. Thus, if the remaining
estimated useful life thereof during the year 1998 is fifteen (15)
years, its monthly amortization shall be computed as follows: Take note also of 13th month pay, the guaranteed or
exempted amount is up to 82,000.00. If the EE has a
Monthly amortization (P3,000,000.00 divided by 200,000.00 13th mo. Pay then deduct the 82,000.00
15 years divided by 12 months) P16,666.67 first since that is exempted. The excess is taxable.

In this case, XYZ Corporation shall take up the

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

To record fringe benefit and fringe benefit tax

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

Under Section 33, the term 'fringe benefit'

means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an
individual employee except rank and file employees.

Prior to 1998, there was no such provision but there are

schemes which are off books.

It is based on the

Fringe benefit= gross-up monetary value x 32%

The tax base now is not the actual value.

Gross-up monetary value = actual value divided by 68

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