UPDATED EXPLANATORY NOTES

NIRC SECTION 1 83
August 31, 2016

- NIRC being a special law prevails over a general law like Civil Code.
- Revenue law, is a law passed for the purpose of authorizing the levy and collection of taxes.
- Revenue derived from taxes are exempt from execution.
- Revenue refers to all funds or income derived by the government whether from tax or other source.
- Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 when an administrative agency renders an opinion by means of circular or memo, it merely
interprets a pre-existing law, and no publication is necessary for its validity. Construction by an executive branch of government of a
particular law although not binding upon the courts must be given weight. These agencies are the one called to implement the law.
- Rulings or interpretation while entitled to great weight, are not judicially binding.
- BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of the administrative level issued by the BIR and the DOJ.
These two will take a character of substantive rules and are generally binding and effective, if not otherwise contrary to law or
constitution.
- It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
- Ruling of first impression means rulings, opinions & interpretations without established precedents. Only the CIR can issue this
ruling. Those with precedents are called Ruling with established precedents.

Requisites for valid regulations. (a) They must not be contrary to law; (b) They must be published in the Official Gazette; (c) They must
be useful, practical and necessary for law enforcement; (d) They must be reasonable in their provisions; and (e) They must be in conformity with
the legal provisions.

Rational Basis Test - It is sufficient that the legislative classification is rationally related to achieving some legitimate state interest.
(British American Tobacco vs. Camacho, G.R. No. 163583, April 15, 2009)

Assessment, meaning. With special reference to internal revenue taxes, an assessment is merely a notice to the effect that the
amount stated therein is due as tax and a demand for the payment thereof. It is not an action or proceeding for the collection of taxes. It is a step
preliminary, but essential to warrant of distraint, if still feasible, and also to establish a cause for judicial action as the phrase is used in the Revenue
Code.

Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or
capriciously. (Marcos vs. CA, 273 SCRA 47, 1987)

Assessment is not an action or proceeding. It is a preliminary step.

Assessment as a general rule is a condition sine quanon for the collection of taxes but not for filing criminal actions.

An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer
concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumption no matter how reasonable
or logical said presumption may be.
In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of
assessment being a mere presumption cannot be made to rest on another presumption x x x. (Collector vs. Benipayo, 4 SCRA 182)

A tax assessment is prima facie valid and correct and the taxpayer has the burden of proof to impugn its validity. (Behn Meyer & Co. vs.
Collector of Internal Revenue, 27 Phil. 647) The validity of a tax assessment is a disputable presumption. (Perez vs. CTA, et al., G.R. No. L-10507,
prom. May 30, 1948; Collector vs. Bohol Land Transportation, G.R. Nos. L-13099 and L13462, prom. April 29, 1960)

All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are
presumed. The burden of proof is upon the taxpayer to show clearly that the assessment is erroneous, in order to relieve himself from it.

Where a taxpayer question the correctness of an assessment against him and is apparently not acting in bad faith or merely attempting
to delay payment, but is deprived of the best means of proving his contention because his books of accounts were lost by the BIR agent who
examined them, said taxpayer must be given an opportunity to prove by secondary evidence that the assessment is incorrect. (Santos vs. Nable, et
al., 2 SCRA 21)

As the law provides that any person who is aggrieved by an assessment issued by the Commissioner of Internal Revenue is given only 30
days to appeal therefrom to the Tax Court, the only effect should be that after that period, the assessment can no longer be questioned by the

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taxpayer; otherwise, the assessment which has become final, executory and demandable under Section 11 of Republic Act No. 1125 would be an
absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec. 28, 1961)

The taxpayers failure to appeal to the Court of Tax Appeals in due time made the assessment in question final, executory and
demandable. (Republic vs. Manila Port Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for collection of the tax was
instituted, said taxpayer was already barred from disputing the correctness of the assessment or invoking any defense that would reopen the
question of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the period of thirty days for appeal to the Court of Tax
Appeals would make little sense. (Republic vs. Lopez, 2 SCRA 566)

Acquittal in a criminal case does not exonerate taxpayers civil liability to pay the tax due (Republic vs. Patanao, G.R. No. L-22317, July 21,
1967)

Best evidence obtainable, explained. It refers to the findings gathered by internal revenue examiners and agents from the records of
the register of deeds, corporations, employers, clients or patients, tenants, lessees, vendees and the like with whom the taxpayer had previous
transactions or from whom he acquired any income.

It will be noted that under Section 5 of the said Code, the Commissioner of Internal Revenue may obtain information on potential
taxpayers from government offices or agencies.

Networth method of investigation. As stated above, the Commissioner of Internal Revenue may make tax assessments on the best
evidence obtainable. He can avail of methods in order to arrive at a correct and reasonable assessment of taxes. One method is the networth
method of investigation.

The power or authority of the Commissioner to choose the method of determining taxable income is quite comprehensive, and the only
limitation to the exercise of such power of authority is that the method chosen or adopted must clearly reflect the income. Consequently, Tax
Code (Sec. 43) authorizes the Commissioner of Internal Revenue to employ the networth method, where a taxpayer keeps no books or records or
where such books or records do not clearly reflect his income. (Commissioner vs. Enrique Avelino, G.R. No. L-14847, prom. Sept. 19, 1961)

It is not required in networth cases that the Government prove with absolute certainty the sources from which petitioner derived his
unreported income. It is sufficient if evidence is adduced of the likely source or sources of such income. In this case, there is ample evidence of the
probable sources from which petitioner could have derived his undeclared income such as flourishing business in optical goods, office equipment,
and haberdashery; horse racing, and real estate transactions. (Reyes vs. Collector, G.R. Nos. L-11534 & L-11558, prom. Nov. 25, 1968)

CIR vs. Hantex, G.R. No. L-136075, March 31, 2005

- Mere photocopies not admissible. Exert effort to get the original
- Hearsay evidence is admissible. BIR not bound by the technical rules of evidence. It depends on trustworthiness for evidence to be
admissible.

A. SECRECY OF BANK DEPOSITS

Q. What guarantees on confidentiality do depositors enjoy under the law?

A. For peso deposits, Republic Act No. 1405 (Bank Deposits Secrecy Law) declares all deposits of whatever nature with banks in the Philippines,
including investments in government bonds, as of an absolutely confidential nature and prohibits the examination or inquiry into such deposits or
investments by any person, government official, bureau or office, as well as the disclosure by any official or employee of a bank of any information
concerning said deposits.

There are only four (4) instances under the law where bank deposits or investment in government bonds may be disclosed or looked into, namely:
(1) upon written permission of the depositor; or (2) in cases of impeachment; or (3) upon order of a competent court in cases of bribery or
dereliction of duty; or (4) in cases where the money deposited or invested is the subject matter of the litigation.

It may be noted that RA 1405 covers not only bank deposits but also investments in government bonds.

For foreign currency deposits, Republic Act No. 6426 (The Foreign Currency Deposit Act) similarly declares that these deposits are of an absolutely
confidential nature and cannot be examined, inquired or looked into by any person, government official, bureau or office whether judicial or
administrative or legislative or any other entity whether public or private. There is only one instance for disclosure under said law and, that is, upon
the written permission of the depositor. RA 6426 also exempts foreign currency deposits from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative body whatsoever.

For investments in trust accounts or in deposit substitutes, if these are in the form of investments in government bonds or deposits, the protection
under RA 1405 and RA 6426 extends thereto accordingly. If these are in other forms of investments, the disclosure of information related thereto is
covered by Section 55 of the General Banking Law of 2000 (Republic Act No. 8791) which prohibits, unless there is an order of a court of competent

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jurisdiction, the disclosure by any director, official, employee or agent of any bank any information relative to the funds or properties in the
custody of the bank belonging to private individuals, corporations or any other entity.

NOTE:

Under par. (F) of the NIRC, it states:

(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related Information Held by Financial Institutions.
Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of
the Philippines, and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits and other related
information held by financial institutions of:

(1) A decedent to determine his gross estate; and

(2) Any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)(2) of this Code by reason of financial
incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that hi financial position demonstrates a clear
inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No.
1405, Republic Act No. 6426, otherwise known as the Foreign Currency Act of the Philippines, or under other general or special laws, and such
waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

(3) A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign tax authority pursuant to an
international convention or agreement on tax matters to which the Philippines is a signatory or a party of: Provided, That the
information obtained from the banks and other financial institutions may be used by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement purposes. 1

In case of a request from a foreign tax authority for tax information held by banks and financial institutions, the exchange of information shall
be done in a secure manner to ensure confidentiality thereof under such rules and regulations as may be promulgated by the Secretary of
finance, upon recommendation of the Commissioner.

The Commissioner shall provide the tax information obtained from banks and financial institutions pursuant to a convention or agreement upon
request of the foreign tax authority when such requesting foreign tax authority has provided the following information to demonstrate the
foreseeable relevance of the information to the request:

(a) The identity of a person under examination or investigation;

(b) A statement of the information being sought including its nature and the form in which the said foreign tax authority prefers to
receive the information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within
the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person believed to be in possession of the requested information;
(f) A statement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that
if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the
information under its laws or in the normal course of administrative practice and that it is in conformity with a convention or
international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the
information, except those that would give rise to disproportionate difficulties.

The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response,
the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the
request, if any, within sixty (60) days from receipt of the request.

If the Commissioner is unable to obtain and provide the information within ninety (90) days from receipt of the request, due to obstacles
encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately
inform the requesting tax authority of the same, explaining the nature of the obstacles encountered or the reasons for refusal.

The term foreign tax authority, as used herein, shall refer to the tax authority or tax administration of the requesting State under the tax
treaty or convention to which the Philippines is a signatory or a party of.

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As amended by RA 10021, entitled An Act to Allow the Exchange of Information by the BIR on Tax Matters Pursuant to
Internationally-Agreed Tax Standards, otherwise known as Exchange of Information on Tax Matters Act of 2009, Amending Secs.
6(F), 71, and 270 of the NIRC of 1997, as Amended, and for Other Purposes march 5, 2010
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Q. How do banks respond to an order of a competent court?

A. For peso deposits, banks comply with orders for disclosure in court cases subject to these requirements: (a) there must be a court order; (b) the
order must be issued by a competent court specifically directing the bank concerned to disclose the required information; and (c) the bank should
check and satisfy itself that the deposits or investment in government bonds being inquired into are either the subject of a case of bribery or
dereliction of duty of public officials, or of a case where the deposit or investment itself is the subject matter of the litigation. If these requirements
are not met, there would be basis for the bank to request the court to excuse compliance with the court order.

In impeachment cases, it is necessary that there be an order issued by the impeachment court or by its authorized officer. For foreign currency
deposits, the law does not provide an instance for disclosure upon a court order. As mentioned above, there is only a single instance for disclosure
under RA 6426 and, that is, upon written permission of the depositor. Thus, for foreign currency deposit accounts subject of a court order, the bank
can invoke RA 6426 to excuse compliance.

Q. What is the liability of the banks and/or its officers and employees for violating the laws against disclosure?

A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the General Banking Law of 2000 are subject to stiff criminal
penalties.

Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine of not more than P20,000, or both, in the discretion of
the court. Under RA 6426, the penalty is imprisonment of not less than one year not more than five years or a fine of not less than P5,000 nor more
than P25,000, or both, in the discretion of the court. The violation of Sec. 55 of the General Banking Law of 2000, the penalty is imprisonment of
not less than two years nor more than 10 years or a fine of not less than P50,000 nor more than P200,000, or both, in the discretion of the court;
and in addition, if the offender is a director or officer of a bank, he is subject to suspension or removal by the Monetary Board.

B. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS

Q. Are banks allowed to open accounts using an alias or a number?

A. There is no specific banking law up to the present prohibiting banks from opening deposit accounts using an alias or a number. Prior to July 7,
2000, there is also no banking regulation providing for such prohibition. On July 7, 2000 and in seeking the adoption of anti-money laundering
measures, the Bangko Sentral ng Pilipinas (BSP) issued a regulation, Circular No. 251, providing that, unless otherwise prescribed under existing
laws, anonymous accounts or accounts under fictitious names are prohibited.

The exception referred to under Circular No. 251 was RA 6426 (The Foreign Currency Deposit Act) which explicitly allows the keeping of numbered
accounts for the recording and servicing of deposits.

For peso accounts, when banks allow the opening of deposit accounts under pseudonyms, it is assumed that: (1) they have exercised due diligence
to ascertain the identity of their clients; and (2) they are aware of the legal provisions and requirements on the use of pseudonyms.

The above notwithstanding, it may be pointed out that in the Manual of Regulations issued by BSP, or even before the issuance of Circular 251,
there were already regulations requiring the banks to: (a) adopt systems to establish the identity of their depositors; and (b) require to set a
minimum of three (3) specimen signatures from each of their depositors subject to regular updating. Even for numbered accounts as authorized
under RA 6426, BSP has required banks, under Circular 258, to take necessary measures to establish and record the true identity of their clients,
which identification may be based on official or other reliable documents and records.

Q. Are there other laws governing the use of pseudonyms or aliases?

A. Art. 178 of the Revised Penal Code penalizes the: (a) publicly using of a fictitious name for the purpose of concealing a crime, evading the
execution of a judgment, or causing damage; and (b) concealment by any person of his true name and other personal circumstances.

On the other hand, there is also Commonwealth Act No. 142, as amended by Republic Act No. 6085 (Regulating the Use of Aliases) which provides
that, except only as a pseudonym for literary purposes and athletic events, it is unlawful for any person to use an alias, unless the same is duly
recorded in the proper local civil registry. Related thereto, Articles 379 and 380 of the Civil Code provide that no person shall use different names
and surnames except the employment of pen and stage names provided it is done in good faith and there is no injury to third persons.

What can be noted is that the above provisions allow the use of aliases under certain circumstances. Conversely stated, the use of aliases is not
absolutely disallowed. Moreover, the sanctions for any violation of the above provisions on aliases are mainly directed to the one using the
unauthorized alias.

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Q. How does Circular No. 251 apply to existing numbered accounts?

A. For peso accounts, the banks should have their respective programs of compliance with the Circular. For foreign currency deposit accounts, they
are allowed to continue maintaining numbered accounts opened in accordance with RA 6426 subject to the requirement that the banks shall take
necessary measures to establish and record the true identity of their clients.

Q. What penalties/sanctions are applicable for violating the laws/regulations?

A. Article 178 of the Revised Penal Code is directed to the person concealing his identity publicly or using a fictitious name and the penalty would
range from one day up to six months imprisonment and/or a fine up to P500,000. For violation of Commonwealth Act 142, which is likewise
directed to the person using an unauthorized alias, the penalty is imprisonment from one year to five years and a fine of P5,000 to P10,000. For the
violation of Circular 251, it is subject to the administrative sanction on the bank and/or responsible directors/officers of fine up to P30,000 per
transaction.

C. CONTINUED CONFIDENTIALITY/SECRECY OF DEPOSIT TRANSACTIONS

Q. Is confidentiality/secrecy of deposit accounts compromised with the issuance of Circular 251?

A. No. Circular 251 merely disallowed the opening of fictitious and anonymous accounts and has not in any way modified nor lessened the
safeguards and protection to depositors under RA 1405. This means that, notwithstanding Circular 251, deposit accounts cannot be examined or
looked into except under the limited circumstances provided for in RA 1405.

Q. Why are the BSP and the BAP advocating the amendment to bank secrecy laws?

A. The proposal of BSP and BAP is for access to deposit accounts only under exceptional circumstances, such as deposits only above the P50-million
level and in relation to the commission of serious offenses like racketeering and illicit drug trade. Except for these instances, depositors and those
with legitimate transactions remain protected under RA 1405. The objective of the proposal is to institute this measure as an anti-money
laundering campaign so as to delete the Philippines as a non-cooperative country in the list of the Financial Action Task Force against money
laundering

INCOME TAX

A. Income Tax Systems

There are three kinds of income tax systems:
o Global (unitary) tax system
Here, all items of gross income, deductions, personal and additional exemptions are reported in one income tax return and a single tax
is imposed on all income received or earned, regardless of the activities which produced the income.
It is akin to putting all income into one basket and taxing the entire basket.

o Schedular tax system

Here, different types of activities are subjected to different types of tax rates. The tax rates depend on the classification of the taxable
income ant the activities which produced the income.

o Semi-global, semi-schedular system

Certain passive income and capital gains are subject to final taxes while other income are added to arrive at the gross income (where
deductions are used to arrive at the taxable income)
We follow the semi-global/semi-schedular system in the Philippines.
Schedular can also mean that tax rates will differ based on the tax base.
For instance, global is usually applied to corporations, as corporations are taxes at a single rate, regardless of the tax base; while
the schedular system is applied to individuals as they are subjected to different tax rates based on their tax bracket.

D. Situs of Taxation
Now that we know that only resident citizens and domestic corporations are taxed from income sources worldwide, it is important to
determine whether such income is realized in the Philippines or abroad. This brings us to Section 42.

This section is NOT relevant to domestic corporations and resident citizens because they are taxed worldwide anyway. This section
comes into play when it comes to problems related to the income sources of taxpayers who are only taxed for income sourced within
the Philippines.
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 The following are treated as gross income from sources within the Philippines (Secs. 152-165, Revenue Regulations No. [R.R.] 2-1940:

1. Interests including interests on bonds, notes and other interest bearing obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines

2. Dividends
a. From a domestic corporation; and
b. A foreign corporation, unless less than 50% of the gross income of the foreign corporation was derived from the Philippines
for the three-year period (the amount will be based on the same ratio to dividends as the gross income for such period
derived from sources within Philippines to its gross income from all sources.)
i. For example, We make kaijus, Inc., a Japanese corporation, derives more than 50% of its gross income in the Philippines
from the sale of kaiju action figures for the past three years. If it declares dividends to a non-resident Filipino, the
dividend income will be considered sourced within the Philippines.
3. Services compensation for labor or personal services performed in the Philippines.
4. Rentals and Royalties from property located in the Philippines or from any interest in such property for:
a. The use of any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other
similar stuff
b. The use of any industrial, commercial or scientific equipment
c. The supply of scientific, technical, industrial or commercial knowledge or info
d. The supply of services by a non-resident person in connection with those of property or rights, or the installation or
operation of any brand, machinery, or other apparatus purchased form such non-resident person
e. Technical advise, assistance or services rendered in connection with technical management of any scientific, industrial or
commercial undertaking
f. The use of motion picture films, films for TV, tapes for radio broadcast
5. Sale of real property the gains, profits and income from sale of real property located in the Philippines.
6. Sale of personal property gains, profits and income from sale of personal property, determined by subsection (E).

The place of the signing of a contract is NEVER an issue or a factor for determining the source of income.
Do not forget the turnkey contract case of CIR v. Marubeni (G.R. No. 137377, December 18, 2001), when it comes to situs problems.
Expenses of a multinational corporation directly allocated or identified with the operations of the Philippine branch. So, the company can
claim as its deductible share a ratable part of such expenses based upon the ratio of the local branchs gross income to the total gross
income, worldwide, of the multinational corporation. (CIR v. CTA and Smith Kline & French Overseas Co., G.R. No. L-54108, January 17, 1984)
The source of income is the property, activity, or service that produced the income.
o It is the place of activity creating the income which is controlling, and not the place of business or residence of a corporation.
Hence, reinsurance premiums ceded to foreign reinsurers are considered income from Philippine sources. (Howden & Co., Ltd. V.
CIR, G.R. No. L-19392, April 14, 1965)
Also, the sale of airline tickets through a general sales agent in the Philippines is considered income from Philippine sources, even if
the tickets pertain to an airline company which does not maintain any flights to and from the Philippines. (CIR v. British Overseas
Airways Corporation, G.R. No. L-65773, April 30, 1987, wherein the Court considered the sale of the tickets as the source of
income, and not the activity of actually transporting passengers)
When the sale is consummated within the Philippines (as in the title to the property was transferred in the country), the situs of the
sale is in the Philippines and is therefore taxable here. (A. Soriano Y Cia v. CIR, G.R. No. L-5896, August 31, 1955)

Income Test of Source of Income

Interest income Residence of DEBTOR
Dividend Income: Income within

1) From domestic corporation Income within, if 50% or more of the gross income of the
foreign company (for the past 3 years) was derived from
2) From foreign corporation sources within the Philippines

Income without, if less than 50% of the gross income of the

foreign company (for the past 3 years) was derived from
sources within the Philippines
Service Income Place of performance
Rent income Location of Property
Royalty income Place of use of intangible
Gain on sale of real property Location of property
Gain on sale of personal property Place of sale
Gain on sale of domestic shares of stock Income within

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Gross income from sources outside (without) the Philippines.
1. Interests other than those derived from sources within
2. Dividends other than those derived from sources within
3. Compensation for labor or personal services performed outside the Philippines
4. Rentals or royalties from property located outside the Philippines or any interest in such property
5. Gains, profits, income from sale of real property located outside the Philippines

Income from sources partly within and partly without the Philippines.
For the gross income items allocated to sources partly within and partly without the Philippines,
o There shall be deducted the expenses, losses and other deductions properly apportioned, and
o A ratable part of other expenses, losses and deductions which cannot properly be allocated to some item of gross income.
If there is any remainder, it shall be included in full as taxable income from sources within the Philippines

Situs of sale of personal property

Gains, profits and income derived from purchase of personal property within and sold without, or from purchase without and sale within, are
treated as derived entirely form sources with the country in which it is SOLD.

Situs of sale of stocks in a domestic corporation

Gains from sale of shares of stock in a domestic corporation are treated as DERIVED ENTIRELY from sources within the Philippines regardless
of where the said shares are sold.

E. Income Tax on Individuals

Now that we know how to determine where income is sourced, it is time to focus on the different kinds of taxpayers. Let us begin with
individual taxpayers.

Individual taxpayers are classified into:

1. Citizens, who are divided into:
Resident citizens those citizens whose residence is within the Philippines; and
Non-resident citizens those citizens whose residence is not within the Philippines.
2. Aliens, who are divided into:
Resident aliens those individuals whose residence is within the Philippines and are not citizens thereof; and
Non-resident aliens those individuals whose residence is not within the Philippines but temporarily in the country and are not citizens
thereof. They are:
Those engaged in trade or business within the Philippines; and
Those who are not so engaged. (see NIRC, Sections 23-25)

It is important to know the definition of each kind of individual taxpayer because the tax liability of each differs (as we shall see later).

Resident aliens
Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen
Mere physical or body presence is enough, not intention to make the country ones abode. (Garrison v. CA, G.R. No. L-44501, July 19, 1990)
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income
tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite
purpose which in its nature may be promptly accomplished is a transient.
o But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his
home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or abandoned. (R.R. 2-1940)

The BIR has ruled that there is intention on the part of an alien to stay in the Philippines indefinitely when the alien:
o Had a Special Resident Retirees Visa;
o Acquired real property and is actually present most of the time in the Philippines; and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)

Non-resident citizens
Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to
reside therein;

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 2. Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent
basis;
3. Citizen who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the
time during the taxable year;
4. 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.

Who are non-resident citizens? (R.R. 1-1979)

1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured.
2. Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis.
3. Contract worker one who leaves the Philippines on account of a contract of employment which is renewed form time to tome under
such circumstance as to require him to be physically present abroad most of the time (not less than 183 days)

Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be
required to file information returns from sources outside the Philippines beginning 2001. (R.R. 5-2001)

The phrase most of the time shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year.
o However, citizens who work outside of the Philippines for at least 183 days in a taxable year due to a contract of employment with a
Philippines employer (such as employees seconded to a foreign country) is not considered a non-resident citizen because they are not
considered employed abroad. They do not fall within Section 22(E)(3) because their employment remains with the Philippines employer.
(BIR Ruling No. 116-12)

The wage or income of an OFW/OCW which is earned from outside the Philippines is exempt from income tax.
o An OCW is a Filipino citizen who:
Holds a job outside the Philippines;
Is physically present in that foreign country where the job is;
Is registered with the POEA;
Has valid overseas employment certificate;
Their salaries and wages are paid by an employer abroad and is not borne by any entity or person in the Philippines. (R.R. 1-2011)

Non-resident aliens engaged in business in the Philippines

Who are non-resident aliens?
1. An individual whose residence is not within the Philippines, and
2. Not a citizen of the Philippines

One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient or non-resident.
(R.R. 2-1940)

Non-resident aliens are either:

o Engaged in trade or business, such as:
One who actually derives income in the Philippines, or
Stays in the Philippines for more than 180 days during any calendar year (deemed to be a non-resident alien engaged in the
Philippines, Section 25[A])
o Not engaged in trade or business.

Less of residence by alien

o An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the
Philippines.
o A mere intention to change his residence does not change his status from resident alien to non-resident alien. An alien who has
acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. (Section 6, R.R. 2-1940)

Minimum wage earner

Fixed by the Regional Tripartite Wage and Productivity Board.
Minimum wage earner:
o Private sector paid the statutory minimum wage
o Public sector not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned

Senior Citizens
Senior Citizens are
o Resident citizens of the Philippines, and
o Who are at least 60 years old

8
 They are not exempt from income taxes unless they are considered minimum wage earners. (R.A. 9994)

Senior citizens are granted a 20% discount from select establishments.

o Sales of goods and services by select establishments to senior citizens are also exempt from VAT. (R.R. 7-2010)

Discounts for senior citizens are now treated as tax deductions for business, as per The Expanded Senior Citizens Act of 2003 (R.A. 9257). This
can be very bad for the taxpayer because he doesnt get the peso for peso benefit which he would have gotten if it were considered a tax
credit as before. (M.E. Holdings Corp. v. CIR & CTA, G.R. No. 160193, March 3, 2008)

Persons with Disability

Persons with Disability (PWD) are:
o Individuals suffering from restriction or different abilities,
o As a result of mental, physical or sensory impairment to perform an activity in a manner or within the range considered normal for
human beings.

PWD are granted a 20% discount from selected establishments.

o These discounts can likewise be claimed as a deduction for businesses. (R.R. 1-2009)

Kinds of income and income tax of individuals

Before we get into the smallest details of the tax liabilities of each kind of individual, lets set down some basic rules which will be helpful
to remember:
Only resident citizens (and domestic corporations as we shall see later) are taxed on income derived from abroad. Worldwide taxable!
For income received from sources within the oh and which are not subject to final withholding tax (like passive income to be discussed
below), a resident citizen, a non-resident citizen, a resident alien, and a non-resident alien individual engaged in trade or business in the
Philippines are all subject to the graduated income tax rates in Section 24.
o But what about non-resident aliens not engaged in trade or business?
For non-resident aliens not so engaged, the tax rate is:
25% of the entire or gross income received from sources within the Philippines or
15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment by:
o Regional or area headquarters and regional operating headquarters of multinational corporations;
o Offshore banking units establishment by a foreign corporation in the Philippines; or
o By foreign petroleum service contractor or sub-contractors operating in the Philippines. (Section 25[A-E])

Income tax formula for individuals

It is important to note the basic formula to determine the taxable income of an individual. Think of it as a road map where the different
provisions of the code will plug into. The basic formula to determine the taxable income of an individual is as follows:

Gross Income
Less: Deductions (either itemized of optional standard deduction)
Less: Personal/Additional Exemptions and Premium Payments on Insurance
Taxable Income
Tax Rate
Tax Due

Deductions
Individuals, except those who earn purely compensation income can claim deductions in two ways:
o Itemized deductions (which we will discuss in more detail), or
o Availing of the optional standard deduction (which is discussed below).

Engaged in trade or business, explained. The phrase engaged in trade or business within the Philippines includes the performance
of the functions of a public office or the performance of personal services within the Philippines. (Sec. 8, Rev. Regs. No. 2)

To engage in business is uniformly construed as signifying to follow the employment or occupation which occupies the time, attention,
and labor for the purpose of a livelihood or profit.

A nonresident alien who shall come to the Philippines and stay there in an aggregate period of more than one hundred eighty days during
any calendar year shall be deemed a nonresident alien doing business in the Philippines. (Sec. 25A)

The length of stay is the criterion. Hence, a non-resident alien shall not be considered engaged in trade or business in the Philippines if he
stays in the Philippines for less than 180 days notwithstanding the fact that during such stay he actually performs personal services, or engages in a
commercial activity therein. And the whole period of more than 180 days must cover a calendar year.

9
 The entire gross income of non-resident aliens not engaged in trade or business received from all sources within the Philippines is subject
to income tax. He must not be engaged in trade or business in the Philippines.

The sources of the income are interests, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income, and capital gains.

Tax Liability of Members of General Professional Partnerships (GPP). (Sec. 26)

The GPP as a juridical entity is exempted from income taxes. It would be the individual members who will be liable on their net income
share from the GPP.

A partner in a general professional partnership shall report in his income tax return, whether distributed or not, his share of the profits of
the partnership. If he reports his net share in the profits, he shall be deemed to have elected the itemized deduction and may no longer claim the
optional standard deduction. In case he declares his distributive share in the gross income undiminished by his share in the deduction, he may avail
the 40% optional standard deduction in lieu of the itemized deduction.

Professional partnership. Your professional partnership of Certified Public Accountants is exempt from income tax pursuant to Section
26 of the Tax Code, as amended. Accordingly, payments to said partnership for professional services rendered are exempt from the withholding tax
provisions of Revenue Regulations No. 13-78 as amended by Revenue Regulations No. 6-79, both implementing Section 50 (now 43) of the Tax
Code, as amended by Presidential Decree No. 1351. (BIR Ruling No. 84-142)
Professional partnership are not required to file income tax return. Requesting confirmation of your opinion to the effect that
professional partnerships are not required to file quarterly returns of their income; and that individual partners of a professional partnership
should not be required to file quarterly returns if they received their shares in the net income of the partnership at the end of the calendar year or
the fiscal year of the partnership.

In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3, Revenue Regulations No. 7-93 prescribing the
procedures for the filing of quarterly returns and payment of the quarterly income tax by individuals receiving self-employment income, a return of
summary declaration or gross income and deductions (BIR Form No. 1701 Q) for each of the first three quarters of the calendar year, and a final or
adjustment return (BIR Form No. 1701) shall be filed by all individuals, including estates and trusts. The tax returns shall be filed on or before
indicated dates:

First quarterly return - May 15 of the current year;

Second quarterly return - August 15 of the current year;
Third quarterly return - November 15 of the current year;
Final return - April 15 of the following year.

The corresponding income tax, as computed, shall be paid at the same time that the returns are filed based on declarations of actual
income and deductions for the particular quarter. The filing of the returns and payment of taxes shall be in lieu of the filing of a declaration of
estimated income for the current taxable year and the payment of the estimated tax as provided for in Section 67(a) and (b) (now 60) of the NIRC
primarily for the reason that the procedure prescribed in Section 67 (now 60) of the NIRC of estimating the amount of income and tax to be paid by
the individual.

Such being the case, your opinion that professional partnerships are not required to file quarterly returns of their income is hereby
confirmed. However, individual partners of a professional partnership are required to file a return of summary declaration of gross income and
deduction for each of the first three quarters of the calendar year and a final or adjustment return. The corresponding tax, as computed, shall be
paid at the same time that the returns are filed based on declarations of actual income and deductions for the particular quarter. (BIR Ruling No.
94-60)

Joint venture. A joint venture was created when two corporations while registered and operating separately were placed under one
sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial
economy and profits in the operation. (Collector vs. Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82
dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990)

Thus, Empire Venture which has been constituted as a single entity whereby Empire and Uniphil agreed to pool their resources for the
development of a parcel of land and the construction of condominium units thereon as well as the eventual sale of said units is a joint venture
which is subject to the 35% Section 27 of the Tax code, as amended. However, the respective 70% and 30% shares of Uniphil and Empire from the
profits of the joint venture are not subject to income tax Section 27 of the Tax Code, as amended. (BIR Ruling No. 91-254)

Note: The term corporation mentioned in joint venture refers to a corporation as defined by the corporation law.

Unregistered partnerships. They, in order to be subject to corporate income tax, must be engaged in joint venture for profit. To
constitute said unregistered partnership, the character of habituality peculiar to business transactions for the purpose of gain must be present. (BIR
Ruling No. 89-124)
10
 STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually of its own stocks without change in per value.
- The stock distributed is a stock dividend. It is not subject to a dividend tax or passive income. However, if the stockholder owns a
common stock and the stock dividend is preferred stock or vice versa, then the stock dividend is subject to tax because there is
already change of interest. -

Dividends out of quarterly profits. This refers to your letter requesting opinion as to whether your company can declare cash and/or
stock dividends out of quarterly profits and/or surplus.

It is represented that your company has been issuing cash and stock dividends for the last five (5) years; that during the early part of this
year, you have issued 50% dividend out of accumulated retained earnings; and that since your company has been making profits as early as the first
quarter of this year, you intend to declare cash and/or stock dividend out of quarterly profit.

Ruling: An ordinary dividend is the most common type of corporate distribution, and is defined as (1) a distribution of property by a
corporation to its stockholder (2) made in the ordinary course of its business (3) out of its earnings and profits. (par. 2251, 2d Am. Jur. 33) Thus, a
dividend is a corporate profit set aside, declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time. (Fisher
vs. Trinidad, 43 Phil. 973)

It is distinguished from profits for the profits in thousands of a corporation do not become dividends until they have been set apart, or
at least declared, as dividends and transferred to the separate property of the individual stockholders. Such being the case, your company can
declare cash and/or stock dividends out of its quarterly profit. (BIR Ruling No. 87-172)

Domestic Corporations and Foreign Corporations

The term domestic, when applied to a corporation means created or organized in the Philippines or under its laws (Se. 22[C], NIRC),
while the term foreign, when applied to a corporation, means a corporation which is not domestic (Sec. 22[D], NIRC). The branches of a domestic
corporation, whether located in the Philippines or abroad, are merely extensions of the local head office. Accordingly, their incomes in the
Philippines and abroad of the head office and foreign branches are to be reported by the Philippine head office in its corporate income tax return,
and the branch profits remitted by its foreign branches to the Philippine head office shall no longer be subject to the branch profit remittance tax
because (a) the income of the foreign branch had already been subjected to Philippine income tax, and (b) the branch profit remittance tax applies
only to Philippine branches of foreign corporations operating in the Philippines operating in the customs territory and exempts from the tax profits
remitted by the Philippine branch operating in special economic zones to their head offices abroad.

A resident foreign corporation is a foreign corporation engaged in trade or business within the Philippines (Sec. 22[H], NIRC), and a
nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines (Sec. 22[I], NIRC).
Test in determining Status of Corporations

Following the above provisions, it can be said that the Philippines adopted the law of incorporation test under which a corporation is
considered (a) as a domestic corporation,, if it is organized or created in accordance with or under the laws of the Philippines, or (b) as a foreign
corporation, if it is organized or created in accordance with or under the laws of a foreign country. Corollarily, a domestic corporation may be
formed or organized by foreigners under the Philippine Corporation Code, provided that it is organized under the laws of the Philippines. On the
other hand, a corporation established by Filipino citizens under the laws of a foreign country will be treated as a foreign corporation, and the
branch that such foreign corporation sets up in the Philippines is a resident foreign corporation. In other words, the nationality of the owners of the
corporation has no bearing in ascertaining the status or residence of corporations, for income tax purposes.

Doing Business

The term doing business implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or
for the purpose of business organization. In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character (BOAC v. Commissioner, 149 SCRA 395).

Partnerships

Except for a general professional partnership and an unincorporated joint venture or consortium in construction or energy-related
projects, which in reality are also partnerships, Section 22(B) of the 1997 Tax Code considers any other type of partnership (described here as
business partnership) as a corporation subject to income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business partnership and an
ordinary corporation on a similar footing, by imposing the 10% dividend tax on the cash and/or property dividends actually or constructively
received by an individual stockholder of a corporation, or in the distributable net income after tax of a partnership of which he is a partner, except
a general professional partnership, received by a partner. The term after-tax net profit means the net profit of the partnership computed in
accordance with generally accepted principles of accounting, less the corporate income tax imposed in Section 27 of the Tax Code (Sec. 2 Rev. Regs.
11
No. 2-84, January 16, 1984). Sec 73(D) of the 1997 Tax Code, however, provides that the taxable income declared by a partnership for a taxable
year which is subject to tax under Section 27(A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have
been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether
actually distributed or not.

Joint Ventures

Elements of joint venture. To constitute a joint venture, certain factors are essential. Thus, each party to the venture must make a
contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money; profits must be shared among the parties; there
must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise; and usually, there is single business
transaction (BIR Ruling No. 317-92).

Exempt joint venture or consortium is an unincorporated joint venture or consortium engaged in construction activity or energy-
related project. The term joint venture or consortium, referred to in Section 22(B) of the 1997 Tax Code that is not considered as a separate
taxable entity, means an unincorporated entity formed by two (2) or more persons (individuals, partnerships or corporations) for the purpose of
undertaking construction project (P.D. 929, May 4, 1976), or engaging in petroleum and other energy operations with operating contract with the
government. The term joint venture was clarified by the Secretary of Finance when he issued Revenue Regulations No. 10-2012 on June 1, 2012.
In said Regulation, the joint venture that is not taxable as a corporation must comply with the following requisites: (a) the joint venture or
consortium is formed for the purpose of undertaking construction activity; (b) It involves jointing or pooling of resources by licensed local
contractors; i.t., licensed as a general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and
Industry; (c) the local contractors are engaged in construction business; and (d) the joint venture itself is licensed as such by PCAB. If all the above
requisites are not met, the joint venture becomes liable to the corporate income tax. Each member of the joint venture not taxable as a
corporation shall report and pay taxes on their respective shares to the joint venture profit. Since it is not considered as a separate taxable entity,
the net income or loss of the joint venture or consortium is taken up and reported by the co-venturers or consortium members in accordance with
their participation in the project as set forth in their agreement. The participation in the project as set forth in their agreement. The two (2)
elements unincorporated entity (or entity not registered with the Securities and Exchange Commission) and for the purpose of undertaking
construction or energy-related project must be present in order that the joint venture or consortium may not be considered as a separate taxable
entity.
Tax-exempt joint venture shall not include those who are mere suppliers of goods, services or capital to a construction project.

Joint Venture (JV) involving foreign contractors may be treated as non-taxable corporation only if:
1. Member foreign contractor is covered by a special license as contractor by PCAB; and
2. Construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign-
financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and
between the Philippine government and the foreign/international financing institution, pursuant to the rules and regulations of R.A.
4566 (Contractors License Law)

Each member of the joint venture not taxable as corporation shall report and pay taxes on their respective shares on the joint venture
profit, received by a joining corporation.

All licensed local contractors must enroll to BIRs eFPS at the RDO where local contractors are registered as taxpayers.

Foreign joint venture or consortium that does not sell goods nor perform services in the Philippines. A joint venture or consortium
formed among non-resident foreign corporations in connection with a local project in the Philippines is not subject to Philippine income tax, where
said foreign joint venture or consortium does not sell goods nor perform any service in the Philippines. This rule is anchored on the fact that a
foreign corporation is taxable only on income from sources within the Philippines (BIR Ruling No. 23-95). Accordingly, no withholding tax is required
to be deducted and withheld by the Philippine payor from income payments from foreign sources made to the foreign joint venture or consortium.

Exempt joint venture or consortium may become taxable partnership. An exempt joint venture or consortium undertaking a
construction of office tower project may subsequently become subject to income tax as a separate joint venture or consortium, where after the
construction period, the joint venture partners engaged in the business of leasing the building floors or portions thereof separately owned by them
(BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the joint venture granted under the law is valid only up to the completion of the
construction project and does not extend to the subsequent sale or lease of the developed condominium floors or units to customers.
BIR Rulings prior to Revenue Regulations No. 10-2012:
Corporations does not include joint venture undertaking construction activity; allocation of floors, units, or lots is a mere return of
capital. The joint ventures described above are not subject to corporate income tax under Section 27 of the 1997 Tax Code, since the term
corporation does not include a joint venture or consortium formed for the purpose of undertaking construction projects pursuant to Section
22(B) of the 1997 Tax Code. Accordingly, the memorandum of agreement, joint venture agreement, or exclusive development and marketing
agreement between or among the contracting parties, as the case may be, will not give rise to a taxable joint venture, and the allocation of specific
floors or units or subdivision lots in the project is not a taxable event and is not subject to income tax and expanded withholding tax, because the
allocation is a mere return of the capital that each party has contributed to the project.

12
 Transfer of land to joint venture is similar to capital contribution; distribution of developed lots/units is merely an act of partitioning
commonly owned property. Joint venture agreements for the construction and development of real property may or may not be treated as a
separate taxable unit, depending on whether or not a separate taxable unit, depending on whether or not a separate taxable entity is established
by the joint venture partners. If the parties did not form nor register a separate entity and merely agreed to pool their resources to a common
fund, no separate taxable unit is created. In this case, each joint venture partner has to account for his respective share in the net revenue earned
from the joint venture project separate income tax returns partners. Hence, the partners may file separate income tax returns for its net revenue
for the project less its respective proportionate share in the joint venture expenses. The contribution of land to the joint venture is not a taxable
event that will give rise to capital gains tax on sale or transfer of land. Such transfer is similar to a capital contribution that does not give rise to
income tax. The distribution of developed lots/units is merely an act of partitioning the commonly owned property. It is nothing more than an act
of terminating the co-ownership by making each partner specific owner of the identifiable lot or unit. At this stage, no taxable sum has yet been
realized by the joint venture partners. That act of allocation or assigning portions of the developed lots to each member of the joint venture cannot
be treated as a taxable event. The same is true despite the fact that the shares allocated to or received by the partners may not necessarily
correspond to the lot area originally contributed by them to the joint venture. Hence, the titling of the land back to the joint venture partners is not
subject to income tax, expanded withholding tax, and value added tax (BIR Ruling DA-165-03-18-99).

Sale of developed floor, unit or lot is subject to income tax. Should the corporate landowner or developer sell any of the floors or
portions of the floors allocated to them to third parties, the gain that may be realized by them from such sale will be subject to the regular
corporate income tax and to the expanded withholding tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as amended (BIR Ruling
No. 274-92, September 30, 1992). This rule applies even if the sale takes place before or during the construction period.

Taxable Joint Ventures

There are two (2) instances when a joint venture becomes a taxable entity. First, a domestic corporation jointly owned by individuals and
by two or more existing domestic corporations and/or foreign corporations that is incorporated under the laws of the Philippines (e.g., D.M.
Consunji, Inc.), or duly registered with or licensed by the Securities and Exchange Commission [e.g., Marubeni Corporation Philippine Branch] is a
taxable corporation, even if it is engaged in the business of construction or energy-related activity. Second, if the unincorporated joint venture or
consortium (or unregistered partnership) is engaged in any other line of business than construction or energy-related activity with operating
contract with the government, the same will also be treated as a taxable corporation. The income and expenses of the taxable joint venture must
be reported by it during the taxable year.

Immediacy Test Improperly Accumulated Earnings Tax (Cyanamid vs. CA, G.R. No. 108067, January 20, 2000)
Taxation of Co-ownership (Read)
1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436

Section 30 - Exemption from Tax on Corporations. The corporations covered by this section are exempted from income tax because it is
generally organized not for profit but exclusively for the benefit of their respective members. So that no income inuring to the benefit of the
individual members but for the benefit of the organization as a whole.

However, a corporation is not simply exempted from tax because it is not organized and operated for profit, it is still subjected to income tax
no matter how these corporation are created. Hence, if they will have income of whatever kind and character 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, they will be liable for income tax.

For instance a non-profit corporation will sell their property and derive income therein, that income would be subjected to income tax.

The rule that regardless of their disposition made of such income do not apply to non-profit educational institution, because under the
constitution all revenues and assets of these institutions it actually, directly and exclusively used for educational purposes will make these
institution exempted from all taxes. Thus, if Xavier University, for example, who is a non-stock, non-profit educational institution will use their
rental income from the gym for education purposes, the same is not subject to income tax. However, if the gym rental is used for charitable
purposes it would already be subjected to income tax because what the constitution provides is only to educational purposes.

READ : 1) CIR vs. Court of Appeals, 298 SCRA 83

2) Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998
3) CIR vs. St. Luke, G.R. No. 195909 60, September 26, 2012

Section 31 - Taxable Income means Gross Income, less deductions and/or personal and additional exemptions.

The following are the deductions under the tax code:

1. Business deduction (Sec. 34, par. A J and M): available to corporations or individual taxpayer who are taxed on taxable income derived
from business, trade, or exercise of profession.

13
 2. Optional standard deduction (Sec. 34, par. L); available to corporations or individual taxpayer who are taxed on taxable income derived
from business, trade, or exercise of profession.
3. Personal exemptions (Sec. 35): only individuals allowed who are also taxable based on taxable income.
4. Premium on health insurance / Hospitalization insurance: only individuals allowed who are also taxable based on taxable income.

Section 32 - Gross Income

(A) General Definition the term all income derived from whatever source means from legal or illegal sources.

The enumeration of items of income from no. 1 to 11 is not exclusive. Meaning that incomes that are not mentioned in the enumeration are
also included as part of gross income.

Sources of income might be from the following activity:

1. Exercise of profession;
2. Services rendered;
3. Rentals;
4. Profits from sale or exchange of asset;
5. Business or trade;
6. And from other sources such as interest in bank deposits, dividends, and royalties.

Definition of Income

Income means an amount of money coming to a person or corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, income means cash or its equivalent (Conwi v. CTA and Commissioner, 213 SCRA 83).
Income is a flow of service rendered by capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to
such fund through a period of time (Madrigal v. Rafferty, 38 Phil. 414). Income covers gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of capital assets (Fisher v. Trinidad, supra). Income
includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without
restriction as to their disposition (James v. U.S., 366 U.S. 213). Thus, income from illegal drug and gambling activities is taxable as well.

Income may include: (a) increase in inventory at the end of the taxable year; however, mere increase in the value of property is not
income but increase in capital; (b) transfer of appreciated property to employee for services rendered; and (c) just compensation paid by
government for property acquired by expropriation.

Income is an amount of money coming to a person within a specified time, whether as payment of services, interests or profits from
investments.

Presumed Gain (Capital Gains on Sale of Real Property) is also income.

Gain is synonymous with income.

Gain may be derived from capital, labor or both.

Income in taxation does not solely mean profit. Hence, SP may be considered an income if provided by law. But capital is never treated as
Income.

Profits or gain may also derive through sale or conversion of an asset.

There is no statutory definition of income under the tax code. However, under Section 36 of the Revenue Regulation No. 2, income is defined
that in its broad sense, means all wealth which flows into the taxpayer, other than as a mere return of capital.

An income to be considered as taxable must be:

1. Actually or constructively received;

2. It must be realized.

Test in determining INCOME.

a. Realization test. There is no taxable income until there is a separation from capital of something of exchangeable value, thereby
supplying the realization or transmutation which would result in the receipt of income (Eisner v. Macomber, 252 U.S. 189). Thus,
stock dividends are not income subject to income tax on the part of the stockholder, because he merely holds more shares
representing the same equity interest in the corporation that declared the stock dividends (Fisher v. Trinidad, supra).
14
 b. Claim of right doctrine. A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a
definite unconditional obligation to return or repay that which would otherwise constitute a gain. To collect a tax would give the
government an unjustified preference as to the part of the money that rightfully and completely belongs to the victim. The
embezzlers title is void (Commissioner v. Wilcox, 286 U.S. 417, 424).
On May 27, 1977, Dolores Ventosa requested the transfer of US$1,000 from the First National Bank, West Virginia to Victoria
Javier in Manila through the Prudential Bank. Accordingly, the First National Bank requested the Mellon Bank to effect the
transfer. Unfortunately, the wire sent by Mellon Bank to Manufacturers Hanover Bank, a correspondent bank of Prudential
Bank, indicated the amount transferred as US$1,000,000.00 instead of US$1,000.00. Hence, Manufacturers Hanover Bank
transferred one million dollars less bank charges to Prudential Bank for the account of Victoria Javier. On June 3, 1977, Javier
opened a new dollar account (No. 343) in the Prudential Bank and deposited $999,943.70. Immediately thereafter, Victoria
Javier and her husband, Melchor Javier, Jr. made withdrawals from the account, deposited them in several banks only to
withdraw them later in an apparent plan to conceal, lauder and dissipate the erroneously sent amount. Spouses Melchor and
Victoria Javier filed their consolidated income tax return for the ear with the notation The taxpayer was the recipient of some
money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation, but they did
not declare it as income. The court ruled that the amount received is income subject to tax, but the tax return filed cannot be
considered as fraudulent because petitioner literally laid his cards on the table for respondent to examine. Error or mistake of
fact or law is not fraud (Commissioner v. Javier, 199 SCRA 824).
c. Income from whatever source. All income not expressly excluded or exempted from the class of taxable income, irrespective of
the voluntary or involuntary action of the taxpayer in producing the income, and regardless of the source of income, is taxable (Blas
Gutierrez v. Collector, 101 Phil. 713).
d. Economic benefit test. Any economic benefit to the employee that increases his networth (i.e., total assets less total liabilities),
whatever may have been the mode by which it is effected, is taxable. Thus, in stock options, the difference between the fair market
value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the
employee at the time of exercise (not upon the grant or vesting of the right) (Commissioner v. Smith, 324 US 177).
e. Severance test as capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of
said capital by the taxpayer for his separate use benefit or disposed income subject to tax.
f. Substantial alteration of interest lost income to be returnable for taxation must be fully and completely realized. When there is no
separation of gain or profit, or separation of the increase in value from capital, there is no income subject to tax.
g. Flow of wealth test anything/implying existence of capital
a) Capital is fund income is the flow;
b) Capital is wealth income service of wealth;
c) Property is tree income is fruit;
d) Labor is tree income is fruit.

All of the following tests are followed in the Philippines for purposes of determining whether income is received by the taxpayer of not
during the year.
Significance of knowing the Type of Character of Income

In general, it is important to know the types of income realized by the taxpayer, since the Philippines has adopted the semi-global or
semi-schedular tax system. Under this tax system, compensation income, and other income not subject to final income tax, are added together to
arrive at the amount of gross income of an individual, and after deducting the allowable deductions from business and professional income, capital
gains, passive income, and other income not subject to final income tax as well as personal and additional exemptions, if qualified, the graduated
income tax rates ranging from five percent (5%) to 32% are applied in the resulting net taxable income to arrive at the income tax due and payable.

The passive investment income are generally subject to the final withholding tax; hence, the income recipient does not file a tax return
covering such passive investment incomes, although the withholding agent-payor of income is held responsible under the law to deduct, withhold
and remit the final income tax thereon to the BIR.

Capital assets subject to the final capital gains tax such as shares of stock of a domestic corporation and real property located in the
Philippines, except when sold or transferred by a dealer in securities or real estate dealer, are covered by the capital gains tax return; hence, not
included in the taxable income of the individual taxpayer subject to the global tax system and the graduated income tax rates.

The rules for individuals discussed above apply also to a corporation, except that the corporation does not receive compensation income
and are not entitled to deduct personal and additional exemptions from their gross income during the year.

Compensation Income

In general, the term compensation means all remuneration for services performed by an employee for his employer under an
employer-employee relationship (See Sec. 2.78.3, Rev. Regs. No. 2-98, as amended), unless specifically excluded by the Tax Code. In determining
the existence of an employer-employee relationship, the elements that are generally considered are: (a) the selection and engagement of the
employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employers power to control the employee with respect to the means
and methods by which the work is to be accomplished. It is the so-called control test that is the most important element (Brotherhood Labor
Unity Movement of the Philippines v. Zamora, L-48645, January 7, 1987).
15
Who is an employee?

For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulations No. 12-86, to wit: An individual,
performing services for a corporation, whether as an officer and director or merely as a director whose duties are confined to attendance at and
participation in the meetings of the Board of Directors, is an employee. The non-inclusion of the names of some of petitioners directors in the
companys Alpha List for 1997 does not ipso facto create a presumption that they are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work performed by such individuals in the company. Moreover, Section 2.57.2.A(A) of
Revenue Regulations No. 2-98 cannot be applied to this case as the latter is a later regulation, while the accounting books examined were for the
year 1997 (First Lepanto Taisho Insurance Corporation v. CIR, G.R. No. 197117, April 10, 2013). [NOTE: Beginning 1998, a director who is not an
officer or employee of a corporation is NOT an employee of said corporation; hence, the applicable withholding tax to be deducted from such
income shall be 10% EWT, which is creditable against his ordinary income tax liability for the year, provided it is evidenced by BIR Form 2307.
However, said directors fee is taxed also under the global tax system].
The term employee refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the
government or any political subdivision, agency or instrumentality thereof. It includes also an officer of a corporation. Thus, a juridical entity that
performs services to another person is not an employee of the latter. Accordingly, the proper withholding tax on such income payment is the
expanded withholding tax (not withholding tax on compensation income). To create an employer-employee relationship, the person that performs
the service to another must be an individual.

The term compensation income means all remuneration for services performed by an individual employee for his employer, including
the cash value of all remuneration paid in any medium other than cash. There are various types of taxable compensation income, such as salaries,
wages, bonus, remuneration, honorarium, benefits and allowances (including representation and transportation allowance (RATA), personal
emergency relief allowance (PERA), longevity pay, subsistence allowance, hazard pay, annuities, pensions, etc. Additional compensation allowance
(ACA) given to government employees pursuant to E.O. 219 shall not be subject to withholding tax pending its formal integration into the basic pay.
While its nature shall continue to be that of compensation, it shall be treated as part of the other benefits which are excluded from
compensation income, provided that the total amount does not exceed 30,000 (BIR ruling No. 034-2002, August 16, 2002 modified BIR ruling No.
179-99, November 22, 1999). BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000, November 20, 2000 exempt benefits and allowances such
as longevity pay, subsistence allowance, and hazard pay granted to uniformed policemen and jail guards under R.A. 6975 (DILG Act of 1990).
However, if the recipient is an AFP personnel, all remunerations (monetary and non-monetary) are taxable, except allowances for quarters,
clothing and subsistence which are exempt from income tax pursuant to RMC 15-87 (BIR Ruling No. 143-96, December 24, 1996).

Compensation Income of Philippine Nationals and Aliens Employed by Foreign Governments and International Organizations in the Philippines

Section 23 of the Tax Code lays down the general principles in taxing citizens and alien individuals. Resident citizens are taxed on
worldwide income, while resident aliens are taxed only on their Philippine-source income. As an exception to the general rule, most international
agreements which grant withholding tax immunity to foreign governments/embassies/diplomatic missions and international organizations also
provide exemption to their officials and employees who are foreign nationals and/or non-Philippines residents from paying income taxes on their
salaries and other emoluments.

Since the withholding tax is merely a method of collection of income tax, the exemption from withholding taxes on compensation income
of foreign governments/embassies/diplomatic missions and international organizations does not equate to the exemption from paying the income
tax itself by the recipients of said income.

Foreign Embassies and Diplomatic Missions

Articles 34 and 37, Vienna Convention on Diplomatic Relations, exempts: (a) diplomatic agents who are not nationals or permanent
residents of the Philippines; (b) members of family of diplomatic agent forming part of his/her household who are not Philippine nationals; (c)
members of administrative and technical staff of the mission plus members of their families who are not Philippine nationals or permanent
residents of the Philippines; (d) members of service staff of the mission who are not Philippine nationals or permanent residents of the Philippines;
and (e) private servants of members of the mission who are not Philippine nationals or permanent residents of the Philippines. The applicable rules
are as follows:
Aid Agencies of Foreign Governments
JICA: Only JICA resident representatives and his/her staff who were dispatched from japan shall not be subject to Philippine income tax.
GIZ: (Germany): Only German specialist of German construction and consulting firms shall be exempt.
AUSAID: Salaries and other remuneration paid by the Government of Australia or by Australian personnel, firms, institutions or
organizations to any person performing work under the Memorandum shall be exempt.
CIDA: Only Canadian personnel who derive income from Canadian aid funds as provided under the subsidiary agreement shall be exempt.

Advisory Committee on Voluntary Foreign Aid-USA

CARE: Only Care employees who are not Philippine nationals are exempt.
FPPI or PLAN: Only non-Filipino staff members of the PLAN who receive salaries and stipends in US dollars shall be exempt.

Aid Agencies
16
 Ford Foundation, Rockefeller Foundation, Agricultural dev Council, and Asia Foundation: only non-Filipino staff members thereof who
receive salaries and stipends in US dollars shall be exempt.
IRRI (PD 728 and RA 3538)
Catholic Relief Services NCWC and Tools for Freedom Foundation (R.A. 4481)

Asian Development Bank (ADB) Section 45(b), Article XII of the Agreement between ADB and RP: Only officers and staff of ADB who are
not Philippine nationals shall be exempt from Philippine income tax (because exemption is subject to the power of the Government to tax its
nationals. Any exemption from Philippine income tax must be granted under duly recognized international agreements or particular provisions of
existing law. Affected individuals (of foreign embassies and international organizations) who were not granted such exemption must file their
income tax returns and pay the tax due thereon on or before the 15th day of April following the close of the taxable year (RMC 31-2013, April 12,
2013).

Statutory Minimum Wage

Compensation income falling within the meaning of statutory minimum wage (SMW) under R.A. 9504, effective July 6, 2008, as
implemented by Revenue Regulations No. 10-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax. Holiday pay, overtime
pay, night shift differential pay, and hazard pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the above compensation
such as commissions, honoraria, fringe benefits. Benefits in excess of the allowable statutory amount of 30,000, taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay, shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from income tax and withholding tax.

Hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid
to MWEs which does not satisfy the above criteria is deemed subject to income tax and withholding tax.

When an award of backwages is made, there is an acceptance that the employee was illegally or unjustly dismissed, and the backwages
are the salaries he was supposed to have earned had he not been dismissed. It is as though he was not separated from employment, and as though
he actually rendered service (Escareal v. Court of Tax Appeals, et al., CA-GR SP No. 41989, September 30, 1998). In this connection, RMC 39-2012
dated August 3, 2012 provides that the employee should report as income and pay the corresponding income taxes by allocating or spreading his
back wages, allowances and benefits through the years from his separation up to the final decision of the court awarding the backwages. The said
backwages, allowances and benefits are subject to withholding tax on wages. However, when the judgment awarded in a labor dispute is enforced
through garnishment of debts due to the employer or other credits to which the employer is entitled, the person owning such debts or having in
possession or control of such credits (e.g.., banks or other financial institutions) would normally release and pay the entire garnished amount to the
employee. As a result, employers who are mandated to withholding taxes on wages pursuant to Section 79 of the Tax Code, as implemented by
Revenue Regulations No. 2-98, cannot withhold the appropriate tax due thereon. In this regard, the employer also refers to the person having
control of the payment of the compensation in cases where the services are or were performed for a person who does not exercise such control.
Thus, the person owning or having possession or control of the credit shall withhold the required tax.

Backwages, Allowances, and Benefits Awarded in Labor Dispute

Backwages, allowances, and benefits awarded in a labor dispute constitute remuneration for services that would have been performed
by the employee in the year when actually received, or during the period of his dismissal from the service which was subsequently ruled to be
illegal.

The employee should report as income and pay the corresponding income taxes by allocating or spreading his backwages, allowances and
benefits thru the years from his separation up to the final decision of the court awarding the backwages.

The backwages, allowances, and benefits are subject to withholding tax on wages.

However, when the judgment awarded in a labor dispute is enforced thru garnishment of debts or having in possession or control of such
credits (e.g., banks or other financial institutions) would normally release and pay the entire garnished amount to the employee. As a result,
employers who are mandated to withhold taxes on wages cannot withhold the appropriate tax due thereon.

In order to ensure the collection of the appropriate withholding tax on wages, garnishees of a judgment award in a labor dispute are
constituted as withholding agents with the duty to withhold tax on wages equivalent to five percent (5%) of the portion of the judgment award,
representing the taxable backwages, allowances and benefits (RMC 39-2012, August 3, 2012).

Items Not Included as Compensation Income

Compensation shall not include remuneration paid: (a) for agricultural labor paid entirely in products of the farm where the labor is
performed; or (b) for domestic service in a private home; or (c) for causal labor not in the course of the employers trade or business; or (d) for
services by a citizen or resident of the Philippines for a foreign government or an international organization (Sec. 78[A], NIRC).

17
 As a general rule, the income recipient is the person liable to pay the income tax. In order to improve the collection of income on the
compensation income of employees, the State requires the employer to withhold the tax upon payment of the compensation income, such that at
the end of the calendar year, the employee needs only to file a tax return and no tax is paid, because his total withholding tax during the year is
equal to his income tax liability. [Beginning 2002, qualified employees need not file their income tax returns and the employer may file a
substituted return for its employees.]
Other Income

Income from any source whatever

The phrase income from any source whatever is broad enough to cover gains contemplated here. These words disclose a legislative
policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains (Blas Gutierrez v. Collector, supra).

Any economic benefit to the employee, whatever may have been the mode by which it is implemented, is income subject to tax. Thus,
in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes
additional compensation income to the employee (Commissioner v. Smith, supra). A stock option is a right, but not an obligation, to purchase (call
option) or sell (put option) a specified number of shares at a fixed price before or at a certain date in the future

The principle underlying the taxability of an increase in the net worth of a taxpayer rests on the theory that such an increase in net worth, if
unreported and not explained by the taxpayer, comes from income derived from a taxable source. In this case, the increase in net worth was not
the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its books relating to its
indebtedness to the insurance company. The income tax law imposes a tax on income; it does not tax any or every increase in networth whether or
not derived from income (Fernandez Hermanos, Inc. v. Commissioner, CTA Case 787, June 10, 1963)

READ : Madrigal vs. Rafferty , 38 Phil. 414

The tax code did not indicate the source of income (Blinds Sources). What it enumerates are specific items of income.

Are the following items considered income?

1. Found treasure other forms of gain;
2. Punitive damages/damages for breach of promise or alienation of affection;
3. Recovery of bad debts;
4. Tax refund;
5. Non-cash benefits;
6. Income from illegal sources;
7. Prizes, scholarship, fellowship;
8. Forgiveness of debt.

In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme Court stated that taxable income, however, does not include
items received which do not add to the taxpayers net worth or redound to his benefit such as amounts merely deposited or entrusted to him.

The following are not income: (a) deposit of property that does not increase networth of taxpayer (e.g., the increase in asset has a
corresponding increase in liability); (b) increase in networth is due to correction of errors in book entries; (c) voluntary assessments by a
corporation paid by its shareholders under Revenue Regulations No. 2; (d) security deposit paid to a lessor until it is applied in payment of accrued
rent; (e) contributions by lot owners for the memorial park care fund; and (f) loan proceeds received by the borrower.

(B) Exclusion from Gross Income an income can be exempted from taxes based on the following reasons:

1. Exemption by the fundamental law of the land;

2. Exempted by the statute;
3. It does not come within the definition of income such as stock dividend or increase in the appraisal of the FMV of the property.
Some Principles:

A tax free income is different from a tax free organization.

Doctrine of Constructive Receipt of Income means that it was already set aside, without limitations, restrictions or conditions for its
withdrawal. Example share of the partner in a general partnership.

Doctrine of Cash Equivalent in Transaction means that if a property is exchanged with another property the difference of a Fair Market Value
(FMV) would be considered income.
18
 The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under the solutio indebiti rule, if the holder of the property has the
obligation to return it and instead use it for his own benefit, the amount to be returned would be considered an income.

Exclusions from Gross Income simply means that these incomes are not subject to income tax:
There are only instances an item of income would not be subjected to income tax:
1. If it is exempted by the Constitution.
2. If it is exempted by the statute or law.
3. When it does not come within the definition of income.
Example: increase of appraisal value of the property

1. Life Insurance proceeds of life insurance being only an indemnity of life lost is not subject to income tax. However, it can be subjected
to estate tax if the rules of the estate taxes will apply. If it is an accident insurance and it includes coverage of life insurance the proceeds
would not be subjected to income tax.
2. Return of Premium not subject to income tax because it is just a mere return of capital.
3. Gifts, Bequests, and Devises not subject to income tax but subject to estate tax or donors tax.
4. Compensation for Injuries or Sickness includes physical, moral and psychological injuries.

Lost profits recovered are subject to income tax.

5. Income Exempt under Treaty would not be subject to tax because of the treaty (International Comity) entered into by the government
with other countries.
6. Retirement Benefits covered by a private benefit plan maintained by the employer would be exempted from income tax if the following
conditions will be present:

(1) The retiring employee is in the service of the same employer for at least ten (10) years;
(2) He is not less than fifty (50) years of age at the time of retirement.
(3) You retired under the private benefit plan of the employer.

The aforestated conditions would be applicable if there is a reasonable private benefit plan of the employers.

Retiring person which has no private retirement plan by the employer:

A. Private Employee - labor code will govern. Requirements are the following:

(1) At least sixty (60) years old but not more than sixty-five (65) years old.
(2) Has served at least five (5) years of service with the same employer.
(3) Entitled retirement salary for every year of service but not less than one month salary.

If it is a government employee, retirement will be governed either by the retirement plan of the government agency or by the GSIS.

B. Pseudo retirement, or involuntary retirement, or compulsory retirement.

Involuntary retirement is present if the employee did not ask, did not initiate, and it is not of his own choice that he is retired. The reasons
may be because of the death, sickness or other physical disability, or for any cause beyond the control of the said official or employee. Some other
grounds like retrenchment, redundancy, closure of business, are also other forms of involuntary retirement. The retirement benefits received from
involuntary retirement not subject to income tax.

BIR Ruling No. 071-95, April 11, 1995 retirement under CBA is taxable for being voluntary. If the company has no BIR approved retirement
plan an employee who is separated against his will but who signed a CBA, the retirement benefits under the CBA is taxable because by signing the
CBA it will make his separation voluntary.

C. Foreign retirement benefits gratuitously received by a resident or non-resident citizen of the Philippines or alien who come to reside
permanently in the Philippines are exempted from income tax.

D. Benefits given to persons residing in the Philippines whether alien or citizen by the USVA exempted from income tax.

SSS and GSIS benefits are exempted from income tax.

7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).

a) Income Derived from Foreign Government are exempt because of reciprocity between countries, if there is a treaty or law that
exempts it. Take note of the source of income.

19
 b) Income Derived by the Government or its Political subdivisions not subject to tax because it is an inherent limitation, provided
that the government agency is performing governmental function.
c) Prizes and Awards conditions to exempt from income tax:

I. The award is primarily:

(1) religious;
(2) Charitable;
(3) Scientific;
(4) Educational;
(5) Artistic;
(6) Literary;
(7) Or civic achievement;
II. There was involuntary participation by the recipient
III. The award is unconditional meaning he is not required to render substantial future service as a condition to receiving the
prize or award.

All the three (3) conditions must be present to be exempted from income tax.

Mnemonics to remember: R E L A C C S

READ: R.A. 7549, May 22, 1992

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 82,000.00. (R.A. 10653, February 12, 2015)

13th month pay are exempted if received by public or private entities. The first 82,000.00 would be exempted, the excess would be subjected
to income tax.

The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus, etc.

Nota Bene take note of the tax provisions for minimum wage earners which exempt compensation and other benefits.

F. GSIS, SSS, Medicare, Pag-IBIG contributions (which are employers share) are exempted from income tax including union dues but not
including contributions made by employers which are not enumerated in par. F to be exempt.

G. Self-explanatory.

H. Self-explanatory.

Section 33 - Fringe Benefit this tax is imposed to the employee but payable by the employer under the withholding tax system.

Rank and file employees are exempt from Fringe Benefit Tax (FBT)

Only supervisory or managerial employee are liable to pay FBT, except if:

1) The FB is required by the nature of the employment;

2) Necessary to the trade, business or profession of the employer;
3) FB is for the convenience and advantage of the employer.

The tax base is grossed up monetary value of the FB.

FB given to employees which are non-residents alien individual not engaged in trade or business within the Philippines including the special
alien individuals under Section 25 shall not be subject to FBT but the regular rates imposed under Section 25.

Memorize definition of FB under Sec. 33.

FB means employees benefits supplementary to a money wage or salary.

Example of FB - see par. B, Section 33, no. 1-10

FB that are not taxable refer to par. C, Section 33. (memorize)

20
 If the FB is already subjected to FBT it is no longer subject to tax as compensation income. So that if the FB is exempted from FBT it would still
be subject to compensation income tax unless if the employee is also exempted from the income tax.

De minimis benefits (benefits of small value) is exempted both from FBT and compensation income tax.

Examples of De minimis benefits:

1) monetized unused vacation leave not exceeding ten (10) days for private employees; for public employees no limit.
2) Medical cash allowance to dependents not exceeding 700.00/semester or 125.00/month;
3) Rice subsidy 1,000.00/month or less;
4) Uniform allowance 3,000.00/annum;
5) Medical benefits 1,000.00/annum;
6) Laundry allowance 300.00/month.

READ: Revenue Regulation No. 1-2015

CHAPTER VII. Allowable Deductions.

A. Business Expenses in general: (Sec. 34 A)

I. Ordinary and Necessary Trade, business or Professional Expenses. Requisites:

1. Ordinary and necessary

2. Paid or incurred during the taxable year (fiscal or calendar year)
3. Connected and related to the taxpayers business
4. Substantiated by receipts or invoices (par b(1)A)
5. To be deducted in the category it belongs (e.g. taxes cannot be deducted as losses)
6. Reasonable expense
7. Not contrary to law, morals, public policy, public order, good customs.

Bribes, kickbacks and other similar payments NOT ALLOWED as expense.

Private Educational Institutions (Proprietary) is given the option to deduct the expenditures which are capital outlay for expansion of school
facilities either:

1. Deduct the entire amount of expenditures during the taxable year, or

2. Deduct as depreciation expense

II. Itemized Deductions (the same requisites with the ordinary but with additional conditions):

1. Interest Expense (4 requisites)

- there must be an indebtedness
- proceeds of the loan is utilized in the business
- there must be a legal liability to pay interest
- indebtedness must be that of the taxpayer
- Tax Arbitrage Scheme the amount of interest of loans will be deducted from business income net of the interest
income received by the taxpayer from his bank deposits subject to Final Tax

Example:

Interest Expense 60,000

Less : Bank deposit interest income
50,000 x 38% (effective Jan. 1, 2000) 19,000
Deductible interest expense 41,000

- Different treatment if the taxpayer used the CASH METHOD and the interest on loans was prepaid interest expense.
The entire prepaid interest expense will not be deducted on the year the loan was incurred. The interest to be deducted must
be prorated with the payment of the principal loan.
- Sec. 36(b). interest expense on loans obtained from related persons [Sec. 36(b)] NOT DEDUCTIBLE.

- Interest on indebtedness incurred to finance petroleum exploration NOT DEDUCTIBLE.

- Optional treatment of Interest Expense when loans are incurred to acquire property to be used in business:
21
 1. Deduct the interest as outrightly; or
2. Treat the interest as capital expenditures. To be deducted through depreciation.

2. Taxes

The following cannot be deducted:

1. Income Tax
2. Foreign Income Tax (if Foreign Tax credit is not utilized)
3. Estate and Donors Taxes
4. Transfer Tax on sale of shares of stocks (Sec. 127d)
5. Special Assessments

Taxes that are not enumerated above are deductible from business income provided it is connected.

Foreign Tax Credit is a portion of foreign income tax which can be used as a deduction from the Philippine Income Tax due.

Two approaches:
1. Gross Income (within and without) xxx
Less : Deductions (including Foreign Income Tax) xxx
Taxable income xxx
OR
2. Gross Income (within and without) xxx
Less : Deductions (not including Foreign Income Tax) xxx
Taxable income xxx

Phil. Income Tax Due xxx

Less : Foreign Tax Credit (FTC) xxx
Tax still due xxx

FTC will only arise if the taxpayer is taxable in the Philippines of income derived within and without the Philippines

C to determine FTC there is a Formula. The entire foreign tax paid cannot be used as FTC.

3. Losses

Kinds of Losses
A. Ordinary losses operation of the business
- NOLCO will apply
- connected with business

B. Casualty losses - properties used in business

- loss arises from fires, storms, shipwreck, or other casualties, robbery, theft or embezzlement.
- to be reported to the BIR not less than 30 days and not more than 90 days.
- not used as a losses deduction for estate tax purposes
- proof of loss (par. 2 of par. D). study carefully.
- should not be compensated by insurance to be deductible.

C. Capital losses - (to be discussed with Capital Gains)

D. Losses from Wash Sales - (to be discussed in Sec. 38)

E. Wagering losses (gambling) to be deducted only from gambling gains [Sec. 39 (a)]

F. Abandonment losses read

4. Bad Debts (A/R that cannot be collected)

READ : Pareo vs. Sandigan. 256 SCRA 242
- Connected to business
- Actual bad debts or write-offs, not the estimated bad debts
- If recovered later after it was deducted, then the recovered bad debts to be included as part of gross income in the
taxable year it was recovered. This is the Tax Benefit Rule.
- The tax benefit rule applies also to taxes previously used as a deduction and later the taxpayer was able to get a
refund.
22
 5. Depreciation
- property, plant and equipment are normally usable for a number of years. A point will be reached when such
property may not be useful anymore in the business die to exhaustion, wear and tear.
- the owner will be able to recover the cost of the property because it will gradually or periodically deducted from his
gross income as deduction called depreciation.
- depreciation will only apply to extraordinary expenditures or capital expenditures.

Depreciation for income tax purposes, depreciation means the reduction in service value or property used in business or trade arising from
exhaustion, wear and tear, and obsolescence. (Sec. 195, Rev. Reg. No. 2)

Depreciation commences with the acquisition of the property or with its erection.

Depreciation of properties used in petroleum operations is allowable.

Requisites for claiming depreciation deductible are as follows:

(a) It must be charged off

(b) Must be deducted directly from the book value of the assets
(c) Must be reasonable allowance
(d) Property must be used or employed in business or trade or must be determined if it is not being used.

The proper allowance for depreciation of any property used in trade or business, or out of its not being used, is that sum which should be set
aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the sums so set aside, plus salvage value, will,
at the end of the useful life of the property, suffice to provide an amount equal to the original cost. (Sec. 195, Rev. Regs. No. 2)
Depreciation a deduction from gross income for depreciation is allowed but limits the recovery to the capital invested in the asset being
depreciated. The law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost
cannot be claimed and allowed. The reason is that deductions from gross income are privileges not matters of right. They are not created by
implication but upon clear expression of the law. (Basilan Estates, Inc. vs. Commissioner, G.R. No. L-22492, Sept. 5, 1967)

Goodwill, trademarks, formulas.

(1) Business and income producing property other than land, generally depreciates or loses its usefulness and value with the passage of
time. A deduction for such depreciation is allowed in computing taxable income. As such, your opinion that the assigned cost on the plant as
determined at the time of purchase can be depreciated for tax purposes is hereby confirmed.

(2) Goodwill, including trademarks, trade names, and trade brands, are not such property as are subject to exhaustion. Accordingly, the
value assigned on the trademarks which is computed on the basis of future sales cannot be discounted to its present value at the time of
acquisition and cannot be amortized for tax purposes over the average remaining lives of the different trademarks purchased.

(3) Right to receive royalties over a given term is depreciable. Accordingly, your opinion that discounted or present value at the time of
acquisition and that it is acceptable for tax purposes to amortize the said present values and royalties to be paid on the basis of future sales may be
discounted, to determine the present values and may be paid at said price (i.e., the cash price as discounted) over the agreed period (say 5 to 8
years) when royalties will have to be paid is hereby confirmed. Moreover, said royalty payment is subject to the 20% final withholding tax.

(4) Formulas are not subject to annual depreciation. If, however, after acquisition, a formula is found to be worthless, its cost may be
deducted in full as a loss for the year in which the formula is abandoned as being worthless. Accordingly, the cost of the different formulas cannot
be amortized over the (a) remaining life of the trademarks purchased or (b) the expected period within which your client proposes to continue
manufacturing said products using the said formulas.

(5) Amounts paid for an agreement not to compete in a trade or business, where the taxpayer can prove the existence of such an
agreement, are capital expenditures and subject to allowances for depreciation ratably spread over the period mentioned in the agreement but
only where the elimination of competition is for a definite and limited term may the cost be exhausted over such a term. Accordingly, your opinion
that the value agreed between your client and seller may not compete in the same line of business that was sold to your client is hereby confirmed.

(6) Goodwill is not such property as is subject to exhaustion. Accordingly, your opinion that any amount of goodwill paid for by your client
may not be deducted for tax purposes unless the same business or the assets related to the said goodwill is sold by your clo9ent is hereby
confirmed. (BIR Ruling No. 88-206)

Patents, copyrights, etc. Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a
depreciation allowance. Examples are patents, copyrights and franchises. Intangibles, the use of which in the business or trade is not so limited, will
not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to
be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such
23
intangible asset may be the subject of a depreciation allowance provided the facts are fully shown in the return or prior thereto the satisfaction of
the Commissioner of Internal Revenue. (Sec. 107, Income Tax Regulations)
Such being the case, the value assigned on the trademarks which is computed on the basis of future sales can be discounted to its present
value at the time of acquisition and can be amortized for tax purposes over the average remaining lives of the different trademarks purchased.
Moreover, the cost of the different formulae can be amortized over the (a) remaining life of the trademarks purchased or (b) the expected period
within which your client proposes to continue manufacturing said products using the said formulae.

- Methods
Cost Salvage Value
1. Straightline method - Life (years)

2. Declining balance method

3. Sum of the years digit method. Read very well par. 4 (petroleum operations) and par. 6.

6. Depletion
- it is the cost or value of the exhaustion of natural resources, such as mines and oil and gas wells, as a result of
severance of production. Only persons having an economic interest in a mineral land or oil gas wells are entitled to a
depletion allowance (which should not be more than the capital invested). To acquire an economic interest, the
taxpayer must have a capital investment in the property and not a mere economic advantage.

7. Charitable and Other Contributions (par. H)

Two kinds
1) Deductible in Full (see par 2(a), (b), (c), and (d)

2) Deductible subject to limitation on the following:

1. Public purpose
2. Religious, charitable, scientific, youth, sports development, cultural or educational purposes

Individual donor not in excess of 10% of taxable income without including the charitable contribution as a deduction,
whichever is lower with the original contribution.
Corporate donor the same rule above except the rate is 5%

In both cases (full or with limitation) the contribution is given to a juridical person.

8. Research and Development self-explanatory (read)

9. Pension Trust

Requisites:
1. Employer contributes for the pension trust for the payment of reasonable pension for employees. The contribution is a
deductible business expense.

10. Optional Standard Deduction (OSD)

- in lieu of the business deductions which required receipts
- non-resident alien cannot claim OSD
- NRFC not allowed OSD
- election of OSD is irrevocable for the taxable year for which the return was made
- deduction rate is 40% of Gross Income/Gross Sales/Gross Receipt
- there is no need to support the deduction with receipts
- a source of tax avoidance

If the taxpayer failed to elect the kind of deduction in his income tax return, he shall be considered as having availed himself of the itemized
deduction. Deduction elected for one taxable year is irrevocable for that year. If the taxpayer elected both deductions in one taxable year, the
optional standard deduction will be disregarded. It must be emphasized that for one taxable year, a taxpayer must elect only one kind of
deduction.

11. Premium Payments on Health and/or Hospitalization insurance

- only individuals (except NRA not doing business) can claim as deduction if taxable under the schedular rates.
- a deduction whether engaged in business or compensation earner.
24
 Query: (1) How much is the amount deductible?
(2) What is the ceiling of gross income to be allowed?
(3) Who can claim if the taxpayers are married?

12. Personal Exemptions

- For individuals only whose tax base is TAXABLE INCOME (Sec. 24-A)
- Regardless of STATUS BASIC P50,000.00
- Additional Exemptions for Dependent 25,000.00 for each but not more than four (4) dependents.

Additional Exemptions for Dependents. There shall be allowed an additional exemption of 25,000.00 for each dependent not exceeding
four (4) children.

The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children.
Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum of four (4) children allowed.

For purposes of this subsection, a dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with
the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is
incapable of self-support because of mental or physical defect.

Dependent (to be qualified to the claim of 25,000)

- refers only to children who are legitimate, illegitimate or legally adopted
- chiefly dependent upon: more than 50% support
- living with: does not mean residing in the same house or roof or the same place
- not more than 21 years old and unmarried
- not gainfully employed
- regardless of age: incapable of self-support because of mental/physical defect

Change of Status If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may
claim the corresponding additional exemption, as the case may be, in full for such year.

Note: The change of status rule as single, HF or married is already irrelevant because the BASIS is now 50,000.00 regardless of STATUS.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s)
as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years old or becomes gainfully employed during
the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents
married, became 21 years old or became gainfully employed at the close of such year.

Example: Jan. 1, 2010 X is single; June 2, 2010 X got married; December 1, 2010 X became a widower when the wife died after she delivered twin
babies. On December 10, one of the twins died. How much basic exemption for the 2010?

Personal Exemption Allowable to Nonresident Alien Individual a nonresident alien individual engaged in trade, business or in the exercise
of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in
the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country not to exceed the amount fixed in this
Section as exemption for citizens or residents of the Philippines. Provided, that said nonresident alien should file a true and accurate return of the
total income received by him from all sources in the Philippines, as required by this Title.

Rules to observe
1. Reciprocity Rule
2. Whichever is lower rule
3. Can avail only basic personal exemption

Senior Citizen
- those 60 years old and above
- Exemption from the payment of individual income tax provided that their annual taxable income does not exceed the poverty level
of P60,000.00 or such amount as may be determined by the NEDA for a certain taxable year.

Taxability of senior citizen to other internal revenue taxes.

25
 a. A senior citizen whose annual taxable income exceeds the poverty level of 60,000 or such amount as may thereafter be determined by
the NEDA for a certain taxable year shall be liable to the individual income tax in the full amount thereof on his taxable income net of
allowable deductions.
b. Regardless of the amount of taxable income, a senior citizen who derives income from self-employment, business and practice of
profession shall be subject to other internal revenue taxes which include but are not limited to the value-added tax, caterers tax,
documentary stamp tax, overseas communications tax, excise taxes, and other percentage taxes. He shall, therefore, file the
corresponding business tax returns in accordance with existing laws, rules and regulations.
c. He shall be subject to the 20% final withholding tax on interest income from Philippine Currency bank deposit, yield and other monetary
benefit from deposit substitutes, trust fund and similar arrangements; royalties, prizes (except prizes amounting to 3,000 or less which
shall be subject to income tax at the rates prescribed under Section 21, par. (a) or (f), NIRC) as the case may be, and winnings (except
Philippine Charity Sweepstakes winnings).
d. Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC)
e. Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)

Basic personal exemption only for benefactor a qualified senior citizen living with and taken cared of by a benefactor whether related to
him or not, shall be treated as a dependent and his benefactor shall be entitled to the basic personal exemption of 20,000 as head of the family,
as defined in Section 2(e) of these regulations. (This rule no longer applicable because of the 50,000.00 exemptions regardless of status.)

For purposes of claiming personal exemption as head of the family with dependent senior citizen, the identification card number issued by the
OSCA shall be indicated in the ITR to be filed by the benefactor. The senior citizen shall indicate in a certification to be submitted to the RDO and
the OSCA his benefactor who will be granted the exclusive right to claim him as dependent for income tax purposes.

Caring for a dependent senior citizen shall not, however, entitle the benefactor to claim the additional exemption allowable to a married
individual or head of family with qualified dependent children under Sec. 29(1) (2) (now 34) of the NIRC, as amended.

Section 36. - Items not deductible

1. Absorb by personal exemptions

2. Capital expenditures absorb by depreciation
3. Extraordinary repairs. To be deducted through depreciation. The cost of repair added to the value of the property to be depreciated.
4. Not allowed if the taxpayer is the beneficiary of the life insurance. If the beneficiary is not the employer the premium is a deductible
business expense.

Query: A lawyer, exercising his profession, paid premium for his own life insurance. If he dies the proceeds will go to his estate. Premium is
deductible? How about if the beneficiary is his GF and he is married?

5. Not allowed in order to avoid evasion and collusion. The prohibition is on losses. It includes also interests on loans. See notes on interest
expenses.

Why? (Sec. 36B)

1. Between members of the family. Take note of the degree of relationship being covered.

No. 2-6 -- considered one (1) personality in the eyes of the law.

Section 38 Losses from Wash Sales (WS)

- WS is a taxpayer scheme to recognize a deductible loss in his tax return by selling shares at a loss when the shares sold are
substantially identical stock or securities of that which were purchased or acquired beginning 30 days before the date of sale and
ending 30 days after the sale.

- wash sales losses are not deductible from gains derived from wash sales transactions

- this rule applies only to securities (e.g., bonds) which are capital assets. Not on the stocks because of the capital gains on sale of
stocks rule on taxation.

- wash sales gains are to be reported and recognized as income

- this rule of nondeduction does not apply if the dealers transaction of stocks and securities is made in the ordinary course of
business.
- loss of WS is disallowed to prevent the taxpayer from manipulating a pretended or engineered loss purely to establish a tax
deduction

- WS gains are taxable under schedular rates (individual) and regular corporate tax (corporation).
26
READ: Calasanz vs. CIR, 144 SCRA 664

Section 39 Taxation of Capital Gains and Losses on Capital Assets

- the rules do not apply to sale of capital assets (real property) of an individual and sale of capital assets (land or buildings) of
corporations, which are subject to Final Taxes. This rule will not also apply to capital gains on sale of shares of stocks, because
subject also to final taxes (5% or 10% rates).

- if the capital gain/net capital gain arise the applicable tax rates would be schedular rates (individual) and the regular corporate tax
(corporation)

- memorize the following:

1. Ordinary Assets (four groups)
a. Stock in Trade and Inventories for sale in the regular conduct of business.
b. Properties primarily held for sale in trade or business.
c. Property used in trade or business subject to depreciation.
d. Real property used in business.
2. Net Capital Gain (NCG)
3. Net Capital Loss (NCL)
4. Net Capital Loss Carry Over (NCLCO)

- Rules Individual Corporation

1. A capital loss is only deductible Applicable Applicable
from a capital gain

2. Percentage of gain or loss to

be recognized
- 100% Gain/Loss recognition if
held not more than 12 months
- 50% Gain/Loss recognition if
Held more than 12 months -do- Not Applicable
Holding Period Rule
3. Net Capital Loss Carry Over -do- -do-

- Difference

NOLCO NCLCO
- losses from business operation - arise from capital assets transaction [Sec. 39(D)]

- has a carry over of 3 years - to be carried over only once,

following the year of such loss following the year the NCLCO
Ex. Business operating losses in 2010 was sustained.
Can be carried over to 2011, 2012, and
2013. Ex. Net capital loss in 2010 can be deducted from the net capital gain
in 2011. If after the deduction there is still a balance of the 2010
net capital loss, it can no longer be carried over to 2012.
-- Sec. 34Net
the entire (D-3) NOLCO
operating loss - subject to limitation. What can
can be carried over be carried over is not more than the ordinary net income of that
year the net capital loss was sustained (2010) or the actual net
capital loss, whichever is lower, that can be carried over to the
following taxable year and will be a deduction from the net
capital gains of that year it was carried over (2011)

- applies to corporate and - applies only to individual

individual

Section 39 (F) Gains and Losses from Short Sales

- Short Sales (SS) is the taxpayers advanced sale of shares of stocks to another person even before the seller actually owns the said
shares. A SS can be at the same time a WS whenever the selling and the subsequent buying (to meet the commitment to sell)
happens within the 30 day period rule of WS.

- Any loss from SS is deductible from the gain of SS except it is a WS. (Not applicable under the present tax laws)
27
 - SS a typical capital asset transaction in the stock market.

- Short Sale For income tax purposes, a short sale is not deemed to be consummated until the delivery of property to cover the short
sale. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not deemed to be
consummated until the obligation of the seller created by the short sale is finally discharged by delivery of the property to the broker
to replace the property borrowed by such broker.

Section 40.

(A) Query: How is the gain or loss computed?

What includes the amount of gain or loss to be realized?

(B) What are the basis?

(C) - No gain or loss to be recognized if its a merger or consolidation. Merger/Consolidation are forms of business combinations for
corporations (corporations as defined by the Corporation Code)

Merger - two corporations combined and one of the name survived.

Consolidation - two corporations combined and a new name emerged.

Forms of exchange which are exceptions (par. c(2), Sec. 40)

a. Property vs. Stock
b. Stock vs. Stock
c. Securities (bonds or debentures) vs. Stocks/Securities

Reason : They became one entity after the combination.

(3) Exchanges not solely in kind

- Exchanges where it not only involves property (stocks/securities) but also cash and/or properties (which are not
stocks/securities), the gains will be recognized but not the losses. The gain to be recognized is in an amount not in excess of the
cash and the FMV of such properties (e.g., tangible properties, lands or buildings)
Memorize the terms in par. 6 (Definitions)

Source Rules Section 42

The source rules to determine whether income shall be treated as income from within or outside the Philippines can be found in Section
42 of the 1997 Tax Code. There are different source rules for different types of income. The following incomes are considered as income from
sources within the Philippines:
1. Interests: Residence of the debtor or obligor. If the obligor or debtor (corporation or otherwise) is a resident of the Philippines,
the interest income is treated as income from within the Philippines. It does not matter whether the loan agreement is signed in the
Philippines or abroad or the loan proceeds will be used in a project inside or outside the country.
2. Dividends: Residence of the corporation paying dividend. Dividends received from a domestic corporation or from a foreign
corporation are treated as income from sources within the Philippines, unless less than 50% of the gross income of the foreign
corporation for the three (3)-year period preceding the declaration of such dividends was derived from sources within the
Philippines, in which case, only the amount which bears the same ratio to such dividends as the gross sources within the Philippines
bears to its gross income from all sources shall be treated as income from sources within the Philippines.
3. Services: Place of performance of the service. If the service is performed in the Philippines, the income is treated as from sources
within the Philippines.

Gross income from sources within the Philippines includes compensation for labor or personal services performed within the Philippines,
regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. If a specific amount is
paid for labor or personal services performed in the Philippines, such amount shall be included in the gross income. If there is no accurate
allocation or segregation of compensation for labor or personal services performed in the Philippines, the amount to be included in the gross
income shall be determined on apportionment of time basis; i.e., there shall be included in the gross income an amount which bears the same
relation to the total compensation as the number of days of performance of the labor or services within the Philippines bears to the total number
of days of performance of labor or services for which the payment is made. Wages received for services rendered inside the territorial limits of the
Philippines and wages of an alien seaman earned on a coastwise vessel are to be regarded as from source within the Philippines (Sec. 155, Rev.
Regs. No. 2).

28
 A non-resident alien is taxed only on her commission income for services rendered in the Philippines. Baier-Nickel, a non-resident
German, is the President of Jubanitex, Inc., a domestic corporation engaged in manufacturing, marketing, acquiring, importing and exporting and
selling embroidered textile products. Through its General Manager, the corporation engaged the services of Baier-Nickel as commission agent, who
will receive 10% sales commission on all sales actually concluded and collected through her efforts. In 1995, Baier-Nickel received commission
income, which Jubanitex withheld 10% and remitted to the BIR. Baier-Nickel filed her income tax return on October 17, 1997 and on April 14, 1998,
she filed a claim for refund, contending that her commission income is not taxable in the Philippines because it was compensation for her services
rendered in Germany.

Non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income tax on their income received from all
sources with the Philippines. The underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the Government is that income which is created by activities and property protected by the
Government or obtained by persons enjoying that protection. The important factor, therefore, which determines the source of income of personal
services is not the residence of the payor, or the place where the contract for service is entered into, of the place of payment, but the place where
the services were actually rendered (Baier-Nickel v. Commissioner, G.R. No. 156305, February 17, 2003).

In this case, however, the appointment letter of Baier-Nickel, as agent of Jubanitex, stipulated that the activity or the service which would
entitle her to 10% commission income, are sales actually concluded and collected through her efforts. What she presented as evidence to prove
that she performed income-producing activities abroad were copies of documents she allegedly faxed to Jubanitex and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very
least, these pieces of evidence show that while Baier-Nickel was in Germany, she sent instructions/orders to Jubanitex. Thus, claim for refund was
denied (Commissioner v. Baier-Nickel, G.R. No. 153793, August 29, 2006).

Income from turnkey contract with onshore and offshore portions. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment and suppliers were completely designed and engineered in Japan. The
two (2) sets of ship unloader and loader, the boats and the mobile equipment for the NDC project and the ammonia storage tanks and refrigeration
units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies
listed under the Offshore Portion such as steel sheets, pipes and structures, electrical and instrument apparatus, were not finished products when
shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under Japanese Portion Yen I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to tax on the part of a foreign corporation
(Commissioner v. Marubeni Corporation, G.R. No. 137377, December 18, 2011).

A tax sparing credit is a credit granted by the residence country for foreign taxes that for some reasons were not actually paid to the
source country but that would have been paid under the countrys normal tax rules. The usual reason for the tax not being paid is that the source
country has provided a tax holiday or other tax incentive to foreign investors as an encouragement to invest or conduct business in the country. In
the absence of tax sparing, the actual beneficiary of a tax incentive provided by a source country rather than the foreign investment may be the
residence country rather than the foreign investor. This result occur whenever the reduction in source-country tax is replaced by an increase in
residence-country tax.

In the leading case of Commissioner v. Procter & Gamble PMC (160 SCRA 560), the court ruled that the preferential 15% tax on dividend
paid to a non-resident foreign corporation is inapplicable because of the failure of the claimant to show the actual amount credited by the U.S.
government, to present the U.S. income tax returns of PGMC-USA, and to submit a duly authenticated document evidencing the tax credit of the
20% differential. Upon motion for reconsideration, the Supreme Court in an en banc resolution reversed the earlier decision of the court. It
pronounced that the 15% preferential tax rate was applicable to the case at bar, because it was established that the Philippine Tax Code only
requires that the U.S. shall allow Procter & Gamble USA deemed paid the tax credit equivalent to 20%. Clearly, the deemed paid which must
be allowed by U.S. law to P&G USA is the same deemed paid tax credit that Philippine law allows to a Philippine corporation with a wholly-or-
majority-owned subsidiary in the U.S. The deemed paid tax credit allowed in Section 902, U.S. Tax Code, is no more a credit for phantom taxes
than is the deemed paid tax credit granted in Section 30(C)(8) (now Sec. 28[B][5][b], NIRC). The legal question should be distinguished from
questions of administrative implementation arising after the legal question has been answered. (Commissioner v. Procter & Gamble PMC, 204 SCRA
377)

The fact that Switzerland does not impose any tax on the dividends received from a domestic corporation should be considered as full
satisfaction of the condition that the 20% differential is deemed credited by the Swiss government (as against the Commissioners contention that
the tax-sparing credit should apply only if the foreign country allows a foreign tax credit). The court observed that to deny private respondent the
privilege to withhold only 15% provided for under P.D. 369 would run counter to the very spirit and intent of said law and definitely will adversely
affect foreign corporations interest and discourage them from investing capital in our country (Commissioner v. Wander Philippines, 160 SCRA
573).

What are disguised dividends in income taxation? Give an example.

Disguised dividends are those income payments made by a domestic corporation, which is a subsidiary of a non-resident foreign
corporation, to the latter ostensibly for services rendered by the latter to the former, but which payments are disproportionately larger than the
actual value of the services rendered. In such case, the amount over and above the true value of the service rendered shall be treated as a dividend,
29
and shall be subjected to the corresponding tax of 35% on the Philippine sourced gross income, or such other preferential rate as may be provided
under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement.

(A) Gross Income (GI) from sources within the Philippines.

- this provision enumerates certain kinds of income that would be considered derived within the Philippines.

Example:
1. X is an American residing in Canada but he has bank deposits in the Philippines. His interest income from the bank deposits will
be considered derived within the Philippines. this is an application of the territoriality rule as source of income.

2. Supposing X is also a stockholder of SMC. The dividend he will receive is also taxable in the Philippines.

3. If the dividend is from a FC Corporation (doing business in the Philippines)

(1) General rule: considered derived within the Philippines;
(2) Pro-rata rule: if less that 50% of the FC gross income was derived in the Philippines for the three (3) year period preceding
the declaration of the dividend.

Example: In the 2010 FC declared dividend. The accumulated gross income FC derived in the Philippines for the years 2007,
2008 and 2009 was P1 Million. FC total gross income (2007, 2008 and 2009) within and without the Philippines was P3 Million.
The dividend declared would be prorated to get the portion taxable within the Phils. Thus:
1 million
Dividend declared x 3 million

b. Services read par. 3

c. Rentals and Royalties read par. 4

.
d. Sale of Real Property read par. 5

e. Sale of Personal Property (PP)

- PP is bought within the Phil., then sold outside the Phil. OR PP is bought outside of the Phil. then sold within the Phil. = Gains or
profits derived will be considered DERIVED within the Phil.

- Gain from the sale of SS of a domestic corporation always treated derived within the Phil. even if it is sold outside the Phil.
Rationale : Protection/benefit rule.

f. Taxable Income within the Philippines

General Rule: The deductions/business expenses must be connected/related to the income derived within the Philippines.

Hence, Gross Income within the Philippines (trade, business or profession) shall only be deducted by expenses incurred within the Philippines.
Application of the connected/related rule on expenses.

Except : Interest paid on loans abroad, the proceeds of the loans is actually used in connection with the conduct or operation of the
business in the Philippines.

(B) GI from sources without the Philippines.

- self-explanatory (par. C of Sec. 42)
- Taxable income means GI without the Philippines less expenses without the Philippines.

(C) Sources Partly within and Partly without the Philippines

- Allocation rule will apply on gross income and expenses.

GI Partly within
Example: GI partly within and without x GI within and without

- same computation for expenses

Section 43 50. - Accounting Periods and Methods of Accounting

- Method and Accounting Period (Fiscal or Calendar) as basis of computing taxable income and the method of accounting, it is the taxpayer
who will choose. If no period or method is used or the method used do not clearly reflect the income, the CIR will compute using the
method in the opinion of the CIR clearly reflects the income.
30
 - No uniform method of accounting can be prescribed for all taxpayers.

METHODS OF ACCOUNTING There are two main methods generally followed by taxpayers. They are (a) the cash method, and (b) the
accrual method.

Cash method is nearly used by individuals. All items of taxable income whether cash, property, or services actually or constructively
received are classed as receipts. Only amounts actually paid for deductible expenses are classed as disbursements. Business expenses must be
paid within the taxable year. There is no such thing as constructive payment.

CASH METHOD in Accounting is different from CASH METHOD for Taxation.

Under the cash method for taxation purposes, there is constructive receipt of income to be reported but no constructive payment of
expenses to be reported.

Accrual method is used mostly by business concerns. Under this system, net income is measured, in a broad sense, by the excess of
income over expenditures. Cash, property, or services earned during the taxable year, though not received have accrued to the taxpayer, and
are classed as income. In the same way, expenses incurred during the taxable year are usually deductible even if they are not received during
that year.

All events test means all events fixing an accrued method, taxpayers right to receive income, or incur expenses must occur before the taxpayer can
report an item of income or expense. (CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007)

All events test (deductions) is met:

1. All events have occurred that fix the fact of liability
2. The liability can be determined with reasonable accuracy.

- Computation of Business deductions based on accrual method

TAXABLE PERIOD the rule is that the taxable period of a taxpayer covers a period of 12 months. The exceptions are as follows:

(a) In case of dissolution of a corporation.

(b) In case of change of accounting period.
(c) In case of corporation newly established.
(d) Final return of decedent.
(e) Return for the decedents estate.
(f) In case the Commissioner of Internal Revenue terminates the tax period of a taxpayer.

Other accounting methods.

(a) Percentage of completion basis is a method available in the case of building, installation or construction contracts covering a period in
excess of one year, where there should be deducted from gross income all expenditures made during the taxable year on account of the contract,
account being taken of the materials and supplies on hand at the beginning and end of the taxable period for use in connection with the work done
under the contract but not yet so applied.

(b) Completion of contract basis is a method available to contractors for building, installation or construction covering a period more than
one year where income is reported in case the contract is finally completed and accepted.

(c) Crop year basis is a method where a farmer engaged in producing crops which take more than a year from the time of planting to the
process of gathering and dispositions, the law allows expenses deducted to be determined upon such basis and such deductions must be taken in
the year in which the gross income from the crop has been realized.

(d) Installment plan or method is a method which is available to sales by dealers of personal property on the installment basis, where the
returnable income in the taxable year which the gross profit realized or to be realized when payment is completed bears to the total contract price
expressed in the following formula:

Gross profit times installments received divided by total contract price equals returnable income.

The method applies also to sales of realty where the initial payment does not exceed 25% of the selling price; if the initial payment of the
selling price exceeds 25% thereof, then the income shall be reported in full.

This applies further to casual sales of personality (other than property includible in the taxpayers inventory) for a price exceeding 1,000 and
where the initial payment does not exceed 25% of the selling price.

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 Methods of determining taxable income.
(a) Percentage method
(b) Net-worth expenditure method
(c) Excess cash expenditure method
(d) Bank deposits

Requirements for use of net-worth method

(a) That the taxpayers books do not clearly reflect the income, or the taxpayer has no books, or if he has books, he refuses to produce them.

(b) That there is evidence of a possible source or sources of income to account for the increases in the networth or for expenditures.

(c) That there is a fixed starting point or opening networth, a date beginning with the taxable year or prior to it at which the taxpayers
financial condition can be affirmatively established, with same definiteness; and

(d) That the circumstances are such that the method does clearly reflect the taxpayers income with reasonable accuracy and certainty, and
proper and just additions of personal expenses and other non-deductible expenditures were made, and correct, fair and equitable
credit adjustments were given by way of eliminating non-taxable items.

- Period for which deductions and credits taken = apply as paid or incurred rule

Section 51-59. Returns and Payment of Taxes

Individuals
A. Required to file Income Tax Return
1. RC within and without income
2. NRC within income
3. RA within income
4. NRA within income

B. NOT REQUIRED
1. If the gross income does not exceed his personal or additional exemptions. But this rule does not apply if engaged in trade,
business or exercise of profession.
2. Compensation earners purely derived in the Phil. and the income tax correctly withheld. This rule does not apply if deriving
compensation income from two (2) employers within the taxable year.
3. Those whose sole income is subject to the final withholding taxes.
4. Minimum wage earner
Question:
1. How many copies of tax return will be filed?
2. Where to file the income tax returns?
3. When to file?
4. If both H and W are working, who will file?
5. If the child is a minor, but has income, who will file his return? How about persons under disability?

Financial Statements Attached to the Income Tax Returns upon Filing

The financial statements required to be attached with the income tax returns:
1. Statement of Net Worth and Operations. This statement is to be attached with the income tax return of individual taxpayers if the gross
sales, receipts or output from business does not exceed 50,000 in any one quarter.

2. Balance Sheet and Profit and Loss Statements. These statements are to be attached with the income tax return of individual taxpayers if
the gross sales, earnings, receipt or output from business in any one quarter exceed 150,000.

a. Balance Sheet and Profit and Loss Statement certified by an independent Certified Public Accountant.
b. Comparative profit and Loss Statements for the current and preceding taxable years.
c. Schedule of income producing properties and corresponding income therefrom.

The said taxpayers books of accounts shall be audited and examined yearly by an independent Certified Public Accountant and their income
tax returns accompanied with a duly accomplished Account Information lifter from certified balance sheets, profit and loss statements, schedules
listing income producing properties and the corresponding income therefrom and other relevant statements.

Annual Declaration and Quarterly Payments of Income tax for Individual Taxpayers.(Applies only to those who are engage in trade,
business or exercise of their profession).

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 1. On or before April 15 of the following year for the taxable income of the previous year.
2. April 15 of the same taxable year for the estimated income of the current year.

In general, except as otherwise provided by the law, every individual subject to income tax under Sections 24 and 25 (A) of the National
Internal Revenue Code who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with
salaries, wages and other fixed or determinable income, shall make and file a declaration of estimated income for the current taxable year on or
before April 15 of the same taxable year.

3. Return and Payments of Individuals Estimated Income tax.

FILING OF DECLARATIONS
AND PAYMENTS DATES
First April 15 of the current taxable year

Second August 15 of the current taxable year

Third November 15 of the current taxable year

Fourth April 15 of the following calendar year

When final adjusted income tax return
Is due for filing.
B. Corporation/Partnership
Read Sec. 52 56. Self-explanatory

CORPORATE RETURNS

Section 52 (A) of the National Internal Revenue Code provides that every corporation subject to the tax herein imposed, except foreign
corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and
final or adjustment return.

The return shall be filed by the president, vice president or other principal officers and shall be sworn to by such officer and by the treasurer or
assistant treasurer.

Taxable Year of Corporation

A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return.

A corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the
prohibitions of Section 47 of the Tax Code.

Rules in filing and payment of corporate income tax:

1. The corporate quarterly return shall be filed within sixty (60) days following the close of each of the first three quarters of the taxable
year. (three times)

Example:
Calendar Year Jan., Feb., Mar. = File in the months of April and May
Fiscal Year June, July, Aug. = file in the months of Sept. and Oct.

2. The income tax due on the corporate quarterly returns and the final adjusted income tax returns computed in accordance with Section 75
and 76 shall be paid at the time the declaration or return is filed. (Pay as you file system)
3. The final adjustment return shall be filed on or before the 15th day of April, or on before the 15th day of the fourth month following the
close of the fiscal year, as the case may be.

Note : Corporate Returns are filed four (4) times a year. Three quarterly and one final adjustment return

CORPORATE QUARTERLY TAX

To ease the burden of paying taxes for a lump-sum amount, income tax expense of a corporation may be paid in an aggregate quarterly
periodic payment.

Rules:
1. A corporation files a quarterly income tax return within 60 days after the end of each first three quarters of the taxable year.

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 2. A final income tax return covering the total taxable income of the taxable year should be filed on or before April 15 of the following year.
The amount of total income tax computed thereof shall be reduced by income taxes paid during the first three quarters of the taxable
year.
3. The amount of tax previously paid for the preceding quarters should reduce the amount of tax computed on the cumulative taxable
income.
4. If the total quarterly tax paid during the taxable year is more than the tax due on the final return the corporation may claim tax credit
carry over or refunded with the excess amount.

Section 57 to 59. Withholding Taxes

Withholding of taxes is a systematic way of collecting taxes at source. It is an indispensable method for collecting taxes in order that the
government can obtain adequate revenue. The withholding tax agent who is usually an employer or a person from whom the income is derived
does this process through withholding the appropriate amount of taxes from taxpayers. It is designed to ensure the collection at source of income
taxes.

If withholding tax is not withheld from income payments, there will be a disallowance of deductible business expenses claimed by the
withholding agent in this income tax return or a penalty shall be imposed on withholding tax agent for failure to withhold the tax.

Withholding Tax at Source

A taxation at source is that part of tax system which collects through withholding agents or employers the appropriate income taxes due as
they are earned and before earnings are paid to the employees.

The income paid to the employees is the net amount after deducting the taxes withheld which is based on the taxable income after
adjustments with respect to personal, additional exemptions and or other adjustments allowed by the law, if any.

The primary objective of the system is to ensure accurate payment of taxes and to be able to use taxes collected at an earlier time to finance
the operations and projects of the government.

Classification of Withholding Tax at Source

Withholding tax may be classified into two categories such as

1) Final Withholding Tax, and
2) Creditable Withholding Tax

Final Withholding Tax (FWT)

Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment
of the income tax due from the payee on the said income. The liability for the payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of failure to withhold or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent.
The payee is not required to file an income tax return for the particular income, the final tax on which has been withheld.

The finality of the withholding tax is limited only to the payee or recipients income tax liability on the particular income. It does not extend to
the payees other tax liability on said income, such as when the said income is further subject to a percentage tax.

Creditable Withholding Tax (CWT)

Under the creditable withholding tax system, taxes withheld on certain payments are intended to equal or at least approximate the tax due of
the payee on said income. The income recipient is still required to file his income tax return as prescribed in the Section 51 of the NIRC, either to
report the income and/or pay the difference between the tax withheld and the tax due on the income. A tax withheld in income payments covering
the expanded withholding tax from compensation income is creditable in nature.

Diferrence between FWT and CWT

- in FWT no more tax liability if properly withheld. In CWT it may or may not result to a balance of tax liability.

Taxes withheld on compensation is an example of CWT.

Section 60 to 66. - Estates and Trusts

TAX ON INCOME OF ESTATE

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 The estate is composed of all properties, rights and obligations including those properties, earnings or obligations that have accrued thereto
since the opening of the succession. The estate is to be transferred from the decedent to his successors.

During the period when the title to the properties is not yet finally transferred to the successors, there may be earnings generated from the
estate. These earning are subject to income tax.

Estates or Trusts Taxable Income and Tax

For taxation purposes, the taxable income of the estate/trust shall be determined in the same manner and basis as in the case of individual
taxpayers. The items composing the taxable income and tax of the income from estates/trusts are as follows:

Treated as Individual Taxpayers

1. Gross Income
The items of gross income of the estate are the same items with the items of gross income of individual taxpayers.

2. Deduction
Deductions from the gross income of the estates/trusts are the same with the items of deduction allowed to individual taxpayer.

3. Special Deduction
In addition to the allowable deductions under Section 34 of the Tax Code, the estate is also allowed to deduct the amount of income
of the estate during the taxable year that is paid or credited to the legatee, heir or beneficiary, subject to a creditable withholding tax
of fifteen percent (15%)

However, the amount so allowed as a deduction shall be a part of the taxable income of the legatee, heir or beneficiary. It is to be
noted that any portion of the gross estate paid to the heir is not deductible from the gross income of the estate.

4. Exemption
Generally, the income from estate/trusts is allowed for an exemption of 20,000.

5. Tax Rate
The tax rate applicable is the tax rate prescribed for individual taxpayers.

TAX ON INCOME OF TRUSTS

A trust is an obligation imposed or a right to administer over a property given to a person for a benefit of another.

This is a legal institution used to administer funds in behalf of individuals or organizations. Trust device is used frequently to transfer property
from one generation to another.

Illustration.
Suppose Juan wants his wife to have the income from his estate as long as she lives. Juan may place his property in a trust, the income of
which would go to his wife for life; the trust might be dissolved at her death and the property distributed to the children. The trust is assigned to be
administered by Attorney Nilo, a trustee.

Under this arrangement, the trustee is required by law to manage the trust strictly in accordance with the terms of the trust instrument.

When a trust is created, a new entity comes into being, for which returns must be filed and taxes paid.

Income accumulated in trust and/or to be distributed to beneficiary are subject to income tax.

A trust created by a written instrument other than a will is known as a trust inter-vivos, if created by will is known as a testamentary trust.

Income Derived from Trusts.

Tax imposed upon individual taxpayers shall apply to the income of any property held in trust, including:

1. Income accumulated in trust for the benefit of unborn or unascertained person/s with contingent interests, and income accumulated or
held for future distribution under the terms of the will or trust;

2. Income that is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant that is to
be held or distributed as the court may direct; and

35
 3. Income that, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

The trust, or the beneficiaries or the grantor may pay the tax on income derived from trusts.

Computation of Trusts Income Tax

The computation of the net taxable income of trust shall be in the same manner with the net taxable income of estate. The net taxable income
shall be taxed by using the scheduler tax of an individual taxpayer based on Sec. 24 A of the Tax Code.

Two or More Trusts

In the case of two or more trusts created by the same person, for the same beneficiary, the taxable income of all trusts shall be consolidated
and the tax shall be computed based on the consolidated income.
The proportionate amount of the tax computed based on the consolidated income shall be assessed and collected from each trustee which
should be equal to the proportion of the taxable income of the trust administered by the trustee to the consolidated income of the several trusts.

REVOCABLE TRUSTS

Generally, revocable trusts exist when the trustor (grantor) reserves the power to change at any time any part of the terms of the trust. For
tax purposes, the rule is that the grantor is liable for the income of a revocable trust (because the revocable trust by itself is not subject to income
tax except if the trust is irrevocable (because irrevocable trust is subject to income tax, so that the grantor is already exempted from income tax on
the income derived from the irrevocable trust).

Illustration:
Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary who will receive the income of the trust. If the eldest son
could not abide with the rules provided in the trust instrument, Mrs. Duda could change outright the terms of the trust. For the year, the trust
earned a total income of 200,000. How much would be the taxable income of the trust?
There is no taxable income of the trust because it is a revocable trust. The income should be reported as taxable income of the grantor, Mrs.
Caduda Duda.

Trusts, explained. These are taxable entities created by will or trust deeds where the transfer of property to such trusts is irrevocable and
the income of which is to be accumulated for designated beneficiaries other than the grantor.

Estates and trusts are subject to the rates of income tax applicable to individuals. Income of estate or trust includes the following:

(a) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or trust.

(b) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is
to be held or distributed as the court may direct.

(c) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(d) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

Trusts not subject to tax.

(a) Revocable trusts the income of which is held or distributed for the benefit of the grantor
(b) Employees pension trusts.

The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual.
However, when it comes to allowable deductions, the guidelines in Section 61 of the Tax Code, should be followed.

Exemption allowed to estates and trusts.

(a) 20,000.00 is allowed as an exemption.

Revocable trusts. Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (a) in the grantor,
either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, or (b) in any person not having a substantial adverse interest in the disposition of such part of the trust shall be included in computing
the net income of the grantor.

Income for the benefit of grantor. Where any part of the income of a trust

36
 (a) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the grantor;

(b) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor;

(c) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the
income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor; such part of the income of the
trust shall be included in computing the net income of the grantor.

Requisites for exemption of employees pension trust.

(a) The employees trust must be part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees;

(b) Contributions are made to the trust by such employer, such employees, or both;

(c) Such contributions are made for the purpose of distributing to such employees both the earning and principal of the fund accumulated
by the trust;

(d) The fund is accumulated by the trust in accordance with the plan of which the trust is a part;

(e) The trust instrument makes it impossible for any part of the trust corpus or income to be used for, or diverted to, purposes other than
for the exclusive benefit of such employees.

It may be noted that under Republic Act No. 4917, retirement benefits received by officials and employees of private firms under a reasonable
private benefit plan maintained by the employer are exempt from all taxes.

Section 78 to 83. Withholding on Wages

INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME

Basic Rules on Withholding Taxes

As a general rule, all salaries earned by persons as government or non-government employees are subject to withholding tax, except of the
following items:

1. Commissions paid by an insurance agent to his sub-agents.

2. Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization.
3. Remuneration for causal labor not in the course of employers trade or business.
4. Remuneration for private service performed by maids, cooks, gardeners, family drivers and the like.
5. Remuneration paid to agricultural labor and paid entirely in products of the farm.

Requirement of Withholding Tax Due

Every employer must withhold taxes from compensation paid arising from employer employee relationship. However, no withholding of tax
shall be required where the total compensation income of an individual does not exceed the statutory minimum wage of 5,000.00 monthly or
60,000.00 a year, whichever is higher.

It is to be noted that employees whose total annual compensation does not exceed 60,000.00 in a year shall be given two options with which
to pay his income tax due as follows:

1. His compensation shall be subjected to withholding tax, but he shall not be required to file the income tax return, or
2. His compensation income shall not be subject to a withholding tax but he shall file his annual income tax return and pay the tax due
thereon, annually.

Where the employee has opted to have his compensation income subjected to withholding so as to be relieved of the obligation of filing an
annual income tax return and paying his tax due on a lump sum basis, he shall execute a waiver in a prescribed BIR form of his exemption form
withholding which shall constitute the authority for the employer to apply the withholding tax table provided under these Regulations.

The employee who opts to file the Income Tax Return shall file the same not later than April 15 of the year immediately following the taxable
year.

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 Cumulative Average Method

This method is used if the compensation of a particular employee is exempt from withholding because the amount thereof is below the
compensation level, but supplementary compensation is paid during the year; or the supplementary compensation is equal to or more than the
regular compensation to be paid; or the employee was newly hired and had a previous employer(s) within the calendar year, other than the
present employer doing this cumulative computation, the present employer shall determine the tax to be deducted and withheld in accordance
with the cumulative average method.

The cumulative average method, once applicable to a particular employee at any time during the calendar year shall be the same method to
be consistently used for the remaining payroll periods of the same calendar year.

Annualized Withholding Tax Method

This method is used when an employer employee relationship is terminated before the end of the calendar year and when computing for
the year-end adjustment the employer shall determine the amount to be withheld from the compensation on the last month of employment or in
December of the current calendar year in accordance with the following procedures.

PERSONS REQUIRED TO DEDUCT AND WITHHOLD

Section 2.57.3 enumerated the following persons who are hereby constituted as withholding agents for purposes of the creditable taxes that
are required to be withheld in income payments enumerated in Section 2.57.2:
1. In general, any juridical person, whether or not engaged in business or trade;
2. An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or
transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding
agents;
3. All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments.

Time of Withholding

The obligation of the payor to deduct and withhold the tax under Section 25.7 of these regulations arises at the time an income is paid or
payable, whichever comes first. The term payable refers to the date the obligation becomes due, demandable or legally enforceable.

Exemption from Withholding

The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

1. The National government and its instrumentalities, including provincial, city or municipal governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special such as but not
limited to the following:

a. Sales of real property by a corporation which is registered and certified by the Housing and Land Use Regulatory Board
(HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does
not exceed 180,000.00 in Metro Manila and other highly urbanized areas and 150,000.00 in other areas or such adjusted
amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under
Republic Act No. 7279 and its implementing regulations.

b. Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by R.A. No.
7916 and the Omnibus Investment Code of 1987.

c. Corporations which are exempt from the income tax under Section 10 of NIRC, to wit: The GSIS, the SSS, the Phil. Health
Insurance Corp., the PCSO and the PAGCOR; However, the income payments arising from any activity is conducted for profit
or income derived from real or personal property shall be subjected to a withholding tax as prescribed in these regulations.

Where to File

Creditable and final withholding taxes deducted and withheld by the withholding agent shall be paid upon filing a return in duplicate with the
authorized agent banks located within the Revenue District Office (RDO) having jurisdiction over the residence or principal place of business of the
withholding agent. In places where there is no authorized agent banks, the return shall be filed directed with the Revenue District Officer,
Collection Officer or the duly authorized Treasurer of the city or municipality where the withholding agents residence or principal place of business
is located, or where the withholding agent is a corporation, where the principal office is located except in cases where the Commissioner otherwise
permits.

When to file
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 The withholding tax return, whether creditable or final shall be filed and payments should be made within 10 days after the end of each
month except for taxes withheld for December, which shall be filed on or before January 25 of the following year.

For large taxpayers, the filing of the return and the payment of tax shall be made within 25 days after the end of each month.

The return for final withholding taxes on interest from any currency bank deposit and yield, or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements shall be filed and the payment made within 25 days from the close of each calendar
quarter.

Withholding Tax Statement

Every payer required to deduct and withhold taxes under there regulations shall furnish each payee, whether individual or corporate, with a
withholding tax statement, using the prescribed form (BIR Form 2307) showing the income payments made and the amount of taxes withheld
there from, for every month of the quarter within 20 days following the close of the taxable quarter employed by the payee in filing his/its
quarterly income tax return. Upon request of the payee, simultaneously with the income payment. For final withholding taxes, the statement
should be given to the payee on or before January 31 of the succeeding year.

Annual Information Return for Income Tax Withheld

The payor is required to file to the Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent in the city or
municipality where the payor has his legal residence or principal place of business, where the government office is located in the case of a
government agency, on or before January 31 of the following year in which payments were made, and Annual Information Return of Income Tax
Withheld at Source (Form No. 1604), showing among others the following information:

1. Name, address and taxpayers identification number (TIN);

2. Nature of income payments, gross amount and amount of tax withheld from each payee and such other information as may be required
by the Commissioner.

If the payor is the Government of the Philippines or any political subdivision or agency thereof, or any government-owned or controlled
corporation, the return shall be made by the officer or employee having control of the payments or by any designated officer or employee.

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DUE DATES

Due dates refer to the last day for filing return and payment of tax. The following are the due date prescribed by laws for filing of return and
payment of taxes.

Events Due Date

1. Income tax (taxpayer is individual) April 15 succeeding year

2. Income tax (taxpayer is individual, in

Business/practice of profession)
a. First quarter (Jan-March) . April 15 same year (new)
b. Second quarter (April-June) August 15 same year
c. Third quarter (Jul-Sept) November 15 same year
d. Annual (final return) April 15 succeeding year

3. Income tax (corporate taxpayers)

a. First quarter 60th day after end of quarter
b. Second quarter . 60th day after end of quarter
c. Third quarter .. 60th day after end of quarter
d. Final/adjustment return 15th day of the 4th month after
close of taxable year

4. Estate tax
a. Notice of death .. 2 months after death
b. Estate tax return 6 months after death

5. Donors tax 30th day after each donation

6. Value-added tax:
a. On sale of goods, services or property
(1) Monthly declaration . 25th day after months end
(2) Quarterly return 25th day after quarters end
b. On importation .. Before release from Customs

7. Other percentage taxes (quarterly return) 25th day after quarters end

8. Capital gains tax on sale of shares of stock

(not traded through local stock exchange)
a. Per transaction return .. 30th day after sale
b. Final/consolidated return ... 15th day of 4th month after close
of taxable year

9. Capital gains tax on sale of real property

(capital asset) by individual
a. Cash sale .. 30th day after sale
b. Installment sale 30th day after receipt of installment
10. Remittance of tax withheld
a. In general
January to November . On or before 10th day of the
which withholding was made

December . Not later than January 25 of the

succeeding year

b. Large taxpayers On or before 25th day of the month

following the month in which
withholding was made

Nota Bene A withholding agent (WA) is a taxpayer but not a statutory taxpayer. WA can claim a tax refund if there is overpayment.

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Take note of the following:

Meaning of : 1. Employee (Sec. 78(a))

2. Employer (Sec. 78(d))
3. Husband and Wife (Sec. 79 F)
4. Sec. 80b

pc3
Updated August 2016

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